Horice is a picturesque little town about an hour's drive from Prague. It's not famous for anything but it's home to Mileta International, a small textile company (CY06 sales: euro 22 million) that makes fabrics for Europe's top couturiers. Much like other fabric makers in Europe, Mileta too was struggling with high production costs, leaving it with wafer-thin margins.
Until September, when the Rs 1,418-crore (Rs 14.18 billion) Mumbai-based fabric manufacturer Alok Industries bought it over.
By gradually shifting production to its Indian facilities, the company plans to bring down production costs, at the same time using Mileta's technical and design expertise to move up the value chain.
In fact, it's already bagged an order for 1.5 million metres of fabric to make table linen, shirting and handkerchiefs. In the meanwhile, it's putting in spinning facilities - 5,000 tonnes a month - at its unit in Vapi. That will complete the production chain: from spinning, weaving, knitting, processing to home textiles and readymade garments, Alok will have it all.
But becoming an integrated player will not really help bring down costs. For that the company has built scale: for instance, at 10 million sheet sets or 60 million metres a year, it has the largest capacity for bed linen in the country.
Knitting and woven capacities, too, have increased substantially. What integration will do, however, is allow buyers to source both knitted and woven products from Alok, which is what overseas retailers prefer.
More important, as Dilip Jiwrajka, managing director, explains, "It gives us control over the product since we can monitor the quality levels at every stage and avoid defects such as shrinkage." That's key to servicing US retailers, who can be a finicky lot.
In fact, according to Manish Saigal, associate director, KPMG, there are several US retailers who are clear that for their vendors to be able to grow with them, they need to be fully integrated.
Says Saigal, "Retailers value this attribute in a vendor because integration makes it is easier to customise production and also reduce cycle times. It also gives the vendor greater flexibility to react quickly to any changes in price or product, compared with a stand-alone player."
However, Saigal believes that the bigger challenge is to be able to be able to move up the fashion curve and into the value-added space, which is the way Indian companies should be going.
Says he, "Indian firms cannot compete with China on costs because they simply do not have the scale, their advantage lies in customised exports." That's exactly what Alok is hoping to achieve with a string of technical alliances and, of course, the acquisition of Mileta International, in which it picked up a 60 per cent stake for euro14 million.
With the takeover of Mileta, Alok now owns a basket of fabric brands - Cottonova, Erba, Lord Nelson, Osaka and also the licensee rights for Daks handkerchiefs - apart from facilities that make shirting fabrics, bed and table linen and handkerchiefs.
And this gives it a foothold in the highly competitive and fashion conscious European market, with access to all Mileta's customers, which include fashion houses, private label retailers and branded players such as Hugo Boss, Zara and Marks & Spencer.
By "offshoring" as much of the manufacturing as possible to India, Alok hopes to bring down the cost of production by 20-25 per cent. Observes Jiwrajka, "Mileta's net margins today are barely 7-8 per cent. Once we start outsourcing the grey fabric from our Indian unit, the margins could go up significantly." (The cost differential between grey fabric sourced abroad and in India is roughly 20-25 per cent.) Not surprisingly, once costs are brought down, the company hopes to lower the selling price overseas so as to capture a larger share of the market.
Says Sunil Khandelwal, CFO, "Currently, Mileta sells fabric at around euro5 a metre. We could bring this down to euro4 a metre and expand our customer base."
The reason why only grey fabric will be made here, in the initial stages, is that buyers overseas need to get comfortable with the "Made in India" tag before the processing too can be shifted back home. And that could take anywhere from three to four years.
To begin with, the stitching plant for handkerchiefs will be moved to the Indian unit. That's about 4 million units a year, to be sold across the world.
Alok is also in the process of finalising an agreement with a European textile maker, which would give it access to technology and design.
Explains Jiwrajka, "The company will give us committed orders and we would gain from their technical expertise and design knowledge. For them the costs would go down significantly since they are outsourcing the fabric."
Jiwrajka says at a later stage the finer quality would fetch Alok better prices. "Our average realisation for apparel fabric is around Rs 85-87 a metre today; we would attempt to raise this to around Rs 125 a metre."
The margins too would improve simply because the 5-6 per cent increase in the production cost would be less than the 40-50 per cent increase in selling price. Which is why Alok is open to more of these alliances.
In fact, it's already working with Grabal Embroideries of Austria for embroidered fabrics and also making shirts for Portuguese shirt maker Teviz Txtil Vizela SA. If it sounds simple, it's not. KPMG's Saigal cautions that co-ordinating with European players to imbibe technology and improve designs is not easy.
"Making the shift from a manufacturing company to a design-oriented company is not easy. Partnering with the right design houses is, therefore, important."
Alok's hoping that once the quality of the fabric improves, it can raise the selling price of apparel fabrics from around $1.75 a metre currently to $3 a metre over the next three to four years. Should that happen, high end product sales, which today account for 40 per cent of total sales, should move up to 60-65 per cent.
That's important because it's the sale of high-end products that will prop up margins offsetting the lower margin sales of commoditised products to buyers such as Wal-Mart and JC Penny.
At present operating margins on export sales for Alok are in the region of 20-21 per cent and exports accounted for about 27 per cent of sales of Rs 1,418 crore (Rs 14.18 billion) in FY06, up from 9 per cent in FY04. The management hopes to increase this to 33 per cent in FY07 and further to 40 per cent in FY08.However, with margins in the domestic market a tad better than those for exports, and the demand too buoyant, the idea is to let the sales mix remain at 50:50. Right now, what Alok's really keen on is dressing the rest of the world.