Arvind Mills, struggling to come out of a rough patch brought about by a recession in the main denim business, has already set in motion the recast process by roping in a foreign fund to pick up around 49 per cent of the hived off garment entity. A confirmation for this was not available from the company.

However, the company in a press release stated that it would sell off 49 per cent in the two businesses to a foreign fund or strategic partner. The company also plans to take the initial public offering route for the new outfits at a later date, the release added.

The proceeds from the sale will be deployed to improve the cash flow of Arvind Mills which has slipped into the red after a global recession in the denim market. The valuation for the spin off will be done internally mainlyin consultation with the prospective partners, institutional sources said.

The Arvind Mill scrip fell to Rs 31.15 on the BSE after opening at Rs 32.30. "Stock markets are viewing Arvind Mills as a commodity textile company. The restructuring may help change its image to one with having many high profile brands," an analyst with a brokerage firm said.

The recast will result in sharper focus in the spun off business, ability to raise required capital and apprropriate P/E rating. The garment subsidiary will also have the advantage of strong fabric linkage with Arvind, the release said. The garment division markets jeans, cotton trousers, formal and casual shirts under the brand name Arrow, Lee, Newport, Flying Machine, Ruggers, Excalibur and Ruf & Tuf.

Arvind Mills has drawn up a major foray into the speciality denim business and branded wear manufacturing in a move to completely delink itself from the loss-making commodity business. The company would now make garments for leading global players instead ofcontinuing as a mere supplier for them. However, the products will carry the label of the respective foreign company, sources said.

The Lalbhai flagship suffered a setback two days back when Crisil downgraded its two non-convertible debentures issues amounting to Rs 98 crore by three notches to C from BBB+.

The downgrading, taken up after a weakening of the company's capital structure, put it in the "substnatial risk grade" just one notch above the default slot. The company's debt equity ratio has risen to 2.18:1 as on March 31, 1999, due to project overruns.

Arvind Mills has also defaulted on instititutional payments after a reversal of fortunes. The institutions have in principle agreed for a reschedulement and are working on it. Crisil, as a matter of principle, did not consider this while announcing the downgrade.

INSIGHT
Hiving off makes sense

That Arvind Mills is in poor financial shape is now a well-known fact. With the recent downgrading of its debentures, it would havefound it extremely difficult to raise new debt. Shareholders would have taken unkindly to any attempt to dilute equity. This leaves Arvind Mills with no choice but to consider other means to infuse fresh cash flows. Hiving off the garments division into a subsidiary and then offloading a part of the equity in the new entity in favour of a strategic partner, would help achieve this objective easily. By ensuring that it holds the majority of the shares in the garments company, Arvind Mills would also continue to have an exposure to the high-value added business.

Sarad Saraf