Raymond Ltd. Textiles pg.2
Raymond Textiles – Globalization within Emerging Markets
Mr. Gupta, the President of Raymond Textiles, was deep in thought when he came out of the monthly strategy meeting with the Executive Board in Mumbai, India, in March 2005. The meeting had revolved around the potential investment in a Greenfield integrated textile manufacturing plant in the South East Asian region. The proposal had been in the works for quite some time and the strategy team had been considering various countries in the region as a potential location for the plant. While the initial investment in the plant would not be considerable, Mr. Gupta knew that the success of the project would determine the company’s longer-term strategy of creating low costs manufacturing hubs outside India to fuel future growth. The plant would be the first step in a long series of similar investments in the region. While the preliminary financial analysis conducted was encouraging, Mr. Gupta was not sure whether the analysis had taken into account all the risks associated with the project. He had asked Mr. Sandeep Bhagaria, a senior financial analyst in the corporate office into carry out a more detailed analysis of the project. On entering his office, Mr. Gupta saw the completed project report lying on his desk and he sat down to read it.
Background on the Textile Industry
The textiles industry consists of the production of cotton, wool and man-made fibers for different uses such as apparel, home furnishings, footwear and other industrial purposes. In 2003, the global textiles sector was worth $958.6 billion at manufacturers selling price (MSP), having grown at a compound annual growth rate (CAGR) of 2.9% since 1999. (Exhibit 1)
In recent years the prices have been declining due to the pressures being placed on the sector’s end-users, such as manufacturers of apparel, home furnishings and automotive interiors. Despite this, the sector has retained its positive growth, primarily due to increased demand for textiles in the Asia-Pacific region. Looking ahead, increased demand is expected to drive prices upwards again. The increases in demand are primarily forecasted to originate from the Asia-Pacific region, although the Europe and North America shall also support this growth. By 2008, the sector is expected to have reached a value of $1.18 trillion, growing at a CAGR of 4.3% since 2003. In terms of production, the sector reached a volume of 57.1 million tons in 2003 (CAGR of 2.7%) since 1999. Unlike values, volume growth between 2003-2008 is expected to be lower than in the 1999-2003 period. The sector is forecasted to reach a volume of 64.2 million tons in 2008, following growth at a CAGR of 2.4% since 2003.
The vast majority of textiles are produced from raw cotton or synthetic fibers, which collectively account for nearly 93% of the sector volume share. Synthetic fibers have become increasingly popular in the last two decades and now represent over 54% of the sector. In terms of end-users, apparel manufacturers are the primary consumers of textiles, accounting for over a third of all consumption.
As seen in Exhibit 2, Asia-Pacific is the dominant producer of textiles for the global sector. In 2003, the region produced over 59% of volume, which equated to 33.9 million tons of product. The major producers of textiles within Asia-Pacific include China, India, Japan and Taiwan. Europe remains a significant producer of textiles (20% of volume), although its dominance of the sector is long forgotten. The US sector is relatively small and produces just 5.5% of the global sector volume. Due to the relatively low value of textiles, manufacturers have been increasingly attracted to the Asia-Pacific region, with its abundance of low wage workers.
The global textiles sector is highly fragmented, with the top five players collectively controlling little more than 2% of the sector value share. The leading company in the textiles industry sector is Coats, which generates 0.6% of the sector's value. Coat's nearest competitor is Far Eastern Textile, which accounts for a further 0.6% of the sector's value. The vast majority (98.1%) of the sector is fragmented between smaller players, which individually hold sector value shares of less than 0.4%.
Until recently, trade in textiles used to be subject to a number of quotas and trade restrictions reducing the share of free trade. However, this situation changed in January 2005, when the World Trade Organization phased out completely the Multi-Fibre Agreements (MFA). The MFA, negotiated through the World Trade Organization (WTO), used to place limits, by country, on exports of textiles for 30 years. In 1995, the WTO began to phase out these quotas under the Agreement on Textiles and Clothing, but left the largest reductions in quotas for 2004, the final year of the phase-out. It is expected that the liberalization will shake up the global textiles market by increasing exports and increasing share of China and possibly India. However, a number of smaller current exporters such as Mexico, Indonesia or Bangladesh will suffer as they will not be able to stand up to the new competition. The competition will further intensify and enjoying the lowest cost base, primarily due to low labor and raw inputs costs, will no be sufficient any more. The winners will have to offer in addition high productivity and high quality infrastructure allowing for fast exports.
Understanding India
India is the sixth largest and second most populous country in the world. It was subject to several hundred years of invasions and foreign rule and after a sustained campaign for independence, India succeeded in gaining independence from the British on August 15, 1947. British India was partitioned, amidst great bloodshed, into Muslim dominated Pakistan and secular India.
India lays claim to being the world’s most populous democracy and regular and largely free elections have been held since independence with a Prime Minister (PM) as the elected executive head of state. But the young democracy has been fraught with tension and violence. For example a state of emergency was declared by PM Indira Gandhi in the 70s where civil rights were suspended, the press was controlled, and many of her critics were imprisoned. Two Prime Minister’s have been assassinated (1984 & 1991) by religious insurgents. But the tide seems have turned in the last decade.
The current Prime Minister, Manmohan Singh, has held many important positions in the economic and civil service hierarchy in India, and is a respected economist, a pragmatist, and highly regarded across the political spectrum. He is widely credited with the successful implementation of wide-ranging economic reforms as finance minister in a previous government in 1991 at a time of deep economic crisis.
Border and internal safety
Political tensions still continue between India & Pakistan, which have already fought three wars over land ownership and religion. Most of the tension is focused around the northern border region of Kashmir, where the situation remains volatile and there are frequent terrorist attacks in the region. Further aggravating the situation is the fact that both nations have a nuclear weapons development program and have tested nuclear devices in recent years. India’s relations with China are also delicate because of disputes over land ownership on the border. However trade relations have been improving in recent decades.
