The last 18 months has been quite eventful for the Himatsingka Seide, the Bangalore-headquartered woven silk and home furnishings manufacturer and exporter. While the company in line with its play to expand its cotton bed linen segment bought three overseas companies for around $150 million, the entire industry was just heading for one of the worst economic downturn. While there was a timing mismatch between the acquisitions and the expansion, the company's controversial derivative agreement with HDFC Bank further added to its woes following which the company had to approach the Karnataka High Court in an effort to claim damages to the tune of Rs 175 crore.
Even though the global economic slowdown continues to affect the textile sector, Himatsingka Seide seeks some amount of comfort as their Hassan SEZ plant in Karnataka for cotton fabrics has now gone full-stream and the output is still less than the demand in the global markets.
Adding to the comfort is that the company's margin from the silk business continues to be at high levels. Dinesh Himatsingka, the managing director of the Rs 1,000 crore company speaks to Raghuvir Badrinath and Bibhu Ranjan Mishra about the company's plan going forward. Here are some excerpts.
Q: You acquired three companies in the US and Europe and then your Rs 400 crore bed-linen plant went on stream during second half of 2008. By that time the downturn had already surfaced. You also made a loss in the December quarter. How are you managing the situation?
Q: So to what extent this recession is affecting you?
A: Historically, the business of silk fabrics what we produce in our Bangalore-based Doddaballpur plant, has been a very profitable business. In fact, the EBITDA margin coming from silk produced in this particular plant at one time was at par with the IT industry. However, it is not the case at this moment, but this is still very high when compared to any other textile firm. We still have close to 32-35 per cent EBITDA margin coming in even in this slowdown. What has slowed down is not the EBITDA margin but the revenues which dragged our net profit or PBT. My sales has definitely gone down, but if I maintain a healthy EBITDA margin, still I am comfortable.
Q: How do you manage this?
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A: The main reason for maintaining the EBITDA margin is we are selling the products at a pretty high premium because of high-degree of value-addition. In times such as these, the prices are regulated by large retailers like Wal Mart or Target where they say that they want to the product of certain quality at a certain price. In the silk furnishings premium business in which operate, things are not like this. We tell the retailers - this is my product and this is my price. Because our silk fabrics are design-led, and it's a product which you do not need, it's a product which you want. That's the difference. When we are selling something that people want, we can dictate rather than the other way round. For high image branded goods like this, sales can drop during a recession but the prices do not fall. For premium products, we don't reduce the price to push up the sales. Buyers still are ready to pay a premium for such products.
Q: You have an retail arm 'Atmosphere' and an export business? How are things shaping up?
In India, we sell the silk products through Atmosphere outlets. Untill November, the sales at these outlets were growing by close to 40 per cent. It has slowed down in December and the growth has come down to about 30 per cent. Of the remaining, almost half are being exported to the US and other half to the Europe. Globally renowned high-end retailers buy from us and retail them across the world - US, Europe, Middle East, Japan or other markets. Even in this market, sales have come down to an extent but there is nothing alarming.
Q: Since you said the demands for these products have come down, how are you managing the capacity of your Dodaballapur plant?
A: The plant is obviously underutilised by about 20 per cent. The capacity of the plant is close to 2 million metres per annum. At the moment, we might be producing 1.67 or 1.7 million tones per annum.
Q: How are you managing the cash flow then?
We have reduced working hours. The plant is running for five days in a week. Besides, instead of three shifts, we are working two shifts now. The contractual or casual workers are being released, and the permanent workers which is more in our case are being kept idle. We have no ways but to take such kind of routes.
Q: For how long you are prepared to sustain the 20% cut in the capacity?
For the silk business, I can sustain for ever, but at a cost. I used to earn a PBT of 12 per cent a month which may come down 6- 8 per cent depending upon the fluctuation in revenue. But it's not that bad. The business is still healthy and I can still manage.
Q: How much drop has happened in case of silk exports from India?
A: The Silk Board says the silks exports are down by 40 per cent. Based on our experience, I will say it might have dropped in the range of 35 to 45 per cent at the moment. Six months ago, the exports were down by about 20 per cent. The market for silk furnishing which is my focus area is not very large revenue wise. Despite being the largest player in this segment, we might be doing a business of about Rs 160-170 crore per annum. But this is a low volume but high margin business, if you can take it. But not every manufacturer can manage to get 30-35 per cent EBITDA like us as we are completely designed-led and selling to very famous brands.
Q: What is your market share in this segment?
In this high-end silk furnishing, our market share may be about 15-18 per cent. This segment is very unorganised as there are many smaller players who are not listed companies.
Q: Given the context of lower capacity utilisation and idle assets, is there any plan to spin off some business and take private equity route?
A: No. It does not sound prudent at this valuation. We have no such immediate requirements because we just completed major expansion either in the form of greenfield projects in manufacturing which we set up in Hassan or in acquiring overseas brands to sell products manufactured in Hassan plan. That has been completed and we don't have cash-flow problem now.
