Going beyond home turf

Having created capacities, home textile players are on the prowl for global brands to enter foreign markets.

Ever since the dismantling of quotas in 2005, Indian textile players are obsessed with three words""scale, competitiveness and market share. Companies chalked out massive expansion plans to build size and to become more competitive.

And at a time when most weavers and garment manufacturers have been in the news for raising money and expanding capacities, home textile players have been catching attention for a different reason""buying foreign brands. Instead of taking the traditional route of entering into foreign markets by selling their own branded products, they have adopted a more ambitious strategy of acquiring well-established foreign brands.

Trendsetters
Two companies""Welspun and GHCL""recently acquired top global brands. These are the first such acquisitions by the Indian home textiles industry.

India's largest terry towel producer and exporter and Asia's fourth largest terry towel player, Welspun India acquired 85 per cent stake in CHT Holdings, the holding company of UK's largest and number one terry towel brand Christy, also the world's oldest towel company.

The acquisition, announced earlier this month cost Rs 132 crore. GHCL a domestic soda ash major with no major presence in textiles followed suit and announced two acquisitions in the last six months for about Rs 450 crore.

After buying the third largest US home textiles player, Dan River, in December 2005, the company bought UK's largest home textile retailer, Rosebys last month.

Even Alok Industries, which is predominantly a supplier of apparel fabrics, has now chalked out plans to expand its range from bed linens to terry towels and is looking for a marketing tie-up in foreign markets, if not an acquisition.

Faster access
Why are companies taking the inorganic path, especially given the complexities in managing and integrating overseas businesses and the fact that there is still tremendous scope for organic growth?

Consider this:

There is already a huge opportunity in terms of outsourcing of home textiles to the world's biggest markets like the US and EU, which account for 60 per cent of the $70 billion global home textile market

India occupies a competitive position when compared with equally low-cost producing countries, particularly Pakistan and China

India's exports to these markets are also growing at a scorching pace""terry towel exports to the US grew at 26 per cent and bed sheets at 35-40 per cent in calendar year 2006.

Sunil Khandelwal, CFO, Alok Industries, has an answer. "Indian players have created capacities. Now it's time to create markets," he says.

"As we move to the higher end of the market, there is less competition. Our strategy is to attain higher market share in the branded business," adds Rajesh Mandawewala, joint managing director, Welspun India and chairman of Christy.


"Our company has become the world's first fully integrated home textiles company that has a presence from spinning to retailing with strong brands and distribution set-up," adds Nikhil Sen, senior general manager (GM), corporate finance and strategy, GHCL. It goes without saying that branded products fetch higher margins.

In a nutshell, these acquisitions will help the companies create a foothold in the brand conscious markets such as the US and EU, which are otherwise difficult to get into.

So far, Asian companies have gained from a surge in sales to developed markets primarily driven by shutting down of capacities in those markets.

However, since these companies are into the commodity business of manufacturing products for leading brands, expanding margins beyond a point would be difficult. But with branding and retailing, companies can hope to improve their margins substantially.

Says Sonal Shrivastav, analyst at Religare, "Indian companies are doing the right thing by moving up the value chain as the highest value addition is at the retail level. And if companies are integrated, it will boost margins." 

GROWTH IN US IMPORTS FROM INDIA
(mn sq mtrs)	CY2004	% chg	CY2005	% chg	Jan-June 2006	% chg	Share in  total imports
Pillow cases	14.50	14.80	22.50	51.60	11.60	16.60	13.66
Cotton sheets	71.00	19.90	111.80	57.50	59.80	30.40	11.69
Bed spreads	13.60	-20.10	20.90	53.40	9.00	57.80	4.91
Pile towels	37.50	26.10	46.40	24.00	31.70	51.10	21.16

Welspun's deal
Welspun is currently into the mid-range of the terry towel market and supplies to a balanced mix of mass merchandisers, specialty and fashion stores and well established designer brands such as J C Penney, Kohl's, Target, Nautica, Tommy Hilfiger, Polo Ralph Lauren, Umbro, Bed Bath & Beyond and Macy's.

The company at present does not have a brand of its own in the global home textiles market though it has license to market the Nautica brand in India and Tommy Hilfiger in the US and Canada. With exports accounting for 90 per cent of the total turnover, Welspun entered the domestic retail business last year through its brand Spaces and Welspun Home Mart under the aegis of Welspun Retail Limited.

With the acquisition of the premium brand Christy, 20 per cent of the company's consolidated sales would come from branded products by FY07.

Says Priya Ayyar of IDBI capital, "Welspun's move is a big positive for the company especially in terms of access to the high-end premium segment and the quality-conscious European market."

The company will also be able to sell Christy brands in the domestic market through its more than 50 Spaces outlets. "Our company would benefit from Christy's strong design and development skills, distribution set up and technical know-how," says Mandawewala.

Currently, Christy is a Rs 300 crore profit-making company with 22 standalone stores and has well-established relations with 98 concessions (Shop-in-shops), which includes Marks & Spencers, House of Frasers, Debenhams among others. It is the sole supplier of the towels used at Wimbledon Championships.

Says an analyst from a broking firm, "With the acquisition of Christy, not only will Welspun's retailer base for existing products rise but also new product launches will accelerate in those markets."

Apart from manufacturing, Christy supplies a wide range of its own label products for leading retailers. Revenues grew by 9 per cent in 2005-06 and are expected to touch approximately Rs 330 crore in 2006-07.

"It is a win-win situation for both. While Christy has considerable retail experience, it can go deeper into the US and European markets with the help of Welspun, where it does not have a strong presence," says Shrivastav.

