After much speculation and dithering, Ahmedabad-based garments giant Arvind Limited recently spun off its brands and retail business in an effort to realise valuation and raise funds for aggressive expansion.
Post this, the retail industry has been caught in the crosswinds of recession, a development which has also hampered the growth plans of the company. J Suresh, CEO, Brands & Retail, Arvind Brands, in an interview with Raghuvir Badrinath and Ravi Menon, details the company's plans to steer through the storm. Excerpts:
Have the effects of demerging your retail and brands businesses started to kick in?
The demerger will be effective April 1, 2009 and the overall strategy for retail and brands has not changed. The entire effort behind spinning off these businesses into wholly-owned subsidiaries is to bring to bear enhanced financial focus on these entities and explore various alternatives for fundraising in these vehicles at the appropriate time.
Do you think any private equity investor will look at investing in retail or brand plays during the ongoing economic slowdown?
Well, it is pretty tough, but we are in no hurry. As is the case of any retail player, we are calibrating our expansion plans. In 2007, we had envisaged a total investment of Rs 400 crore (Rs 4 billion) in the retail and brands businesses by 2012. We have invested Rs 120 crore (Rs 1.2 billion) of this planned capex. The remainder will most probably be required by 2014, instead of 2012. Internally, we are generating cash and the broad argument right now is that we are not desperate for equity infusion.
Prior to the downturn, the brands and retail businesses were said to be valued at around Rs 1,200 crore. To what extent will Arvind Limited divest stake?
We have not worked that out yet. The topline of these two businesses is Rs 440 crore (Rs 4.4 billion) and we will be growing at around 15 per cent in the coming year. At the operating level, we make 6 per cent margins while at the net level margins are 1.5 per cent. Ideally, 1.5 to 2 times the topline would be a good valuation whenever we are comfortable with raising equity.
During the last fiscal, brands and retail posted 40 per cent growth and you laid out plans to set up large format retail stores. How are these plans being calibrated right now?
The earlier plans are being deferred over a period as many builders are delaying their schedules for property handovers. Many of the malls are behind schedule. We should have opened seven more large format stores in 2009-10, but with many of the malls pending completion, these plans are likely to be delayed. We have so far expanded from an initial 45 stores to 130 stores presently. All the capex for these came from internal accruals. For now, instead of pressing the button in April, we propose to do so in July.
Moving ahead, how do you think the business will pan out?
We have always been believers in value retailing which we think has fructified on the Megamart front. In the premium men's clothing business, we have been growing our brand share through a range of established brands; Arrow has done very well while Izod, Pierre Cardin and US Polo, which we will launch sometime this month, will propel us further. Arrow alone racked up Rs 140 crore (Rs 1.4 billion) of our Rs 190 crore (Rs 1.9 billion) topline for premium brands last year, with an additional Rs 50 crore (Rs 500 million) coming in from Flying Machine.