How can a Debt Restructuring plan improve the financial health of a company?

In early 2001
Arvind Mills announced a restructuring plan. Consequent to this decision state the impact of the
restructuring plan on the companys financial health and its plans to reduce the debt burden.

CORPORATE RESTRUCTURING
Corporate restructuring is a multifarious phenomenon that management has to deal with.
Every company has to choose either to diversify or to refocus on core business activities.
Diversifying in simple terms is expansion of business domains while refocus is a deliberate
attempt made by companies to become more alert on core business activities. From this
point of view, corporate restructuring is thoughtful reduction followed by diversification.
Corporate restructuring is an experience in itself which requires one or more of the following:
1
Pattern of ownership and control
2
Composition of liability
It is a comprehensive process by which a firm can consolidate its business operations and
strengthen its position for achieving the desired objectives: (A) synergetic (B) competitive
(C) successful. It involves significant re-orientation, re-organisation or realignment of assets
and liabilities of the organisation through conscious management action to improves future
cash flow stream and make more profitable and efficient.
CORPORATE RESTRUCTURING AT ARVIND MILLS
The case provides an overview of the Arvind Mills expansion strategy, which resulted in the
companys 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.
ISSUES
1
Debt driven expansion plan, financial restructuring of Arvind Mills
KEYCONCERN
1
Global recession will dampen the demands.
2
Depends highly on the movement of cotton and denim price.
INTRODUCTION
In the early 1990s, Arvind Mills 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 meters.
However, in the late 1990s, due to global as well as domestic overcapacity in denim and the
shift in fashion to gabardine and corduroy, 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 companys 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. As a result of the restructuring plan the interest burden
came down substantially and got Arvind Mills the distinction of becoming the first Indian
corporate to restructure its entire debt in a single go. Also, post restructuring, Arvind has
reported a profit of Rs. 10 crore for the first quarter of the financial year 2002, after a gap of
three years. The sheer instinct of Sanjay to survive in the business coupled with some bold
and frank decisions had enabled Arvind Mills to come out of its problems and stand again on
its feet.
Court approves ArvindMills debt restructuring plan

The Gujarat High Court has approved over Rs 2,700 crore debt restructuring plan of
Ahmedabad-based Arvind Mills. This decision of the HC makes the debt
restructuring plan legally binding on the company as well as on all lenders,
including the dissenting ones, Arvind Mills Managing Director Sanjay Lalbhai said in
a release here on Tuesday. The company planned to restructure debt of over Rs
2,700 crore owed to more than 80 lenders, including several foreign lenders, he
said. ArvindMills chief financial officer Jayesh Shah said the plan would provide a
permanent reduction in the interest burden of the company. The denim major had
already tied up necessary funds by realising proceeds of non-core assets, rights
issue of equity shares, fresh borrowings and internal accurals to meet its debt buy
back commitments, he added.
FINDINGS
1
1. By late 1990s, Arvind Mills was in deep financial trouble because of its increasing
debt and interest burden.
2
2. Its total long-term debt was estimated at Rs 27 billion, out of which the total
overseas debt was Rs 9.29 billion and debt to Indian institutional lenders was Rs 17.71
billion.
3
3. Arvind Mills had defaulted on interest payments on every loan.
4
4. ICICI was the largest Indian institutional lender, with a loan of over Rs 5 billion to
Arvind Mills. In 2000, the company reported a net loss of Rs 3.16 billion against a profit of Rs
.14 billion in 1999.
Solutions
1
1. In February 2001, Arvind Mills announced a debt restructuring
2
2. Plan for its long term debt. While the company set itself a minimum debt buyback
target of Rs 5.5 billion, the management was hopeful of a larger amount, possibly Rs 7.5
billion.
1
3. In mid-2001, Arvind Mills got the approval of a majority of the lenders for its debt
restructuring scheme. Forty-three out of fifty-four lenders approved the plan.
2
4. Some of the banks agreed to the buyback at a 55% discount on the principal
amount, while some agreed to a five year rollover for which they would be entitled to
interest plus the principal. Some banks also agreed to a ten year rollover for which they

would be paid a higher rate of interest plus principal. The debt revamp was expected to
reduce Arvind Mills interest burden by 50%.
Arvind Mills board Debts restructuring plan
Company has drawn major restructuring plan, which involves:
1. Entry into industrial or performance fabric.
2. Focus on growing the existing brands and retail vertical.
3. Unlocking value from the real estate.
4. De-leveraging of the balance sheet.
5. Outsourcing of non-core activity.
FINDING FROM THE CASE
1
Most of the companys profitability margins are affected after corporate
restructuring.
2
Companies mostly increase their profitability margin after their corporate
restructuring.

ARVIND MILL FINACIAL GROWTH

Arvind Mill is worlds third largest and Indias largest denim producer and commands 70% domestic
market share with 120 m meters of denim rolling out every year. The company is also into knitting and
shirting. Apart from textiles, Arvind Mills has presence in ready-to-wear, agrochemical and telecom
industry through its subsidiaries.