Analysts predict that Welspun should be able to grow its top line and bottom line by 30-35 per cent per annum till fiscal 2008. Last fiscal, the first year after the quota regime was abandoned, the company saw its sales grow 37 per cent while net profit grew in single digits at 7.7 per cent.

From soda ash to textiles
In case of soda ash producer, GHCL with revenues of Rs 475 crore, the textile business comprising spinning, forms 19 per cent of sales. The company is expanding its spinning capacity by 65 per cent to 1.4 lakh spindles to be operational by January 2007.

It is also setting up a new home textiles manufacturing facility at Vapi with 36 mn mtrs per annum of processing capacity and 9 mn mtrs of weaving capacity, at a cost of Rs 230 crore. At 90 per cent capacity utilisation, the Vapi unit would be capable of producing at least Rs 400 crore worth of goods, which equals the entire turnover the company recorded last fiscal.

With a turnover of about Rs 1,125 crore, Dan River is well known for its own brands in the high-end segments such as 'Bed In a Bag', Marquis Home Collections and also the well-known Alexander Julian, in addition to other high margin juvenile segments. It has the widest sales and distribution network within the US catering to the largest retailers.

It is a preferred supplier to large retailers like JC Penny and Linen & Things, Wal-Mart and Bed, Bath & Beyond. The company has, however, filed for Chapter 11 in the US. Rosebys, with a turnover of Rs 930 crore, has a strong presence in bedding, curtains and kids garments with over 300 retail outlets across the UK.

Along with a strong presence in the world's biggest markets, GHCL will benefit by sourcing from alternate locations like China and Pakistan, where Rosebys and Dan River have sourcing arrangements.

Sanjay Dalmia, chairman, GHCL said, "The deal offers an ideal combination of low-cost sourcing and a large established marketing platform, which will put our growth on the fast track." Both are expected to contribute approximately Rs 2,000 crore, which will be over 70 per cent of the total turnover in CY06.

The company is also expected to benefit from the rise in soda ash prices leading to higher realisations aided by higher volumes in CY2007 due to its acquisition of a Romanian soda ash player. The next one is expected to happen very soon in the same region.

Says Apurva Doshi, analyst, Kotak Securities, "The company has been successful in turning around operations and streamlining processes in the acquired Romanian soda ash plant. Now it remains to be seen how they execute the acquisition plans in the textiles business."

According to broking firm Kotak Securities, the company's sales are expected to touch Rs 2,380 crore and net profit Rs 120 crore in CY 2006. In CY07E, sales are expected to grow by 25 per cent to Rs 2,970 crore and net profit will reach Rs 200 crore.

"Comparing the acquisitions by the two large players, Welspun's move seems to be better," says Shrivastav. Welspun is an established player and is present in the higher end of the value chain compared to GHCL. Moreover, it is present both in terry towels and bed linen, which are growing at a fast pace.

Apparel fabric producer Alok Industries is also planning to go the whole hog in the home textiles space. Its export revenues for FY2006 stood at Rs 389 crore of which 95 per cent came from home textiles.

Its present home textiles portfolio covers bed sheets and pillow cases and the company is increasing its product offerings from bed sheets to terry towels. Says Khandelwal, "We are looking for opportunities for a marketing tie-up which should also help us upgrade and improve our product range."

Growth+value picks

Textile stocks have been laggards on the bourses for a prolonged period as many companies are still on the expansion mode, the benefits of which are expected to kick in only over the next two years. Concerns over competition from China and other low cost producers like Pakistan, Sri Lanka and Bangladesh are also holding back investors.

Leading home textiles players like Welspun, Alok and now, GHCL seem to be on a high growth trajectory. Leading broking houses have upgraded these stocks betting on steady growth and improvement in profitability even though their share prices have declined in the range of 15-30 per cent year-on-year except GHCL (which has in fact soared by 83 per cent). 
  

FINANCIALS
(Rs crores)	Welspun India			GHCL			Alok Industries
	FY06	FY05	%chg	CY05*	FY05	%chg	FY06	FY05	%chg
Net sales	653.73	476.31	37.25	477.30	525.24	-9.13	1418.76	1224.5	15.86
Operating profit	122.84	107.50	14.27	133.38	104.70	27.39	296.14	238.38	24.23
Net profit	41.55	38.58	7.70	71.32	40.55	75.88	110.19	89.25	23.46
OPM (%)	18.79	22.57	-	27.94	19.93	-	20.87	19.47	-
NPM (%)	6.36	8.1	-	14.94	7.72	-	7.77	7.29	-
* The company has changed its accounting year to calendar year (CY)

Welspun India
The stock has gained 9 per cent month-on-month. At Rs 75, the stock trades at 6.25x and 5x for FY07E and FY08E. This looks cheap considering the expected growth. Historically, the stock has been trading in the P/E band of 12-15 times at a premium to textile companies' multiple of 10 times.

The full impact of the Christy acquisition will be seen in FY08. Edelweiss and IL&FS Investmart have given a buy recommendation with a target price of Rs 150.

GHCL
The company's stock price spiked by 19 per cent over a month and 83 per cent year-on-year. The stock trades at 13.6x and 8.1x for CY06 and CY07 respectively, not including Rosebys' numbers.

The stock should be looked at taking into consideration a two-year horizon as it will take time for the company to integrate and synergise operations, say analysts. In June 2006, Kotak Securities had put a buy recommendation at Rs 106 with a one year target price of Rs 170.

Alok Industries
Unlike the above peers, the stock has declined by 4 per cent in a month. At Rs 56, the stock trades at 5.9x and 4.7x FY07E and FY08E respectively. Sharekhan has given a buy recommendation at the same price with a target price of Rs 120. With its capex plans in place for backward integration, Alok is turning out to be a fully integrated textile house.