Arvind’s cost-cutting plan hits Covid wall
Textile major Arvind’s plan to reduce costs by ~440 crore has hit a roadblock. Bankers said the firm expects a sharp fall in demand for its products, coupled with declining sales, in the June quarter (Q1) of FY21 on account of the pandemic.
However, both Lalbhai group firms — Arvind and Arvind Fashions — are taking steps like asset sale in order to cut costs and pare debt. “Exports are expected to decline $100 million to $300 million in FY21. Besides, domestic sales will also hit the slow gear, with production taking a hit due to lockdown,” said a banker.
Ahmedabad-based Arvind had assured banks it would slash fixed costs by close to ~440 crore in FY21, by way of pay cuts, reduction in IT budget, restriction on foreign travel, lower ad spend, and sale of loss-making units. Besides cutting down on capital expenditure, the firm has decided to avail of the moratorium on outstanding loans and working capital limits. “The firm is also taking a ~50 crore lifeline loan from SBI,” said another person in the know.
An email sent to Arvind on Wednesday did not elicit any response. Reflecting its financial performance, the Arvind stock lost almost half its value — from ~60 last year to ~32 on Wednesday — thus giving it a total market valuation of ~835 crore. Bankers are expecting the firm to sell more assets in the coming months, to pare ~400 crore from the total debt of ~2,500 crore (as of March). Debt stood at ~2,950 crore as of March 2019. Arvind plans to develop its land parcels near Ahmedabad and sell villas to customers. However, with a slowdown expected in the realty sector, demand may remain subdued, fear bankers.
Separately, Arvind Fashions sold 27 per cent stake in its subsidiary Arvind Youth Brands, to Flipkart for ~260 crore. Arvind Youth Brands retails denim brand Flying Machine on the online retail platform. It is raising ~400 crore through a rights issue this week. Following its demerger from Arvind, AFL was listed in March last year, and was valued at ~1,115 crore as of Wednesday. Declining footfalls from early March owing to the outbreak hit AFL’S operations. This hammered revenue and profitability for the March quarter.
Following the unlocking, it has managed to re-open 75 per cent of its stores. “The firm has put in place a comprehensive cost management plan that covers reduction in costs during the lockdown and until sales normalise. Structural reductions have been implemented in the cost structure, which will serve to reduce the break-even level by 35 per cent,” the firm said.