We Expect To Perform Even Better

There has been a sharp increase in the demand for denim fabrics in the last one year. Denim prices have increased by about 18 per cent in the last one year

The Rs 1,193 crore Arvind Mills has been facing harrowing times over the past two years. While topline for the 12 months ended March 2001 (the company has extended the financial year to June 2001) has dipped 4 per cent as compared to FY00, the company has sunk deeper into the red with a net loss of Rs 339 crore as against a loss of Rs 316 crore in FY00.

 

With almost 50 per cent of the company's revenues coming from the sale of denim fabric, the price recession in the denim industry has had an adverse impact on the company.

However, the scenario has been looking up for the last one year with the buoyancy in the denim markets and the reduction in cotton prices.

Besides, the financial and business restructuring aimed at reducing finance charges and the focus on value added and finished products have resulted in the company registering a modest cash profit for the first quarter of the current fiscal.

Even as Arvind Mills is in the midst of a major restructuring exercise, Rajesh Nair spoke to Jayesh Shah, chief financial officer, about the company's revival initiatives.

The Rs 2,751 crore debt recast plan is said to be the first major step in your turnaround strategy. How will this happen?

The company has a two-pronged strategy for turnaround. The first is the financial restructuring. This is aimed at achieving three objectives.

We will significantly reduce the debt burden and thereby correct the debt equity ratio (2.5:1 in March 2000 corrected to 1.1:1). The cash flow mismatch between earning and repayments will be removed and we will significantly reduce the interest cost.

The second part of the turnaround strategy relates to our business operations. We will first focus on the value added products.

We converted our denim production from being 80 per cent standard products and 20 per cent specialty products to currently 60 per cent of speciality products.

Then there is the vertical integration. Instead of supplying just fabric, we will convert it into garments as much as possible. This gives us a significantly higher contribution compared to supplying fabrics.

In the last one year, we have converted almost 10 per cent of our knits capacity and shirting fabric capacity into making T-shirts and shirts.

What will be the impact of the debt restructuring on the finance charges for the ensuing years? When do you expect the company to turnaround?

The finance charges for the current year will be reduced from approximately Rs 350 crore to Rs 180 crore. With the continued uptrend in the denim business, we expect the company will back in the black in FY03.

Over 84 per cent of the Rs 384 crore net loss for FY01 is accounted for by the interest charges. However, while the debt restructuring plan can help reduce interest charges and improve bottomline, what will fuel topline growth?

The two-pronged strategy for turnaround which I mentioned earlier, will help fuel topline growth. The company's topline grew by 17 per cent in the first quarter of FY02, and operating profits grew by about 50 per cent. This is essentially on account of two strategies that I mentioned earlier.

How has the price recession in the denim industry changed over the last one year? In view of this, how has the denim division performed for the 12 months ended March 2001 and the quarter ended June 2001?

There has been a sharp increase in the demand for denim fabrics in the last one year. Denim prices have increased by about 18 per cent in the last one year. The denim division operated at 100 per cent capacity utilisation during the same period.

During the current fiscal year, the denim revenues grew by about 28 per cent in the first quarter. We are currently fully booked for the next six months, and we are looking at outsourcing denim to meet our customers' demands.

What was the basis for the size of the Rs 75.41 crore rights issue? Considering that the scrip currently rules below par value, why do you expect shareholders to subscribe to the issue? If subscribed, what will the proceeds be utilised for?

As a part of the restructuring, Arvind intends to buy back close to one-third of its long term debt. In rupee terms, there will be a debt reduction of about Rs 750 crore.

The company needs to pay up approximately Rs 340 crore for this. The Rs 75 crore rights issue is part of the requirements of funds to meet with the debt buyback cash flows.

The balance money is being raised from the sale of real estate (Rs 100 crore), new borrowing (Rs 120 crore), and internal generation (Rs 50 crore).

To what extend is the financial restructuring expected to dilute the company's equity base? At what rate is the topline expected to grow so as to service the diluted equity base?

The company's book value currently is Rs 55 per share. Its net worth is Rs 550 crore, and the equity capital is Rs 100 crore. Due to the financial restructuring, the net worth is expected to go up to Rs 1,200 crores (Rs 120 book value before dilution due to the rights issue).

The company is raising about Rs 75 crore by way of the rights issue at par. The book value post dilution will be approximately Rs 70 per share.

The company's capital will grow to Rs 175 crore and the net worth will grow to Rs 1,200 crore. The company expects its turnover to grow by at least 20 per cent per annum in the next few years.

Our business operations have shown a significant improvement in the recent past. The turnover is expected to rise by about 17 per cent during the current year and operating margins may rise by about 100 per cent compared to the last financial year.

After two years of weak performance, Arvind Mills has made a modest cash profit in the first quarter of the current financial year. With continued buoyancy in the denim markets and expected sharp reduction in cotton prices due to a good monsoon, we expect to perform even better in the near future.

What steps are you taking to concentrate on your core business, considering the company's presence in the telecom and financial sectors?

The company has a small telecom business (radio trunking business). We are looking at opportunities at a time when the businesses are consolidating.

Most of your subsidiaries have accumulated losses or negative cash flows. How did they perform in the last fiscal? How will their performance reflect on Arvind Mills' accounts upon consolidation?

With the revival of the textile business, all the subsidiaries have started improving their performance. All of them are expected to turn in to black in FY03.