• OUTLOOK ARENA
  • VIEWS ON NEWS
  • DECEMBER 9, 2010

The shift from yarn to real estate

Mumbai has emerged as one of the most expensive and sought after destinations for realty development in Asia. The reason for the same obviously stems from the city's role in housing India's financial infrastructure. If one traces back into history, the role was assumed by the city over a period of time. Once known for its textile mills, the city has lost its roots with yarn manufacturing over the decades. So much so that the largest players in this business have now taken upon themselves to make the move from yarn to real estate.

Companies like Raymond and Arvind Mills have been the pioneers of branded apparel in the country. In fact they are also the biggest exporters to global apparel manufacturers and retailers. The inherent cost advantage that India enjoys has helped the businesses for decades. Being the second largest producer of cotton has also come to the players' aid in the past. But the post recession period has not really brought any meaningful recovery to their fortunes. Being largely export oriented, the Indian players' pricing power remains restricted to the growth in demand from the West. Despite higher domestic consumption, margins continue to lean on the Western trends.

Meanwhile higher input costs have also played spoilsport. With most of Indian cotton getting exported, international prices for the commodity have gone through the roof thereby impacting cost of raw materials. Companies like Arvind and Raymond attempted to curb rise in power costs with captive capacities. However they were constrained by issues like lack of gas supply for power plants.

Further, foreign currency dealings have had the biggest impact on the wafer thin margins of these companies. Little pricing power and high input costs were already taking a toll. In addition, the forex losses led the company's financial health into oblivion. Important to mention here that these companies have also accumulated excessive debt. Thanks to the lure of borrowing at subsidized rates. The only item that could bring some 'positivity' to their cash flows was something 'extraordinary'! And that is what the players finally tapped.

Most of the textile players owned large parcels of land in and around Mumbai. Raymond and Arvind, for instance, own land in Thane and Ahmedabad (Gujarat) respectively. Since real estate has come to be a more lucrative business than textile, the promoters leaned towards the former. Arvind chose to partially sell its land and cut down losses in denim manufacturing. Raymond on the other hand took up realty development as its latest business interest. Players like Alok who were quaint and profitable manufacturers of home textile also tried their hand at it. This was despite having no previous experience in real estate.

Thus the real estate bug seems to have bitten the once yarn manufacturers really hard. For the time being, it may seem benign to them as well to their investors. For those who are selling land are able to cut down textile losses. Those are not selling are able to over value their land banks and seek premium valuations. While the textile businesses still offer very little visibility, realty is claimed to be the game changer. We are not so sure. The valuations of the realty stakes could erode dramatically in the event of a bubble burst in the sector. Further, both textile and real estate businesses have the tendency to lean towards high leverage. Hence a combination of the two could be a futile one for investors.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407