For the last 3 years, exporters have been talking about working with just 5-6% operating margins. However, it would appear that companies that are well managed are still showing double-digit operating margins (operating profits/ EBIDTA margins). Both Gokaldas Exports and House of Pearl Fashion have declared good operating margins for the financial 2006-07. While GE has shown 12.49% operating margins, House of Pearl declared 10.13%. This only goes to show that the working margins do exist; it is for the companies to be cost effective for greater profitability.
It cannot be denied that for an industry used to seeing high double-digit margins in the early days, it requires a lot of grit and determination to sustain and grow at the lower side of double-digit margins. With the international market becoming very price sensitive and the cost to maintaining proper working conditions and complying with various CSR issues adding to expenses, operating margins are touching rock bottom. Besides this, profitability is also under stress due to hardening rupee and slow down in business for many because of fashion uncertainties. However, the blame also lies in the inefficiencies of our factories that have low productivity.
A survey analysis by StitchWorld shows that the machine cost per day on an average in India is Rs 856.30 ($20.88) against the accepted international benchmark of $13-15. No wonder most exporters are investing in productivity.
The need now is to bring to the balance sheet a healthy operating margin…. Apparel Online talks to some of the industry leaders on performance, efforts to sustain and grow business, and how they expect the current year to flow.
While it is easier to trace performance for listed companies, not many others are so transparent. However, discussions with players in all major manufacturing hubs gives a distinct direction in which the industry is moving.
Though many of the listed companies like Gokaldas Exports, House of Pearl, Shivalik Global have declared positive results, some like SPL, Addi industries, Celebrity, Maral Overseas have struggled through the year.
The most impressive of results has, not surprisingly, come from a company that has acquired an iconic status being the first apparel company from India to cross Rs 1,000 cr turnover with top line growth of 15% and 7% PAT(Profit After Tax) margins- Gokaldas Exports Ltd. “We are happy with the performance and are looking to maintain the momentum in the current financial,” says Rajendra Hinduja, ED, GE.
Expanding on the factors that contributed to the growth Hinduja says, “In spite of the prevailing adverse conditions we were able to show good results because of consistent efforts to improve productivity, bring down man-machine ratio, introduce the concept of lean manufacturing one at a time in all our factories and expand our production base, which has added another Rs 100 cr to our top line.”
The company commissioned 5 new factories including a washing unit and expanded production capacities of two existing units by 30% each. Says Hinduja, “The last financial was the highest capex (capital expansion) year for the company wherein Rs 100cr were invested. With the new additions an annual capacity of 30 mn garments consisting of outerwear, bottoms, shirts, active wear and knit wear has been created.”
The House of Pearl Fashions Ltd (HoPF) also posted impressive growth with revenues at Rs 952.48 cr and PAT at Rs 52.65 cr. The manufacturing business contributed revenues worth Rs 314.96 cr, accounting for 32.7% of total revenues. While the company is happy with the performance, they are conscious of the tight PAT margins, which stood at 5.5% this year. Says Deepak Seth, Chairman, HoPF, “The Company has its strength in a fully integrated business model, which draws an increasing number of customers. However, controlling the complete chain effectively is a challenge. To address this we have signed an MoU with SAP for implementing ERP systems to monitor business processes likely to be implemented over the next 18-20 months.”
Many unlisted companies that shared their results with Apparel Online were cautious of the future. Says Harish Ahuja, MD, Shahi Exports, “We at Shahi have seen about 12% top line growth and there has been an ongoing effort to improve productivity as the margins are getting thinner.
Many methods, like 6 Sigma are being implemented under the supervision of experts to optimise production capacities and improve labour efficiency.”
He, however, strongly feels that the government needs to step in and support the industry in areas that are beyond the reach of the manufacturers so that in-house efforts to compete on a global platform do not become ineffective in the final costing.
“Getting orders on merit is no longer a concern with Indian exporters but what is a matter of worry is retaining profitability,” he says.
