Textile manufacturer Arvind reported 1.5 percent profit growth to Rs 71.7 crore on a yearly basis. Revenue rose 19.1 percent to Rs 2,331 crore in the quarter gone-by. The company also said it will be selling 10 percent stake in Arvind Fashions to Multiple Equity. Speaking to CNBC-TV18, Sanjay Lalbhai, CMD of Arvind said that the company has a few cash-generating businesses, which can be unlocked for value to shareholders. These can either be given to existing shareholders or crystalised or could be put under separate boards. The main objective, he said, is to create shareholder value. Arvind is growing at 25 percent level, which is on-track to achieve its 2020 target of Rs 9,000 crore topline growth. The matured brands are giving stellar returns, he said. The company could look at listing branded businesses, he added. Below is the verbatim transcript of Sanjay Lalbhai’s interview to Priya Sheth.
Q: Explain more about the debt situation?
A: This year along with everything else what we have sold and we will be reducing debt by Rs 1,000 crore, so we should be at around Rs 2,500 crore of total debt in a company whose topline is more than Rs 10,000 crore and EBITDA would be more than Rs 1,200-1,300 crore. We were always saying that the kind of ratio which I am chasing is total debt to EBITDA and we should be at a very comfortable 2.2-2.5 total debt to EBITDA ratio.
Q: You also mentioned that you would perhaps look at unlocking some value because you have sufficient cash flow to fund some of your businesses. What specifically would you look at unlocking in terms of divestments? What could be the other possible divestments that you would look into?
A: We may not look at divestments but our real estate business was doing pretty well and we have given it to the shareholders, so it has crystallised a separate valuation for our shareholders. We have a few businesses which are generating enough cash; they don't require any kind of support from the parent and it may be worthwhile to unlock that value by any means. I cannot figure out because it is a board decision but we may give it away to the shareholders or it will get crystallised, it will be separately managed by separate board or if it is given away to the existing shareholders. All this will unlock value. It will bring focus. We will have a set of new directors managing each board. We of course have professionals running all these companies. So in this way our continuous or constant endeavour is to create shareholders' value, which could be disproportionate to where we are.
Q: But in terms of total amount, if you were to put a number to it, if you were looking at unlocking value, how much would you look at over the next three-five years. Is there a number that you have in mind that could possibly help Arvind going ahead?
A: We do not chase valuation numbers but as you perform well you have to know that this business should be valued at -- anyone would be able to say and an analyst would be able to say that this business is getting valued at this, but when you put all these businesses together, it has a conglomerate discount and we keep these businesses together because if it requires funding from the parent, to take it to a logical level. So till it becomes financially independent and it has sufficient kind of free cash flow to grow on its own, we keep it as part of the conglomerate but the day it is not, it doesn't make any sense in just keeping it as part of the portfolio. So we are not chasing a number but we do believe that there will be huge amount of opportunities to unlock value for the shareholders.
Q: The market has been speculating on whether or not you possibly look at listing the branded business. Run us through that. Is there a possibility going ahead, in the near term or in the medium-term that this could be a possibility?
A: I think all things will be always considered but it is very difficult to give an answer like yes or no because finally we want a collective wisdom of the board and we have very good board members and they add a whole lot of strategic intend and we need to do for that particular business but everything is on the table. If there is a good reason to list it, we will list it but I cannot give an answer yes or no.Q: So it is a possibility?
A: The whole objective is to create shareholders' value and in wanting to create shareholders' value - it is an option; it is not a strategy but if you need resources you list. You list because it could crystallise different valuation. You list because of various reasons. So there has to be a valid reason to do something but if it is there then we have no mental block that we will not do this or that or we will do whatever is logical, whatever is advised or agreed by the board and whatever is going to create value for our shareholders.
Q: You also announced your results today. Run us through what have been the key growth drivers and how do you expect to reach a topline of about Rs 9,000 crore by 2020 for your branded business?
A: As Suresh said, who is running the entire brand business, is that we are growing at around 25 percent year in-year out and we have a set of many growth engines and brands. So if we were to grow at 25 percent and we believe that we would because we only have four power brands in a very large portfolio, so logically we will reach Rs 9,000 crore and that is not to say that that is a number cast in stone; we may surprise ourselves by doing much better.
Q: In terms of margins your textile business has always been a better margin business than your branded business. How would you look at improving margins as far as the power brands are concerned and also run us through guidance as to how much you like to achieve as far as margins are concerned?
A: Our top brand US Polo has 20 EBITDA and 40 percent return on capital employed (RoCe). I think it would be amongst the best performing brand. The whole objective is to take all the brands at least to US Polo level and US Polo to a different level. I think that would be the simple answer. We can dramatically improve things and because we have huge amount of growth engines - when you look at all brands put together, they are in different stages of growth and evolution but you can see that matured, established brands are delivering stellar kind of financial numbers. So the whole effort is and we do believe that we have each brand or each opportunity which we have, has the potential of reaching these kinds of numbers.
Q: You guided for 20 percent margin by FY17. Is that a number that you take back or can you surprise the street with a higher number?
A: I think these are guiding principles; when you prepare a business plan, the macroeconomic factors could dramatically change. If you have seen how China has inflected in the entire clothing sector, it's phenomenal. We haven't seen the kind of growth which we should see for this category. So anything is possible. In a steady state taking conservative numbers, you have a roadmap for five years that this is something which you would want to do looking at macroeconomic factors which are reasonably conservative and predictable but goods and services tax (GST), I believe will create a level playing field and organised honest players are going to win big. Now, that could completely change the game. So there are so many things which can alter the way you are looking at the future.
Q: A question on the whole omni-channel play that you have. How big do you expect in the whole e-commerce or the omni-channel pie to be going ahead for Arvind. Do you think it will be a significant 5-10 percent over the next three-five years?
A: One thing is that the world is changing so rapidly that if you do not keep on changing and remain relevant to the consumer, you run a risk of becoming irrelevant, so the whole objective is that you enable you consumer to buy a product the way he wants to and the generation next is very use to and with the kind of connectivity and smart phones, which are coming into India. It is anybody's guess whether 20 percent of the consumption is going to happen online or are they going to go to brick and mortar stores. So Arvind is completely ready and we are the first company which has the omni-channel solution which not only is being used by our brands but we are now advancing it to other brands in India. So the very fact that our competition is also looking at our solution, so it is a solution; it is a technology platform which Arvind has created and that is absolutely necessary in today's age. How big it will become - I do not want to guess a number because it depends on various things but it is a very powerful tool. It gives complete freedom to a consumer to buy online and you will never go to our store and not find our product.
All our stores have become storage facilities or point of sale. You can ship from every store. All are inventory is live. So it is a phenomenal thing. You will never go to a store and not find your product and are also talking about endless aisle that means that in a small store in a B and C category town where I have only 1,000 squre feet, it could work like a flagship store because on that platform you have the entire stock keeping unit (SKU) available. So you can show the entire range of products in a very small shop to your customer without having to invest in a huge amount of real estate. So technology is fundamentally changing the way this business is going to be done.
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