Alok Industries: Debt-Driven Dream Run Meets With A Bad End
The fate of Alok Industries Ltd. continues to hang in the balance after the Ahmedabad bench of the National Company Law Tribunal yesterday asked the company’s lenders to reconsider a resolution plan submitted by JM Financial Asset Reconstruction Co. Ltd. and Reliance Industries Ltd.
The plan had been rejected by the committee of creditors in April as it received 70 percent votes against the minimum requirement of 75 percent then. A recent amendment to the Insolvency and Bankruptcy Code, however, lowered the threshold to 66 percent.
The plan, submitted by JM Financial Asset Reconstruction Co. Ltd. and Reliance Industries Ltd., was the only one on the table. The two had offered Rs 5,000 crore against close to Rs 30,000 crore in dues to creditors. Lenders rejected this resolution plan, putting the company at risk of liquidation. However, some of the company’s operational creditors and employees opposed this and approached the NCLT.
Alok Industries is the only textile company in the list of twelve large stressed accounts identified by the Reserve Bank of India for insolvency proceedings in June 2017. The list is dominated by steelmakers, power and infrastructure companies.
In most of these cases, the 270-day deadline for resolution set under the insolvency code has ended. Some cases are still being litigated, a few are on course for resolution and a few others, like Alok Industries, are on the brink of liquidation.
How It All Began
The story of Alok Industries is a textbook case of ambitious debt-fuelled expansion gone wrong.
Between 2004 and 2013, the company undertook large-scale expansion and spent more than Rs 10,000 crore on building up its spinning, weaving, processing & garmenting units. Most of this was funded through debt.
But a combination of factors meant that the company’s gamble did not pay off. Some of this may have had to do with domestic and global market conditions but the company made its share of mistakes as well.
Its domestic retail plans failed to take-off and the share of exports slipped as the company could not maintain market share amidst global competition. To add to this, the company’s unrelated diversification into sectors like real estate weakened its finances further, eventually pushing the company into bankruptcy.
Analysts who have tracked the company in the past say that not only did the company over-invest, it also over-produced.
Large capex and high inventory maintained in anticipation of demand impacted the company, Sameer Kalra, founder of Target Investing told BloombergQuint. “The demand scenario in the textile industry keeps on changing very quickly so very few companies can address it efficiently,” Kalra added.
Bhavesh Chauhan an analyst tracking textile companies with IDBI Capital, adds that Alok Industries’ choice of investments was also questionable. For instance, Alok Industries invested in the spinning business which already had excess capacity in India. This failed to generate commensurate revenues for the company, said Chauhan.
The company failed to read the sector well, an analyst who tracked the company told BloombergQuint on condition of anonymity. In the textile industry, companies need to have periods of consolidation and expand only once the existing capacity is well utilised. Alok Industries ignored this fact and expanded its capacity continuously, said this analyst.
As a result, Alok Industries failed to utilise its assets well. Its asset turnover ratio, which indicates the efficiency of deploying assets to generate revenue, remained below one times and declined sharply over the last few years.
Diversification Gone Wrong
Alok Industries’ ambitions did not end with expanding capacity. The company also wanted to get into new business lines – some related, others unrelated.
It aggressively expanded into the retail market in India through ‘H&A Stores’. It also forayed into the U.K. market with ‘Store Twenty One’. At its peak, in financial year 2011-12, the company had nearly 350 retail stores in India and 221 stores in the U.K.
The strategy did not pay off and the company had to close down all its stores in India. In the U.K., the company still has close to 100 stores and is planning to ‘exit this business at the earliest opportunity.’
In 2007, the company also entered the real-estate business by acquiring commercial property in Lower Parel though its real estate subsidiary – Alok Infrastructure Ltd. This locked up large amounts of capital.
ICICI Securities which dropped coverage on the stock in November 2013, had cautioned against the weight of subsidiary operations on the already stretched finances of the company.
With tapering down revenue growth and lower margins, we now fear the company will begin to face profitability issues. Also, its subsidiaries (real estate and retail) are facing losses, which will further weigh on the group. With lower revenue growth and pressure on the operating margin we remain fearful of the company’s ability to service debt.ICICI Securities On Alok Industries (2013)
Debt Comes Home To Roost
The unbridled expansion led to a build-up of debt.
Between March 2007 till September 2013, the company saw its debt jump six times to Rs 20,230 crore. However, during the same time period, company’s cash flow from operations were much lower, putting its ability to repay in doubt.
To add to company’s woes, interest rates started to rise. Between 2009 and 2011, the benchmark repo rate rose from 4.75 percent to 8.50 percent. The company’s own interest costs jumped to about 13 percent from 7.5 percent. This put pressure on the company’s ability to service debt.
Over time, interest costs became the second largest expense for Alok Industries after raw materials.