PROBLEM III

Features of the organisation are out of alignment, parts of the organisation are working at
cross purposes, alignment activities- interventions- are developed to get things back “in
sync”.

ARVIND MILLS – TEXTILE SECTOR

INTRODUCTION

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.

By the late 1990s, Arvind Mills was the third largest manufacturer of denim in the world,
with a capacity of 120 million metres. Therefore, in the early 1990s, Arvind Mills initiated
massive expansion of its denim capacity.

Problems that started in Arvind Mills -

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

In the late 1990s, due to global as well as domestic overcapacity in denim and the shift in
fashion, 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.

Arvind Mills' expansion strategy 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 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.

Steps taken - Then Arvind Mills went for debt-restructuring plan for the long-term debts.
The restructuring was overseen by Mr Jayesh Shah, CFO and advised on by a JP Morgan
Hong Kong team, led by Mr Ahmad Ayaz.
New markets were created, technology was upgraded, and looking at rationalising their

suppliers and competition was also tackled.

In 2003 - For the fourth quarter, Arvind Mills witnesses 280% growth in the net profit

Arvind Mills Ltd is assigned a `P1+` rating by CRISIL, which indicates a very strong rating

for their commercial paper.

In 2004 - Company turns itself around showing remarkable improvement in financial

performance. This was done only when all the parts of the organisation started back to be in
sync. The decisions were taken accordingly so that every activity in the organisation are
aligned. It was necessary to do so as they don’t face the same problem that they have faced
earlier of non-repayment of loans which they had taken for capacity expansion.

In 2005 - For the fourth quarter in a row, Arvind Mills has managed to post a profit growth in
excess of 80 per cent.

History has been witness to the Arvind Group’s commitment to excellence, innovation,
perseverance and undying attention to customer and societal needs. As an organization,
Arvind has successfully integrated diverse businesses, services and products, unified by a
common vision - of enriching lifestyles.

Policy of change has fetched the company to well deserved results. Arvind Mills’s adoption
of new-age fabrics has seen the Company emerge as one of the largest denim manufacturers
in the world, while also bringing us global recognition for the manufacture of shirting, khakhi
and knitted fabrics.

Currently Arvind Mills has a strong Research and Development focus on process
improvement, cost reduction and new product development. Arvind Mills continuously
modifies its production process to enhance flexibility on the use of various types and quality
of cotton. To further meet customer needs, Arvind Mills has also introduced a new dyeing
and processing method for denims.
State-of-the-art technology and equipment have made Arvind Mills one of the top three
producers of denim in the world, paving the way for the Company to emerge as a global
textile conglomerate. This cutting edge position comes to Arvind Mills courtesy technologies
such as Open-end Spinning, Foam Finishing, Mercerizing, Slasher-dyeing, Rope-dyeing, Air-
Jet, Projectile and Wet Finishing. It’s only natural that Arvind Mills’s quality fabrics are in
high demand in the markets of Europe, US, West Asia, the Far East and Asia Pacific.

Arvind Mills Gets HC Nod For Debt Restructuring

Ahmedabad, April 9: : Ahmedabad-based Arvind Mills Limited (AML) finally seems to have
come out of the woods with the Gujarat High Court upholding the debt restructuring plan
proposed by it after eight months of deliberation.

Briefing the media, chief financial officer (CFO) of AML, Mr Jayesh Shah said the verdict,
which comes into retrospective effect from April 1, 2000 has finally paved the way for
implementation of the recast plan, which has "achieved the stupendous task of restructuring
debt of Rs 2,700 crore owed to more than 80 lenders including several foreign lenders."

Expressing optimism that the implementation of the plan would not only enable AML to post
a one-time networth increase of Rs 500 crore in the forthcoming quarterly results due next
week but also wipe out the accumulated losses of over Rs 500 crore, Mr Shah said he was
hopeful that the company would also be able to post a healthy profit in 2002-03, after three
years in the red. It may be recalled that AML had posted a whopping Rs 300 crore loss in
2000-01, both on account of a heavy interest burden on borrowings which exceeded Rs 360
crore and also due to the slump in worldwide demand for denim.

"We hope all that is behind us now," Mr Shah said, adding that the verdict had come at an
"opportune time, particularly since our denim division is doing extremely well now, despite
the global sluggishness."

Besides, the recast is expected to provide a permanent reduction in the interest burden of
AML, halving it from Rs 360 crore to Rs 180-Rs 190 crore annually. It may be mentioned
that AML has been able to achieve this by giving two options to its lenders. The first is that
of immediate exit through a one-time debt buyback at a discount of 55 per cent of the
principal amount. In this case, all unpaid interest is to be waived. With lenders opting for the
first option, the company has achieved a significantly lower contracted rate of interest. The
company expects a debt buyback of Rs 900 crore by making a one-time payment of Rs 400
crore. This also implies that AML would be able to book a one-time gain of Rs 500 crore on
its balance sheet.

The second option given to lenders is the repayment of the entire debt by 2009-10
commencing from 2004-05. Of the total debt burden of Rs 2,700 crore, the company would
also write back the interest of Rs 200 crore being excess interest provided in the balance sheet
in earlier years. The company has already tied up the necessary funds by realising the
proceeds of non-core assets, rights issue of equity shares, fresh borrowings and interest
accruals to meet its buyback commitments. In addition, AML had also come out with rights
issue of Rs 75 crore in December 2000 as a part of its debt restructuring plan. Post rights
issue, the promoters’ stake has gone up from 20 to 50 per cent.

Mr Shah maintained that with the greenh signal for its restructuring plan, "AML has become
the first Indian corporate to restructure its entire debt in one go rather than resorting to
frequent roll-overs which are standard financial practice in the Indian corporate system."

However, he did not rule out the possibility of the court verdict being challenged by
dissenting lenders including Commerzbank, Bank of Nova Scotia and Daichi Kangyo Bank
of Japan.

"While the plan is at present binding even on dissenting lenders following the court verdict, it
may still be challenged," he said