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Indian textile companies realising the fact: Wealth at the end of Chain

Textile companies providing raw materials (yarns & fabrics) for the apparel & made-up manufacturers are also realising the importance of control through the value chain. This is happening by forging growth relationships with textile/apparel companies to create synergies and by forward integrating to get a share in retail markets. This is being done through mergers, strategic acquisitions or forward integrations.

The sheer number of mergers and acquisition (M&A) deals struck last year has made 2006 a milestone year for India Inc. According to the Dealtracker study by Grant Thornton, there were 480 M&A deals in India alone with a total value of about $20.3 billion in 2006 with the average deal size being $42 million.

Primarily IT, pharma and biotech have garnered the highest number of M&As, however textile industry has also had its share in the opportunity. Forward integration, by the textile companies has been prominent in this sector as the margins in the initial stages (spinning, weaving) have shrunk, while subsequent stages (processing, garmenting & retailing) still manage to have relatively better margins. Another reason for this frantic move is buyer's high expectations of vertical setups and bigger capacities in garmenting, be it for domestic or exports.

Some of the deals effected by prominent Indian textile companies since 2006 are mentioned below:

•Indian consumers are converting from stitched apparel to ready-to-wear causing a surge in discount retailing

Companies are increasingly looking to acquire domestic and overseas companies which complement the value chain. However, it is the foreign acquisitions which have caught the attention of the industry and the world. Indian companies are taking on larger companies, integrating the Indian advantage of manpower & raw material with the acquired company's strategic location, technology and/or well established distribution channels.

•Foreign acquisitions have specially caught the attention of the textile industry

•Private equity firms make large investments in growing textile industry

Given the new growth opportunity presented by the quota-free global textile market and the favourable investment climate created by the pro-active government measures, private equity flow into the domestic textile sector is picking up. Textile companies are also realising that this inflow of funds can help them in ramping up capacities and integrating at a faster pace to face the quota phase out challenge.

Another trend which is simultaneously visible is the growing investment by Private Equity firms in the textile sector. Below are few examples of PE firms which have invested in the Indian textile industry:

Going forward, what is going to be the growth path of the textile industry – are we looking at increased foreign acquisitions to forward integrate in these markets or are the textile companies looking at strengthening their manufacturing advantage by acquiring/buying stake in complementary manufacturing companies?

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