Chirag: expanding in compact cotton yarn. Photo credit: Sanjay Borade
Thus started SVP’s state-of-the-art plant, which had the most advanced technologies, used artificial intelligence and was strategically located at the Sohar Free Zone. A plant with the capacity of 150,000 spindles and 3,500 rotors was set up at an overall cost of $150 million with debt-equity funding at 70:30. The rotors units is running at more than 95 per cent capacity, while the scaling up of spindles capacity is in place and expected to be fully completed by March 2021.
China’s decreasing dominance
The first major cotton spinning unit in GCC region, it will promote development of a textile cluster in Oman, as also social and economic development. The major advantages at Sohar Free Zone include low power cost, Oman’s free trade agreements with US, tax free zone, latest automation and technology and low-cost borrowings. “SVP has won all round praise for training and employing more than 1,000 Omanis. The neutral location also offers access to markets barred by India due to political reasons,” adds Vinod.
“The global yarn skyline has been undergoing tectonic shifts impacting China, the world’s largest producer of yarn with massive capacities,” informs Prakash Saraogi, EVP, finance, SVP. “Over the last few years, yarn supply from China has been decreasing on account of the country’s focus on food crops and due to significant increase in power costs and labour costs”.
For instance, power in China is 20 per cent costlier and labour cost is three times that of India, says Saraogi. At 21 million yarn capacity, China has the largest share (54 per cent) of the global output but, of late, it has been growing less and less competitive. India, the second largest yarn producer globally, with 33 per cent share and 13 million tonnes output, on the contrary, has been doing business competitively – so much so, that “India is now supplying to China,” remarks Saraogi.
Post-Covid, the situation has aggravated even more for China, due to negative sentiments worldwide. Also, many countries have imposed restrictions on import of textile products from China due to alleged human rights violation and genocides in Xinjiang province of China. Xinjiang produces about 20 per cent of the world’s cotton; also, 20 per cent of the yarn used in America comes from Xinjiang. The US has banned imports of cotton from Xinjiang and several international brands, such as M&M, have cancelled textile orders from China. Global customers have begun to look to India to fill this gap.
O.P. Gulia & Prakash Saraogi: ‘we swear by quality’ Photo credit: Sanjay Borade
“Yarn prices have recently escalated by 25-30 per cent, while cotton prices have increased by only 5-8 per cent,” says Saraogi. “And we believe that, due to the strategic shift in supply chain away from China and the fact that spinning capacity is capital-intensive, the high demand for cotton yarn is there to stay in the short to medium term”. Saraogi, a seasoned professional, has more than 20 years of experience, spanning diversified industries, including textile. For instance, 40-count yarn, which used to cost R245 a kg before, fetches only Rs335 a kg today.
Due to the Covid-19 pandemic, the operations of the company in India and Oman were shut during March-April 2020. Operations have since resumed gradually. But, during Q1 2020, severe disruptions were witnessed in Indian domestic demand for yarn, including deferred shipment and delay in the orders. The company has since been leveraging on its vast sales distribution network in India and overseas to selectively focus on more profitable markets.
SVP had witnessed a reduction in profit in Q2 and Q3 of 2020-21 because of Covid but, in view of the increasing sales enquiries and escalating demand, SVP began to spring back in July last and catapulted itself to normal operations in 2020-21 Q3. “Demand is picking up and we already have orders worth Rs5,000 crore,” points out Gulia.
Though some analysts say that Indian economy could return to pre-Covid levels by 2025, “demand for textiles has already begun to go up,” says Gulia. Textiles are being used not only for apparels, but also in other applications, such as bullet-proof attire and even road construction.”
India, the second-largest manufacturer and exporter of textiles and clothing globally, with a share of 5 per cent of global trade, has registered a 3 per cent increase in the export, from $39.2 billion during 2017-18 to $40.4 billion in 2018-19. The share of textile and clothing in India’s total exports stood at 12 per cent in 2018-19. With 48 per cent of total textile and apparel export, European nations and the US are India’s major export destinations. The trade war between the US and China and the stand-off between India and China could lead to the creation of additional yarn and cotton demand from neighbouring countries to the tune of 500,000 tonnes and 8-10 million bales respectively.
Asked about the impact of the ongoing farmers’ agitation on cotton procurement, Saraogi says: “Cotton procurement business has become highly competitive and the raw material is available anywhere, globally. Our cotton procurement depends upon the quality and count of yarn we are producing. Based on the same, we procure our cotton from cotton hubs in India, the US and Australia.”
Change in product mix and capacity expansion in high margin compact cotton yarn manufacturing capacity, cost rationalisation and better operational efficiencies has resulted in significant growth in EBIDTA margins from 3.7 per cent in 2015-16 to 13.2 per cent in 2019-20. “Over the last few years, the company has been reducing low-margin yarn trading business and expanding in high-margin compact cotton yarn manufacturing,” says Chirag.
“This explains the drop in revenue in 2018-19 over 2017-18, which is primarily due to our business strategy of exiting from low-margin textile trading business and focussing on manufacturing capacity expansion in compact cotton yarn. Though, 2018-19 showed a drop in revenue, the EBIDTA margins improved by 320 bps from 8.9 per cent in 2017-18 to 12.1 per cent in 2018-19,” explains Saraogi.
Bangladesh, a country of apparels & textile manufacturing, appears to be happy with SVP supplies. Says a spokesperson of SLG (Silver Line Group), the country’s largest textile conglomerate: “SVP Global has been a strong, consistent vertical partner in the supply chain. And, owing to the support we got from them in all areas, from technology to keeping abreast of the current situation and prices, our relations with our buyers like Ralph Luara, H&M, JC Penny, American Eagle, Next, Zara and many European and American customers have been well-maintained”.
