Playing For The Long Term

The seventh largest metropolitan city in the country, Ahmedabad, has always been one of the most important economic and industrial hubs in the country. With Gujarat being the largest producer of cotton, it was obvious for Ahmedabad to emerge as one of the leading textiles hubs. Thanks to the growing presence of textiles, the city came to be known as ‘Manchester of the East’. While giant textiles fell to power looms owing to higher costs and rising competition, Ahmedabad is still home to a number of textiles businesses and is the largest producer of denim in India. Over the years, the city has gone beyond textiles and is now home to several industries including a thriving pharmaceutical cluster. For our State Of The Economy survey this year, we take a closer look at the city’s two prominent businesses — textiles and pharmaceuticals.

Homegrown Advantage
Presently, Ahmedabad has more than 200 textile units. The industry employs around one-lakh workers. The textile industry in Ahmedabad is largely focused on the domestic market rather than exports. The city offers a favourable environment for the textile industry since both cotton and yarn are easy to obtain. The industry accounts for about 23% of Gujarat’s Gross State Domestic Product. 

Bharat Chhajer, managing director, Bumaco Fabrics, is someone who has seen the upheaval in the textile industry between 1980s and 1990s. “We were the distributors for Calico and Ambica Mills. But, when they shut down, we had to start our own processing unit. Orders were moving towards power looms since the rates for processing the cloth were much cheaper,” he recalls.

Today, the textile industry is facing another challenge. Demonetisation has affected demand in this industry. Aamir Akhtar, CEO-denim (lifestyle fabrics) Arvind Mills, says that they are worried about how long this short-term pain would last. This uncertainty has created lot of stress in the industry. Certain units have also cut down on production to offset the slump in demand.

Yasin Ahmedji, who runs a processing unit, says his production level has declined by 40-50% after demonetisation was announced on November 8^th  last year. “This period reminds us of the slack we saw in 1984-1985 when 85% of factories had to be shut down.” Certain industries have adopted a smart expansion strategy to battle the demand slack. Danoo Textile Processing, which earlier focused on processing bed-sheets, is also into processing of shirts or dress materials depending upon the requirement of its clients.

Gajendra Agarwal, CEO, Gajendra Textile Mills, which started back in 1981, also has a similar story to narrate. “We receive our payments through the bank, but the market has been slack. We are wholesalers supplying to distributors who in turn push the products to retailers. Now, at the retailer end, there is a cash crunch, so our volume has been impacted by 30-40%.”

So far, textile has largely enjoyed tax-exemption. The state government, over the years, has announced several schemes to exempt the industry from levies, like the excise duty, to help it revive. However, the textile industry in Ahmedabad hopes that Goods and Services Tax (GST) doesn’t change this and put the industry under a tax burden. “There is uncertainty hovering around GST, and till there is an official clarification that textile will remain outside the purview of GST, the sentiment will remain weak. If the industry is taxed, it will collapse slowly,” says Ahmedji.  

Right Prescription
The turnover of Ahmedabad’s pharma industry stands at

15,0000 crore, which is 1/4^th of the total turnover of the Gujarat pharma industry. The number of pharma units in Ahmedabad is around 200. The Gujarat pharma industry employs around 85,000 people, while Ahmedabad accounts for 30,000. The cluster caters to both domestic and export markets.

The pharma industry has grown in Ahmedabad due to the availability of skilled manpower and the presence of ancillary industries. Pharma, being a specialised industry, needs to make sure that both skilled and unskilled labour is available in the region, especially at locations where they are setting up their capacity. Raw material as well as power costs have remained stable helping them maintain operating margin of 20% or thereabouts.

Pharma companies here limit their markets to specific regions or cities to help them compete better with the larger players. They also tend to focus on particular segments, whether it is pediatrics, gynaecology or orthopedics.

Unlike the textile firms, pharma companies are not seeing any major demand destruction due to demonetisation, but there are some problems. “Due to the cash crunch, we had to find new ways to pay the doctors to promote our drugs,” says a project manager of a listed pharma company. “So now, we list them as consultants who help us implement some strategy and pay them through banks,” he says. Although, Indian Medical Council Regulations 2009, bars doctors from receiving freebies or gifts, this practice is still widely prevalent.

Domestic Duties
While demonetisation may have a limited impact on pharma companies, their concerns are not very different from the textile industry. They also hope that GST, whenever it is passed, doesn’t put too much tax burden on them. Nirav Mehta, director, Corona Remedies, hopes that the pharma industry is taxed at 5% since it would help the companies operating in the affordable medicine segment. The government is also trying to encourage this through its National List of Essential Medicines (NELM) and Drug Price Control Order (DPCO). Corona Remedies offers affordable medicines in the cardio-diabetes and infertility segments. The company, which employs 2,100 people, gets 95% of its 300 crore revenue from the domestic market. 

