Mr. Sunil O. Khandelwal, Chief Financial Officer (CFO), Alok Industries Ltd. is a qualified Chartered Accountant. He is working with Alok Industries for 21 years. As a CFO, he is responsible for the overall Corporate Finance, Accounts, Tax, Internal Controls, Investments, Risk Management and Strategic Planning functions. During his tenure with the company, he has gained wide experience in raising funds for project financing, working capital, acquisition funding from international and national lenders, equity raising in domestic and international markets, private equity, financial planning and budgeting, treasury, corporate accounts and taxation.
Established in 1986, Alok Industries Ltd. is India's largest fully integrated textile company with a dominant presence in the Cotton and Polyester segments. It is a diversified manufacturer of home textiles, apparel fabrics, garments and polyester yarns. The company has a blue chip international customer base, comprising world renowned retailers, importers and brands. Its strategy for attaining the leadership position is to focus on world class infrastructure, best-in-class technology, uncompromising quality standards and dynamic product innovation. Alok’s first polyester texturising plant was set up in 1989. It became a public limited company in 1993. Over the years, it has expanded into weaving, knitting, processing, home textiles and garments. Alok has also integrated backward into cotton spinning and manufacturing partially oriented yarn. The company also provides embroidered products through Grabal Alok Impex Ltd., our associate company. Alok has a strong foothold in the domestic retail segment through a wholly owned subsidiary, Alok H&A Ltd., which offers garments and home textiles. Alok also has an international presence in the retail segment through its associate concern, Grabal Alok (UK) Ltd. This entity owns more than 200 outlets across England, Scotland and Whales vending value for money ranges for menswear, womenswear, childrenwear, footwear, homeware and accessories.
In an exclusive interview with Hemant P. Maradia of IIFL, Mr. Sunil Khandelwal says: “There is some slowdown in the textile industry but Alok Industries’ volumes are growing.”
Is there pressure on bottomline as PAT growth in Q2 was muted compared to strong jump in revenues?
We had to make a non-cash extraordinary provision on account of currency fluctuations. We can reverse this once the rupee rebounds to ~46 levels.
Although the absolute amount on Interest outgo and Depreciation increased but as a percentage of net sales they remained steady.
What is your take on cotton prices?
We are focusing on more value-added products and better inventory management. For e.g. our three months’ cotton inventory is sold out. This has helped us manage our raw material cost well.
From Rs 60,000 per candy in July, the price of Shankar 6 variety of cotton has come down to Rs 38,000 a candy. We believe that by the end of December, cotton prices should reduce further. Shankar 6 price can drop to Rs 32,000 per candy.
We may think of increasing the cotton inventory if prices moderate further.
What has led to a drop in your margins?
Margins have come off because the proportion of the Polyester business in the company’s total turnover has been going up. Last year, it was at 25% of total sales; this year it has gone up to 35%. We believe it will be almost 45% next year.
Polyester is a volume game. Margins are comparatively lower but the Return on Capital (ROC) is very good at ~30%. Instead of EBITDA, our focus is now on ROC. Though the EBITDA is 18%, the asset turnover is 2.25. Higher asset turnover leads to higher ROC.
On the other hand, cotton has very good EBITDA of 35% but the asset turnover is only 0.5. If I invest Rs 1,000 crores on the cotton business, the turnover I get in return is just Rs 500 crores. The ROC in cotton business is 12-13%.
So, are you looking to scale down cotton business?
No, we are not reducing our Cotton business; it is just that we have scaled up our Polyester business much more. From 200,000 tons per annum, our Polyester capacity will increase to 500,000 tons next year.
Do you see change in consumption pattern of cotton and polyester textiles?
India’s domestic textile consumption is rising by 10% a year. Two years down the line, the cotton surplus situation will cease to exist and prices will start firming up.
Affordability will come into play sooner or later due to high cotton prices. People will start switching from cotton to polyester or blended fabrics.
We sell finished polyester products like fully drawn yearn (FDY), texturised yarn and some part of POY also. We are also going for industrial yarn and other variety which find applications in technical textiles.
We are also adding capacity in polyester staple fibre (PSF), which is used to blend with cotton. With more and more people turning towards blended cotton clothes, the demand for PSF will shoot up going forward.
We are looking at exporting 40-45% of our polyester capacity as opposed to 30-35% at present.
Overall, our exports have grown by 28% YoY during the first half of FY12. We can see higher growth in exports during the remaining two quarters.
How is Home Textiles business doing?
