How Sanjay Lalbhai is reinventing Arvind

US space agency NASA was the first to use the “Phase Change Material” (PCM) technology to make space suits and gloves for its astronauts—to protect them from extreme temperature fluctuations in outer space. Shorn of technological mumbo-jumbo, the technology, if used on fabrics, keeps the temperature stable—say from one’s office to a waiting car or from an air-conditioned room to an open environment.

The 77-year-old Arvind (which changed its name from Arvind Mills in May this year), tied up with Colorado-based Outlast Technologies— which commercialised the use of PCM in garments, footwear, bedding and accessories—last year to bring these high-tech climate control fabrics to India. Initial trends suggest that the venture is already a success. Arvind is supplying garments made of Outlast material to Marks & Spencer. But that’s only one jewel among half a dozen others in Arvind’s new product pipeline. On the anvil are fabrics that absorb water or sweat from the inner surface and transfer it outside, wrinkle-free fabrics, fabrics that don’t pale even after 20 washes and clothes that remain odour-free and stain-free.

Sitting comfortably in the slightly old-fashioned corporate office of Arvind on Naroda Road in old Ahmedabad, Sanjay Shrenik Lalbhai, Chairman & Managing Director of the company, says: “These are the new growth engines for us. But the market for protective fabrics is at a very nascent stage in India.”

Falling margins

His excitement is palpable, but it is tempered by caution. Lalbhai’s biggest concern is Arvind’s core denim business—it is among the world’s top five denim manufacturers— which is grappling with sluggish global demand, over-supply in the domestic market and soaring cotton prices (cotton accounts for more than a third of the total cost of denim). Then, the appreciation of the rupee against the dollar (the trend has reversed, albeit slightly, over the last month) has squeezed his export margins as well.

These are reflected in Arvind’s 2007-08 results. Its net profit dipped from Rs 119 crore on sales of Rs 1,845 crore in 2006-07 to less than Rs 20 crore on revenues of Rs 2,655 crore in 2007-08, indicating a massive pressure on margins, which is not expected to improve anytime soon. “The denim business is a drain on the company’s profitability and if the cost pressure continues, the company will be severely impacted,” says an analyst with a domestic brokerage firm. That’s why Lalbhai’s thrust on new businesses assumes importance.

The company is in the initial stages of conceptualising and extending its garments expertise and marketing front-end to build a buying house-style operation. “We will not only design new fabrics but also convert them into garments,” says Lalbhai. The idea is to become a one-stop shop for leading garment brands. “There are life cycles in a company’s history and you need to ride them. You constantly need to reinvent, keeping values and core competence intact,” Lalbhai says.

Focus on brands…

He has chalked out an aggressive growth plan for brands and retail, which is expected to change the face of Arvind over the next two-tothree years. The company has access to a large number of global brands like Arrow, Lee, Wrangler, Tommy Hilfiger, Nautica and Jansport through joint ventures and licensing arrangements, and also owns a number of homegrown ones like Flying Machine, Newport, Excalibur and Ruf n Tuf.

Lalbhai kick-started his brands and retail strategy about one-and-ahalf years ago when he recruited Suresh J., a former Hindustan Lever professional to head Arvind’s Brands & Retail portfolio. Under Suresh’s leadership, Arvind has already re-launched its own brands in the market, all of which have turned around and are raking in profits. Excalibur is currently the #1 brand in its portfolio and does annual business worth Rs 60 crore, while Flying Machine and Newport are both Rs 25-crore brands.

But iconic US brand Arrow is the star of its portfolio. “It’s one brand that can be the cash cow for the company,” says Suresh. Last year, Arrow grew 25 per cent and delivered a profit of Rs 11 crore. “We are targeting a 50 per cent growth at a substantially improved profitability this year,” he adds.

The company also plans to strengthen its brands in the areas of ethnic women’s wear and kids’ wear. “Our brand portfolio is growing at a CAGR of 30-40 per cent and will become a substantial part of our business going forward,” says Lalbhai. In May this year, he tied up with the US-based Hartmarx Corporation to make suits under the Hart Schaffner Marx, Pierre Cardin and Sansabelt brands.

In March, Arvind entered into an agreement with Phillips-Van Heusen Corporation for a sportswear licensing arrangement under which it will bring the IZOD brand into India. Lalbhai expects his brands portfolio, which did Rs 300-crore business in 2007-08, to touch revenues of Rs 700 crore in two years.

…and on retail

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Lalbhai is also going the whole hog on expanding his retail operations. His MegaMart brand of retail stores has, thus far, been used to hawk discounted products at select outlets. It is being repurposed, and will now be used to expand into Tier II and Tier III towns. It will also sell private brands where margins are as high as 50 per cent. “We are already profitable at the store level,” says Suresh. MegaMart clocked a turnover of Rs 100 crore and earned a net profit of Rs 4 crore in 2007-08. Going forward, Arvind is targeting revenues of Rs 1,000 crore over the next three years from it. “We now have a portfolio that cuts across all price points, caters to all consumer segments and is present across all channels— like departmental stores, hyper markets and others,” says Suresh.

There are also plans to spin off the brands and retail businesses into two separate units to meet their business and capital needs. Says Jayesh Shah, Director & CFO, Arvind: “The plans are still on the drawing board.” Arvind has already pumped Rs 250 crore into these two divisions, and another Rs 400 crore is in the pipeline. Also on the anvil are plans to sell nonstrategic assets like land—Arvind owns huge tracts of real estate in Ahmedabad—which is expected to fetch Rs 700 crore.

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Both the new thrust areas— brands and retail—are highly competitive. Lalbhai realises that the human element, more than strategies drawn up by highly paid consultants, will be critical for success. “We have started building a second line of leadership,” says Lalbhai, who has roped in S. Venkatesh, who was earlier President (HR), Vedanta (Sterlite Group), for this. “We are consciously making an effort to make the organisation young and vibrant,” says Venkatesh. If the new strategy pays off, Lalbhai is open to options like an initial public offer or private placement to raise money from the market.

Today, “brand companies” enjoy valuations of at least two times turnover, while retail businesses are valued at 1.50-1.75 times revenues. The company’s stock has remained range-bound in the recent past, hovering around Rs 50, but it got a major push following reports that it was planning to unlock the value of its real estate. The stock even touched a high of Rs 90 just before the January crash this year.

“I personally believe that the company is undervalued by the stock market,” says Lalbhai. That’s something that will get corrected if he gets his brands and retail strategy right.