Arvind: Stitching a new future

The summer sun is blazing in Ahmedabad as we walk into the chairman’s office at Arvind Ltd’s mill compound. Yet, as we walk through the large wooden doors, it feels like we have entered an oasis of serenity. High ceilings and large glass windows, which seem to merge the landscaped gardens surrounding a pond with the interiors, trick the mind into thinking it is a pleasant spring morning.

At first glance, the massive 5,500 sq. ft. office could easily be mistaken for an art gallery. Spotlights on the ceiling highlighting paintings, company memorabilia, and a portrait of the company’s co-founder, Kasturbhai Lalbhai, add to the effect. The building’s modernist Indian architecture is all too evident from the exposed concrete walls intertwined with dark wooden textures.

It is an apt setting to meet the promoters of a company in the throes of transformation as new ideas from the next generation of the Lalbhai family take shape. The Lalbhai Group is one of India’s oldest business houses that traces its history back to 1897 when Lalbhai Dalpatbhai set up his first mill, the Saraspur Manufacturing Company. Today, the nearly ₹11,000 crore textile group is in the hands of the fifth generation of the Lalbhai family and they have their eyes firmly set on the future. Their ambitions are to pivot from being an asset-heavy manufacturing company to an asset light technology-driven conglomerate primarily in the clothing space. “Seeing Arvind as just a textile manufacturing company is looking at it through the wrong prism. The core competency of the company is technology and we are using that to be a solution provider of clothing,” says 32-year-old Harvard-educated Kulin Lalbhai, executive director of Arvind Ltd.

The Lalbhais have always been known to reinvent the company with time. Their textiles business took off during the years of Mahatma Gandhi’s call for Swadeshi and flourished over the decades—until the 1980s when they were hit by the arrival of power looms which put many old mills in the country out of business. Unfazed, the Lalbhais turned their energies to denim which had then become one of India’s coolest fashion trends and transformed Arvind into one of the world’s largest manufacturers of the fabric. Today, denim remains one of its mainstays, but over the years the company has grown from just a textiles business to apparel and, more recently, even retail and real estate.

The Lalbhai family’s penchant for disrupting the business-as-usual scenario was in evidence when, nearly a year ago, the now 64-year-old chairman and managing director, Sanjay Lalbhai, announced a demerger of three businesses housed within Arvind Ltd. The demerger was recently approved by the National Company Law Tribunal and by the end of 2018- 19, the group will have four listed entities on the BSE. Arvind Ltd will house the textiles and garments business and other verticals like the advanced materials division. Arvind Fashions Ltd will be spun off as the branded apparel and retail business. Anveshan Heavy Engineering, earlier known as Anup Engineering, will have the engineering business. It produces heat exchangers, pressure vessels, and other such industrial products for various industries including oil and gas and petrochemicals. Arvind SmartSpaces, the group’s real estate arm, is already operating as a separate listed firm. “We expect that the demerger will become effective during the third or fourth week of November and Arvind Fashions and Anveshan Heavy Engineering may get independently listed in early January,” says Jayesh Shah, chief financial officer, Arvind Ltd.

Investors love a demerger of a large company with different businesses and Sanjay Lalbhai knows it. “There is no point in housing diverse businesses in one firm because people want to invest in a sharply focussed company. Many of them don’t even come if varied businesses are housed in one company. For example, many international funds didn’t invest in Arvind until the real estate business was demerged,” he says. Currently, the promoters have a 42.92% stake in Arvind Ltd and the rest is held by domestic institutional investors, retail investors and foreign institutional investors. FIIs hold a sizeable 21.92% stake.

The day after the announcement of the demerger on November 8, 2017, Arvind Ltd’s share price rose 5.2%. “With this demerger, we believe Arvind would be able to efficiently channelise its resources to full potential, leading to optimised results. We expect Arvind to play a pivotal role capturing a larger pie of the Indian textile industry,” Bharat Chhoda, Ankit Panchmatia, and Cheragh Sidhwa, research analysts at ICICI Securities, had said then.

Of course, there was no pressing need to please the markets. Arvind Ltd’s share price had already risen nearly 30-fold over the 10 years prior to the demerger announcement. Today, its market capitalisation stands at more than ₹8,000 crore. In 2017-18, Arvind Ltd’s consolidated revenues stood at ₹10,826.13 crore. More than 60% of this came from the textiles business. While the company declines to comment on its share of the overall textile industry, with revenues of less than $2 billion, it is estimated to be relatively small. The industry was pegged at $137 billion as of 2016, according to investment promotion agency Invest India.

