Mr. Sunil O. Khandelwal, Chief Financial Officer, 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 Alok, 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 amongst the leading vertically integrated textiles solutions provider in India. It is a diversified manufacturer of world-class home textiles, apparel fabrics, garments and polyester yarns. The company has a blue chip international customer base comprising of 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., its associate company. Alok has recently entered the domestic retail segment through a wholly owned subsidiary, Alok Retail India Ltd., with a chain of stores named ‘H&A’ that offer garments and home textiles at attractive price points.
In a free-wheeling one-on-one with Hemant P. Maradia of IIFL, Mr. Khandelwal says, "By 2020, India’s share of the global textiles trade is estimated to be around 8%. India can actually do even better and take its share into double digits."
How do you see prospects for the Indian textile industry?
The next decade i.e. 2010-2020 is likely to be very good for the Indian textile industry. The industry will move to a different league in terms of size and scale.
According to a research done by Technopak, a leading Textile Consultant, the Indian Textile Industry would more than triple from the present size of US$70bn (US$47bn domestic and exports US$23bn) in 2009 to US$220bn (US$140bn domestic and US$80bn exports) by 2020. However, to achieve this target, the industry will need to spend about US$70bn.
Being in the industry, we feel the buoyancy. The domestic textile market is growing at about 10% per annum now. We believe that exports during the next five years will grow faster at around20% a year and after that even the domestic market will start growing at a fair clip.
The proportion of exports in the Indian Textile pie is still low vis-à-vis China. The domestic market is likely to account for two thirds by 2020. Your comment?
The proportion of exports in the total Indian textile industry is one third while the domestic market accounts for the balance two third. But it is good. This means that the Indian textile industry is not dependent on the overseas markets for its growth.
When we look at the overseas competition, China clearly is the leader. But it is also facing a situation where its domestic demand is surging. China’s local textile demand is growing at 15-20% per annum, which is not leaving much surplus for them to export and they have started importing textiles to meet domestic demand and to maintain their export share.
Also, global retailers, who source a big chunk of their products from China, are looking to cap their exposure to China to about 35% - 40% of their requirement. They are looking at de-risking their sourcing strategy by increasing their purchases from other markets like India.
India is good in quality, especially in cotton textiles. The only problem was that we could not put up large scale capacities like China. But, now Indian textile companies have started setting up large capacities keeping in mind the rapidly growing demand both on domestic and export front.
We are reaching a scenario where China is not able to grow its share in the global textiles trade beyond a point. Even the other big textile centre - EU’s share is reducing. This gives an opportunity to countries like India to increase their share in the world textiles trade.
By 2020, India’s share of the global textiles trade is estimated to be around 8%. India can actually do even better and take its share into double digits, provided the Indian textile players create capacities.
It is critical that the Government’s TUF scheme remains in place for the next decade, as it will be a golden period for the Indian textile industry. The TUF scheme would go a long way in helping the textile industry invest US$70bn over the next 10 years for further expansion.
We do talk to the government at different forums on this issue of TUF scheme. The Textile Minister and the Government are aware of the huge opportunity for the Indian textiles. They have already indicated that the TUF scheme would be extended even beyond the 12th Five-Year Plan.
How can India compete better with countries like China, Bangladesh and rest of Asia? What are some of the key advantages and disadvantages that India enjoys?
As far as China is concerned, Indian textile players are very much competitive in terms of cost but in terms of volumes we were lagging behind. The new generation Indian textile companies are now able to compete with China on volume terms as well.
If you look at Bangladesh, Sri Lanka and even for that matter Vietnam, they are very good in garmenting. Their efficiency is good. Bangladesh and Vietnam also enjoy low labour costs. But, they are potential clients as they depend on us for fabrics.
India needs to create large garmenting facilities and train its labour force in this area. In other skills, especially in yarn and fabrics, we are much stronger than our regional rivals. Even in garmenting, we can do better if we work towards it with a clear focus over the next few years.
Have you completed an exit from the Real Estate business?
One of the commercial buildings - The Peninsula Business Park is getting ready by December this year and the other building Ashford Centre is ready. The valuation of commercial property is about Rs 14-15bn.
We are working on it. It is a large piece of real estate. We have appointed Cushman & Wackfield for the sale of commercial properties at Lower Parel Mumbai. We are receiving good amount of enquiries. Hopefully, we should be able to finish the exit process in the next one to one hand a half years.
We also have a residential project at Nahur, Mumbai where we are 50% JV and that will take some 3-4 years to complete. Our 50% share in the project upon completion would be worth about Rs 4-5bn.
In all, the real estate assets are worth about Rs 22bn.
What about the Silvassa land parcel reserved for SEZ?
We have decided not to go ahead with SEZ and instead the land would be now sold as and when we have a buyer.
Our land at Silvassa is worth about Rs 4bn.
Do you have any capex plans? Future expansion plans in various segments like cotton, polyester, fabric and apparel ?
In FY11, we are undertaking capital expenditure of about Rs 7.5bn to Rs. 8 bn mainly on the Polyester and Cotton spinning side. On the whole, we are done with our major capex.
Our depreciation charge annually is about Rs 4.5-5bn. That much capex is possible every year for maintenance or for adding balancing equipments. It could also be for capacity addition, especially on the polyester side.
In cotton spinning, we have a capacity of about 340,000 spindles; and we are increasing this to about 400,000 spindles by March 2011.
