Expect to see improvement in H2 because of cotton prices: Arvind

There were bottomline pressures owing to some of these transition impacts. As the market hits equilibrium in Q2, we should see some of those impacts going away, said Lalbhai.

Cotton prices have corrected quarter-on-quarter (QoQ). With good monsoon in India, he expects the crop to be a good crop once again. We should see an improvement in H2 because of cotton prices, he further mentioned.

'Unlimited' has been successful at store level. The company has plans to open 30 stores, he said.

Below is the verbatim transcript of the interview.

Anuj: What are your thoughts on the bit of pressure that you saw on the margins in the last quarter, can you overcome that in the quarters going forward and in terms of your net profit, what kind of growth can you report?

A: I think Q1 was challenging on a couple of fronts. The main challenge for us was that the GST implementation led to some discontinuities in the business. The two main segments for us which were impacted were in the textile side, we have a trade channel where we sell to the distributors. There was very little sell in the month of June as people were preparing to move to GST. Similarly, in the brand side of the business, the End of Season Sale was preponed. So there was some impact on margins due to that. Again there we have a large wholesale business where we sell to the mom and pop shops. Again because of GST, there was barely any sell in the month of June. So there were bottomline pressures owing to some of these transition impacts, which we are expecting as the market again hits equilibrium in Q2 we should see some of those impacts going away.

Reema: Your margins on the whole were down 320 basis points (bps) from 11.6 percent it came down to 8.4 percent at the operating level. How much of the margin pressure would you attribute to the one time hit on account of GST and how much on account of higher cotton prices as well as the currency appreciation?

A: The cotton price is another impact on the textile side of the business. The good news is that as far as cotton is concerned, quarter on quarter the prices have already corrected. We expect with the good monsoon in India, the crop will once again be a good crop and that means again in the second half of the year which is H2, we should see an improvement because of cotton prices.

As far as the currency is concerned, whilst that is a thing of concern, we have an active hedging policy due to which we are better off as compared to the market prices.

Latha: So the rupee doesn’t hurt at all, it has been one percent in the last one week and over the year, it has been best performing currency, not a worry at all?

A: No, I wouldn’t say that. I think in the medium-term currency is surely a worry compared to the other trading countries that India competes with in textiles, they have had a lower appreciation in fact some currencies have depreciated. So I think the competitiveness of textiles will definitely need a competitive currency. The other issue is that with a very strong currency imports again become more competitive.

So I think for the real make in India progamme to be successful, having a good currency and a competitive global currency is definitely required. Within the macro circumstances, we are obviously optimising to the best extent that we can.

Latha: Vis-à-vis China, the Indian currency is appreciated by 10 percent over the year, so is there any direct impact on your margins, have you all had to lower your future contracts with foreign buyers and separately if you can tell us about your Unlimited stores, when is the breakeven, how is the performance?

A: As far as the currency is concerned, on the export business, when a currency appreciates in the short-term, it is impossible to protect your margins completely. What we are doing on the textile front is trying to move the business in to as strategic a zone as possible. So our strategy as far as textile is concerned is to become vertical, which is rather than selling fabrics, we are selling end-to-end garment packages, this sort of business model is a lot stickier, you are much more strategic with your customers. So we are trying to make it vertical. That being said, whenever there is a strong currency appreciation, it will have an impact on the bottomline as far as exports are concerned.

As far as Unlimited is concerned, we have successfully transitioned the business into the value space from a discount space in fact we are very happy with the kind of tractions that the model has gotten. Even in the last quarter, we had almost a 40 percent like-for-like sales growth so that shows that fundamentally the model is being quite successful at the store level. It has become a family destination rather than just a men’s wear focus destination. In fact, we are rapidly expanding the format, we have almost 30 stores, which we will be opening this year. As we open these stores, that is when you will see the operating leverage kicking in the business and that is when the bottomline will start trading up as well.

Anuj: When is Arvind’s brand listed?

A: I wouldn’t be able to get into the specifics of that. We maintain that we are constantly going to look to unlocking value for our shareholders and at an appropriate time, we will evaluate all possibilities.