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Tough times ahead for Arvind - Views on News from Equitymaster
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  • Apr 20, 2000

    Tough times ahead for Arvind

    Arvind Mills (Arvind) has been slapped with a legal notice by foreign lenders for defaulting on the payment of External Commercial Borrowings of US $ 75 m (Rs 33 bn). This has been reported by a financial daily. The report also mentions that the company has defaulted on interest payments on Rs 7 bn of domestic commercial borrowings.

    The chickens have finally come home to roost for Arvind. The company is the largest player in the domestic denim market but went on unrelated diversification into telecom equipment four years back. With the telecom equipment market going into a tizzy, the company was straddled with capacities and a high inventory in the division.

    The textile market has also undergone a drastic change with denim market facing a glut worldwide and the domestic market has been no exception. The weak demand for denims has not allowed the company to capture higher value by better realisations. Arvind was hit by a double whammy last year with cotton prices going up almost 15%. These two factors together hit the operating margins adversely. With cotton prices declining Arvind would be able to source its raw materials at better prices in the current year. However denim realisations have also declined and thus the company is unlikely to recover in the current year FY2001.

    In the current year, Arvind transferred all its garment brands (‘Excalibur’, ‘Newport’, ‘Ruf & Tuf’, ‘Flying Machine’ and ‘Ruggers’ apart from the license to the ‘Arrow’ and ‘Lee’ brands) to a 60% subsidiary Arvind Garments. ICICI ventures which took the balance 40% paid Rs 1 bn for the stake and it is this money that is likely to be used for payment of the interest on the domestic borrowings.

    The domestic ready made garments market is itself undergoing a change with brand positioning amongst brands growing in importance after the emergence of a host of local brands such as ‘ColorPlus’, ‘Provogue’, ‘Blackberrys’ etc. in the casual wear segment. Even Raymond and Indian Rayon have launched new brands ‘Parx’ and ‘Elements’ respectively in this segment.

    We expect the company to report losses over the next two years and shareholders would have to wait for a considerable period of time before they can expect decent returns.



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