‘Reinvent Yourself To Create Shareholder Value’
For a group that’s more popular for its knack in denim manufacturing, the Lalbhais have traversed a long way into other successful businesses too. The group now expands its footprint into internet platforms, water solutions and engineering in a bigger way – and all this with an eye on increasing stakeholders values and a focus on business opportunities of the future.
In a freewheeling conversation with BW Businessworld’s Clifford Alvares, top leadership team of Arvind comprising Sanjay Lalbhai, Punit Lalbhai and Kulin Lalbhai take time out to discuss what is in store for its varied businesses, including textiles.
Edited excerpts:
Q: What has changed for Arvind over time, particularly in the last three years?
We have a history of many generations. I am the fourth generation. Started by Lalbhai in 1896, the first business was the first mill. As a company, we are constantly changing. We have transformed ourselves from being a textiles company into a conglomerate. It has been a planned journey. A business has a lifecycle. When I came in, we were a domestic women’s wear textiles company. Those days, Calico and Arvind were household names. Then, power looms arrived, and we started a new proposition called denim. In textiles, now, we are one of the largest denim textile producers in the world. As far as a shirting and bottom-weights are concerned, we are the third largest company after the Chinese. And in knits, we pioneered bringing in a completely vertical play of knits to India.
There are quite a few verticals only in textiles. We have not remained a denim company. We have expanded the entire platform of denim. The advanced material division, with Punit now, is a new generation business that builds on our existing capabilities.
And it is now charting its own course. We have announced a division of real estate some time ago. We have announced a new structure lately. Unless you reinvent yourself, you cannot create shareholder value.
Q: So what are your various businesses and how are you looking at creating shareholder value?
Sanjay Lalbhai: There is no other country in the world on the cusp of such growth. Core competence is in mature economies. Because we read a book written in America, we think it is valid in India. Conglomerates are being built. If the same management is trying to learn 10 things, you may get diluted. But we are building vertical domain expertise with professional management in each of our verticals, with separate divisions. It is not that the textile person has gone into development or engineering.
Punit: Arvind is an engine based on core capabilities that Sanjaybhai was mentioning, which is innovation, the platform of doing business the right way, and empowering people and the right managers. When we think about where we can create value, it is more than just backward and forward integration.
It is where our capabilities are, and where these core principles are. Think of Arvind as an engine that is building businesses. Once those businesses have their own legs, they will be freed to follow their own best path.
Kulin: You end up creating value when you can identify an opportunity and ready yourself to take advantage of it. It is thinking ahead of time, then putting in place the right model with the right management. When the export model wasn’t there in India, it was put in place by this company. We reinvented textiles; now we are a global manufacturing hub.
We believe that we are now in a position to put in many of these businesses. We are building the platform. So, allowing a conglomerate allows you to patiently incubate a business, because cash flows from a mature business allow you to create new opportunities ahead of time. The brands business depended on cashflows of the parent for a good 15 years. Now, it can completely benefit from being an independently listed entity.
Q: Where do you see your main business, textiles, in the near future after the split?
Punit: This split allows us to look at how we are going to chart our growth in a very different way. The textiles business has been the cash generating engine for the company, and most of that cash was going into incubating brands. Now, the brands business has a very exciting story and can chart that story on its own resources.
That now gives us an opportunity to completely change the way textiles is done. There are three major themes which we are focusing on. The first is how we go from a manufacturing-driven business to a business that is totally integrated and a service provider in the global space. That means forward integration into garments, and our design and innovation into their design and innovation.
The second is to see how we are going to change the way textiles are manufactured. Textile manufacturing hasn’t changed for over a 100 years, and we are still weaving, dyeing and finishing. Now, with technology, automation, artificial intelligence, additive manufacturing, 3D printing, the opportunity to completely change the game has come to the doorstep. So, we are going to play the lead role in manufacturing textiles in a way that can add much value.
And, the third area of focus of taking our textiles capability and branching out of fashion, stepping out of textiles but now stepping into material science in what we called advanced materials, which means we can take our capabilities into human protection. We can take textiles into new areas of use such as construction.
So, instead of steel or stone structures, we use textiles to make buildings and sheds and all kinds of infrastructure or mass transportation.
These are three areas that are very exciting in textiles. It’s going to look a very technology-heavy business, and different from asset-heavy manufacturing. It will be asset-light.