The Home Textiles division has shown good traction, with revenues growing by 40% in the second quarter of FY12. We are adding one more processing line for this segment. From January 2012 onwards, our volumes of Home Textiles will grow by 70,000-75,000 metres per day. So, sustaining growth at the current pace is not an issue.
We have also doubled our Terry Towel capacity, which will also be operational from January 2012. That will also continue to grow.
In Home Textiles, we export 95% of our production.
Are you witnessing any slowdown due to macro-economic problems?
Yes, there is some slowdown in the textile industry but Alok Industries’ volumes are growing. What happens is in a downturn, the customers go for consolidation of vendors. They tend to buy more from large textile players. Also, their demand shifts more towards basic products as opposed to buying higher thread count products during the good times. So, we are confident of maintaining our growth in exports.
The Garment segment is also doing well. It is a relatively smaller segment for us. In FY12, its turnover should be ~Rs 1.8bn or equivalent to 2.5-3% of our topline.
We also export apparel fabrics – woven and knits both. In case of knitted fabrics, almost 50% is exported while in case of woven fabrics the same is 20%.
Are you scouting for new geographies for exports?
Yes, we are looking at new geographies for exports.
We are exporting polyester to Syria, other African nations, Latin America, Eastern Europe, South East Asian countries and China.
For Home Textiles, we are looking at markets like Australia, New Zealand; even Russia is a potentially good market. Asia is also emerging as a major market.
We are exporting cotton and cotton yarn to Pakistan. It is a good market for polyester yarn but as of now, they are barred from importing the same from India.
We have sold about 75 acres out of the total area of 500 acres. We are getting good level of enquiries as Silvassa is an industrial property. Another 150-200 acres can be sold before March 2012. The remaining land can be sold by March 2013.
We are getting a price of Rs 75-80 lakhs per acre as against the purchase price of Rs 15 lakh per acre.
What kind of capex are you looking at going forward?
In the remaining part of FY12 we are planning a capex of Rs 4bn for the ongoing projects. We are yet to decide on capex for FY13. There can be regular capex to the extent of Rs 3-4bn.
In the long run, polyester will continue to be a key thrust area for us. We would like to grow our polyester capacity to one million tons per annum from 500,000 tons a year. However, as of now there are no firm plans on this front.
Even technical textiles is something that we are interested in. We might go in for some capex for this segment.
What is the status of your proposed exit from Real Estate?
We are working on it. Hopefully, by March 2012 we will be able to exit from Peninsula Business Park, Ashford Centre and some portion of the Silvassa land. We are targeting to mobilise about Rs 14bn from the real estate sale by the end of the current fiscal year.
We would be left with two residential projects – one at Nahur and the other at Bhulabhai Desai Road apart from small piece of land in Vapi. Another Rs 4-5bn can be garnered from these properties over the next two years.
What is your view on competition to Indian textile industry?
The worldwide major player in textiles is China, accounting for 33% of the global textile trade. China exports ~US$200bn worth of textiles. China is facing its own set of issues. Its domestic demand is growing rapidly; it is growing at a CAGR of 15$ per annum. This is reducing China’s capacity to boost exports.
Secondly, China’s cost of production is also going up. It is a net importer of cotton whereas India is net exporter of cotton. So, China’s cotton cost is about 10% higher compared to India. Their labour cost is almost 200% more than India. As a result, China’s competitiveness has diminished slightly. It will still continue to drive volumes and maintain its share in the world textile trade. However, it may not be able to increase it further.
Another big player in textiles is Europe, accounting for ~30% of the global trade. Europe’s textile exports are approximately US$190bn. Europe’s share is likely to come down, while China may not be able to increase its share. India should be a major beneficiary from this trend going forward. India is poised to increase its share in global textiles trade, from 4% now to 8% by 2020.
How much is absolute debt and debt-equity?
We are having a standalone debt of Rs 100bn and consolidated debt of ~Rs 120bn. The debt-equity ratio is 2.5.
Over the next 2-3 years our major focus will be on three things. One, reducing the debt; we are aiming to bring it down to a level of 1.5 by 2016 or so.
Second will be to increase the ROC, which our polyester business will enable us to achieve. In cotton, we will concentrate on more and more value-added products.
Third, we will focus on boosting the asset-turnover ratio.
Tell us about your retail business?
At the moment we have ~370-380 H&A stores across India on franchisee basis. We will grow this up to 500 stores in the next one year or so. After that, we will review H&A’s performance and see whether it is able to sustain itself on its own.
H&A is close to breakeven now. If it is able to sustain on its own then we could grow the business further. As a company we would not like to be in any non-profitable business.
The UK retail business is in cash profits.