Alok Industries is one of the largest textile manufacturers in the country. Despite the challenging environment the company has dared to invest close to Rs 5,500 crore over the past five years, aggressively expanding its capacities in various product segments, including home textiles, apparel fabrics, garments and polyester yarn. As a strategy to de-risk its business, Alok has also been increasing its presence in the local market by setting up a retail chain called H&A to sell garments. Its strategy of building scale seems to be paying off with the company now running at almost full capacity, on orders from overseas buyers who prefer large suppliers over small ones, and a simultaneous growth in domestic volumes. Between 2005 and 2009, the company witnessed a three fold increase in exports from a modest Rs 300 crore to Rs 1,000 crore; total sales grew from Rs 1,800 crore to Rs 2,900 crore and net profit more than doubled from Rs 90 crore to Rs 188 crore. In the first quarter ended June 2009, Alok reported a 44 per cent y-o-y growth in turnover at Rs 786 crore and 13 per cent growth in net profit at Rs 32 crore. Still, the stock market seems unconvinced over Alok’s growth prospects as its shares, at the prevailing market price of Rs 22, trade at merely three times estimated earnings for the current fiscal. Probably, some part of the skepticism is to do with the fact that the promoter has pledged close to 70 per cent of his 36 per cent stake in the company – most of it for personal use. Dilip Jiwrajka, managing director, describes the major strides the company has made over the past couple of years

What’s been happening at Alok recently?

We have been added large capacities in the past three years. And in spite of putting up large capacities we are still running at full steam. We have got orders which we could not have imagined. Except for the polyester textile division, we can’t take any orders for deliveries before January or February 2010.

This is primarily because of our size, which is drawing people to us. For example, in our home textiles division we are doing about 5 million metres a month, that roughly translates to 0.9 million bed-sheets. This is huge by any standard. Our exports have grown to Rs 1,000 crore last year, and going by the trend by a conservative estimate we expect a 33 per cent jump to over Rs 1,300 crore this year.

How much of Alok’s business comes from the US right now and how is the demand situation there?

Over overall order book will be close to Rs 1,000 crore. For us, this is unprecedented, as earlier we did not have the size to execute such a large quantum of orders

Now, almost 40 per cent of our exports go to the US. I don’t think it would be in our interest to increase it beyond the current levels. Each of our customers from the US wants large capacities to be available to them. In fact, each of these large customers is willing to book our full capacity. But in line with our policy we can commit only a certain percentage of our capacities to them.

What’s the order book of the company currently?

For example, in fashion fabrics there are two parts to the business. Fashion is generally predicted over six months and in this six months there are two parts. We currently have an order book of three to four months. Similarly, in bed linen, though it is not a fashion conscious segment, orders range for three to four months. Now we have gone beyond that even in this segment. In terms of value it will be close to Rs 1,000 crore, overall, across various segments. For us, this is unprecedented, as earlier we did not have the size to execute such a large quantum of orders.

Do you have fixed price contracts with customers?

No, we don’t have fixed price contracts that run for the full year. Prices are fixed within a specific contract, which typically run for two or three months.

When you say that most of your capacity is blocked for the next few months, do you have the ability to raise prices and have you done so ?

Yes, given that we have huge orders, we have that flexibility and it has been exercised to raise margins. I am unable to disclose specifics, but we have increased prices, which will improve our margins.

What’s the capacity utilisation at Alok currently?

We are not operating at full capacities yet, mainly because much of the fresh capacity was added recently in March-April 2009. It takes some time to stabilise capacity. In some segments peak utilisations are already taking place, like in bed linen. The terry towel plant was commissioned in March, so the order book has yet to get full. In general, capacity utilisations are picking up, but efficiencies will pick up over a period of time. Our target is that by the end of calendar 2009 we should achieve 90 per cent capacity utilisation and 90-92 per cent efficiency.

How do you perceive the sales mix for Alok?

We intend to keep sales split equally between domestic and exports. Of our exports, we intend to maintain 40 per cent directed at the US.

On the exports front, for the remaining 60 per cent even the UK and the rest of Europe are facing a poor business environment. How do you plan to counter this?

India’s share in global textile trade is about 3 per cent. It is not difficult for us to achieve these targets even under harsh conditions.

What kind of top line/bottom line growth do you expect this fiscal and the next?