No wonder measures to improve declining bottom lines is the focus of most companies. Says Sudhir Dhingra, CMD, Orient Craft, “Maintaining profitability is a real challenge today and realising the same, we had not set any goals for top line growth for 2006 as we wanted to spend the year focussed on improving working systems, efficiencies and waste control measures, all of which can provide better costing abilities to stay competitive.”
The company has employed a group of consultants (both foreign and Indian) to study the various units and suggest changes. Waste control measures in all departments are emphasised and internal training for greater efficiency is an ongoing process. “Having spent last year on system implementations for better bottom lines, we are better equipped this year, though the hardening rupee is of grave concern.” Says Dhingra.
Lalit Gulati, MD, Modelama Exports is another North India-based exporter who faced a tough time. “Profits have dipped, many may talk about turnover growth but at the end of the day, the profitability of the venture matters,” he says The company kept a low profile in 2006, spending the year on re-structuring its operations to cut down on cost. The company is so confident of its re-structuring that Gulati anticipates healthy profits this year despite the rupee appreciation.
It must be kept in mind that the adverse effects of the Dollar depreciation is not reflected in the annual reports of apparel exporters for the financial 2006-07(year ending March 07). “Whatever problems we faced last financial was because of global influences on the apparel trade; it is only since Feb 07 that the dollar has started sliding and a reflection of this will definitely be seen in the financials next year,” says Vijay Agarwal, MD Creative group.
The Creative Group of companies saw a growth of nearly 17% in sales to achieve a turnover of Rs 380cr but also witnessed a drop of about 20% at the bottom line. “It was bad enough that prices were under severe pressure, but now that exchange rates to the US have fallen 10% in the last 10 months and extremely drastically in the past 4 months, bottom lines could effectively decrease 70-80%,” cautions Agarwal.
The fast growing Celebrity is another company that has seen declining profits, but the management puts it down to investment in takeovers and technology, positive results of which can be expected in the coming financial. Says Sandeep Walia, CEO Export Division “2006 was not that good because of consolidations, shifting, and planning for the future. But our future is looking really good as we are now through with the responsibilities that come with transfer of assets and once we take off, it would then be difficult to stop us.”
It is indeed ironic that last year the orders were missing because of factors like trends, prices and delivery schedules all of which have been extensively debated upon in Apparel Online through the year and today, when the industry has made allowances for these shifting preferences and the buyer is back with a bang, the currency exchange situation is making it very difficult to cost production for the US in particular. “Orders are coming in again and the US slum also seems to be over but bottom lines are truly under stress,” bemoans Ahuja.
Companies that work mostly with the US have started to take steps to aggressively counter the effect of rupee appreciation. Many had anticipated the trend much in advance and planned accordingly. “The impact of the INR appreciation is being countered at GE by appropriate forex risk management through sizable imports, which was to the tune of Rs 350cr in financial 2007 and also by covering the US dollar in the forward market suitably. Also, we do about 10% of business in the EU and are now looking at the domestic market as promising territory,” says Hinduja.
The concerns of over 8,000 exporters, a large number of who are working for the US, has not dampened the spirits of those who are primarily working for the EU market. “SP Apparels, with 95% business in the EU market has seen 40% growth in 2006 and we anticipate at least 20-25% growth this year also,” says Stalin, CFO, SP Apparels.
The company is very upbeat and having doubled their capacity over the year through the supply chain, the company touched a turnover of Rs 268 cr with 8% PAT margin. One of the major cost cutting efforts undertaken by SP Apparels is to completely switch over to wind energy to save on power cost. “Using windmill energy is a double edged advantage, we get to save on cost and also fulfill our social responsibility, which is a major attraction for buyers,’ reasons Stalin.
Sums up Ahuja, “When countries like Bangladesh, Vietnam and Indonesia can show double digit growth and companies from Sri Lanka can talk about huge expansion and growth in India, why not us ….”