Denim segment remains the lead performer for Arvind Mils (63% of FY03 revenues). The domestic denim
business is expected to grow at a faster rate of around 6% as compared to 4% in the global market.
Internationally, this segment faces competition from China, Indonesia and Hong Kong. In India, Arvind
rules the market as small denim manufacturers suffer from financial and capacity limitations.
Shirting contributed to around 22% to FY03 revenues. Domestically, the division faces competition from
the lower end of the market. The company expects shirting business volumes to increase, as the global
shirting business is growing at around 6% whereas domestically, this segment is growing at around 25%.

Arvind Mills is focusing on HVCS (High Value Cotton Shirting) because it commands premium in both
domestic and international markets. The major consumers of HVCS are countries like Europe, Japan and
US. But due to quota restrictions applied by European and US markets, the company is not able to cash
the opportunity. However, prospects for this segment looks better post 2005. Arvind Mills is also targeting
key brands that are expected to improve its orderbook position and margins.
The company has presence in the garments segment through its subsidiary. Garment is a growth area
and has low capital requirement but high value addition. The industry is labour intensive, so the company
has the opportunity to take advantage as it has access to cheap labour.
Knitting is another key growth area for the company, as demand in the domestic and international markets
are expected to grow by 15% and 5% respectively in medium term. The company is already supplying to
domestic majors Wills and Madura Garments. Domestically, this segment faces competition largely from
unorganised and regional players.
Raw material cost as percentage of net sales is expected to go down from the current level of 25%
because of good cotton crop this year. Debt restructuring is expected to improve net profit margin (8.7%
in FY03). To put things in perspective, interest cost was lower by 22% YoY, in 1QFY04. However, rupee
appreciation as against US dollar can affect the margins, because company earns more than 50%
revenues from exports. Out of the total export earnings, around 70% is US dollars denominated.
At the current price level of Rs 52, the stock trades at P/E multiple of 7.1x FY03 earnings. The phasing
out of the MFA (multi fiber arrangement) in 2005 would provide Indian majors like Arvind Mills an
opportunity to improve access to major textile-consuming markets based in the Europe and US. However,
concerns regarding the sustainability of strength in denim prices and the past track record remain intact.
PROFITABILITY OF COMPANY
Arvind's financial performance over the last four years is the tale of a transformation. Since
2008, revenue has grown at a compound annual growth rate (CAGR) of 17 per cent to Rs
4,925 crore (in fiscal year 2012), earnings before interest, taxes, depreciation and
amortisation (EBITDA) has grown at a CAGR of 15 per cent to Rs 602 crore.
This transformation is the result of a strategic roadmap we prepared four years ago. It
visualised a four-pronged strategy: create a portfolio of diversified businesses, develop a
strong business to consumer business model (B2C), expand the share of domestic revenue
in the total pie, and achieve growth without using incremental debt.
In 1997, Arvind undertook a major expansion plan. We were setting up aRs 1,000 crore
complex in Gujarat. We borrowed money against the project but it took time to be
commissioned and become profitable. There were overruns due to depreciation of the rupee,
denim entering a downward cycle and flooding in the area where the complex was being
built. This led to an accumulated loss of over Rs 500 crore. To turn Arvind profitable again,

the debt of Rs 2,700 crore was restructured. The key learning from this experience was to
not leverage the balance sheet. If things no one can plan for happen suddenly, there will be
financial problems.
The brands and retail business offers high growth, but relatively low margins. It also requires
lower capital. We decided in future, the brands and retail business would be a major growth
driver. Here we again adopted a four-pronged strategy: launch new brands to fill market
segment opportunities, expand distribution reach, extend successful brands to newer
categories and rapidly roll out the Megamart hub-and-spoke model. Thus, the brands and
retail business has been growing at a CAGR of 25 per cent since 2008. We also have a strong
portfolio of international brands, including Arrow, US Polo, Izod, GANTT, Tommy Hilfiger, and
Elle.
Arvind Mill also created a B2C vertical, Arvind Stores, to retail fabrics in India. Today, the
share of B2C sales is almost 40 per cent against less than 20 per cent four years ago.
Monetisation of surplus land helped in reducing our financial leverage. So far, we have
realised cash flows of Rs 255 crore.
Today, Arvind is well poised to seize the huge opportunities before the Indian textile industry.
CONCLUSION
The results from the study reveal that there has been significant change in profitability post
restructuring program. Companies have responded favourably to post corporate
restructuring process. CRP helped the firms to in a positive way by way of increasing their
profitability margin. Hence restructuring program should be undertaken in case a company
faces problems but the restructuring should be done in systematic manner. Company at
primary route level should identify the problems and accordingly plan for restructuring of the
required processes for achieving success in terms of profile and also for enhancing
shareholders value.