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All set to become a textile major? - Views on News from Equitymaster
 
 
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  • May 20, 2000

    All set to become a textile major?

    The A.V. Birla group has been working on a strategy based on focus. While Grasim would be concentrating on the cement business, Hindalco has been consolidating capacities in aluminum; Indo Gulf is focussing on copper and urea, the emerging focus area for Indian Rayon seems to be textiles.

    A major restructuring of the company's portfolio was the takeover of Madura Coats' garments division. The takeover of this division brought into its fold garment brands such as Allen Solly, Van Heusen, Peter England, San Frisco, Byford and Louis Phillipe. This was after the company de-merged its cement business last year. Along with that, the debt of Rs 4.37 bn was apportioned to Grasim as cement related debt. Also, the company wrote off the assets of the sea water magnesia division of Rs 2.98 bn and it was this write off which saw Indian Rayon report losses in FY2000.

    Thus at present Indian Rayon has three existing businesses viscose filament yarn, carbon black and insulators apart from a presence in textiles and garments. The company is the third largest producer of insulators in the world (out of every ten insulators exported from India eight are from Indian Rayon) and the lowest cost manufacturer as well. With the power sector reforms likely to lead to increase in generating capacities this division is expected to do well over the medium term.

    Besides, the company is the sixth largest producer of carbon black in the world and the largest in India. With international tyre companies such as Bridgestone and Michelin setting up capacities, the prospects for carbon black demand in the medium term too seem to be good.

    FY2000 (Rs m) VFY Carbon black Insulators Textiles Garments
    Capacity 15,000 98,750 34,000    
    Sales (volume) 13,507 94,656 23,701    
    Sales (value) 2,447 2,627 1,670 3,416 570

    However, the main growth engine seems to be the garments division, which yielded a turnover of Rs 570 m in the last quarter (the merger become effective from January 1st, 2000). If one were to take into account the full year figures for this division (including the nine months under Madura Coats) the division had a turnover of Rs 2.40 bn in FY2000. An investment of Rs 350 m and 130 employees were all that was required to build the division to the present level. And Indian Rayon expects to double turnover from this division every three years. This is because the men's ready made garments market is still at a nascent stage and is growing at a rate of 25% per annum every year.

    The company also plans a far clear-cut differentiation between the brands. Where Madura Coats struggled was basically in establishing a distinct look for each brand. While Peter England did establish its position in the middle market range and Allen Solly was successfully positioned as a casual dressing, the fact is that the positioning difference between Louis Phillipe and Van Heusen was considerably blurred. Indian Rayon has laid down a premium positioning for Louis Phillipe as an 'Upper Crest' status and Van Heusen would be positioned between Louis Phillipe and Peter England and advertised as 'the largest shirt brand in the USA'.

    The company also plans a far clear-cut differentiation between the brands. Where Madura Coats struggled was basically in establishing a distinct look for each brand. While Peter England did establish its position in the middle market range and Allen Solly was successfully positioned as a casual dressing, the fact is that the positioning difference between Louis Phillipe and Van Heusen was considerably blurred. Indian Rayon has laid down a premium positioning for Louis Phillipe as an 'Upper Crest' status and Van Heusen would be positioned between Louis Phillipe and Peter England and advertised as 'the largest shirt brand in the USA'.

    More importantly, the company plans to focus on developing the trouser market. It has earmarked a set of retail stores under the name of 'Trouser Town' which would stock the company's trouser brands (including San Frisco). This set of stores is expected to contribute around Rs 200 m to the revenues in two years time. This set of stores would be in addition to the existing distribution strength of 250 exclusive retail stores. Besides, the company's products also retail in 1,500 retail outlets.

    The advertisement expenditure, which was at Rs 250 m for the last year is expected to be maintained at 9% in the coming years. While the advertising expenditure on the older brands is expected to be around 5-6% of the division's turnover, the expenditure on the newer brands (including promotion of the 'Trouser Town' concept) is expected to be in the range of 13% of turnover. The company expects new brands to contribute almost 30% to its overall turnover over the next three years.

    The interesting development to look out for is whether the company would amalgamate the textiles division of Grasim with Indian Rayon. This division owns brands such as Graviera and Scabal, both higher-end brands. Interestingly, Mr. Vikram Rao who heads the garments division at Indian Rayon still continues to be in charge of Grasim's textiles division.

    Thus the company seems to be changing its contours from being a commodity-based textile major to a consumer led apparel manufacturer. Whether Indian Rayon emerges as a focused textile player or continues to remain a diversified company, the fact remains that ready made garments would continue to be the star for the company over the foreseeable future.

     

     

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