India suffers from occasional bomb attacks, often occurring at the densely populated transportation system, usually attributed to Pakistan’s intelligence agency. There are also religious clashes between Hindus and Muslims which can escalate rapidly and lead to a high number of casualties.
Economy
The first Prime Minister, Jawaharlal Nehru, had visited the Soviet Union in the 1930s and felt that it provided the best economic model for India’s development. Under his government, India established a complex system of socialist economic controls that remained in place until the 1980s. In the late 1980’s and early 1990’s, liberal reforms made the country more receptive to foreign trade and investment, and led Western countries to take greater interest in India. See Exhibit 11 for more details on the Economic Reforms.
Two-thirds of India’s labor force works in agriculture which, with forestry and fishing, accounts for around 25% of GDP. Since less than one-third of cropland is irrigated, agricultural output (and GDP) is heavily dependent on the annual monsoon. GDP growth has been between 5-8% over the last decade and inflation is largely under control. In the 90’s, inflation was around 10% but has currently fallen to 4-5%. See Exhibit 3 & 4 for growth trends.
The majority of landholdings are farmed at subsistence level, and many farming families live below the poverty line. India has some of the lowest human development indicators in the world, particularly in rural areas. At the other end of the scale, India also has a large number of highly qualified professionals, as well as several internationally established industrial groups. Without a rapid and sustained increase in economic growth and higher investment in primary education and healthcare, reducing poverty will remain a considerable challenge.
Currency – The official currency of India is the Rupee and after exchange rate policy was liberalized in 1991, the Reserve Bank of India (RBI) has managed the rates very carefully. The main focus of the central bank’s currency policy has been to smooth the rupee’s appreciation since June 2002 and deliver a low volatility of the nominal exchange rate. (Exhibit 5) India has taken a gradualist approach to capital-account convertibility. In January 2004 custom duties on capital-goods imports were reduced further and Indian companies are now allowed to invest abroad up to their net worth. Restrictions on capital outflows stem mainly from the concern that the rupee needs to be protected from a speculative attack, depleting foreign-exchange reserves.
Infrastructure
The low quality of India’s infrastructure is a major hindrance to growth. There is a very poor road network and the 13 ports around the country have poor port governance and inefficient customs clearing, which translate into high costs. An identical shipment of textiles to the US from India costs, on average, 20% more than from Thailand and 35% more than from China. The power sector is plagued with problems of a grossly inefficient State Electricity Boards (SEBs), high levels of power theft, unsound cross-subsidization policies and chronic underinvestment. The government is attempting to encourage private investment, but has been largely unsuccessful.
Textile Industry Competitiveness
India enjoys several competitive advantages in the textile industry, such as competitive labor cost, abundant input raw materials (3rd largest producer of raw cotton), rich textile traditions and skilled designers and workers. However, to succeed in the new global competitive battle several barriers still exist. At first, it is a regulation favoring small-scale ‘family’ operated textile facilities through tax advantages. Secondly, inflexible labor laws, which require companies to obtain government approval for labor force reduction for companies with over 100 employees. Thirdly, lack of transportation infrastructure (e.g. ports), which increase time needed for exporting from India. Finally, the textile industry is scattered all around India, which makes co-operation more difficult. If India does not want to loose its competitive position after the Multi-Fiber Agreement liberalization it is necessary that the government adopts measures eliminating these barriers.
Raymond Limited Company Background
Raymond Limited is a public company incorporated in India. Founded in 1925, it has five divisions comprising of Textiles, Denim, Engineering Files & Tools, Aviation and Designer Wear. A segment wise financial summary is given below in Table A for the years ended 3/31/04 and 3/31/05. (See Exhibits 6 & 7 for more details)
TABLE A (millions of dollars?)
Textiles / Garments / Files / Denim / Others / Total‘03-‘04 / ‘02-‘03 / ‘03-‘04 / ‘02-‘03 / ‘03-‘04 / ‘02-‘03 / ‘03-‘04 / ‘02-‘03 / ‘03-‘04 / ‘02-‘03 / ‘03-‘04 / ‘02-‘03
Total Revenue / 157.32 / 147.78 / 62.06 / 56.47 / 32.58 / 30.81 / 42.44 / 29.35 / 4.54 / 3.09 / 298.94 / 267.51
EBIT / 27.98 / 24.52 / 4.78 / 4.12 / 2.68 / 3.59 / 4.72 / 5.33 / (3.27) / 0.56 / 36.89 / 38.12
The company derives 54% of its revenues from its Textile Division, Raymond Textiles. Raymond Textiles is India's leading producer of worsted suiting fabric with over 60% market share. With a capacity of 25 million meters of wool & wool-blended fabrics, Raymond Textiles is the world’s third largest integrated manufacturer of worsted fabric. It manufactures high-value pure-wool, wool blended and premium polyester viscose suiting in addition to blankets and shawls, all marketed under the flagship brand "Raymond” 1925. It also produces and markets plush-velvet furnishing fabric in wide array of designs and colors including carpeting for the niche markets of India and Middle East. (Exhibit 8 for Portfolio of products)
The company currently exports 11% of its production to more than 50 countries including USA, Canada, Europe, Japan and the Middle East. The exports have different demand dynamics from that of the domestic market. The demand for worsted fabric in India is mainly from customized tailored garments and in-house demand from the garments division. The international demand is from the garment industry, which uses fabric to manufacture ready-made garments. Apart from the large garment manufacturers, demand also originates from big retail stores, which order fabrics to be supplied to their selected fabricating units that may be outside vendors. While Raymond has a strong brand presence in the domestic market, its brand in the global market is relatively unknown.