After studying law I vectored towards journalism by accident and it's the only job I've done since. It's a job that has taken me on a private jet to Jaisalmer - where I wrote India's first feature on fractional ownership of business jets - to the badlands of west UP where India's sugar economy is inextricably now tied to politics. I'm a big fan of new business models and crafty entrepreneurs. Fortunately for me, there are plenty of those in Asia at the moment.
At Indo Count’s spinning facility in Kolhapur, Maharashtra, 80,000 spindles churn out 40 tonnes of yarn a day. Cotton is fed into the machines, fine thread is spun and after a five-step process, the yarn is produced—the first in a series of steps as the yarn winds its way through the facility before ending up as bed sheets and pillow covers sold in the United States on the shelves of retailers such as Wal-Mart and Bed Bath & Beyond.
While the majority—65 percent—of Indo Count Industries Limited’s business comes from retailers in the US, it also exports to 54 countries and has taken baby steps in selling products under its own brand, a bold step for a company that was set up only in 1991 as a yarn maker and entered the home textile business in 2006. In August, it also plans to launch its range of bed sheets in India under the Boutique Living brand.
In the last decade, a handful of Indian home textile companies—Welspun, Alok Industries, Himatsingka Seide, Trident Industries and Indo Count—have carved out an enviable 47 percent share of the bed linen segment in the US market. Simply put, there is, today, an equal chance of bedding sets sold in the US being made in India or China, which earlier had a much larger market share. In India’s case, it took a smart set of entrepreneurs to tap this opportunity after the abolition of World Trade Organization textile quotas in 2005. What this meant was that countries could no longer discriminate about where the goods came from. As margins in the home textile business are far better, some companies decided to try their hand at this. But this is also a business that takes time to break into since retailers tend to be very finicky about whom they contract to. But once the contracts are in, they are inclined to be long-term and sticky.
It is in this highly competitive and specialised business that Indo Count, run by Anil Kumar Jain, 63, and his son Mohit Jain, 40, has carved a niche for itself. As Mohit admits, “We looked at a whole host of other businesses, from flexible packaging to co-generation of power from sugar mills and hydropower, in the early 2000s.”
The shift is remarkable, given that most of India’s textile companies are still in the spinning business and haven’t managed to make the transition to value-added products. Spinning is capital-intensive, where capacity needs to be added at regular intervals. And single-digit margins mean that companies can never earn enough to add this capacity without taking on debt. As a result, profitability is always low. But Indo Count has chosen to build itself differently. “This is an industry that is characterised by high capital expenditure, low return on capital employed and low asset turnover. Indo Count has chosen to outsource and so its use of capital is far more efficient,” says Sandeep Raina, vice president at Edelweiss Global Wealth Management Research. In the last five years, revenues have risen 25.5 percent annually to Rs 2,070 crore while profits have touched Rs 250 crore in the year ended March 31, 2016.
In 1990, before they started Indo Count, Anil Kumar Jain, chairman, was far removed from the textile business. “In 1975, my father had bought me a brewery and I ran it along with my cousin,” he says. During those days, his brother-in-law, based in Manchester, England, would often complain about the quality of yarn available in India. He convinced them there was an opportunity in the business, and that sowed the initial kernel in Jain’s mind.
With the economy opening up, the government had also announced a host of incentives, including an exemption from import duties for factories set up as ‘export-oriented units’. Jain decided to get into the business and placed an order for machines from Reiter, a Swiss manufacturer. “There hadn’t been any orders from the Indian market for the last 30 years, so Reiter was reluctant to come back, but the demand was so high that when their representative landed in India, he had to also give appointments on the way from the airport to his hotel,” says Mohit Jain, managing director at Indo Count.
Anil went off to Kolhapur in south Maharashtra and bought land in a region known for its cotton. The company began operations in 1991 with a capacity of 12,000 spindles and with all the yarn being exported. Capacity was swiftly expanded to 60,000 spindles in the next five years and Indo Count clocked revenues of Rs 150 crore. Over the next 10 years, till 2005, the company continued to serve its clients. “By 2005 the company was debt-free, it had a regular dividend payout and had created an export-oriented culture where serving clients and supplying a high-quality product was paramount,” says KK Lalpuria, executive director at Indo Count. They then decided to leverage their balance sheet and make use of the government’s Technology Upgradation Fund to buy machinery.
It was at this juncture that the company confronted a fork in its path. In order to move into the business of manufacturing finished products (which has higher margins) Indo Count decided to outsource some part of its low-margin business of simply spinning and selling yarn, a move that most other spinning companies don’t make. At present, the company produces 30 to 40 percent of the yarn it consumes; the rest is outsourced. “We could have either continued to invest in the spinning business or moved up the value chain,” says Mohit, who, as a 29-year-old, led Indo Count’s charge into the home textile business. The phasing out of textile quotas meant companies like Dan River and Springs Global, which would earlier manufacture in the US, could now pay low import tariffs and import instead. At that point, India had a 10 percent share of the US bed linen market.
Getting into the US home textile market takes a while. This is something Mohit would quickly learn. First, he engaged Swiss consultants Gherzi to help the company chart its entry into the market. Next, he started meeting buyers with a blueprint of their plans. He’d explain they had been in the yarn business for 15 years and were looking to enter the home textile business. Now, retailers are very careful about signing on new suppliers and getting their quality specifications right tests a lot of suppliers. On-time delivery is key and a missed shipment can permanently impair the relationship. Still, Indo Count managed to sign on Springs Global and Belk, a retailer based in Charlotte, North Carolina. There was no looking back then, though it would be three years before Indo Count’s manufacturing capacity of 36 million metres would be fully utilised.
That was in 2012. At the Kolhapur facility, the company has set up a state-of-the-art plant where yarn is processed. The cloth is then dyed and printed, and the bed sheets and pillow covers are ‘cut and sewn’ before being packed into boxes. Indo Count has now expanded capacity, in three phases, almost three-fold from 36 million metres to 90 million metres by December 2016.
As an exporter, Indo Count has had to deal with three types of key risks over the years. First is a sudden fall in demand due to a recession in the developed world. “Could demand fall tomorrow? The answer is yes,” says Mohit, but he explains they have access to live data on what is selling at the retailers they supply to and so orders are tweaked accordingly.
Second, Indo Count’s earnings are vulnerable to currency fluctuations. The company had an unfortunate experience in June 2008, when their erstwhile CFO signed a zero-cost derivative contract. This was a time when the rupee was quoting at 40 to the dollar and consensus was that it was expected to strengthen further. In order to lock in their dollar receivables, the company got into a contract that stipulated they would have to pay double the amount if the rupee depreciated. That is exactly what happened and Indo Count was saddled with a Rs 150 crore loss. “We just didn’t know what to do,” says Anil. They could have sued the banks that sold them the contracts as they were sold without being signed by two signatories. Instead, the company decided to repay what they owed. The decision resulted in Indo Count going for corporate debt restructuring, which set them back by at least three years. Although their customers were still serviced on time, payments to suppliers were delayed.