Q: Now that you are able to sustain the silk furnishings business, what is the scenario in the cotton home furnishings business which is more of a mass play when compared to the premium silk business?
A: The Hassan plant is capable of producing cotton fabrics of close to 60,000 metres per day. The plant is running close to its full capacity for the last two quarters. The downturn has not affected us much due to the approach we took before the plant went full stream. We prudently decided to de-risk our distribution by acquiring three overseas companies. Had we not done that we would have faced the slowdown and suffered. The total requirement of fabrics by the three companies we acquired overseas is close to 37 million metres per annum what they entirely source from outside. So my entire capacity of 20 million metres per annum is being catered to these companies.
Q: But their requirements must have dropped by now?
A: Their requirements might have dropped by 15-20 per cent due to the downturn, but still it's way above 20 million metre mark which is my capacity. We again made a prudent judgement at the time of acquisition, and we did not fill all our basket with products which are only suitable for a customer like Wal Mart. Customers like them are extremely price sensitive and requires very large volume, which does not give much margin.
Q: There was some delay in the opening up of Hassan plant. How did that affect you?
A: There was in fact a timing mismatch in our acquisitions and operations of the Hassan plant. We acquired the companies overseas before our plant was ready which reflected in our balance sheet. Then Hassan got delayed by 6-7 months because when we put up a Rs 500 cr project in a remote areas like Hassan, there were many initial hiccups. First we got delayed in fulfilling the SEZ formalities, and then we found rock in the foundation of the plant for which we had to take permission to blast it. We had close to 2,700 workers including 2,200 girls for most of who this was their first job. So to take them to the shop floor starting from recruitment, selection and training to produce for brands like Calvin Klein was a real challenge what we have overcome now. So we are quite happy from that point of view that the Indian leg of our bedding section is quite busy even during the time of recession.
Q: But that is not reflected in your balance-sheet?
A: The 15-20 per cent drop you are finding in our consolidated results is primarily coming from our subsidiaries who have experienced a drop in their sales. Some of these subsidiaries who are trading companies works for a very small margin. If there is a drop of 20 per cent, the PBT will obviously become negative. They were profitable when we bought them. But its a temporary phenomenon.
Q: What kind of competition the Indian textile industry is facing from countries like Cambodia, Vietnam, Bangladesh, Sri Lanka or Pakistan?
A: On the silk side, there is not much of competition from these countries right now. On the cotton side, there is some competition what we are offsetting by our superior products. The basic fabric going into any finished product is the same whether you make it here in India or in Italy. The Italians value add by giving the products a direction in terms of aesthetic, design and fashion. If we have the ability to do the same thing in India, we can make money. However, it's prudent to say that the Indian textile industry is not able to value-add that much as we are doing.
Q: When are you expecting to see profitability in the balance-sheet overcoming the forex losses, derivative loses?
A: The MTM (Mark to Market) is an element which changes from quarter to quarter. Only at the end of the year, we will be able to know how much we will gain or lose. I personally don't feel that there will be any addition to the MTM losses. The derivative losses happened as we didn't go in-depth into the understanding of how the derivatives work. We took our bank's words for granted.
Q: So you are saying HDFC Bank did not advise you properly?
A: That matter is closed now -- I don't want to comment. But I can say we at least did not understand it correctly. Whether they really advised us correctly or not, obviously for that reason we went to court. I personally don't think they (HDFC Bank) advised us correctly and explained us every aspect very clearly. We ofcourse understand the meaning of risk and reward. But there should be a little bit of balance between the risk and rewards -- you cannot have a reward of Rs 7 crore on a potential loss of Rs 400 crore. I consider this more like an accident.
Q: So you are not getting into derivatives going forward?
A: No. Now we have taken forward (forex) cover without derivative angle to it. This is a policy we have taken within the company. We are not getting into any exotic deals but we are just taking vanilla forward cover for the next 6 or 9 months down the line.
Q: Assuming that the next 18 months will be problematic for the textile industry, how much debt you can absorb more?
A: Our debt equity ratio is close to 1:1 -- it's not a very bad score at all. For small amounts, we have no problem to go to a bank and raise some debt. Raising equity is not in our mind because of the valuation. If somebody is willing to give me a very high valuation, it's different. But its absurd now.
Q: There were some talks about you going in for a mass retailing in India?
A: We have never done any serious planning on that. For the bedding products from our Hassan plant, we were planning something similar to our Atmosphere stores. As a concept, it is very much there, but we have not really gone ahead with this plan. We may launch a small line of high-end bedding through our Atmosphere store, but that is like an additional product.
Q: Will you stick to core competency or any plan to diversify into other areas -- may be garments?
A: No, garments definitely never has been in our mind. Cutting and sewing is a very simplistic kind of garmenting. We have become an important home textile manufacturers and distributor and we would like to remain in this segment of home textile where we already have made some name.