From a Polyester texturing company in 1993, today Alok Industries is a fully integrated textile company and is amongst India's largest textile manufacturers. The company is fully backward integrated player and has expanded into spinning, weaving, knitting, processing, yarn dyeing, apparels, garments and home textiles. The company recently has entered into domestic retail segment through wholly owned subsidiary Alok Retail with chain of stores named "H&A" which offers garments and home textiles. Excerpts of interview with Mr. Sunil Khandelwal, CFO of Alok Industries:

For the first time in many years, the textile industry is witnessing some exciting time. What is exactly going on and how is the momentum of orders and the enquiry that the company is receiving?
The good times for textiles has started, if the pouring of orders, both from the export and domestic front, is any indication. On the export front, the demand from western and European region has gained momentum as they are coming out of sharpest global economic contractions since world war – II. With customers now coming back to the stores, these retailers, whose inventories have dried down, are now placing large orders to meet their demand.

Due to cost benefit, the textiles manufacturing is increasingly shifting to Asian continent, which has emerged as textile hub for the entire world.

Indian textile players over the last 3-4 years have been continuously investing and expanding capacities taking the benefit of Technology Upgradation Fund Scheme (TUFs) launched by Govt. of India. The technology adopted by Indian players is European and most modern, which is also giving confidence to the overseas buyers about the quality.

Further, India, due to its unique advantages, in terms of availability of raw material, specially cotton, relatively low cost labour, design and product development capabilities and the scale that is being created by the new generation textile companies is well placed to take advantage of this shift. Moreover, the global retailers are looking at de-risking themselves from China whose share in world trade has already increased to 30%.

On the domestic front, too, the situation is very optimistic as the demand for textile products is growing continuously with rising GDP and per capita income. Moreover with the growth of organised retailing in India, the textile consumption would also grow as almost 40%-45% of organised retailing constitutes textile and clothing.

As a result the textile Industry which is about USD 63 bn presently, comprising USD 41bn of domestic and USD 22 bn exports, is poised to become USD 115 by 2012-13 comprising USD 65 bn of domestic and USD 50 bn exports

There has been spurt in raw cotton, cotton yarn prices in the past couple of months. What has been the reason for the spurt in cotton and cotton yarn prices? Going forward do you see the trend sustainable? Why?
The domestic prices of cotton depend on demand and supply position in domestic and international markets. Today, the international prices are higher than the domestic prices, which are leading to increase in the domestic prices. The reason for increase in international prices of cotton is due to relatively lesser crop world over except India. Moreover, except India no other major manufacturing country like China, Pakistan, Turkey is having cotton surplus. With globalization, the domestic cotton prices are fully integrated with international prices and moving in tandem with international prices.

The yarn prices are going up on account of two reasons a) due increase in cotton prices and b) due to closure of south based spinning units due to shortage of power.

Going forward, we expect the demand for cotton to remain high and if supplies do not pick up the trend may continue.

Are you seeing the same trend of high prices of blended yarn as well? Is the raw material for blended yarn is also up in similar trend and proportion to cotton? Basically just wanted to understand the current delta between cotton yarns and cotton vis a vis different blended yarns and their respective raw material.
Other than cotton, the other major fibre used in textiles is polyester. The prices of polyester yarn are much lower as compared to the cotton yarn. For e.g. for 80 denier Texturised yarn, presently sold at Rs. 75/- per k.g. as compared to Rs. 150/- per k.g. of 40s cotton yarn. Under the scenario, the demand for polyester yarn is expected to grow in the domestic market.

However, the price movement of polyester yarn would depend on the demand supply position of the yarn and prices of crude i.e. PTA and MEG, a major raw material for the polyester yarn industry. The crude prices presently are quite stable and demand for polyester is in line with the supply and hence, there is no sharp movement in the prices of polyester and polyester blend.

China has always been our big competitor. Chinese companies have lot of advantage in terms of currency; power cost and other government subsidies favouring them? Considering all these, would it be difficult for Alok to compete against Chinese companies? What are the USP of Alok vis a vis other Chinese companies in the given parameters? In short, why would any developed markets place orders to Alok and not to any other Chinese companies?
China is of course a major player in world textile with share of 30% (USD 180 bn) of the total world trade of USD 600 bn. As against this, India's share in world trade is about 3.7% (USD 22 bn) and strictly speaking not comparable with China.

