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Reliance revamping textiles biz to cut costs, gear up for competition

Priya Ganapati in Bombay

Reliance Industries Limited's announcement on Monday that it would restructure its textiles business is expected to have little impact on the markets.

K Narayan, president, textile business for Reliance, said that the restructuring plan is to enhance overall competitiveness and focus on superior quality, higher margin Vimal and Harmony products, in the broader interests of employees and shareholders.

There is not much significance being attached to the announcement as textiles contribute less than 1 per cent to Reliance's bottomline.

"Textiles does not a major portion of Reliance's revenues. They are doing this just to cut their losses and increase productivity in that company," an analyst tracking reliance at DSP Merrill Lynch said.

The textile sector is plagued by low margins, heavy competition from unorganized players, and a general lack of interest in the business. The industry is expected to face tougher times when it is opened up in 2003.

With cheap imports flooding the country then, low-end players are likely to feel the heat making survival difficult for them.

Reliance's plan to focus on Vimal and Harmony is being seen as a strategy to tackle this. "After two years when imported textiles start flooding the market, if you want to survive, you have to have a strong brand name. In the last two years, the number of dealers for the Harmony brand has remained the same and not grown. So, Reliance is now trying to concentrate on Vimal and Harmony as a long-term measure," said Chirag Shah, an analyst with K R Choksey.

Nayan Mehta, an analyst with Emkay Shares and Stockbrokers, a domestic share-broking firm felt, "Reliance is phasing out some items and planning to get out of certain brands. The textiles business continues to depend on exports for higher returns. In the domestic market, the textile industry is not doing well because of lower margins and increased competition. So, if Reliance wants to concentrate on exports it must have strong brands and quality products."

The general feeling is that Reliance is attempting to move away from the lower margins, high competition retail readymade fabrics trade.

"There is a huge unorganised sector in the textile industry. And fabrics like saris and dress materials form a significant chunk of this sector. This is definitely an area which Reliance would like to avoid. That is why they have announced that they would like to like to concentrate on their better known brands like Vimal and Harmony," the analyst with Merrill Lynch said.

Meanwhile, Mehta agreed that the high brand recall for Vimal would help Reliance to a great extent if the company worked to consolidate on its gains there.

A bulk of Reliance Industries' revenues comes from its petrochemicals or the non-textile business. Fabrics account for just about 1 per cent of its total revenues. Polymer is the highest with its contribution of 33 per cent to the kitty. Fibre and fibre intermediaries have a 28 per cent share of the total revenues, while oil and gas contributes 3 per cent and chemicals 14 per cent.

The restructuring of its textile business is, therefore, expected to have little impact on the bottomline. "What Reliance may do is try and cut down its operations in the textile business and bring it from the current 1 per cent of the revenues to maybe half-a-per cent. They might try to concentrate on their new ventures of telecom and infocom which are expected to give higher returns," Mehta opined.

Ironically, the textile business is what Reliance first started out with. Dhirubhai Ambani, once a small cloth trader, started the textile mill in Naroda, Ahmedabad in 1966. The textiles business was the pride of Reliance till petrochemicals happened.

The focus soon shifted to the higher returns petrochemicals sector and textile was relegated to the background.

"Reliance started with the textiles business. Once upon a time it was its bread and butter. Not anymore, though. Now the company is moving towards new economy ventures like Reliance Infocomm and Reliance Telecom. Those are the sectors expected to generate high returns," Mehta said.

On Monday, Reliance's share price fell by about half a per cent on the Bombay Stock Exchange. The share closed at Rs 390.15 on Tuesday.

"There is going to be no major impact on the share price. In the long run, the voluntary retirement scheme and the restructuring will have a positive impact for the company. It will be good for the stock then. But Reliance has more value to it. The group's stake in Reliance Petro, infocom and telecom will fetch higher returns later," Mehta predicted.

Emkay Shares and Stockbrokers and K R Choksey, both, have a 'buy' tag on Reliance, while DSP Merrill Lynch has given it an 'accumulate' rating.

"Reliance is always a good buy. Irrespective of whether the market has been bad or good, it has given healthy returns more than the interest rates. There is a safety and comfort factor associated with the stock," Mehta said.

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