Textile major, Arvind, a global leader in apparel manufacturing is on a roll. The company, in less than five years, plans to divest almost all its looms in its two manufacturing facilities in Naroda and Santej in Gujarat to its partners. Almost 250 million meters of textiles that the company manufactures, will be contracted to these partners. The company will however continue to process these in its facilities and convert them into apparels. This process will comprise around 40 per cent of Arvind’s textile production in the next few years.
And as Sanjay Lalbhai Chairman and Managing Director explains, they will outsource all textile production in the next five years. Shut down 1,500 looms and retain only a processing and a designing centre that will help them provide complete solutions to 10 most important global clients, and over 10 domestic clients.
New initiatives to fuel growth
The company’s garmenting ambition coincides with employment generation policies of Jharkhand and Gujarat. Both states will provide Arvind a payroll incentive or subsidy of Rs 4,000 to Rs 7,000 per month for every worker it employs. The company, in the next couple of years, will employ at least 5,000-8,000 women in each facilities in the two states to produce apparel. The new Ethiopian units too would focus on garmenting and offer duty-free access to European markets.
Arvind also plans to switch from cotton to manmade fiber which is cheaper, more functional and dominant in the sportswear and athleisure segments. Additionally, the company will launch its own eponymous garment brand to confront rival brands like Raymond. These initiatives will help Arvind lift its ROCE from the current 10 per cent to 18 per cent by financial year 2022-23.
Brands to break even this fiscal
Achieving similar improvement in the loss-making Arvind Fashions, may not be possible at the moment. Arvind’s branded apparel business comprise 20 foreign brands in India. Of these, four are power brands—the ones with the highest earning potential— Flying Machine, Arrow, U.S. Polo and Tommy Hilfiger. The EBITDA margin for these four increased from 9.5 per cent in FY12 to 12.2 per cent in FY18. The other 15 or so are hovering around an EBITDA margin of 5 and 6 per cent for the past six years.
These brands are still in investment phase and as they scale up, operating leverage will improve profitability and capital efficiency. The company will break even across all brands this financial year, a promise that it didn’t fulfill last year. Yet, analysts are hopeful.
Post demerger, Arvind Fashions will have to fund its own growth as it won’t be able to depend on the textile business’ cash flows. The company may prune its brand portfolio but doesn’t commit to it. It believes with the Goods and Services Tax and the new insolvency and bankruptcy law, time to think big has arrived.