However, China is resending having its own set of problems in terms of rising labour cost, environmental issues, etc. Moreover, the buyers are increasingly looking at developing alternate sourcing destinations to de-risk their own business model. In this strategy, India is an attractive destination especially in cotton products.

Over a period, the new gen textile companies in India like Alok, have expanded rapidly across the textile value chain and offer integrated textile solutions rather than a merely acting as a supplier. Alok due to its full integration right from raw cotton to finished products and large scale is able to provide quality products at competitive pricing and at short turnaround time. It has created its own strong infrastructure in terms of captive power plant, training center, ETP where the cost of utilities like power is comparable with the best in the world. Moreover, the wide product offering and complete range offered by Alok is rarely available with any other manufacturer in the world under a single roof.

What is the quantity of raw cotton stocks available with Alok currently? It is the requirement for how many months? What was the cost of the stock and what is the price currently?
Our major raw material is cotton and cotton yarn. The cotton is normally procured during the season period i.e. December to March for the whole year, whereas the stock of cotton yarn is usually kept for 45 days. In terms of no. of days to sales, our total inventory varies between 90-100 days.

On an average, how many months of orders does the company gets in advance? Have you factored the possible rise in raw cotton / yarn / fabric prices in the current order book? What will be the impact on the margins on sequential basis versus first half of the current fiscal, due to this development? Whether and when will it be in a position to fully pass on the rise in costs to customers through hike in fabrics & home textile prices?
Normally, our order book is of 3-4 months, however, presently, it is about 6-7 months. As mentioned, we procure the cotton during the season for whole year at one go without speculating on the prices, whereas the orders are taken on the prevailing cotton prices. As such, we are well protected for any upward movement in the cotton prices.

Presently, demand for fabrics and home textiles is quite high compared to supplies and as a result, we are able to pass on the increase in cotton prices to our customers. The trend would remain like this, so long it is demand led.

The global economy is recovering, but is the demand for textiles improving correspondingly? After the festive season demand, especially Christmas and New Year, do you expect a lull in the global textile market? Why?
With the rebounding of the western economies, the sentiments are improved and we are seeing unprecedented demand coming from them. In 2009, the world has seen contraction in GDP whereas in Calendar Year 2010, the entire world economies are expected to be in trajectory, which is likely to further fuel the demand for clothing and home textiles. We are expecting Indian textile exports to grow by about 15%-20% p.a. to reach USD 50 bn level from present USD 22 bn.

Do you expect the raw cotton / yarn / fabric prices to ease from January / February 2010, as by then the global festive demand would have largely been over? Or is the current rebound appears to be sustainable for the medium to long term, considering the depressed prices in the last few years, and rising costs and the changing demand supply situation?
The demand for textiles and clothing is high both in overseas markets and in the domestic market. As the price is factor of demand and supply, the prices of raw cotton / yarn are likely to be in the same range as long as the demand persists. The global cotton crop this year is expected to be lower compare to previous year and once the major cotton importing countries like China and Pakistan enters to buy cotton, the prices may go up from the present level. The entire world is expected to be in positive zone in calendar year 2010 and such we expect the demand for garments and home textiles to grow further.

How is the demand per se of fabrics, RMG and home textiles? I mean how is the domestic demand vis a vis global? Where realization is better domestic or exports?
The demand for fabrics and home textiles is growing both in domestic as well as overseas markets. In the domestic market, the demand is rising because of many factors like continuous growth in GDP, rising Per Capital Income of the masses, increase in nuclear families, increased number of working women, rising aspirations, housing boom etc. As a result, the domestic market is expected to grow to USD 65 bn by 2012-13 from present level of USD 41 bn.

The realizations are quite better in domestic market, but it does not drive the volumes. Volumes come in export market from overseas retail giants.

The overseas demand is also growing at a CAGR of about 5% per annum and Global Textile Trade is expected to reach USD 805 bn by FY 2015 from present level of about USD 583 bn. India's exports however, likely to register faster growth of about 15%-20% per annum to reach USD 50 bn by 2012-13 from present level of USD 23 bn.

