A slow spin

How distressed investor Wilbur Ross is looking to turn around his maiden Indian investment — suiting player OCM

Vishal Koul

At 76, Wilbur Ross is showing no signs of slowing down. The distressed asset investor, who manages over $7 billion in assets through his New York-based investment firm WL Ross & Co, is looking to raise over $2 billion by floating a new PE fund. The reason is not that hard to fathom — an investor who made his billions buying stressed assets across steel, banks, coal, auto and textiles is now rubbing his hands in glee at the prospect of picking up stocks of distressed small and mid-cap Canadian and US energy companies.

The sudden meltdown in crude oil, which hit an four-year low of $88, has had a debilitating impact on these companies. “We’re looking for things that are idiosyncratically distressed, where we believe the long-term fundamentals are in place,” Ross has been quoted as saying. The rationale for zeroing on these companies is Ross’ belief that, in the long run, oil has to recover and that would mean that today’s out-of-favour stocks will get re-rated.

While Ross has an uncanny knack for hitting the right notes in distressed investing, not all his plays have been a home run. In case of steel, Ross merged five bankrupt US steel companies into what was called as the International Steel Group, later sold to Mittal Steel in 2004 for $4.5 billion, giving Ross a 13x return on his investment. But Ross’ foray into textiles ended in an anti-climax.

In 2003, he entered the business by buying out one of America’s biggest textile companies, Burlington Industries (which went bankrupt in 2001) and Cone Industries. He merged both these companies to form a new entity, the International Textile Group (ITG). Three years later, Ross merged ITG with another company, Safety Components International (SCI), a publicly listed airbag maker that was a part of his portfolio. The merger resulted in a lawsuit from SCI shareholders, who alleged that Ross used the merger to bail out ITG by shelling out $150 million for a ‘worthless’ company. Ross settled the suit late last year for $81 million. In other words, the textile bet did not quite work out for the legendary investor.

If one were to draw a parallel with ITG, Ross had bought out OCM in a similar fashion in 2006 from Arcil, a leading asset reconstruction company in India. Previously owned by the SK Birla group, the suiting company was sold to Ross for ₹170 crore ($37 million). At the time of the acquisition, Ross had said, “OCM establishes us in India’s textile sector and adds to the resources and synergies of our textile holdings.”

Seven years since the acquisition was made, Ross has still not been able to turn around the Amritsar-based tweed company, despite having made a quick exit from his second investment in India — in 2008, Ross purchased Spicejet and sold the business two years later to Kalanithi Maran of Sun group for a tidy profit.

David L Wax, managing director of WL Ross & Co and member of its investment committee, is cognisant of the extended timeline. “Yeah, it has taken longer than anticipated. I think that’s a function of having the right management and we now have the right management on board,” says Wax, who was on a flying visit to India. For now, all the action at OCM is being steered by Ross’ man on the ground, Nitin Jain, who took over as CEO last year. 

OCM has a rather interesting history — it started off in 1924 as a manufacturer of hand-knotted carpets and was called Oriental Carpet Manufacturers before being renamed as OCM. But it was only towards the late ’80s and early ’90s that the brand came of age, with its classic ‘OCM, oh see him’ commercial enjoying top of mind recall among youngsters from that particular generation. The visuals of a suit-clad man walking confidently as passers-by gaped in awe firmly linked success with the choice of suit. This tagline captured the mood of the moment, turning the-then Birla-owned OCM into one of the most popular suiting brands in the country.

But over the past decade or so, the Indian textiles market has seen a sea change, with consumers opting for readymade garments to fabric even in the suiting category, giving fabric makers such as OCM a tough time. Even the edge that domestic textile makers had in international markets has eroded over the years; India has been consistently losing out to firms in Vietnam, Bangladesh and other low-wage nations. Further, the global downturn that followed the sub-prime crisis was the final nail in the coffin for textile exporters as demand shrank and large retailers increasingly squeezed suppliers to the last dollar.

Overcoming a rough patch

OCM has consistently managed to make an operating profit by running a tight ship

In those ensuing years, OCM’s parent Birla VXL came under stress and finally landed in the lap of Arcil, which carved out OCM from the parent and sold it to Wilbur Ross in October 2006. When Ross took over OCM, the idea was to have a close association with the International Textile Group since it manufactured, sold and marketed denim, worsted wool and man-made and cotton fabrics across big markets such as the US, China, Latin America and smaller ones such as Nicaragua and Vietnam. Ross was keen to get a higher share of exports from OCM. But that clearly did not seem to work out, with ITG itself losing its way.

Finding its feet

As for OCM, it’s been a slow and steady recovery. The company today operates a fibre-to-fabric worsted textile manufacturing facility at Amritsar with a spinning capacity of 8.5 million metre per year and weaving capacity of 6.5 million metre per year. It was in March 2011 that Ross brought in textile veteran SK Singhal from market leader Raymond to head the business. Jain, the current CEO, came on board as the head of sales and marketing around the same time that Singhal took over.

Singhal, who had spent nearly 30 years at Raymond — OCM’s biggest rival in the worsted fabric segment — was brought in to steer strategy changes after the old management failed to deliver over four crucial years. “They (the previous management) fell short of the expectations of the board,” says Jain, adding, “The management team today is totally different from 2006.” When Singhal retired last year, Jain was elevated to the CEO’s role. “The key objective was to up the skill quotient,” says Jain on the altered strategy at OCM. More people were hired from Raymond, Mahindra and Mahindra and other groups, existing employees promoted, some others fired. As on date, OCM has about 1,500 employees.

