India's exports are facing a two-pronged attack, said textile maker Arvind Ltd.’s Sanjay Lalbhai. While the rupee has strengthened, he said the Chinese yuan has weakened making exports from the world's biggest manufacturer cheaper for other countries. These cheaper imports will also pose a challenge to the ‘Make in India’ proposition, Lalbhai told BloombergQuint in an interview.
China being the factory to the world, it is a competitive manufacturing hub.Sanjay Lalbhai, Chairman And Managing Director, Arvind Ltd.
Here are the edited excerpts of the interview:
How would you characterise the current environment in the textile industry given that you had some challenges in the case of GST? Also, exports as a whole, including textile exports, have not been doing very well.
The challenge is more because of compliance issues if you are not in the formal economy. People who have always operated in the formal and compliant economy are welcoming GST. If you are non-complaint, then there are challenges and there is no solution to that. They will have to fall in line.
This is a game changing reform. We believe that in the long-term, people who are compliant will do very well as now it is a level-playing field. Through excellence and hard work, you can succeed. There was a substantial part of the textile economy in the non-compliant zone.
As far as export is concerned, the working capital and money getting blocked because of integrated GST refund issues, has been addressed by the government. That is one of the major contention of the small and medium scale exporters which was very valid. We are very happy that the government has addressed that.
The other major challenge which the industry is facing is because of the strong rupee. A strong rupee is an issue not only with exports but the entire Make In India proposition is likely to get challenged because the imports have also become substantially cheap.
There are two issues which happened
- 7-8 percent appreciation of the rupee
- 6-7 percent depreciation the yuan
China being the factory to the world, it is a competitive manufacturing hub. With this double whammy, imports have become substantially cheap. I think if you look at exports, more than anything else, a strong rupee is going to hold a challenge.
Can you give us an estimate of what kind of effect this would have had on your company’s financials in the quarter that just got done?
We are doing pretty well on exports because we hedge our position. In the short-run, we are not likely to get impacted because we would have taken a call last year on the currency. Going forward, we will have to see if other costs would also moderate because of a strong rupee.
Raw materials are moderated because our cotton gets exported, the polyester and man-made fibre also get adjusted to the world prices. When you have a strong currency, your input cost also goes down but they don’t go down at the same level.
In the long run it could be an issue. In the short run, it is not posing a challenge to us.
In the long run, how dramatically could it impact your margin?
It is difficult to say as our input costs would go down. We could work with product or customer mix to ensure that our margin is protected. It is difficult to figure out if it will have an impact or not. Our foreign desk looks at the rupee and the forward premium is at five to seven percent. Luckily the rupee has depreciated in the last month or so.
On the whole, with cotton prices moderating because of global bumper crop and the rupee adjusting a bit, we are not as concerned as we were a month ago.
On The Demand Front
What’s happening on the demand front, with the onset of the festive season? What does this mean for your brands?
I think the demand is reasonably robust. It is a question of the share of the wallet. We have to see what is happening with all the EMIs, white goods, electronics and cars doing exceptionally well.
As far as demand for our category of products are concerned, it is as per our expectation. It is not a stellar kind of Diwali because multiple forces have come into play, it’s not about demand or consumption. It has something to do with the share of the wallet.
GST and Demonetisation are behind and I don’t think they are creating any major hurdle in the strong demand which the festive season should have.
It would be a question of the share of the wallet. Today (October 9) is an important day, the next Saturday and Sunday (October 14 and 15) is going to be critical. Broadly we are on course.
Some part of the trade is formalised is not probably affected but the other part which is not formalised is facing challenges. Is it possible to quantify the proportion of the sales which is affected and what kind of loss the industry has suffered?
The informal economy was never a part of any of the numbers. That’s one of the biggest challenges our industry faces. We have an informal economy which was never impacted. Having said that, these are great entrepreneurs with great abilities. If they were to get into the formal system, they would be able to work in the entire value chain and prosper.
But it is the entire question of changing the mindset and accepting finally that your business model is changing and you need to adapt.
The GST Council has said they will expedite refunds and it is only for the merchant exporters where they have applied 0.1 percent rate. Do you expect the refunds – if they come on time, fine – but if not, will they continue to be a sticking working capital issue? Is it impacting companies like yours or is it mostly for smaller traders and exporters?
It would be for the smaller people and it will impact our cost of carrying or the refund is pretty small to the entire textile structure. So, it doesn’t hurt us. We don’t like working capital going up. To that extent, it’s an irritant but it has no dramatic financial implications on our numbers. But we are confident that the government is taking into account all these issues and quickly trying to resolve them. So, we are confident that these problems will be behind us. Given the inverted duty in polyester and manmade fiber, they have reduced the input duty from 16 percent to 12 percent. All the issues raised by the industry have been broadly addressed. The government is reasonably receptive on all these issues.
Any new brands and new retail plans in the pipeline?
We are buoyant on all the things. Our advanced material division is growing more than 30-40 percent. It is EBITDA positive and it is likely to become a reasonably important part of our textile business. We are going vertical and we are becoming part of the supply chain to the 10 biggest retailers and brands in the world.
Starting from raw material to garments, we are going completely vertical. As a result, we will become part of their value chain. As far as brand and retail is concerned, more than the newer things, we have few initiatives in place. We want to now become dominant, affordable in every new business which we have started because the mature brands are delivering stellar kind of numbers but the newer initiatives initially bleed, stabilise and then give the right EBITDA.
Now, the objective is that the whole portfolio should become equally profitable and grow at 20-30 percent top-line year-on-year basis. That’s the objective as far as brands and retail format is concerned.
How large is the advanced material division (AMD) business now?
AMD could be touching around Rs 700 crore. At that rate, if we are growing 30-50 percent then that’s a handsome growth for a base which is not very large but could become substantial in the coming year.