Arvind to pivot away from yarns biz to ready-made garment segment

As garment manufacturers move out of China, the world's fourth largest manufacturer and exporter of denims sees an opportunity to boost growth down the line

On Friday, the National Company Law Tribunal (NCLT) finally gave the nod to the proposed demerger of textile major Arvind Ltd’s different business divisions that were clubbed under the company for decades. The regulatory approvals pave the way for the company to go ahead with its plan to divvy up its three main businesses of fabrics, fashion and engineering and list them separately on the stock market by January 2019.

Separating fundamentally similar but functionally different businesses is all too common. But behind the Ahmedabad-based company’s plan is an urge to make its businesses future-ready and offer each of its units the flexibility to quickly adapt to the changing dynamics of the business.  

This is not the first time the company is undergoing an overhaul. Founded in 1931, Arvind Mills (now Arvind Ltd) was a manufacturer of unbranded ethnic clothing material like sarees, dhotis and dorias. It implemented a modernisation programme in the late 1980s when the demand for denim was on the rise.
 

This time round, the overhaul is being undertaken to pivot away from the yarns business to branded apparel and the ready-made garment segment.

It is a logical move for the fourth largest manufacturer and exporter of denims in the world to attempt to leverage its decades-old expertise to move to a more value-added business – fully finished garment solutions for global brands and scale up the branded fashion division. Although the business is more capital intensive, growth prospects are brighter with the textile industry expanding at over 10 per cent a year. Surging demand for finished garments from global players is also another trigger.

 Arvind’s branded division is growing at 20 per cent compared to the industry average of 15 per cent. Nearly 12 per cent of the sales is coming from online channels.  But the firm is equally focused on offline channels and it is adding 200 outlets every year.
 

The rethinking at the company started a few years ago when it tied-up with brands like Tommy Hilfiger and bagged the country licence for Arrow and US Polo Association. Currently, it designs, manufactures and markets for the latter two in India. But the company sees a lot of room for growth still. As manufacturing base for ready garments and apparels continue to shift to South East Asia from China, where labour cost is rising and the country is making a conscious shift from low-value product manufacturing, an “exciting opportunity is being unveiled,” says Kulin Lalbhai, executive director of Arvind.

The plan is to go asset light by moving away from looms and investing into designing and garmenting. Despite producing 200 million meters of fabric a year, Arvind today converts only 10 per cent of it into garments. Lalbhai is focused on changing this. Thus, post-demerger, it has set aside an investment of Rs 5 billion a year till 2024 to ramp up capacity to produce more garments. Older looms will be left to be operated by its partners (suppliers, who produce fabrics for Arvind), under supply contracts, as it moves away from production of raw material. “Finally, we can invest Arvind’s huge cash flows into other businesses”, he says. With half the capital expenditure into this space, it will generate employment for 30,000 additional hands at its facilities in Gujarat, Jharkhand, Andhra Pradesh and Ethiopia.

Post-demerger, Arvind Ltd that will get more than half of its revenue from garments & solutions, branded apparels business – coming from brands like Flying Machine, Arrow, US Polo Association and Tommy Hilfiger, will be housed under Arvind Fashions (After demerger garments & solution sold to bigger brands will be under Arvind Ltd & brands that are managed by the group will be under Arvind Fashions).

Arvind has set a target to increase its standalone revenue from Rs 64 billion to Rs 120 billion in the next five years. Apart from accelerating the top line growth that remained at 7.7 per cent between 2013-14 and 2017-18, demerger will help improve the company’s return on capital employed (ROCE). ROCE – a ratio of operating profit and capital employed — is a measure of a firm’s profitability and the efficiency with which its capital is employed. Lalbhai says Arvind’s ROCE could go up to 25 per cent. In 2017-18, the firm’s ROCE stood at 10 per cent and Arvind Fashion’s at 5.2 per cent.

The branded business typically has a higher margin than an unbranded one. So once the two businesses are separated the margin at one business will not affect the margin of the other entity. As things are today, Arvind’s profit margins are under pressure. Operating profit margin has fallen steadily – from over 18 per cent in 2013-14 to 7.79 per cent in 2017-18. Some of the pressure, says Lalbhai, is due to new tie-ups in the branded apparels space that initially give poor returns. “You need to scale up the brands first. A brand should be over the size of at least Rs 2 billion a year to become profitable”. Arvind thus is focusing on scaling up the brands under its fashions business. During April-June, quarter the company registered a strong 75 per cent growth in its earnings before interest, tax, depreciation and amortisation (EBITDA) for branded apparel business, with revenue growth of 13 per cent.

In future, Arvind also expects the active wear, sportswear and technical textiles business to yield high returns. The technical textiles business, which is growing at 25 per cent per annum, may cross Rs 73 billion (US$ 1 billion) in revenue soon.

The segment is relatively new in the country and growing awareness about fitness among Indians is pushing up sales. Euromonitor International pegs the growth in sportswear market in India at 24 per cent CAGR between 2011 and 2014.