Arvind board has approved demerger of branded apparel business to Arvind Fashions and demerger of engineering division to Anveshan. Arvind Anveshan and Arvind Fashions will be listed on NSE & BSE. There will be no cash to be paid by Arvind Fashions or Anveshan to the company or shareholders.
Arvind shareholders will get 1 share of Arvind Fashions for every 5 shares hold in Arvind and will get 1 share of Anveshan for 27 held in Arvind.
Meanwhile, the company reported a poor set of second quarter earnings with a decline in profits at Rs 64.5 crore against Rs 76.6 crore in same quarter last fiscal.
Sanjay Lalbhai, Chairman & MD and Jayesh Shah, CFO, Arvind in an interview to CNBC-TV18 shared the details of the demerger plan.
Talking about the share ratio post the demerger, Shah said the reason for it to be low is because there will be no cross holding left post the demerger and all of 90 percent of Arvind capital is being issued to Arvind shareholders.
Demerger will be a completely tax neutral transaction, said Shah. The process is likely to be completed in eight months and so listing could happen by July/August 2018, he said.
According to Lalbhai demerger helps the specific companies to align their own objectives and have the ability to raise resources independently.
Moreover, till now the cash flow generated by the textile business was nurturing these budding businesses but now that these businesses have become independent, the free cash flow generated by textile business will be reinvested in growth of textile business only, said Lalbhai. Expect Rs 1500 crore to be invested in textile business in coming three years, he added.
Talking on the margin outlook for Brand and Retail business, Shah said their internal targets are to reach double-digit margins by 2021. For this financial year margins should be around 6 percent, he said.
Currently, the Brand & Retail business has a very strong balance sheet with a debt of Rs 600 crore and it is unlikely that they would need to raise cash in the near-term, said Shah.
Below is the verbatim transcript of the interview.
Q: If I am a shareholder of Arvind Ltd what do I get after this restructuring?
Shah: I think there is some confusion, let me try and clarify the share exchange ratio. Arvind Fashions capital is very low, very small capital. It is 5.7 crore shares and if you took the valuations the numbers that you have talked about which is Rs 8,000 10,000 or 11,000 crore it would mean anything between Rs 325 to 400 per share at 1:5 ratio. Because with a small capital base it will list at a very high price because the market capital assumption would remain constant irrespective of number of shares. So, there is this confusion as to why the ratio is low so two clarifications.
Number one – there is no cross holding left. All 90 percent of Arvind capital is being issued to Arvind shareholders. We hold 90 percent Multiples 10 percent so all 90 percent is being issued to Arvind shareholders so in effect – if I were to take the Rs 8,000 crore valuation that we saw last year, one year ago which should have hopefully increased 90 percent thereof has been distributed in ratio of 1:5. So, one is equal to Rs 7,200 crore that we are distributing. So, in effect the valuation per share would be in four digits if these are the valuations of the market capitalisation. I think number of shares plays an important role in trying to determine exchange ratio.
Q: One important clarification – that means that the entire shareholding of Arvind Ltd will be passed on into the mirror image of Arvind Brand and Retail, right? There is no cross holding which will be left after this demerger?
Shah: Absolutely, you are right. All 90 percent is being distributed to our shareholders.
Q: If anyone was assuming a market value of Arvind Brand Retail whether it was Rs 300 or 310 it will simple mean that the market capital of Brand and Retail will be higher because the capital base is very low and it will be multiplied by 5 times, right, going ahead, whenever it list?
Shah: That is correct.
Q: You did Arvind SmartSpaces earlier what was demerged now with this company coming in what is the scope you see in terms of growth coming in for Arvind Brand and Retail and also for textile?
Lalbhai: What we have been able to demonstrate if you have seen that in the past Arvind SmartSpaces has been demerged and has been given to the shareholders of Arvind Ltd. You have seen the kind of stellar performance which the company has put out. I think what happens when they get – they are independently charting their future course is that everyone gets aligned to the objectives of that company. We also have abilities to raise resources independently and it doesn’t have to dependent on the kind of allocation of free cash flow which is being generated from the Arvind textile business.
So, I think because these are mature businesses already generating enough cash flow, free cash flow they will be able to chart out their growth trajectories in a much more focused and aggressive manner. Similarly, I think one of the things which we have observed is that our textile business has not grown at the same clip as our brands and retail business has grown. That was because the free cash flows from our textile business was nurturing all these budding businesses. Now that these businesses have become independent the free cash flows which has been generated by textile business will be reinvested in the growth of textile business, the entire value chain.
We are expecting that something like Rs 1,500 crore will be invested in textiles alone in the next coming three years. As we have mentioned many a times that our textile business is asset light model where we are partnered with many entrepreneurs to set up spinning and weaving along with us. So, when we invest any kind of capital into this business it gives us multi fold kind of turnover and of course we are looking at what kind of return on capital employed (ROCE) and what kind of customer centricity we can bring for this business
Q: You have mentioned about the target in terms of sales in Brand and Retail business which is nearly USD 1 billion by 2020. I want to understand how do you anticipate the EBITDA margins for this business because margins if I see they have been very volatile 1 percent, 2 percent, 3 percent in this range in the last three-four quarters? Analyst are working out that the EBITDA margins for brand and retail business could go to 6-7 percent by 2020? Is that correct sir?
Shah: I think, honestly, if you ask me we expect our margin, last year for example was in the vicinity of 5 percent for the year as a whole. We have guided that we should be increasing our margin by 150 basis points this financial year itself. So, I would think in a long term, at medium-term rather, if you look at a period of say up to 2020 or 2021 I think clearly, our internal analysis says that it should be a two digit margin rather than a 6 percent margin. That is what we are working on. So, that is a broadly the internal team targets.
Varinder: Two digit margin by when?
Shah: We have said that it will be in 2021. We are looking at a two digit margin. In fact this year itself it should be crossing 6 percent.
Varinder: Is there any taxation angle, any taxation cost which the company may have to bear in this entire process if at all?
Shah: Not really. There are some stamp duty costs and other costs but they are very small. This demerger is a completely tax neutral transaction.
Varinder: Also would there be ESOPS also which could be issued to brand retail employees, is that ESOP could be much higher, lower, what could be the cost of that?
Shah: All of our companies key management, team members are already enjoying stock options including Arvind Fashion. It is our policy that we would like that the interest of all stakeholders including our employees are aligned, and that is best done by a common stock option scheme. So we have stock option scheme and we will continue to kind of keep growing that.
Varinder: Multiple bought their 10 percent stake in Arvind, Arvind Brand and Retail, is the option open for anyone else, a private equity major to buy or you to divest more in brand and retail?
Shah: The brand and retail business today is a very strong balance sheet. So for example, its net worth is over Rs 1,000 crore, its debt close to Rs 600 crore, and at a debt-EBITDA ratio of close 2, it is one of the strongest balance sheets in our group. As its margins are improving, as we move forward, we believe that it will have enough cash to sustain its very ambitious growth plans. So we don’t believe that it needs to immediately raise any capital for any kind of an organic growth.
Varinder: My last two questions, one, how will the debt divide between both the companies, the consolidated debt, and second, when can we see the completion of this transaction and expect the listing of the other two entities what have been demerged?
Shah: The total debt is currently divided in this fashion. Arvind Brands business has close to Rs 650 crore of debt, Arvind Textile, the parent company has about Rs 2,700 crore of debt, and Anup Engineering is a debt free company. In fact it has surplus cash. So it has no debt.
Varinder: The timeline, when can we see the listing?
Shah: It takes about eight months to complete all the regulatory processes. So sometime in July or August we could expect a listing.
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