How Arvind Ltd is betting on newer businesses to move up the value chain
Technical textiles are now Arvind's bigger bets, along with water and wastewater treatment
Sanjay Lalbhai, 62, now chairman of Arvind, recalls how the first lot of indigo-dyed denim, made by Arvind sometime between late 1985 and 1986, was technically not denim at all. A thick white cotton twill was printed indigo-blue using a saree-printing machine and then tested to see if it washed like denim.
Lalbhai explains that for a fabric to be considered authentic blue denim, the warp or the longitudinal yarn in the fabric has to be dyed with indigo before the weaving. The transverse thread, or the weft, must be white. The afterwash look of the fabric is the key.
By 1986, the Arvind top brass had been mulling over denim options for two years. That journey had started a few years earlier when former adman-turned-entrepreneur Rajiv Badlani set up the Flying Machine jeans brand in 1980. Badlani, who had married into the Lalbhai family, was importing denim to make Flying Machine as suitable material was not available in India. He wanted Arvind to make denim in India. Arvind, on its part, was looking for a product to take on the competition in textiles, which was becoming more and more commoditised.
The company, then called Arvind Mills, acquired Flying Machine in 1984. But the equipment needed to make authentic denim required big investments and no one was sure it would work. Therefore, the first “India-made denim” came out of a saree-printing machine, and went on to become Flying Machine jeans. The brand’s success led Arvind to invest in the technology required to make denim in 1986 and set up India’s first denim manufacturing plant, at Naroda Road in Ahmedabad.
By March 1987, Arvind Mills was producing authentic denim. Since then, the Naroda factory has seen many innovations in fabric weaving and dyeing — for instance, the use of a rota-spray machine for space dyeing hand woven ikkat. However, Arvind’s most advanced weaving unit today is in Gandhinagar’s Kalol, about 23 km from Naroda.
Set up in 2011 with German company PD Composites, the joint venture weaves glass fibre into technical textiles. Glass fibre textiles are used to make factory-wear, auto-interiors and windmill blades, as well as structural pieces that can be used to make ladders or even bridges. The two units look vastly different. While the one in Kalol is clean and modern, the one in Naroda is a typical old textile mill. White, the colour of glass fibre, dominates the new factory, whereas indigo dye dominates the fabric and walls at the Naroda unit.
If denim was Arvind’s big bet in the 1980s, technical textiles are one of its bigger bets now, along with other businesses such as water and wastewater treatment as well as garment production for international players. These could be the future of Arvind Ltd, which completed a three-way division of the company in November 2018.
The branded retail play (which includes Arrow, GAP, Tommy Hilfiger and Flying Machine) is Arvind Fashions Ltd and the much smaller engineering arm has been hived off as Anup Engineering. More than 60% of the value of the original company has now moved to the branded retail arm.
Arvind Ltd now wants to use the textile business to fund newer businesses. But the key trick will be to ensure there is a balance between older businesses that provide a higher return on capital and the newer ones that need investments to ensure minority shareholders get their due.
Lalbhai says: “The demerger was logical. Shareholders had invested in Arvind because they wanted to be invested in one of the different businesses. A collection of mature businesses did not make sense, either for shareholders or for analysts. The demerger was aimed at unlocking value.”
When other businesses mature, he says, they can also be spun off, just like the brands business. The importance of branding is not lost on the Lalbhais, the descendants of royal jewellers of the Mughal era. Their family surname was Sheth. However, in the 1960s, they decided to use Lalbhai as the surname after Lalbhai Dalpatbhai — the great-grandfather of Sanjay Lalbhai who set up the Saraspur Manufacturing Company in 1897 to produce cotton yarns, thus starting the Arvind legacy.
In an interview with ET Magazine, Lalbhai says he dropped Sheth from his name while in school. But he signs his name as Sanjay Shrenik, using his own father’s name as the second name. “My father would also sign as Shrenik Kasturbhai, using only my grandfather’s name.” But his sons Kulin and Punit use Lalbhai in their signatures.