Quality checks are important to remain in the highly competitive global market. “We make the highest quality yarn certified by world-class stringent quality controls. Our yarns go for multiple quality checks at our world-class laboratory, using technologically advanced machines by Uster of Switzerland. We test for consistent yarn quality against parameters such as evenness, hairiness and strength, monitored by Loepfe, also of Switzerland. Every single cone of yarn passes through the ultra-violet room to detect shade variations. We swear by quality and excellence in whatever we do,” explains Gulia, who brings in his professional military experience in leveraging application of resources and people. SVP is the approved supplier to IKEA and has certification from world renowned agencies like BCI, Fairtrade, GOTS, OCS, GRS, OEK-TEX STD 100 and SUPIMA Gold.
“The SVP group has been a reliable source of organic cotton yarn for our operations, since the initial stages of our growth till now,” says a representative of Shantex Pvt Limited, a unit of the $70 million Shanin group of Dhaka. SVP’s “professional service and superior quality yarn has helped us provide our buyers such as Zara, Primark, JC Penny, Canda and more with premium quality woven fabrics and garments. We are impressed with the quality of their cotton yarns and their constant support,” adds the Shantex spokesperson.
“Our compact cotton yarn is the highest quality yarn having better smoothness, high lustre, better abrasion fastness, low hairiness, higher tenacity and elongation at break and smaller mass irregularity. A world leader in compact cotton yarn, our yarn is used by top fashion and apparel brands,” he explains. Going forward, SVP plans to double its existing compact cotton yarn manufacturing capacity in Oman.
“The financial closure of the phase 2 Oman expansion is in progress and we expect to complete the project implementation by March 2022,” says Saraogi. “As part of SVP Global Venture’s vision to be a world leading integrated textile manufacturer, we are also exploring setting up of garmenting units in India and Oman as part downstream value chain expansion,” says Chirag.
Apart from launching SVP brand garments and apparels, the business will also cater to other brands. The company plans an investment of about $25 million in the new business. Strategically, the company proposes to focus Indian operations to cater to Indian demand and Oman operations to focus on export markets. However, based on sizeable demand from profitable overseas market, the company is also exporting from India.
Oman plant: every single cone of yarn passes through the ultra-violet room to detect shade variations
The company is also focussing on reducing its Rs2,300 crore debt, out of which Rs1,770 crore is secured debt, both long term and short term. The company has recently announced its intention to issue Rs235 crore convertible equity warrants, on preferential basis to Shri Vallabh Pittie Ventures, the promoter company for SVP Global Ventures. The proceeds upon exercise of equity conversion and resultant allotment may be used by the company for reduction in debt, strengthening the financial structure of the company and other general corporate purposes, as permissible under the regulations. “The company is also exploring monetisation of non-core assets and optimisation of working capital requirements. It may even monetise its land parcels near its Tamil Nadu plants, But we have no plans to get into real estate,” discloses Gulia.
Choice Equity Broking has forecast a 29.1 per cent CAGR rise in top-line to R3,036 crore in 2022-23E for SVP, on the back of increased capacity and demand improvement over 2020-23. EBIDTA and PAT margin are estimated to expand by 348 bps and 517 bps over the period, says Choice, which has given SVP a BUY rating. As on February 2021, the counter scrip closed at Rs78.25.
SVP has made a couple of material announcements on the BSE, which can have a positive impact on the scrip. It has completed a share split –face value educing from Rs10 to Re1 –and announced an issue of Rs235 crore equity warrants. It has also embarked on an aggressive debt reduction business over the next 12-24 months. The company is also said to be exploring funding through the QIP route on BSE/NSE.
“The demand for textile has grown at a global level,” says Vinod Pittie, chairman, SVP. “The demand has grown since consumers are buying online. This, coupled with the supply constraints on account of the US engaging in a trade war with China and India imposing restrictions on textiles from its neighbours has directly benefitted Indian yarn manufacturers, who have sizeable capacity. A lot of growth might happen locally, but not from international markets. The company has performed substantially well during the Covid times”.
Business was just one aspect of life for our founder Shri Vallabh Pittie, recalls his grandson Vinod. “He was also a keen contributor to society and always led the way by personal example. His devotion and dedication to society was such that, during a major famine in Rajasthan, he left all his business activities and travelled to Nagaur, going door-to-door with camel tanks to serve water to residents – an act that they still remember fondly. He went on to set up many charitable organisations to contribute to the welfare of his fellow citizens from Nagaur, building temples and donating huge parcels of land for the grazing of cows.” Continuing its CSR, the Jhalawar plant provided jobs to 250 local people, during Covid times. It has also donated a sanitiser tunnel to the local police department and distributed masks to the people during the pandemic. At Oman, SVP set up a 30,000 sq ft licensed training centre for women, incorporating experiential learning through advanced textile machinery for Women in Oman – with about 1,000 Omani women undergoing training, a first of its kind to guarantee employment upon completion of the programme.
“The journey, which Shri Vallabh Pittie began years ago, has culminated in a thriving enterprise, with over 4,000 employees. And, his legacy is alive and sustained in the principles that guide the SVP Group today,” says Vinod, as his son Chirag plans to spread his and company’s wings. Chirag, on his part, aims to convert the close-family held business into a leading public company, delivering superior returns to shareholders.
Talking about the recent budget, Vinod says, “The special package announced by the government of India to establish seven mega investment textiles parks (MITRA) will provide a tremendous boost to the textile industry and will provide the Indian manufacturers a platform to compete with the best in the world. It would generate huge employment and foreign revenue and contribute to the growth story of India”.