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Dressing Up For A Global Party

Dressing Up For A Global Party

Author: Malini Bhupta
Publication: India Today
Date: August 21, 2006

Introduction: As Indian firms go shopping, prominent home textile players in the UK and the US feel the heat of competition in a quota-free world

Next time you go shopping for your home at Christy in London, stop a while and take pride in the fact that one of the oldest home linen brands in the UK-and official supplier to Wimbledon Championship-is now the subsidiary of Welspun India.

India has been widely regarded as the back office of the world. But with recent acquisitions, Indian companies are poised to jump to the forefront with ownership of some of the top brands in developed nations. According to financial and business advisory firm Grant Thornton, 2005 saw a total of 467 deals, of which 343 were mergers and acquisitions and 124 private equity deals. The total net value of these deals was $18.2 billion (Rs 84,800 crore approximately). The textile and apparel sector alone reported 14 deals from January to June 2006 at a total value of $126 million (Rs 586 crore approximately).

India is no novice in the textile sector. The country exports textiles and apparel worth $14 billion (Rs 65,121 crore approximately) and the Government has set a target of $50 billion (Rs 2,32,576 crore approximately) by 2010. Today, the world textile trade is valued at $365 billion (Rs 16,97,852 crore approximately) and India has a 3 per cent share in this. By 2010, the world market is set to balloon to $565 billion (Rs 26,28,219 crore approximately). Till December 2004, the industry was handcuffed by a quota system under the Multi-Fibre Agreement (MFA), wherein each country could export limited quantities. With the end of the MFA in December 2004, the textile industry has found its wings.

The dismantling of the quota system may have unshackled exports from India, but the punch was felt by the developed nations. Denied the protective shield, their markets were flooded with cheaper goods from India, China and Pakistan. Alerted to the opportunity in the unfolding scenario, Indian companies began acquiring distressed companies to carve out retail presence and broaden their distribution networks.

Leading the charge in buying out brands and distribution companies are Gujarat Heavy Chemicals Ltd (GHCL) and Welspun, besides other smaller players like Sarju International and Creative Group. B.K. Goenka-led Welspun India in July acquired 85 per cent stake in CHT Holdings, the holding company of UK's leading and oldest linen brand, Christy, for Rs 100 crore. "This acquisition will give Welspun a retail network and entry into Europe," says Goenka. Christy is a 150-year-old brand with 22 stores. Acquisitions provide Indian manufacturers, who have increased capacity in recent times, ready overseas markets for their goods, an opportunity experts say will exist only so long as China is under the quota system, which restricts it from flooding markets in the US and the UK with cheaper products. Meanwhile, the current favourable climate has attracted new players like GHCL headed by Sanjay Dalmiya. A domestic soda ash major with no significant presence in textiles, the company announced two acquisitions in the last six months for about $140 million (Rs 650 crore approximately).

In December 2005, GHCL bought Dan River-the third largest home textile distributor in the US-for $100 million (Rs 465 crore approximately). Subsequently, it added Rosebys, the UK's largest home textile retailer, to its kitty. So far, GHCL only had a finger in the spinning business, but it now seeks to be an integrated player. "India is weak in home textile, which is where we saw an opportunity. But we didn't want to be a manufacturer alone. Retail and distribution is what gives you pricing muscle power," says Dalmiya.

The company is pinning its hopes on Dan River-which has a turnover of about $240 million (Rs 1,125 crore approximately) and a strong distribution network-to make inroads into the US textile market. The American firm caters to retailers like JC Penny, Linen & Things, Wal-Mart and Bed, Bath & Beyond. Similarly, Tirupur-based Sarju International has acquired Gordon Ferguson, a large brand licensor with a strong distribution network in North America. "It's critical to own a distribution network so that companies can feed their other products through this pipeline," says Dhanraj Bhagat, practice director of Grant Thornton India. Post acquisition, Indian parent companies plan to shut down nonviable manufacturing operations in the West and make India a sourcing hub. The big players believe vertical integration holds the key to enhancing competencies.

Toeing that line, apparel and textile exporter, Creative Group, is also close to announcing its acquisition of Home Expressions, a small US-based trading company, for $20 million (Rs 100 crore approximately). Creative Group, franchisee of New York's Portico, maintains it does not wish to focus on retail abroad since India is booming. "Running a retail company in the developed markets poses a big challenge. Expenses are very high and if sales dip, the company is in trouble," says Chairman Vijay Agarwal. Creative Group, like Alok Industries-both with revenues above Rs 300 crore-is instead looking at inking more strategic partnerships that will lend it muscle power to emerge as a big supplier.

Laurels earned overseas notwithstanding, India's textile industry falls way behind that of Pakistan, China and Turkey. According to the US Department of Trade's 2006 figures, India with a 22 per cent stake in the terry towels segment has been displaced by Pakistan which has a 30 per cent hold. Jolted, the industry has put forth its wishlist before the textile ministry seeking certain sops like Special Economic Zone (SEZ) advantages for home textile manufacturers, exemption of service tax, non-levy of excise duty and vat on raw materials, duty-free import of capital goods, reduction in power tariff and continuation of the Duty Entitlement Pass Book scheme.

In an environment of easy liquidity, Indian textile companies may be on a shopping spree abroad, but the jury is still out on these handful of players. Since most of the textile firms are reeling under the impact of a quota-free world, where developing nations are scoring over the developed in terms of pricing, Indian companies will face an uphill task turning around the fortunes of the foreign businesses they have acquired. Also, since the home textile market is growing at 5 to 6 per cent, the cost of acquisition has to justify the potential gains which Indian companies are anticipating, pitching their hopes on an increase in demand for their products.

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