Because we have not invested, we have not grown in textiles. We are going to invest Rs 1,500 crore, and that should see textiles growing at double digits in the next 3-4 years. It is not about getting market share at lower margins, but a different story from the traditional unattractive textiles one. We want to bring that excitement back to textiles.
Q: So, the new advanced materials division is where you will be focusing. What does the growth rate in this business look like?
Punit: Basically, it is going to be large. I would be careful on a number. Business right now is about a few hundred crores. So it is not tiny, and the predictable model is high-double-digit growth.
Kulin: Even textiles is going to grow in double digits and that’s on Rs 6,000 crore. We are talking about adding about $1 billion in the next 3-4 years.
Sanjay: Given the way we are looking at reinventing the entire textiles business, we are filing patents every month.
Q: In the brands business, you aim to triple your revenue in five years. What are your plans there?
The brands story is a very exciting one. Fundamentally, the customer’s entire perception of this category has changed. What is the underlying opportunity? For a country like India, which is so young, where per-capita GDP is expanding the way it is, your apparel becomes the most important way you express yourself.
Why are brands growing? In every country in the world, when you come across the $2,000 per capita GDP, a major change in consumption takes place. That’s because, suddenly you can afford something. Why is the underlying growth of the apparel market so strong? On an $18 billion market, you are growing at 15-plus per cent because of the shift in consumption.
However, we have created a platform. The platform our brands business has created allows lifestyle brands to scale up very quickly and at a fraction of the cost. As you achieve scale, you get advantages on both sides of the network which is distribution.
Arvind is a multichannel distributor. Today, you walk into any mall in India, the largest number of stores is of this company. You will find 1 lakh square feet of real estate and, more importantly you will find our brands on every floor, which is very critical.
We source more than 200 products from vendors across the world, where our strength continues to increase. Tomorrow the way you experience brands will be digital. In future, the store will be in your hand. And what is more beautiful is that the store you will see will be different from the store I will see. Because predictive analytics will decide what are you are likely to buy. So, if I can change my digital to your liking and my stores and my fabric, which I can change for all the brands, that is the power of Arvind today.
The value of this business is not the 20 brands, but the platform that creates some of the most exciting brands of tomorrow. We believe this portfolio itself will propel the business from being a Rs 3,500-crore business to a Rs 9,000-crore one in five years, an organic 35 per cent CAGR. The beauty of this business is that it is an asset-light business, with high entry barriers.
Q: Where do you see the engineering business?
Anup is a fabrication business, where we are adding more capabilities, and handling exotic metals. We work with the best consultants, globally. As India is going to dramatically change its infrastructure, Anup has a very strong growth trajectory. It is small, but its Ebidta is more than 30 per cent, with very high returns on capital employed. So, it’s the ability to take advantage of this spurt of growth that is going to come in India. A lot of projects are coming.
Q: You also have a water-solutions business? What made you enter into this business and how is that shaping up?
Water is a separate business it is called Envisol. The Arvind platform is nurturing it right now. It is an innovative business. We were the first to invest in zero-liquid discharge. We were the first to start recycling water in Asia in 1996. When we developed expertise in water, we started consulting with other companies. We started providing small solutions, and from that, we started providing end-to-end solutions, and from that, we started providing, unique end-to-end solutions. Today I have more than 25 patents in water and more than 60 installations in 10 different companies. We now work with pharma, leather, chemicals, and across industries. We will continue to incubate this business till it has the cash-flows to chart its own course.
Q: For a long time, Arvind meandered in shareholder value. It’s only in the last few years that the market has begun to recognise your company. Your thoughts.
Valuation is a game of various things. But you have to look at both the short term and the long term. So, investors will see we are focused on creating shareholder value. Let me say that the market is always right. It is a humble way of saying that you did not do what the market wanted. That could be the only explanation. The market is not wrong. You did not do the right things.
Kulin: The shareholder is a lag indicator, and so focuses on things to come. As a company, we have to focus on capital allocation and return on capital employed, and innovation, and then, the outcomes follow.
Q: How do you see the economy shaping up, now and in the future?
We have been discussing transformative reforms. They have all happened. GST is going to reward the formal economy. For the first time, there is a bankruptcy law; so, you cannot do ever greening of companies. There are many reforms like protection of IPR. So, the most exciting thing about India is that now we are unleashing reforms which will allow excellence, execution and honest people to win.
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