Our second polyester plant is starting in December 2010 in stages. That would take our capacity from 200,000 tons per annum to 400,000 tons per annum by March 2011. We may plan another expansion of 200,000 tons per annum in polyester once we complete our current capacity addition project.
In this polyester expansion, we are also adding capacity in Fully Drawn Yarn (FDY) and at the same time, we plan to manufacture the Dyed Yarn in Polyester for the first time. We are also looking at making specialised yarn and industrial fibers.
Cotton prices have shot through the roof, which makes it difficult for common people to buy cotton products. Therefore, we are seeing increasing demand for polyester in the domestic market.
Today, polyester accounts for about 55% of our country’s textile consumption while cotton makes up the balance 45%, which is likely to go up to 75% in polyester and balance 25% in cotton in next 4-5 years.
Tell us about the retail side of your business (India and UK)? How many outlets do you have right now? At a business level, is this unit making profits?
Our retail brand H&A has about 260 outlets across India. These are all franchisee run stores. They have done well and we are satisfied with their growth.
What we have realised is that larger format stores are doing well, especially in the tier II and tier III cities. So, we are looking at increasing the larger format stores with average size of 2,000 sq. ft. to 4,000 sq. ft.
We would be adding about 200 H&A stores every year in the next 3-4 years. That will take our total domestic retail "H&A" footprint to 800-1000 stores.
We are breaking even in as far as company is concerned. The franchisees will also start making money in the next six months.
Our retail brand in the UK – ‘Store Twenty One’ is doing very well. We have 210 stores in the UK as of now. We are opening 2-3 stores every month. We intend to take it to 300 stores in the next two years.
These stores have turned profitable from the current financial year. These are large format stores with average size of 5,000 sq. ft.
The demand at Value Format Stores like ‘Store Twenty One" has increased during the recent slowdown in Europe and the UK. To capitalize on this trend, we are looking at growing the number of stores in the UK.
What is the promoters’ stake right now? Are they planning to hike stake?
In March 2010, we concluded our QIP issue of Rs. 4.25bn, post that the promoters’ shareholding right is now at 28.35%. The other major investor is UK based, Caledonia Investment Plc, which holds around 12% in Alok Inds.
From the bank and institutional sides, the major investors are LIC, SBI, Axis Bank, IFCI, BOB, Syndicate Bank, J&K Bank, etc. Their holding together is about 30%.
The balance is with the public and other investors.
The promoters would definitely like to increase their stake gradually through creeping acquisitions.
Any further equity issue in the offing?
No, from the equity side we are done with the fund raising. On the debt front, we could raise money depending on our requirement from time to time. We could look at ECB or raising funds at our subsidiary level also.
What about the high gearing? Have you been able to reduce the debt?
After the QIP, the net debt-equity ratio has come down to 2.5. We are targeting to bring it down to below 1.5 in the next two years.
In fact, after the QIP our long-term rating has improved to ‘A+’ now. So, our gearing level has come down and will continue to reduce over a period of time.
The gross debt is Rs86bn. At the Real Estate subsidiary level, the debt is around Rs7bn.
The debt level would stabilize by next year and thereafter it would start coming down. As far as debt equity is concerned, it would continue to come down every year as the company’s net worth increase with the accruals.
Also, there are regular repayments based on repayment schedule and we would also get some cash flow of sale of real estate as the sale and exit from real estate happens.
What is the proportion of exports in the topline? What is the outlook?
We expect exports to account for 40% of our total sales as all our products right from cotton yarn, Apparel fabrics, Home textiles, Garments and Polyester yarn are being exported now. In fact, of late, the growth in export of polyester yarn has been significant.
From 2005 onwards our exports have grown at a CAGR of 60% per annum. This is much faster than the average industry growth rate. The total sales of the company have grown at a CAGR of 30% p.a.
Looking at our current order book and the demand scenario, we are quite optimistic about the future.
What is the share of home textiles in exports?
Home textiles account for a lion’s share of our total exports; almost 45% of the total exports are Home textiles, Garment is about 6-7%. Others include polyester yarn at 25% and the balance is fabrics, cotton and cotton yarn exports.
How do you see margins unfolding in the future?
Margins are likely to be maintained though the rupee has been appreciating and cotton prices are also at an all-time high. But that is a global phenomenon and buyers are willing to accept a price increase.
On the currency front, we have started billing at the current spot rates. We have hedging of 2-3 months. We do not expect our margins to be impacted.
We expect to sustain EBIDTA margin at current level of around 29-30%.
What are the prospects for technical textiles?
The Indian technical textiles segment is a US$10bn market, which is likely to reach US$30bn by 2020. The opportunity is big. The Government is also promoting this segment by way of TUFs and other promotional measures. We are also increasing our focus on this segment. We are already making technical textiles for a few niche applications.
We are also setting up R&D facility to develop new products in this segment. Our R&D Centre should start in the next six months.
As of now, a technical textile accounts for about 20% of our fabric business, which is 8% -10% of the total sales of the company. We would like to increase the share of technical textiles to about 15% to 20% of the total company’s sales going forward.
How are you placed in terms of power?
Our total power requirement is about 70 MW, which is totally backed by captive power plant of 70 MW. Out of that 15 MW is located at Vapi, which is totally running on gas.
In Silvassa, we have another 55 MW of power, which is currently running on furnace oil. We also have a parallel connection with grid in Silvassa where the power tariff is reasonable at Rs. 4 per unit.
We are expecting gas connection in Silvassa by March 2011. The switch to natural gas for power generation will lead to good savings for us.