A Stitch In Time

Organisational restructuring at Coats Viyella coupled with the international demerger of the parent promise a good future for the Indian arm. It makes a good investment on a one year horizon

At Rs 55, Coats Viyella looks like an attractive buy. The results for the year ending December 1997, have been good, in tune with the upswing in the cotton textile industry. In addition, there are a whole lot of company initiatives that deserve to be commended too. The company to an extent has borne the cost of profitability, by absorbing high excise outgo and has put in place its finances by coming out with a rights issue in 1997. In 1998, the company is forging ahead with an overall organisational and business re-grouping exercise. A benefit analysis of the group changes will give a better picture.

 

After a disastrous 1994, the company mulled over various strategies to improve its performance. Though the company blamed an inequitable excise structure and high cost of raw material (constituting 85 per cent of the input cost), for the dismal results. A closer look reveals an altogether different picture. This was because the excise pay-offs were applicable to only 30 per cent of its turnover contributed by threads. And the company realised that it had to tackle internal problems whose solution was within their purview.

Since 1995, the company has systematically taken positive steps to modernise their manufacturing infrastructure, to retire high cost debts and to reduce the workforce. At the end of 1997 the fabric and the industrial textiles divisions were brought under one management to build a strong position in canvas products and to optimise the use of manufacturing assets.

Managing director of CVIL, J S Remedios, says, The manufacturing and operations were upgraded to compete in the international markets as it was essential to be competitive internally. CVIL exports 25 per cent of sales directly. It is also looking at investing in information systems to raise the quality of supply chain management.

Starting with modernisation, the companys outlay for capex in 1997 was Rs 160 crore spread over its five units. As part of regrouping, the garment accessories business was in Coats India Sewing Thread division to capitalise on the companys distribution strengths. It spent Rs 35.72 crore on modernising Coats India, the division that makes consumer and industrial threads, interlinings, zip fasteners, needles and other tailoring accessories. It has earmarked Rs 14.88 crore to modernise industrial textiles. Another Rs 9.52 crore has been allocated to Madura Garments which trades in branded readymade garments and allied products.

To take care of its finances, Coats Viyella made a rights issue in July 1997 to net

Rs 156.48 crore. Out of this, Rs 110 crore was used to retire high cost borrowings. Consequently, its debt-equity ratio came down from 1:1 pre-rights to 0.15:1 currently. Earlier, the company had announced the rights issue in 1994 and once again in mid 1995, but on both occasions it had to withdraw as its share price fell below the offer price.

The company decided to reduce another cost component, the employee cost, and started the voluntary retirement scheme (VRS) in 1995. Pegging its manpower requirement at 8,500, it has been reducing its workforce consistently from 14,500 since 1994. In 1997, the company spent Rs 6.7 crore in compensation packages under VRS. In 1998, it faces the task of further downsizing from 12,000 to 8,500.

Coats Viyellas de-merger worldwide is on the anvil this year. The company was bogged down by a bad performance and a steady decline in operating profits. This was due to the strengthening of the pound and the volatility of the South

East Asian and the South American markets. So, to restructure its international operations and to achieve a narrower focus, it decided to demerge the company.

Remedios clarified saying the UK-based fashion retail, home furnishings and clothing businesses of CV will be converted into a new company called Viyella Plc in July 1998. In the second phase, the precision engineering businesses will be floated as a separate company in 1999. Coats Plc will comprise the Coats sewing thread businesses worldwide and will control the 51.5 per cent interest in the Indian arm.

Of the several problems plaguing the company, the one defying solution is the high excise outgo from their threads division. In the last two years, their excise bill has been in excess of Rs 40 crore annually. This started in 1994 when the government levied an excise duty of 23 per cent on fabrics, apparels and synthetic threads. Though the government has reduced excise duty since then from 23 per cent to 17 per cent in 1997, it has not made much of a difference in the accounts of the division. In 1996 due to the high excise duties, the company shut unremunerative activities at its thread and fabric units in Tamil Nadu and Kerala. This lowered its working capital requirement in the short term and the capex in the long run.

According to the company, 60-70 per cent of the margins from the threads sector has been affected by an anomalous excise duty structure. The duty structure is such that large scale manufacturers have to pay a heavy excise duty vis-a-vis the unorganised sector, with only a nominal Modvat credit accruing to them in the end. To combat competition from the unorganised sector, the company has expanded its product lines for threads and simultaneously, it is targeting the premium clothiers for the sewing threads.

But as far as the threads division is concerned, a lot depends on the new governments policy vis-a-vis the small sector. Popular belief is that the government will have a pro-protectionist stance as regards the unorganised sector. Large scale textile units allege that the unorganised sector of yarn rewinders generally evade paying excise duty. There seems to be no respite on the excise front as the industry believes there will be no sops from the new government.

The performance of the textile industry depends on the availability of raw materials at reasonable rates. As the prices of cotton depend on the fate of cotton crop, on an average the industrys raw material procurement cost has gone up by 30 per cent annually since 1994. The estimated cotton production as per the Cotton Advisory Board varies at intervals and their price bulletin fluctuates 10-15 per cent on a monthly basis. For the current cotton season, from October 1997 to September 1998, the Board has pegged cotton production at 150 lakh bales.

Though the quantity of available cotton is known, the prices have not stabilised as yet. The domestic prices are determined after fathoming the domestic demand and the quantity to be exported. Textile mills buy their annual requirement of cotton in the months of November-December. But in 1997, textile mills decided to defer their purchase as the general belief was that after the general elections there would be a fall in cotton prices. But contrary to expectations, the prices have increased by 10 per cent. Remedios says this year cotton prices are higher than the world prices. The only silver lining for the company, in 1998, is the drop in polyester prices.

In readymade garments, the company makes shirts for the high end of the market (with brands like Louis Phillipe, Van Heusen and Allen Solly) and has recently launched the Peter England brand for the middle segment. This business has been growing at 30 per cent. The shirt majors are facing a cut-throat competition, vying for elusive marketshares. According to market sources, the Van Heusen commands a market size of Rs 32 crore a year, Louis Phillipe holds Rs 38 crore and the size of Coats Viyellas semi formal range Allen Solly is around Rs 36-40 crore a year. The middle segment includes Excalibur (Arvind), Cambridge, Zodiac and the latest entrant Peter England.

Market sources say that currently, demand is shifting towards blended shirts which is favourable for manufacturers as polyester is cheaper than cotton. In the premium segment, Coats Viyella faces competition from the Arrow brand of Arvind Mills, whose sales are estimated at around Rs 24-27 crore annually.

Remedios is more realistic about the future. He says, The immediate outlook is clouded by the impact of currency devaluation in S E Asia on the world textile prices and on the Indian textile exports. Another possible dampener is the likely imposition of 10 per cent anti dumping duty on Indias grey cotton fabrics exports to the European Union. He is also not satisfied with the excise duty differential.

Though the current market price discounts the EPS of Rs 2.82 around 19 times, analysts are bullish on the stock in the medium to long term. They say that its worries are discounted by the market and that its financial restructuring is in place and CVIL has set its sights on operational and organisational restructuring. In the short term, the company is expected to perform on an average basis. But the future appears bullish.