Arvind Ltd to demerge and list engineering, apparel businesses by September: Kulin Lalbhai

Excerpts:

Why do you want to demerge the apparel and engineering businesses from the parent? We have been incubating these businesses over the last decade, and the cash flow of the parent was being used to build them. It’s time for them to be standalone businesses, with their own destinies.

This is the best way to unleash the animal spirit in the businesses.

How do you hope the market reacts to the demerger and listing? For the market, the demerger is great. Because different people are interested in in different segments of the textile industry. So the same investors who likes the textile story, may not like brand story, or vice versa. This sort of multiple-company structure will allow people to select stocks that they are most excited about.

When do you expect the process to get over? It’s a seven month process. We are going through it. We expect an August-September kind of a timeline to list these businesses.

Will the present market sentiment be a concern? Not at all. The listing shouldn’t be dependent on market forces. We are doing this because this is the right thing for the business, it’s a long term call. We are not doing this to time the market.

You have some more businesses in the incubation stage – water management, advanced material and telecom. Do you plan to list them?These businesses will remain in the incubation stage for the next few years. For the next few years, we do not see that (listing) happening.

What’s the outlook in your core textile business? There are two structural things happening. China controls 35 percent of the USD 750-billion global trade. India has 5 percent. But China is losing competitiveness, and there are few places in the world that can replace that capacity. India, and rest of South Asia can do that.

The opportunity for India to double its trade is a real one. We haven’t seen this opportunity in many, many decades.

The second thing to happen is that the Indian market is growing very fast - 10 percent growth - and within that the organised part is growing at double the rate. Only large players like Arvind can support the growth of branded apparels.

How much are you investing in these businesses? Over the next three years, we are investing Rs 1,500 crore between the textile and apparel businesses. And we are going to invest along 3-4 themes.

One, we will be selling garment package instead of fabrics. Presently, 10 percent of our fabric gets converted into garments. In the next three years, this will increase to  40-50 percent.

New segments are emerging like at leisure, performance wear, and Arvind will enter these segments.

And third is branded textile, where we sell fabric under our brand name Arvind, one of the largest brands in the fabric segment. That is also growing 20 percent year-on-year.

We believe our growth rates will move from 5-6 percent today, to more like 10-12 per cent on our Rs 6,000- crore aggregate topline.

You have been bullish about the brand business. How has it been doing?Our brand business has been growing at industry leading growth rates, at more than 20 per cent over last five years. And we expect the same rates over the next five years.

In this business, as brands scale up there is huge operating leverage that kicks in as fixed costs remain the same. In our business, we are going through a strong maturity curve and the brands will start seeing the operating leverage.

We have four power brands. These have strong double-digit growth, and over 30 percent of ROCE. In another five years, we see another 4-5 power brands emerging.

Which are the power brands? We don’t divulge brand specific data beyond a point. But some of our largest brands are US Polo, Arrow, Flying Machine and Tommy Hilfiger.  Some of the new brands like Sephora and Aeropostale and scaling up quickly.

There were reports that growth of some of the brands, including GAP, has been slower. Whenever a new brand comes in, one keeps fine tuning the product. So we are now in a situation where GAP is going into a strong growth cycle again. We are bullish on getting the price value proposition right and GAP should be seeing strong growth in the coming years.

What are your plans to expand the retail network? Across our 15 brand, we open close to 200 stores every year. These are a combination of franchisee and company owned.

How much are you investing? On an average we invest around Rs 200 crore a year in capex in our brand business.

You have been passionate about the digital part. What is your strategy?

In digital, we have three focus areas. One is third party market places - the large portals - which are already 10 per cent of our overall sales.

We have our own dotcom presence.

In the US, 50 percent of the buying decision happen on the phone, and 90 percent of the buying happens offline. Already, sales people use tablets to give recommendations, and if a size is not available in one store, customers can order the size from another store and get it home delivered….we have already rolled them in our 1,200 stores. And these technologies are contributing 2-4 percent additional sales. For us, digital is much broader than just e commerce.

What’s your pipeline in the real estate business? We have now built 2.5 million square feet in last four-five years, and over the next three years we will be delivering 8 million square feet more of real estate. It focuses on the mid-market residential side, with a strong presence in Bengaluru. We are in Ahmedabad and we have just entered the Pune market.