Corporate Restructuring at Arvind Mills

The case provides an overview of the Arvind Mills’ expansion strategy, which resulted in the company’s poor financial health in the late 1990s. In the mid 1990s, Arvind Mills’ undertook a massive expansion of its denim capacity in spite of the fact that other cotton fabrics were slowly replacing the demand for denim. The expansion plan was funded by loans from both Indian and overseas financial institutions. With the demand for denim slowing down, Arvind Mills found it difficult to repay the loans, and thus the interest burden on the loans shot up. In the late 1990s, Arvind Mills ran into deep financial problems because of its debt burden. As a result, it incurred huge losses in the late 1990s. The case also discusses in detail the Arvind Mills debt-restructuring plan for the long-term debts being taken up in February 2001.


» Debt driven expansion plan, financial restructuring of Arvind Mills


In the early 1990s, Arvind Mills initiated massive expansion of its denim capacity

By the late 1990s, Arvind Mills was the third largest manufacturer of denim in the world, with a capacity of 120 million metres.

However, in the late 1990s, due to global as well as domestic overcapacity in denim and the shift in fashion to gabardine and corduroy, denim prices crashed and Arvind Mills was hit hard. The expansion had been financed mostly by loans from domestic and overseas institutional lenders.

As the denim business continued to decline in the late 1990s and early 2000, Arvind Mills defaulted on interest payments on every loan, debt burden kept on increasing.

In 2000, the company had a total debt of Rs 27 billion, of which 9.29 billion was owed to overseas lenders.

In 2000, Arvind Mills, once the darling of the bourses was in deep trouble. Its share price was hovering between a 52 week high of Rs 20 and low of Rs 9 (in the mid 1990s, the share price was closer to Rs 150). Leading financial analysts no longer tracked the Arvind Mills scrip.

The company’s credit rating had also come down. CRISIL downgraded it to “default” in October 2000 from “highest safety” in 1997. In early 2001, Arvind Mills announced a restructuring proposal to improve its financial health and reduce its debt burden. The proposal was born out of several meetings and negotiations between the company and a steering committee of lenders.

Expansion at What Cost

Arvind Mills was promoted in June 1931, by Sanjay Lalbhai’s grandfather, Kasturbhai Lalbhai, and his two brothers, Narottam and Chimanbhai, in Ahmedabad. When Sanjay Lalbhai took over the reins in 1975, Arvind Mills was at the crossroads.

A high wage structure, low productivity and surplus labor in the textile mills rendered its businesses unviable in most the products categories in which it competed. The emergence of power looms in the 1970s further aggravated the problems of Arvind Mills.

The government’s indirect tax system at that time also reduced the profitability of its product lines. In the mid-80s, to survive the onslaught of the small-scale power loom sector, the composite mills, with their higher overheads had to change their strategies. It became imperative for them to switch to areas in which the power loom sector could not compete, viz, value added products.

In the mid 1980s, Arvind Mills switched to high-quality fabrics requiring technical superiority that the power looms could not hope to match.

Until 1987, like any other textile company, Arvind Mills had a presence only in conventional products like sarees, suitings and low value shirting, and dress materials. Realizing the bleak growth prospects for textiles in general, Arvind Mills identified denim as a niche area and set up India’s first denim manufacturing unit in 1986 at Naroda Road, Ahmedabad.

To deal with competition from the power loom sector, which rolled out vast quantities of inexpensive fabrics, and to cope with the rising cost of raw materials, Arvind Mills diversified into indigo-dyed blue denim; high quality, cotton-rich, two-ply shirting, and Swiss voiles

Into the Red

By the late 1990s, Arvind Mills was in deep financial trouble (Refer Table III) because of its increasing debt and interest burden.

Its total long-term debt was estimated at Rs 27 billion, out of which the total overseas debt was Rs 9.29 billion and debt to Indian institutional lenders was Rs 17.71 billion.

However, much of the debt to Indian financial institutions was secured was not known. Arvind Mills had defaulted on interest payments on every loan.

ICICI was the largest Indian institutional lender, with a loan of over Rs 5 billion to Arvind Mills. (Refer Table IV for a list of lenders to whom Arvind Mills was indebted). In 2000, the company reported a net loss of Rs 3.16 billion against a profit of Rs .14 billion in 1999.

Into the Black

In February 2001, Arvind Mills announced a debt restructuring plan for its long term debt (Refer Box). While the company set itself a minimum debt buyback target of Rs 5.5 billion, the management was hopeful of a larger amount, possibly Rs 7.5 billion.

In mid-2001, Arvind Mills got the approval of a majority of the lenders for its debt restructuring scheme. Forty-three out of fifty-four lenders approved the plan. As part of the restructuring, lenders offered over Rs 7.5 billion under the company’s various debt buyback schemes.

Some of the banks agreed to the buyback at a 55% discount on the principal amount, while some agreed to a five year rollover for which they would be entitled to interest plus the principal. Some banks also agreed to a ten year rollover for which they would be paid a higher rate of interest plus principal. The debt revamp was expected to reduce Arvind Mills’ interest burden by 50%.

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