The new management at OCM was also quick to realise that what had been lacking all these years was a sharp brand image compared with competitors such as Raymond and Reid & Taylor. Leapfrog Strategy Consulting was roped in and it suggested that, OCM needed to connect with youth living in smaller towns to recharge its growth. So while branding through television and other mediums was formulated, the company also tweaked its products mix.  “We realised that to understand customer demand, we need to think like retailers first, and then like manufacturers,” says Jain. 

As a result, the product portfolio was expanded to include poly rayon, wool poly, all-polyester and all-wool variations. OCM didn’t limit itself to suitings either; shirts, shawls, scarves and blankets were all added to the list. Even the design side was revamped, three new collections were released every year compared with the two earlier. Though suiting continues to dominate sales, Jain says his ambition is to let OCM be counted as more than a suiting company. OCM is being positioned as a young and fashionable brand, with its team tapping into digital and social media to lure young consumers. It has also launched a mobile app that allows buyers to view the entire range of apparel and try it online. “I am not advertising for my existing customer, I want to add newer and younger ones through internet-based marketing,” says Jain. 

Clawing back

In the past three years, OCM has spent ₹35 crore in promotion, branding, and advertising and another ₹21 crore in refurbishing plant and machinery. Most of its business comes through its wholesalers and retailers, who hawk the company’s fabric range — available from ₹150 per metre to ₹4,500 per metre. Ankit Gargya, director, Gargya Textiles, has been OCM’s fabric wholesaler for the past 18 years. His company deals in all other brands as well and distributes to 600 retailers across Seemandhra, Telangana, Karnataka and Maharashtra. “We kept our customers in the loop when OCM changed hands to assure them that it was going into much more professional hands. We have seen better finishing and timely deliveries in past five years,” he says. Though Raymond is the easiest to push to customers, Gargya feels OCM has more vibrant designs. Another Delhi-based distributor, Satyendra Gupta, says, “Raymond’s fabric is harder, whereas OCM has a finer fabric. Their tweeds are clear winners.” This vote of confidence is also getting reflected in the numbers. OCM has amassed a higher share in the worsted fabric market at 8%, against 5% at the time of Ross’ takeover. The worsted fabric market (wool-blended fabrics) where OCM operates is dominated by the complete man of yesteryears — Raymond still rules the category with a 65% market share. 

However, Arvind Singhal, head of retail consultancy Technopak, is skeptical and feels that the higher share is an outcome of stronger players falling off. “Gwalior and Dinesh Suitings are a pale shadow of what they were in the ’80s and the ’90s. Reliance is hardly making worsted fabrics now and S Kumar’s is believed to be in financial trouble. Raymond is the only strong player left. So, OCM could also have taken some market share from crumbling players,” points out Singhal, who incidentally worked in OCM’s marketing department in the early 1980s. When it comes to distribution strategy, OCM is cautious about burning cash and is unwilling to build a standalone retail presence, relying almost entirely on multi-brand outlets to push sales across the country. It has just four exclusive stores in four cities, compared to Raymond’s 600. 

“Most people who have entered the retail market in India have made losses or very little profits because of high real estate costs,” points out Jain. He adds that trust among traders — and not exclusive retail stores — was crucial for the company’s revival. Singhal believes the new management’s strategy for OCM needs to be backed up — with more money. “The owners are neither putting in ‘serious money’ in the business, nor positioning it right or boosting retail presence — all crucial to the success of a textile brand. Raymond’s biggest strength is its exclusive outlets,” Singhal says. However, Jain sees merit in the current approach: “We have a fiscal responsibility towards our shareholders as well. Our strategy is to be investment-selective by focusing only on essential areas.” 

Testing times

Though OCM’s turnover in recent years has increased from less than ₹100 crore in 2008 to over ₹150 crore now, maintaining net profitability has turned out to be a challenge. It recorded a loss of ₹11 crore in FY11 which fell to ₹1 crore in FY12 but increased to ₹5 crore in FY13. However, Jain remains confident. “We have been cash positive for the last three years. We broke even in FY14 and will be profitable by next year,” he says.

What could be a challenge for Jain and his team is that with exports falling, OCM will have to increasingly rely on domestic sales. In the last two years, export contribution has fallen to 20% from 35%. As a result, overall revenues have fallen 20% over the past two years to ₹160 crore in FY14. But Jain is confident of domestic sales continuing their upward trajectory and making up for the export drop. Singhal of Technopak believes the road ahead for OCM will be far from easy. “They are just milking the brand. With no significant amount invested in the company or brand, not backed by advertising and located in a logistically disadvantaged Amritsar, OCM is very vulnerable. I don’t know who will buy it after revival. I guess Raymond won’t,” he says. But for all the external skepticism, Jain is getting a long rope, internally. “We are a very patient investor; we think Nitin and his team are doing a superb job reformulating who and what OCM is. In that regard, we want to give him the time to accomplish his agenda so that we realise the value,” says Wax. 

As for Ross, his investment in OCM is not something that will keep him awake at night for he surely knows when to take the final call. When asked in an interview how he knew it was time to cut bait, Ross said, “You cut bait when you are either out of plausible strategies for solving your problems or when the incremental capital needed for the proposed strategy is disproportionately large relative to what you already have committed.” For now, that doesn’t seem to be the case with OCM.