If excise duty exemption has been a boon for the textiles industry, it has proven to be a major cause for concern for the pharma industry here. Mehta backed out from his plan to set up a plant in Ahmedabad back in 2007, when hilly areas were given excise benefit. He set up a plant in Solan, Himachal Pradesh, instead. While he wants to set up a plant in Ahmedabad now, he is waiting to see what will be the GST framework for the pharma industry. Mehta is looking to expand to Philippines, Thailand, Malaysia, Uzbekistan and Commonwealth of Independent States (CIS) countries and plans to use the Ahmedabad facility for this expansion.

The excise duty exemptions also forced some industries to completely re-align their business models. For instance Viranchi Shah, director, Saga Laboratories, and president of the Indian Drug Manufacturers’ Association, shares that his decision to completely turnaround his domestic-focus business to an export-only business has paid off. The duty exemption was changing the competitive landscape of the pharma industry and giving an unfair advantage to particular geographies. “In 2005, when the exemption was announced, we had two options — either to migrate to these tax havens or change our business model completely. We chose the latter. We slowly wound up our domestic business and started to focus only on exports,” says Shah. Saga Laboratories, which has a

150-crore turnover, operates in the oral solid business with exports to over 40 countries across South East Asia, CIS, Latin America and Africa. Shah also plans to enter regulated markets. “We were recently audited by European audit agencies and plan to enter that market in FY17. After understanding Europe, we plan to enter the US market,” adds Shah. Owing to fall in currencies of oil-rich economies in Africa and Latin America, Viranchi’s export business is facing headwinds. Africa contributes 40% to the company’s revenue while Latin America accounts for 10%. The balance comes from Eastern Europe and CIS economies. “Our buyers have been significantly impacted due to the devaluation of their currencies. Now, to keep our orders ticking, we are giving them products on credit. We never worked on credit before, but given the present circumstances, this seems to be the only feasible way. We are getting our exports insured from Export Credit Guarantee Corporation of India,” says Shah, who has increased his credit limit to manage cash flows.

Some of the companies chose to stay in the domestic market but chose to focus on high-margin segments to protect their profitability. “We started focusing on nutraceuticals and OTC products. We also increased our focus on marketing,” says Atul Shah, executive director at Ellis Pharma. “Increased focus in the high-margin nutraceutical business along with other OTC products helped us to recover our losses caused by these excise-free zones.”

For some pharma companies, their decision to have a limited presence in export markets was also due to the kind of costs and time it takes to get the required approvals from regulated markets. “To get a product registered, it costs around 

10 crore-20 crore. You need to follow-up with USFDA. It is a strenuous, time-consuming and a costly exercise for a small company,” says Kamlesh Patel, CEO at West-Coast Pharmaceutical Works, which currently clocks a turnover of

50 crore, and is present across nutraceuticals, anti-cancer, dermatology and hormones (contract manufacturing).

While pharma and textile entrepreneurs have nothing major to complain about Ahmedabad’s infrastructure, both believe that the city is slipping these days due to one crucial factor —labour. Chhajer of Bumaco Fabrics says that the new generation doesn’t want to work in processing units due to the amount of dust created when the plant is operating does not make for a very conducive atmosphere. “We have to give workers facilities like lodging in order to retain them. There are so many opportunities for them out there, and textiles is not on their current list of preferences,” he says.

Patel of West-Coast Pharmaceutical Works, which currently employs 450 people, also observes that due to development in states like UP, Bihar and Rajasthan, the flow of migrant labour has petered out. He adds that with the shortfall of local labourers, they are forced to get labourers from other states and have to pay them higher wages.

For pharma companies, the problem is more nuanced. “The local talent pool of skilled workers is shrinking. We are hiring people from other states paying them more than what larger companies offer so that we are attractive to the shortlisted candidate. We hope the state government starts an institution near the industrial zones to nurture a skilled pool of workers to address this acute shortage,” says Jignesh Patel, managing director at Elixir Pharma, which manufactures active pharmaceutical ingredients or APIs.

Broader Horizons
For now, some of them are looking at newer markets. Scaling up is the only way that a pharmaceutical firm can survive and sustain, states West-Coast’s Patel. He adds that expanding to new markets is a continuous process and he regularly visits new countries to scout for new markets for his products.

 While more than half of the respondents in our survey say they don’t face a problem while raising fresh borrowings, Elixir Pharma’s Patel feels that banks aren’t always looking at the right parameters when they sanction the loans. “They give us credit after doing a valuation of our land. Instead, they should be factoring in our growth trajectory and give us credit accordingly.” So, he chooses to fund his company’s expansion plan with his own money.

As we leave the cluster, we realise if there is one thing that the Ahmedabad’s textile units and drug manufacturers want — it is stability in policy framework. They want policy makers to give them a clear direction even as they battle short-term hiccups such as demonetisation. As Shahrukh Khan aptly puts it in his movie Raees, ‘Gujarat ki hawa main hi vyapar hai’, their only expectation is that the government allows them to do what they do best.