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There is over-supply of denim from India, Pak, B'desh

Published on Wed, Dec 20, 2006 at 12:38 | Source : Moneycontrol.com

Updated at Wed, Dec 20, 2006 at 15:14

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Arvind Mills claims that there is a denim over-supply from countries like India, Pakistan, Bangladesh and Turkey.

They are planning to target premium customers by means of high volumes. They are also aware that it will take them two quarters to move the volumes to a higher margin business.

They state the current OPM is 23% and major growth may be seen from the garment packages.

Excerpts from CNBC-TV18's exclusive interview with Arvind Mills' Managing Director, Sanjay Lalbhai:

Q: What is the denim scenario globally and locally because people have been trying to game whether most of the pain is out or do you expect the pain to be more protracted from the denim side?

A: The market for denim worldwide is strong. There are no issues as far as the demand is concerned. What has really happened is that there has been a huge build-up of capacities in India, Pakistan, Bangladesh and Turkey, so for a while it is going into a little oversupply and that has hurt the price realization but the market is strong and the companies which will able to differentiate and go to better customers should do very well.

Q: What do you expect to see because realizations have been slipping. If you just look out two-four quarters down the line for the next one year essentially what do you expect to see with domestic realizations and with global denim prices?

A: In the domestic realizations there are three segments one is trade, which is the largest segment. The total market of denim in India is around 220-250 million metres, out of which around 180 million metres is sold to traders which are going to private labels and footpath brands. The branded segment and the readymade garments, which are exporting still constitute a very small part of this Rs 250 crore.

The price realization with Ready Made Garments (RMG) and brands would be substantially higher than with trade. So the trick is to service the brands and Ready Made Garments (RMG) and the rest of the volume which you are selling to the trade curtail it and go to more discerning customers in Europe and America and also South East Asia, Japan and Korea.

Q: Will you start focusing a lot more on the overseas market or will you start shifting focus a little bit to the garment side as well?

A: What we will do with all our fabrics is to take a plan of going to premium customers with volumes. We don't want to go to niche players but premium customers with volume which would be like Zara, Benetton, Esprit, Marks & Spencer, Banana Republic, GAP, these kind of customers who are paying better than medium prices but also have volume and the strategy is to service them with very different charter of requirements.

Secondly provide them design inputs and the third is innovation, so we would like to service customers with these three very discerning kind of requirements for them. With these three strengths we believe we will be able to service these customers. As far as these brands are concerned instead of selling them fabrics we would like to become solution providers from cotton to finished garment. We would be offering them the product in 60 days-90 days with innovation and design inputs. So that is broadly the strategy, which we will follow to bring back our realization and growth.

Q: If you had to map out the denim cycle as you see it when do you think you might be able to see more traction in pricing and realization, by when, in the next financial year or the one after?

A: I think next year should be much better because it is a question of vacating some of the markets which are not paying well and going to these kind of discerning customers who would really deal with you because you can provide them with a different set of service, innovation and design inputs.

It is going to take another two quarters before we really dramatically move volumes from a low margin business into a very discerning customer who is going to work with you because of these three things, which you are offering them; I personally feel it will take another two quarters.

Q: What kind of volume growth do you expect to see from the denim market and what kind of operating margins do you expect to stabilize in after these two quarters?

A: We are just now operating at 23%, we have been operating anywhere between 28-30% on our entire business, so we would like to get back to 26-28% operating margins from 23% and we also have had a dip in volumes because we are vacating some of the markets and going discerning customers. So we would like to gain back that market operated full capacity and the major growth will come by growing in garment packages so that will double our turnover.

Suppose I am selling one metre of denim fabrics and I convert it into a pair of jeans then my realizations per metre of fabrics is doubled. Just now we are only 12-14% vertical which is where we are offering garment packages in knits, shirting and denim and over the next two years we would like to take it 25% so that is where the major growth in revenues and turnover will come from.

Our brand business which is 12% of our consolidated balance sheet we would like to take it to 25%, so if you really see Arvind Mill 28 it would 50% fabrics, 25% garment packages, which is where we will act as solution providers and 25% branded business which is our own brand and license brand which is not including our JV with VF that is now we are at minority so we are not taking it into our consolidated numbers.

Q: More than half or almost 2/3rd in this process of transition would still go to the trade, do you expect to see any pick up in realizations or not quite till you actually mix up the revenue pie to 50-50?

A: Today when we are selling say 90 million metre of denim, around 30 million was going to trade, it is not that everything is going to trade. 30 million was going to trade which we will try and bring it down to almost 12 million in the next 2-3 quarters. One will see a dramatic kind of shift from the market which has become very competitive not because it is not growing but because there is a huge oversupply. As a result we will move out of the market and go to more discerning customers. One will see every quarter in and quarter out a change in our customer mix.

Q: Do you foresee any input cost pressures from cotton?

A: It could come in, this year it is going to be good. We don't see any major problem till November 2007 but then beyond that it is difficult to say because it will all depend on world cotton crop and demand supply situation. That could be because cotton is at a reasonably attractive price. If it were to go wrong after a year's time there could be a price pressure because of cotton or the margin pressure because of the cotton prices.

Q: There has been some talk about a global acquisition as well; you are making a move in the European markets I believe?

A: Not acquisition. What we have done is to achieve a shift in customer mix and go to the right customers. We have dramatically invested in the front office. We have a very capable team appointed for Europe which would do everything. They would be responsible for the profits in that region, they would design the collection, go to the customers, provide service sitting in Europe and establish a very strong distributor network which is absolutely vital because Europe is not just one country it is a continent and it requires different capable agents to approach very discerning customers.

To put all these in place we have appointed a very strong team which understands this business and has tremendous amount of capability and creditability in this market. Ditto for American continent that we have appointed as a front office.

We have appointed a very capable team, which will help us really gain market share with the kind of key customers, which we are aiming to service and become more relevant to them.