But over the next five years, Arvind’s textiles business is set to undergo a radical change. From being a seller of fabric to the world’s biggest names in fashion like H&M, GAP, Levi’s, and Pepe Jeans, it wants to step up its supply of garments for retail outlets of such brands. And technology will lie at the core of this transformation. “In our textiles business, we want complete vertical integration. We want to be a complete clothing solutions provider, not just a supply chain solutions provider. What we are offering to the likes of H&M and GAP are the final garments that can go directly into their retail shops by working with their designers and innovation teams,” says Sanjay Lalbhai.

Arvind has an annual production capacity of nearly 250 million metres of fabric, both denim and woven fabric, but the company converts only 10% into garments. Over the next three years, the aim is to ramp this up to 30-40%, and then 50% by 2022. It wants to sell these garments to 10-12 top customers like Zara, H&M, and Uniqlo, most of whom have an existing relationship with Arvind. Arvind is a top supplier for Sweden’s H&M, and GAP Inc., one of the largest clothing brands from the U.S. In future, more and more of its looms and mills will be used for contract manufacturing of garments for such clothing partners. In a bid to go asset-light, the company is also outsourcing capital-intensive manufacturing processes like spinning and weaving, and focussing on low capital jobs like dyeing and processing in-house. “We are changing the way textile as an industry has been. High growth and an asset-light strategy is what we are following now,” says 36-year-old Punit Lalbhai, executive director at Arvind Ltd.

Arvind is no stranger to transformation, but it hasn’t always been successful. Back in 1998, when brothers Kulin and Punit were still in high school, their father, Sanjay Lalbhai, tried to expand into capital-intensive businesses like steel, cement, and oil refining. Those experiments nearly brought the company to the brink of bankruptcy. Learning a lesson from the experience, Arvind’s future will be funded through equity rather than debt. More importantly, the company isn’t straying too far from its core competencies built over decades.

When the Lalbhais talk of being a technology-driven firm, they aren’t talking about starting new businesses. Instead, they are using technology to make processes more efficient. Take denim, for example. For years, the company used traditional methods involving hours of washing to create fashionable fades and crease lines. Now, a laser-based machine creates the patterns within minutes. “Today, a pair of denims requires 70 litres of water. We have developed a system where we can do it in five. As a next step, we are trying to produce it using a glass of water,” says Punit.

As Arvind seeks to develop its own fabrics into a brand to challenge the likes of Raymond, Kulin explains how technological innovations could give the company an edge in custom-made clothing. “We have developed a concept called ‘CREATE’. You can walk into a shop, sit on a computer and design your products. It will be made just for you and delivered at home in 10 days. You can make one million unique products in a 500 sq. ft. shop that will be just yours and nothing like others,” he says.

Taking on an established player like Raymond is an ambitious plan. Especially as not all the brands it manages are profitable. Arvind has 1,300 retail outlets across the country, including its multi-brand clothing stores called Unlimited, its outlets for custom tailored products called The Arvind Store, and big brand stores for its international brands. It sells clothing under company brands like Flying Machine and True Blue. It has also tied up with large global brands like GAP, GANT, Tommy Hilfiger, Calvin Klein, Aéropostale, and Sephora to sell their products in India through standalone franchisee outlets for each of these brands. Brands and retail is the second largest business segment in the group with revenues of ₹3,852 crore in 2017-18.

Betting on technology has helped Arvind in the past. An example of success is the advanced material division which makes products for human protection, industrial use, transportation, and some projects for the armed forces that it doesn’t disclose. It is a ₹500 crore business in terms of revenue and Punit says it will reach ₹1,000 crore by FY20. Kotak Securities’ deputy vice president (research), Pankaj Kumar, sees Arvind’s technical textiles (nonwoven fabrics) business growing at a faster pace with the potential to touch ₹1,500 crore in the next four-five years. Analysts are excited about this space.

“Technical textiles have immense potential, particularly in developing countries. India currently accounts for less than 5% of the world technical textile production,” say Chhoda, Panchmatia and Sidhwa of ICICI Securities.

In his heyday, Kasturbhai Lalbhai was among the top industrialists of pre-Independence India. Though his legacy has seen its fair share of troubles, his descendants seem to have struck the right balance of experience and youth. Punit and Kulin’s disruptive ideas complement Sanjay Lalbhai’s experience. It’s a combination that’s helping the storied company move firmly into the future—even as it keeps its foot firmly planted in the present.

(This story was originally published in the November 2018 issue of the magazine)