Alok Industries, one of the most formidable players in Indian textile space, has been reeling under financial pressure and may soon be declared bankrupt if the dues aren’t paid. The current 270-day deadline for resolution set under the insolvency code is already over and the company management is trying to get some more time to get out of such a bad state but it seems that plan has been rejected by the committee of creditors in April as it received 70 per cent votes against the minimum requirement of 75 per cent then. A recent amendment to the Insolvency and Bankruptcy Code, however, lowered the threshold to 66 per cent. As per the plan, submitted by JM Financial Asset Reconstruction and Reliance Industries, was the only one on the table. The two had offered Rs 5,000 crore against close to Rs 30,000 crore in dues to creditors. Lenders rejected this resolution plan, putting the company at risk of liquidation. However, some of the company’s operational creditors and employees opposed this and approached the NCLT.
Beginning of the end
It all started with company’s aggressive expansion plan between 2004 and 2013, when the company spent more than Rs10,000 crore on building up its spinning, weaving, processing & garmenting units. Most of this was funded through debt. But the strategy didn’t go down well and as a result, its domestic retail plans failed to take-off and the share of exports slipped as the company could not maintain market share amidst global competition. To add to this, the company’s diversification into sectors like real estate weakened its finances further, eventually pushing the company into bankruptcy.
Analysts say, not only did the company over-invest, it also over-produced. Sameer Kalra, Founder, Target Investing feels large capex and high inventory maintained in anticipation of demand impacted the company. The demand scenario in the textile industry keeps on changing very quickly so very few companies can address it efficiently. Similarly, Bhavesh Chauhan, analyst, IDBI Capital, added that Alok Industries’ choice of investments was also questionable. For instance, Alok Industries invested in the spinning business which already had excess capacity in India. This failed to generate commensurate revenues for the company. Experts averred that in the textile industry, companies need to have periods of consolidation and expand only once the existing capacity is well utilised. Alok Industries ignored this fact and expanded its capacity continuously. As a result, Alok Industries failed to utilise its assets well. Its asset turnover ratio, which indicates the efficiency of deploying assets to generate revenue, remained below one times and declined sharply over the last few years.
Diversification – failed prop?
Alok Industries aggressively expanded into the retail market in India through ‘H&A Stores’. It also forayed into the UK market with ‘Store Twenty One’. At its peak, in financial year 2011-12, the company had nearly 350 retail stores in India and 221 stores in the UK. It didn’t even work as planned and it had to close down all its stores in India. In the UK, the company still has close to 100 stores and is planning to ‘exit this business at the earliest opportunity’. In 2007, the company also entered the real-estate business by acquiring commercial property in Lower Parel though its real estate subsidiary – Alok Infrastructure Ltd. This locked up large amounts of capital.
Between March 2007 and September 2013, the company saw its debt jump six times to Rs 20,230 crore. However, during the same time period, company’s cash flow from operations were much lower, putting its ability to repay in doubt. Adding to the company’s woes, interest rates started increasing. Between 2009 and 2011, the benchmark repo rate rose from 4.75 per cent to 8.50 per cent. The company’s own interest costs jumped to about 13 per cent from 7.5 per cent, ultimately putting the pressure on the company’s ability to service debt. This entire episode resulted in interest costs becoming the second largest expense for Alok Industries after raw materials.