Alok Industries: Banking on exports to cut debt

Textile firm Alok Industries, with Rs 20,000 crore consolidated debt on its books, is in a hurry to offload it. High interest costs have corroded half its profits in the last few years and have erased the market value of the company by almost 60 per cent from its five-year peak of Rs 33 (November 2010).

The Mumbai-based company has approached banks to restructure its debt and, at the same time it is taking several steps to increase exports. With higher dollar earnings, Alok Industries is also planning to swap its local loans with dollar loans, thereby cutting its interest cost by half and reducing its annual outgo by almost Rs 600 crore. The company has converted Rs 5,000 crore of its local loans into dollar debt and plans to convert another Rs 9,800 crore in the next three months.

Analysts say Alok Industries incurs nearly Rs 2,000 crore of interest cost in its annual loan repayment of Rs 2,400 crore. In the past three-four years, the company's debt to equity ratio rose to 5.74 for the year ended September 2013 (18 months) from 3.54 in 2009-10.

For the trailing nine months period ended June 2014, on standalone basis, while net sales is up 8.6 per cent to Rs 11,315.3 crore, PBIDT was down 3.1 per cent to Rs 2,558.6 crore (despite other income surging 130 per cent to Rs 144.5 crore), on a year-on-year basis. Thanks to a 19 per cent rise in interest costs to Rs 1,417.7 crore, net profit (adjusted for one-offs) came in at Rs 211.3 crore (down 69.5 per cent over the same year ago period). But, June quarter has seen gains in both, revenues and profits.

In some relief last week, Alok Industries was sanctioned a $207.41 million (around Rs 1,244 crore) export performance bank guarantee by the State Bank of India. In addition, the firm was also looking to raise another tranche of $1,425.92 million (Rs 8,555 crore) through the same route, it said in a filing to the BSE.

"We expect the strategy to yield us interest cost savings of at least six per cent on the domestic debt replaced," said the company in its filings. The plan will allow repayment over 10 years. Alok Industries fell into bad times after its foray into the retail business. The company finally exited the retail business last year. The company also invested heavily in real estate, which is yet to result in any benefits to shareholders.

Exports to the rescue

Exports account for 25-30 per cent of Alok Industries' revenue. The company plans to increase its exports to 50 per cent of total revenue over the next two financial years. For this, the company is looking to tap the replacement demand as China yields its position as the biggest exporter of textiles.

Economics favours the Indian company. Average Chinese wages are far higher than India's. China is also focusing on catering to domestic needs rather than on exports. That provided an opportunity to Indian textile companies, said an analyst with a brokerage firm.

Also, overseas buyers were looking at India as an alternative to de-risk their sourcing requirements from China, he said. "Since China is phasing out of the export market, it is the replacement demand that companies like Alok Industries are looking to capture. Though there is no new demand," the analyst added.

"Increasing export share is definitely a move in the right direction as Alok Industries is well integrated in its product range and also has the capacity to deliver," said Pulkit Agarwal, an analyst with CARE Ratings. "However, the company's share in exports cannot go above 50 per cent, as its presence in fabrics is high and fabrics do not have much export demand," he added.

Apart from increasing exports, Alok Industries is divesting its real estate. Since the announcement of a sale in 2012-13, the company has sold real estate worth Rs 900 crore. Alok Industries has another land bank of 450 acres in the Silvassa industrial estate.

Selling its subsidiary businesses is another option for the company. Alok Industries holds 100 per cent in Mileta International and 91 per cent in Grabal Alok (UK) Ltd. "With the sale of non-core assets, the company can realise about Rs 2,000 crore by 2016-17," said the analyst.

Alok is also looking at cutting costs, including power bills by about Rs 200 crore annually, going ahead.

Alok Industries' stock price has gone up 48 per cent since January this year, but the stock is still 40 per cent off its five-year peak. Shares of the company's peers like Arvind have gone up by 114 per cent since January. In the same period, Raymond is up 50 per cent. The company has some catching up to do.