The demerger of surnames aside, a question everyone is asking is if splitting the company had something to do with a succession plan for Kulin and Punit, both in their thirties. There is already a certain visible division of work between the brothers. Punit Lalbhai deals with advanced materials and new businesses such as water, while Kulin Lalbhai focuses more on Arvind’s branded business as well as the corporate functions. Father Sanjay says the trinity operates the arms of the companies together. He stresses that there is no “artificial division” in the business.
“There are certain areas that Kulin and Punit work on, four or five areas each. But there are also functions that cut across companies. As a group we have always believed in letting professionals run the business. Not just now, but from my grandfather’s time. We come in when the promoter’s intervention can be useful and effective,” the senior Lalbhai says.
The Lalbhais classify their businesses into three categories: mature businesses like textiles (denim, wovens, voiles); garments business or ones that promise great value creation like brands and engineering; and finally water, glass fibre textiles and Arvind Internet, the digital business that helps offline retailers migrate to omnichannel retailing.
In the new avatar of Arvind Ltd, the textiles business brings in 80% of the group’s operating profits. Lalbhai says many parts of the business, like denim for example, have fully depreciated machinery and a virtually negative working capital — as they also buy material on credit. It is going asset-lite by tying up with third parties for basic weaving and dying, instead of replacing older machines. Therefore, with little capital (equity+debt) at play, this business has a very high return on capital employed.
With textiles, Lalbhai is keen to ramp up the garment production business of Arvind, which has a labour-intensive model. The company is trying out a new model at its garment making units in Jharkhand’s capital Ranchi and in Bavla in Gujarat by providing dormitories for women, especially from tribal regions. The workers are also imparted skill training or college education, and are expected to complete the training in four years.
There are aggressive plans to increase the workforce in Bavla to 12,000 from 1,500 and in Ranchi to 7,500 from 2,000. The plan is to have more than 80% women employees in both locations. The company also benefits from the payroll incentives of these state governments.
While these centres build capacity, Arvind is also offering global garment brands solutions such as fabric research and development and production, among others. It has already invested in a unit in Ethiopia to make the most of the tax advantagefrom there to Europe. An example of the research and development work is the rapid action chinos — trousers that can take the wear and tear of sporting activities — that Arvind developed recently.
Vicksit Mehta, the mustachioed creative director of Arvind, whose team worked on developing the trousers, says sustainability is the key to succeed in the global garment space today and much of the research that happens at Arvind focuses on that.
Mehta, who dresses in jackets and ties that look anything but formal, has been with the company for 15 years. Under Mehta, the creative arm of Arvind has notched up many wins, working with all top global garment brands. So will the renewed garments play and the newer businesses enthuse the market to invest in Arvind Ltd again?
In a post-demerger report in November, Kashyap Pujara, the head of research at Axis Capital, said: “Investors were mainly playing Arvind for the scale-up of its B2C brands & retail business which requires relatively lower capital intensity (versus textiles) and commands far better valuation multiples (15-20x EBIDTA). Investors viewed the mainstay business, textiles (~80% of consolidated EBIDTA) as strong cash cow which funded the brands & retail scale-up.”
Chairman Lalbhai says the focus should be more on the return on capital employed (ROCE) and less on the earnings before interest, tax, depreciation and amortisation (EBITDA), as the textile business is now moving towards an asset-lite model and, therefore, capital investments would be less. The two businesses that were moved out of Arvind Ltd — Anup Engineering and Arvind Fashions — were listed in early March.
There were initial stutters, as the stock price of Arvind Fashions kept hitting its upper circuit filter every day. The combined market capital has inched up to Rs 8,989 crore on March 29, 11% more than its pre-demerger value in November. Around the time demonetisation was announced in November 2016, the Arvind Ltd scrip had crossed Rs 10,000 crore in market capitalisation — and that should be the first milestone for the combined valuations of the new entities to cross.