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Jyotsna Bhatnagar & Nimish Shukla
Ahmedabad, Aug 8: The Rs 1,000-crore Arvind Mills (AML), flagship of the Lalbhai group, has reportedly kicked off talks with two French companies for selling a stake in its denim division at Naroda, Ahmedabad.
Arvind has been searching for a prospective buyer or joint venture partner in the international markets for its denim project for quite some time and it is only recently that the two French companies have shown interest in it. Negotiations are on with them. However, repeated attempts by The Financial Express to contact Arvind's vice-chairman and managing director, Sanjay Lalbhai, for details did not bear fruit. According to sources, Arvind Mills has decided to disinvest substantially in its denim project which has an annual capacity of 40 million metres in view of the drastic slump in demand for denim in the global market. What makes the division an even more losing proposition is the fact that it specialises in producing denim of thick variety which has few takers in the global market. Over the pastfew months, Arvind has been busy conducting a restructuring exercise within the company in an attempt to focus on more lucrative businesses such as cottons which are showing a definite upswing. Arvind's current focus is on its recently commissioned Rs 1,200 crore integrated shirting complex at Santej which has additional capacities in cotton shirting and a new knit fabric facility. This greenfield venture with a state-of-the-art high value cotton shirting facility, which commenced commercial production in April this year,will take Arvind's total capacity to 34 million metres per annum and knitted fabric to 16,000 pieces per day.
At full capacity, the turnover from the Santej complex is expected to be in the vicinity of Rs 800 crore. Even during the current year, operating at a 65 per cent capacity, the plant is expected to see a turnover of Rs 600 crore. Not surprisingly, therefore, the share of denim in AML's total turnover is expected to drastically reduce from 67 per cent to 47 per cent despite the factthat total denim sales are projected to increase by 18-20 per cent.
The full utilisation of the Santej complex is also likely to shore up the sagging bottomlines of Arvind. It may be mentioned that although the company has been able to post a 23.15 per cent jump in net sales income of Rs 250.34 crore for the quarter ended June this year compared to Rs 203.19 crore for the comparable period last year, the company has suffered a big net loss of Rs 48 crore as per the unaudited financial results. During the same period last year, the company had notched up a profit of Rs 10.26 crore.
What is, however, expected to revive the company's sagging fortunes is the fact that cotton prices are expected to remain soft and fall by 15 per cent this fiscal. Fabric manufacturers like Arvind, which procure cotton indigenously, are expected to benefit from the fall as this has a direct impact on fabric prices as well.
INSIGHT - In the right direction
The Arvind Mills management has been actively consideringbreaking up the company into two. While one would exclusively run its garments business and own its brands, the other would be engaged in manufacturing activities.
The company has been facing trying times and there has been a sharp decline in its profit margins over the years. While the denim manufacturing capacity in the country has grown to over 200 million metres per annum, consumption is just about 80-85 million metres. Export demand too has suffered as a result of changing fashions. However, the retailing of branded garments has been doing relatively well and holds a promising future. The proceeds from the sale of its denim manufacturing capacity, would in all probability go into the strengthening of its branded garments business.
Hence the confirmation of a deal with any of the French companies should see a trend reversal in the Arvind Mills stock, which has been heading southwards.
--Sarad Saraf
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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