Alok Industries: Q1 Loss Widens To Rs 1,212 Crore

Company Performance

Alok Industries: Q1 Loss Widens To Rs 1,212 Crore

Textile manufacturer Alok Industries' net loss for the first quarter ended June 30, widened to Rs 1,212.04 crore. The company had reported a net loss of Rs 349.68 crore in the corresponding period a year ago. Its income from operations dipped 47.22% for the quarter under review to Rs 1,810.75 crore, compared with Rs 3,431.14 crore in the year-ago period. Alok Industries owes over Rs 20,000 crore to a consortium of 32 lenders, led by the State Bank of India.

Around 3-4 years ago, Alok Industries had made a corporate presentation which reflected the company's confidence and enthusiasm in its corporate entity and in the markets. The 2015-16 annual report is a complete reversal of this enthusiasm. The report stresses the company's financial burdens, miscalculations, and a vision of paying off the heavy debts, without a long term plan of achieving financial sustainability.

With accumulated losses of Rs 3722.80 crore at the end of the financial year, resulting in erosion of over 50% of peak net worth during the immediately preceding four financial years, the company has become a `Potential Sick Company' within the meaning of Section 23 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), in just three decades of its existence.

In terms of the requirement of SICA, the company will also make a reference to the Board for Industrial and Financial Reconstruction (BIFR) the fact of erosion within the stipulated time period. The company's reasons for landing in this situation are external factors. According to Chairman, S K Bhoan, "First, there was the general global economic slowdown post the financial crisis of 2008 and global markets witnessed a slowdown." Surprisingly, the economic slowdown of 2008 did not seem to have this impact on the company in the years immediately following 2008.

Bhoan goes on with the other reasons for this state of affairs, "Second, our investments in the retail business both in India and UK did not work. While we closed operations in India, the UK business is still burning cash. Third, the diversification into real estate although intrinsically value creating has not been able to encash on any asset appreciation and has essentially locked up large capital. Fourth, our aggressive expansion into polyester came on stream at a time when global polyester prices dropped dramatically driven primarily by sharp fall in oil prices.

Fifth, during the expansion phase, interest rates have gone up from around 7.50% to a little over 13%, which put further pressures on servicing debt and even contributed to incremental debt. Sixth, this period also witnessed huge fluctuations in foreign exchange rates, and much of the benefits of lower costs of foreign exchange nominated external commercial borrowings were eroded due devaluation of the Indian Rupee. Lastly, the bunching of repayments at the parent level (Alok Industries) and at the subsidiary level guaranteed by the parent also contributed to the liquidity crunch. Clearly, these were massive headwinds and affected the scale of our operations. Under this financial stress, 2015-16 was a year with very little working capital support that further aggravated a difficult situation and the company operated at very low utilisation levels resulting in operational losses."

This resulted in delays in realisation of debtors, pile-up of inventory, rising interest costs and bunching of repayments leading to a tight liquidity position. Clearly, these were gross miscalculations on the part of a company that had access to the best resources and brains globally.

Alok is now in the process of moving out of non-core areas. The mounting losses of the company has left it with no funds for CSR activities for the time being.

Alok has already closed its domestic retail (H & A) business by shutting down the stores set up across India. It has also got traction in selling material portions of its commercial real estate units, which were located in Mumbai. The company is continuing its efforts to sell majority of it non-core assets in the next financial year and use the proceeds to reduce debt. "However, market conditions, today are not very conducive to make such asset sales in a reasonable span of time," the company report states.

The company has entered into an MOU to sell its Czech based unit "Mileta International'. If all the requirements of the MOU are satisfactorily met, the trade is expected to get concluded by March 2017/ June 2017. The proceeds of the same would be used to repay the acquisition debt financed by the banks.The venture had achieved sales of Rs 159.6 crore and profit after tax of Rs 6.5 crore for the year ended March 31, 2016.

Grabal (UK) achieved sales of Rs 882.8 crore and made losses of Rs 92.10 crore for the year ended 31st March 2016. Alok Industries is looking at options to exit this business given the right opportunity.

Company's employees today stand at around 11000, from around 19000 18 months ago. Bhoan states that the company optimism over its restoration to health `sooner or later' is based largely on its ability to appreciably grow its exports, as costs in China are increasing, which gives ample opportunities to exporters in other countries. However, the report does not give out a clear strategy on how the company plans to achieve this, or the timeline for increasing exports to the extent that it can restore Alok's financial health.