We are aim to grow in both the domestic and overseas markets by 33 per cent this fiscal year. This applies to the top line as well as the bottom line. In FY11, we are aiming at 25 per cent growth on both these parameters.

Who are your major customers and how much do the top 10 contribute to the topline?

Our major customers are Marks & Spencers, Walmart, J C Penny, GAP and Anne Taylor. Our top 10 customers give us about 50 per cent of our business. As a policy, we don’t supply more than 10 per cent of our products to a single customer. In individual segments however, they may have a slightly higher percentage.

How do you cope with competitive pressure arising from a strong rupee?

We are more concerned that the currencies of our neighbours remain in line with our currency, more than the rupee on an absolute basis. We are okay as long as the relative strength is maintained, as it affects our competitiveness. If the competitor’s currency depreciates more than ours, then they are in a position to sell cheaper.

Having said that, the Indian garment trade per se is not that efficient. So we sell a lot of our fabric to destinations which are more efficient than India in the garment trade. Bangladesh, for example, is a very efficient player in the garment business.

Currently, apparel fabric is a third of our business. Within that one-third we sell to Indian garment exporters, and also to manufacturers in Bangladesh, Egypt and Sri Lanka. The competition is really between how much we sell at home and to those players outside India.

There is a fair bit of debt on your books (net debt as of June 2009 was Rs 6,560 crore). Are you comfortable with that and how do you see it progressively?

Most of those loans are for a period of eight years and I expect to easily repay the loans from the profits that we will make. Most of the loans are subsidised loans received from the Technology Upgradation Fund Scheme (TUFS) of the government.

Can you tell us about your strategy to address the local market and would it require any further investments?

We would like to have a 1,000 H&A stores. As it stands, we have about 145 standalone stores. We have reached a certain size and may choose to stand and catch our breath for a moment. If things go well, in the next three years we may be there.

To achieve this we are following a franchisee model. So this does not involve a large amount of investment per se. But we have to extend supply credit to our franchisees. On a rough estimate, we may have a capital requirement of Rs 45-50 crore to get to the 1,000 stores mark. This is not a major amount compared to our existing operations and we can easily raise that much.

Wouldn’t it be cheaper to grow via other retail outlets like Shoppers Stop, rather than launch your own stores?

I don’t think anybody will acquire us. And I am not in favour of acquiring someone. We intend to grow organically

Yes, but then you are left to their dictates. We also sell to Shoppers Stop, Zodiac, Pantaloon, and some others, but that business arm is different from the retailing business. But the volume of merchandise that we can move out of our own shops is more than any other retail chain would be able to do.

How do you see Alok two years down the line ?

We have chosen the path of large capacities and we would like to be an efficient player across all the segments that we operate in. Our efficiency levels are improving day by day. In the next few years we will be one of the cheapest per unit cost players in the country for sure and we will be very competitive in the rest of the world. I have to look at the per-unit cost, because buyers could change vendors at the drop of a hat if they felt my prices were higher.

Doesn’t that expose you to a lot of risks like materials price hikes ?

There are two things here. Raw material prices move in tandem with international prices. We also do fancy items which do depend on raw material costs. But the mark-ups on these products are much higher and there is enough scope to make money in this business.

What are the biggest risks to earnings – raw material prices, interest rates, labour, government policy ?

All these factors seem to be under control. In the case of raw materials, we have the ability to pass on the increased costs to customers. Most term borrowings are under TUFS and the average cost of our borrowings is currently at 7 per cent. Even labour cost at 4 per cent of sales is at reasonable levels. Current government policy is also helpful to the sector. So, we don’t anticipate major problems with regard to any of these factors.

Where are margins likely to be in FY10 and FY11 and what is leading to the improvement ?

We have a robust order book. We have to make sure that we deliver. So in that sense the company’s ability to utilise its capacity and deliver will ensure better profitability. For FY10, we expect Ebitda margins of 28.5 per cent and that should go up to 31 per cent by FY11.

Do you expect consolidation in the textiles sector? And where do you place Alok on this count?

I don’t think anybody will acquire us. And I am not in favour of acquiring someone. An important part is that we have been growing for the past 5-7 years and we will continue to grow. We intend to grow organically.

You have pledged 69 per cent of your holdings ...

We haven’t entered into any risky deals where we would be left with no shares ourselves. There might be borrowings, but most of it is under control.