Has the export market revived? If so how is the position of US, EU and other nations to whom Alok exports? How much does export account for the company's sales? What is your export strategy?
With improvement in the economic conditions and sentiments in US and EU, buyers are coming back to stores for shopping and encouraged by this, retailers are rushing with big orders to fill their depleted inventory levels. As such, we can say that export market have not only revived but it's growing at a rapid pace. The orders from overseas market are encouraging. Alok exports about 35% of its total turnover to over 70 countries across the globe. The export market of Alok is well geographically spread.

For Alok, US still accounts for 40% of the total exports followed by Asia and Asia Pacific, Europe and South America.

In case of export recovery, given the high unemployment present in developed markets, does the company expect any anti dumping duty or such other measures to promote the local industries in the developed regions? In that case how will that affect Alok?
The manufacturing base of Textiles has shifted from developed countries to Asian countries and it would continue to shift further. This shift is mainly on account the fact that Asian countries cost of production is much lower as compared to the western world.

The textiles are capital intensive in nature and it takes lot of time to start/ restart the business. We do not expect any textile manufacturing getting started in Western world more so considering the marked improvement in their economies. WTO provides for protection measures such as anti-dumping provided the dumping countries are selling below cost of production. We do not see why Indian manufacturers would sale anything below cost of production.

As such we see only one direction for Indian Textile exports from here i.e. only up

Over the past many years, Alok had undergone huge capacity build up. What is the current capacity in spinning, weaving, processing, and finishing and in home textiles? Is there any planned capex on capacities?
Alok has been expanding its capacities since FY 2005. The current capacities of the company are as follows:

We are mostly through with our major capex plans and from FY 2011 onwards, we expect to incur only regular / balancing capex.

Kindly update on the branded store business of Alok in India. How many stores are presently operating? What are the future plans and capex in this segment?
Alok, through its 100% subsidiary called Alok H&A Ltd., has entered into domestic retailing business under the store brand called "H&A". H&A is a value format stores targeted towards Indian masses and sales quality apparels for kids, ladies & men's and home textile products such as bed sheets, comforters, towels, and napkins. It also sales accessories such as Handkerchief, belts, ties, undergarments, sock. In short, it's a complete family store.

Presently we have 151 stores operational across the country and we are looking at taking it to about 500 stores by end of FY 2011. All these stores are franchisee run; hence we do not expect to incur much capex.

What is the company's present debt position and how much is from TUF. What is the company's general working capital requirement? What is the current debt equity ratio? What are the plans of company from the free cash flow that it will generate in next couple of years?
The debt in the books of the company as on 30^th September 2009 is about Rs. 6910 crores. Out of this about Rs. 2800 crores of debt is under TUFs and another Rs. 1000 crores is foreign currency loans. On both these loans our average cost is about 6% and average for the company is about 7.50%. TUFs loans are for a period of about 10 years including the moratorium period.

Our net working capital cycle is about 150 days.

The debt equity ratio, net of cash & bank balances as on 30^th September stood at 2.56 level.

With the capex plans coming to an end in FY 2010, we expect to do only regular capex going forward. Accordingly, we expect to generate free cash flow, net of working capital and capex from FY 2011.

Moreover, investment made by the company in realty and overseas retails have now started yielding results and we would look at en-cashing these investments going forward and use the funds for repayment of debts.

What is the estimated turnover and net profit for FY 2009-10 and FY 2010-11?
Our sales in FY 2009 was Rs. 2977 crore (including exports Rs. 1055 crore). In the first of the current financial year FY 2010, our sales have grown by 41.84% to 1761.07 crore as compared to Rs. 1241.58 crore in the corresponding period of the previous year. Our exports during the same period reached Rs. 583.63 crore registering a growth of 27.12% over exports of Rs. 459.10 crore in the corresponding period of the previous year.

Looking at the present order book position and optimization of new capacities, we expect to achieve similar growth in the second half of the current financial year. The same hold good for FY 2011 as well.

Any plans on inorganic growth, M&A activities etc?
We have already done two overseas acquisitions about 3 years back, firstly we acquired a Czech based textile manufacturing company called Mileta and secondly, we acquired as a group controlling stake in a chain of retail stores in UK called qs. We would like to get maximum value out of these investments, before looking at any other acquisition. However, we may look at doing overall consolidation within the group.