Incorporated in October 1991, Hanil Era Textiles Ltd was jointly promoted by New Era Fabrics and Hanil Synthetic Fibre Industries Company, South Korea. The company, which has a 100% EOU at Patalganga, Raigad, manufactures and exports acrylic, cotton, viscose and blended yarns in varying textures, blends and counts. It exports its products to 21 different countries across the world including China. The company is moving up the value chain by foraying into to fabrics and textile. It has also diversified into Ethanol manufacturing.
Mr R K Agarwal, Chairman, Hanil Era Textiles Ltd has over 25 years of experience in the textile industry. He successfully managed one of the largest textile process house in Mumbai, before promoting his own company Hanil Era in 1991.
In an interview with Toral Munshi and Nitesh Agarwal of India Infoline, Mr Agarwal outlines the challenges ahead for textile companies in the post quota environment and Hanil Era?s plans for growth
How the dismantling of multi fiber agreement (MFA) will affect the Indian textile industry. How we are placed vis-?-vis other countries eg China?
The dismantling of MFA from January 1, 2005 will open a window of great opportunity for India. However, it will also bring enormous challenges with it. We have just started preparing ourselves for a quota-free world, whereas countries like China are fully geared to exploit the opportunities from the day one, thanks to their huge investment in the sector in the last decade. China will be the biggest beneficiary of the removal of quota. However, the backlash against Chinese import in EU and US can?t be ruled out and may give opportunities to other countries too. India is well placed to occupy that slot.
Going forward, we will see increasing competition not only from other countries but also intense competition within domestic players to grab the larger pie of the export market. We may experience consolidation in the industry, where small players are being swallowed up by bigger one. Intense competition will lead to a situation where only fittest will survive. Quality, cost and marketing strength will be key to succeed in a quota-free world.
Are you contemplating any capacity expansion?
In order to exploit the opportunities thrown up by removal of quota from global textile trade, we are moving up the value chain and establishing a weaving and processing plant with an investment of Rs500mn. The said expansion is expected to be on stream by the end of Q1 FY06. We are establishing 60 looms, which will produce about 20-30,000 meters of fabrics a day. This unit will also be an EOU catering to international markets. We see huge potential in US markets. Currently, we (India) command less than 1% of the US home furnishing markets. Further, there were many plant closures in the US, which has vacated huge space for players from other countries.
How do you plan to fund the expansion?
The expansion will be funded through a mix of internal accruals and loans. Loans worth about Rs200mn have been tied up under TUFS (technology upgradation fund scheme) at an average cost of 3-3.5% pa. We are a debt free, cash rich company with about Rs100mn in cash and bank deposits. Debt funding is being availed of to take advantage of concessional funds available under TUFS.
Though your debt came down in FY04, your interest cost increased in H1 FY05? What were the reasons for rise in the interest cost?
We are a debt-free company and even most of the time our working capital limits remains un-utilized. More than 90% of interest costs as shown in our books are in fact bank charges eg letter of credit openings charges, etc. These expenses increase in line with the growth in the business and therefore are higher in this year.
What is the working capital policy of the company?
Due to seasonal nature of the commodity, we maintain cotton inventory of about 6 months. This not only ensures uninterrupted availability of cotton at lower prices but also ensure consistent quality. In case of man-made fibers, we maintain inventory based on our requirements and market conditions. As a policy, we do not take risk on debt. All our sales are backed by letter of credit.
What are your export markets? Can you elaborate on your customer profile? How do you insulate yourself from the volatility of the exchange rate movement?
We export to over 21 countries across the globe including China. Direct consumers accounts for 60% of our export sales while rest 40% are sold through agents. Almost all of our invoices are Dollar denominated. We have a natural hedge as more than two-third of our raw materials are imported which amounts to about three-fourth of our forex revenue. Hence, to a large extent we are insulated against movement in forex rate.
You have 16MW captive power plant, and you earned Rs102mn from sale of surplus power last year. Do you see any increase in revenue from this head? What is the feedstock for the power plant?
We have 16MW power plant at our manufacturing location. We sold our surplus power and earned Rs100mn from this. The feedstock for the power plant is furnace-oil and going forward we might use gas as feedstock subject to availability. Once we get the assured gas supply, our power cost is expected to come down further. Over 75% of conversion cost (conversion of fibers into fabrics) is power cost and having a captive power plant give us competitive advantage.
Where does the company source raw materials from?
We have three main raw materials namely acrylic, polyester and cotton. Acrylics accounts for about two-third of our total raw material cost and most of which is imported. Whereas polyester and cotton are mostly sourced from the domestic market.
Who are the other players in the market and how do you differentiate from them?
Since our current product mix is very versatile and with the addition of weaving, we will have a different set of competitors going forward. In the yarn space, our key competitors are Vardhman, Nahar and Mahavir Spinning. However, we have an edge over competitors in acrylic export market on account of our cost structure, nearness to port and our EOU status. As we move up the textile value chain, we will compete with fabrics maker like Alok, Welspun et al.
We are witnessing huge investment in the textile industry. How much of these investments are going to Indian textiles manufacturers?
Indian textile machinery industry is not as competitive as the EU and Japanese players except in few niche areas like spinning machinery. However, as we move up the value chain ie weaving, processing and garmenting, we do not have enough quality capital equipment manufacturers. Therefore we end up importing these machineries. We too would be investing 70% of our total capital outlay on imported machineries for our weaving and processing unit.
Your annual report says that the company is establishing an Ethanol plant with an investment of Rs100mn. Would you please let us know the current status of the project?
We have established an ethanol plant with an investment of Rs100mn. We see a great future in this business. Across the world, Governments are encouraging mixture of ethanol with the petroleum products on account of its environment friendly nature and it reduces our (economy?s) over-dependence on fossil fuels. There are uncertainties in India with respect PSUs oil company?s purchasing policy. However, until the issue is resolved, we can export ethanol to other countries for which they already have in place an enabling legislation for mixing ethanol with petroleum products.
Our raw material is raw alcohol. Depending upon the sugarcane crop, we either sourced it from the domestic or international markets (mainly from Brazil). The plants commenced its operation in Q3 FY05 and we expect it to contribute Rs500mn annually to our topline.
Any message for the shareholders of your company?
We have always taken care of our investors and will continue to do so in the future. In order to reward our investors, our board has approved, up to 10% of equity capital of the company for buy-back. With the proposed investment of Rs500mn the value of the company as well as the shareholders? wealth will appreciate.