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Arvind Mills Expansion strategy
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DescriptionThe case provides an overview of the Arvind Mills' expansion strategy, which resulted in the company's poor financial health in the late 1990s.
The case provides an overview of the Arvind Mills' expansion strategy, which 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 case also discusses in detail the Arvind Mills debt-restructuring plan for the long-term debts being taken up in February 2001.
» Debt driven expansion plan, financial restructuring of Arvind Mills
Arvind Mills, expansion strategy, company's, poor financial health, late 1990, massive expansion, denim capacity, cotton fabrics, slowly, denim, funded, loans, Indian, overseas, financial institutions, repay, interest burden, financial problems, debt-restructuring plan, February 2001
In the early 1990s, Arvind Mills1 initiated massive expansion of its denim capacity.
By the late 1990s, Arvind Mills was the third largest manufacturer of denim in the world, with a capacity of 120 million metres.
However, in the late 1990s, due to global as well as domestic overcapacity in denim and the shift in fashion to gabardine2 and corduroy,3 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.
In 2000, Arvind Mills, once the darling of the bourses was in deep trouble. Its share price was hovering between a 52 week high of Rs 20 and low of Rs 9 (in the mid 1990s, the share price was closer to Rs 150). Leading financial analysts no longer tracked the Arvind Mills scrip.
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.
Expansion at What Cost?
Arvind Mills was promoted in June 1931, by Sanjay Lalbhai's grandfather, Kasturbhai Lalbhai, and his two brothers, Narottam and Chimanbhai, in ...
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