Dear Shareholders,
2015-16 has been a challenging year for most of the Indian companies right across manufacturing / infrastructure based industries, and Alok Industries was no exception. The way their business dynamics has evolved over the last few years has necessitated a recalibration of growth plans and revision of business strategies.
From a macro-economic perspective, the world has not recovered fast enough from the financial crisis of 2008. Since then, an investment led aggressive growth in China and consumption led rapid growth in emerging economies like India had signaled a new world economic order and early signs of fast recovery. Unfortunately, these trends did not last long. In 2015-16, there have been significant slowdown in China, which was driving global growth and several other emerging economies, especially those that were dependent on commodities faced severe headwinds. Consequently, world economic growth has stagnated between 3 and 3.5%, and there are big pockets of uncertainty, which has affected business world-wide. In this backdrop, while Indian manufacturing companies have grown appreciably in the last few years, the pressures on their balance sheets have also accentuated.
This is especially the case for companies in sectors where investments were critical for global competitiveness and largely funded through debt. The whole of last year was characterized by banks facing challenges of managing leveraged accounts and finding viable solutions.
These underlying industry-wide developments in India affected Alok Industries as well. Through a planned growth path supported by organic and inorganic investments, in the last few years, the Company has created world class capacities, built global scale of operations and established strong supply relationships with a wide spectrum of global customers However, this capacity creation has been accompanied by a large build-up of debt and today there is a mismatch in timings of cash inflows and outflows, creating severe financial stress for the Company.
Let me take a step back and see how we got to this stage. First, there was the general global economic slowdown post the financial crisis of 2008 and global markets witnessed a slowdown. Second, our investments in the retail business both in India and UK did not work. While we closed operations in India, the UK business is still burning cash. Third, the diversification into real estate although intrinsically value creating has not been able to encash on any asset appreciation and has essentially locked up large capital. Fourth, our aggressive expansion into Polyester came on stream at a time when global polyester prices dropped dramatically driven primarily by sharp fall in oil prices. Fifth, during the expansion phase, interest rates have gone up from around 7.50% to a little over 13%, which put further pressures on servicing debt and even contributed to incremental debt. Sixth, this period also witnessed huge fluctuations in foreign exchange rates, and much of the benefits of lower costs of foreign exchange nominated external commercial borrowings were eroded due devaluation of the Indian Rupee. Lastly, the bunching of repayments at the parent level (Alok Industries) and at the subsidiary level guaranteed by the parent also contributed to the liquidity crunch. Clearly, these were massive headwinds and affected the scale of our operations. Under this financial stress, 2015-16 was a year with very little working capital support that further aggravated a difficult situation and the Company operated at very low utilization levels resulting in operational losses.
The lenders are undertaking various efforts to try and resolve the Company''s present situation. Between November 2015 and January 2016, a joint forum of bankers led by State Bank of India, has decided to convert the loans extended to the parent company Alok Industries into a 65% stake by invoking the Strategic Debt Restructuring (SDR) option. SDR, introduced by the Reserve Bank of India (RBI) in June 2015, allows banks to convert a part of a defaulting borrower''s debt into majority equity and assume operational control and manage the Company on a lower debt platform. This process has been under abeyance for some time now due to certain developments that are sub-judice.
At present, there are also efforts to work out a long term viable deep restructuring for the Company.
While the lenders will, presumably focus on resolving the leveraging issues one way or the other, the overall Company efforts are directed at consolidation. This includes accelerating our efforts on selling non-core assets including real estate and overseas businesses. The monetization of the company''s immovable assets and the proceeds from the sale of international business would help reduce debt.
The Company has had a very good reputation of servicing its global clients. In the last couple of years, given a realization that there were working capital constraints, the Company out of its own volition had subdued its business with customers. We are confident, though that given our strong relationships with these Companies, quality of products and past delivery track record, we can bounce back in the market once the restructuring is done.
The Company has a strong home textile, apparel fabric and polyester business to drive exports. It may be noted that the company''s home textile business is established enough in the US market as to account for more than 35% of its overall exports. Meanwhile, the other Divisions of Alok are expected to yield better results in the coming years as the demand for Indian textile is on an upswing. The company is currently exporting its products to more than 90 countries and plans to take advantage of the current downtrend in yarn exports from China. The company optimism over its restoration to health sooner or later is based largely on its ability to appreciably grow its exports. With costs increasing China, there is adequate opportunities in the export markets and Alok with its existing customer relations is well positioned to leverage this. It is noteworthy that even in a very difficult year like 2015
16, the Company has managed an average monthly export of over Rs.100 crore.
Yes, the Company is facing challenging times. Our lenders have shown faith in our business and are exploring paths of debt realignment and revival of the company''s operations. In the Company, we are focused on creating excellence right across our textile business. There are several small level initiatives under way that is aimed solely at our core textiles business and our ''eye is continuously on ball'' to revive and accelerate this business. Together with all our stakeholders including our lenders, we are committed to restoring the past glory of Alok Industries.
I take this opportunity to thank our Board members, whose guidance has always helped us to choose the right path in our journey. I would also like to thank our financers and our shareholders who put faith in our dreams and generously continue to provide us the capital to fund it. My thanks go out to our employees, our customers, our vendors and our well-wishers, for your continued support.
I urge you all to continue to repose faith in our business model, and partner with us as we work hard to turn the corner and embark on a new journey of growth.
Yours Sincerely,
S.K. Bhoan Chairman
