Arvind Limited (500101) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the conference call for analysts and investors for post-results discussion for quarter 3 financial year 2019-'20, Arvind Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Samir Agrawal. Thank you, and over to you, sir.

Thank you. Good afternoon to all of you, and thank you for joining in this Q3 FY 2020 Earnings Call for Arvind Limited. With me today is Mr. Jayesh Shah, Executive Director and Group Chief Financial Officer. Our results this quarter were very much in line with our plan, and we saw a clear improvement in our earnings as compared to the same period last year. More importantly, our performance improved in comparison with the previous 4 trailing quarters as well. Broader sentiment and consumer market conditions continue to be challenging in India. Credit crunch continues to adversely impact our business through trade channels, and we are seeing increasing demands for higher and higher receivable periods. Our export markets, though, especially the U.S., did see a better quarter, especially a record holiday season in U.S. with double-digit growth, although a lesser portion of that was accounted for the apparel. In this context, one development, which is important is to share with you all that the government announced that MEIS export incentive program stands canceled as of April 2019. Because of this, there's a onetime provision of INR 34 crores that has impacted both the top line and bottom line performance of our company. Our reported numbers include this adjustment. However, for the sake of comparison, we have excluded this adjustment. And as such, all my commentary and analysis will not take into account for the Q3 numbers. So with that context, textile revenues grew up by 15% this quarter with the majority of that growth coming from garments. Excluding essentials, garment volumes grew from 7.6 million in Q3 of last year to 10.6 million pieces in this quarter, resulting in the garment revenues going up by 23%. EBITDA margin for this business stood at 12.7% as compared to 10.5% in Q3 of FY 2019. It also compares well with the 10.8% EBITDA that we reported for Q2 of FY '20 for this Textiles segment. Revenues for Advanced Materials business grew by 16% for the quarter and stood at INR 185 crores. As we have shared in the past, Advanced Materials consists of human protection, advanced composites and other industrial products. All these businesses clocked healthy growth. EBITDA margin for Advanced Materials improved from 10.2% the previous year to 13.5 in this -- 13.5% (sic) [ 13.3% ] in Q3 of this year. We are confident that this business is on track to deliver INR 800 crores top line for this full year with a healthy margin. Our net debt at the end of quarter was INR 2,537 crores, 2-5-3-7, as of 31st December 2019. For your reference, this number stood at INR 3,024 crores as of 30th June 2019 and INR 2,694 crores as of 30th September 2019. So we have been sequentially reducing this number as we have indicated in the past. Overall, we continue to maintain our guidance for the full year revenues to grow by about 9% and EBITDA margins for the year to be similar to that of FY 2018-'19 without adjusting for the MEIS impact. We also continue to maintain our target for the overall debt reduction from March 2019 base by about INR 300 crores for the duration of this year. Now I invite you to ask any questions that you may have. Thank you.

[Operator Instructions] The first question is from the line of Nihal Jham from Edelweiss.

Congratulations on a good set of numbers. Sir, my first question was on the denim segment. I think we have recently indicated that the focus is on export growth, and I think the volume growth there also shows that. But just moving to the domestic segment, we still see that there is a contraction in volume. So is it that the domestic denim market continues to be under stress? And is there a potential of further margin pressure coming on this segment from prices contracting? I wanted your comments on that.

Yes. So the denim segment in India, particularly the B2B, which is our segment where we sell other than the brands which are our direct customers and large brands continues to...

Sorry to interrupt, sir. Sir, we are not able to hear you clearly.

Okay. Sure. So there is more than the pressure on sale, it is a pressure on, I think, account receivables collection and the cycles and the liquidity available in the market. So we continue to maintain tight discipline on sales and elect some salesco, but we would rather focus on exports market or focus on converting more fabrics into garments and sell garments in India than -- as compared to selling in domestic market with extended credit. So to that extent, the pressure in the Indian market for denim continues. And we believe that, that scenario may not change in very near future. Our strategy, as we have mentioned in the past, is going to be, a, move more towards denim garments and move more towards exports.

But just checking over the last few months, I think, either the situation has stabilized or it has kept getting worse in the denim segment and the domestic business?

First of all, I think it's stable. In fact, there has been -- what I am hearing is that there is a good demand for denim fabric in India, but it's just the cycle that is affecting. So I won't consider it to be denim market segment. It is just the liquidity, which prevents us from selling in India.

Absolutely. Sir, then moving on to the woven segment, there, the story is a bit opposite, where I see that we've seen a good growth in the domestic business. And surprisingly, exports have contracted. If you could just throw some light, because as I understand, even the fabric segment in India right now is under pressure, at least the volumes are flat. So how is it that we've seen good growth this quarter? And any reasons for the export business to contract?

Not really. Actually, first of all, overall, it's been more or less flat, it's a few -- under few lakh meters here or there. But in wovens, as you know, we have -- 2 things have happened. A, in our own factories where we have now new garment capacities, we are converting more and more fabrics into garments, and that actually results into reduced exports of fabrics, and it gets classified as sale in Indian market. So to that extent, that proportion that you see in woven segment on the -- on that excel sheet may not give you a very correct picture. As far as the -- generally, the woven as a product is concerned or the Indian market is concerned, there has been a lot of inventory correction which is taking place by some of the -- our customers. And as a result, there has been a pressure actually in -- or there has been a reduced offtake by some of the players in the quarter 3. We don't see that in quarter 4 based on the order book, but there was a correction that took place in quarter 3. Also, there are a lot of conversions which are happening in India from -- so garment factories are -- current demand for fabrics for exporting garments in woven segment also is increasing. So it's a fairly good segment. It continues to remain strong.

Jayesh Bhai, just a couple of more quick questions. On the garmenting preoperative losses, we did mention a number, I think, of INR 15 crores, INR 16 crores for the last quarter. Is it a similar run rate? Or has there been an increase or reduction?

See, in fact, it has significantly been lower this quarter. And we believe that it will almost -- become almost negligible in the quarter 4.

That's variable. Last question from my side. On the MEIS benefit, we did mention that INR 35 crores is the impact of reversal. I just wanted to understand then for the coming year, what is the approximate hit on margins that this could have?

So on a plain vanilla basis, it's, of course, 4% or 3.8% of the exports of our garments, that would be the impact. That may result into overall, and on the Textiles segment, to be like 1% margin drop. We have to make it up through the efficiency improvements, which we will get because we'll -- as we ramp up the capacity. I think the issue was -- is not about MEIS withdrawal or as a result, whether it would affect margin. Obviously, anything that goes away, which are a MEIS kind of a benefit would affect margin. But every time you are trying to sell goods, you have certain cost and benefits in mind when you are pricing it. So a retrospective effect takes away that liberty to price it in a way you could and manage the margins. So to that extent, it's a negative because it is retrospective. I don't think we should -- we would be overtly concerned about whether it will make garment business less viable going forward.

The next question is from the line of Sagar Parekh from Deep Finance.

Congrats for a decent performance. Sir, firstly, on this woven exports, I was still not clear. The exports have come down significantly. You mentioned that partly is due to inventory correction and there were some verticalization also, which led to lower exports. Am I right or...

No, no, no. So exports are lower because of the second reason, which is that a lot -- much more has been sold in Indian market for conversion of fabrics into garment, including in our factories compared to a year ago. What I said is that, in general, the woven markets are strong, but for last quarter, where there were some inventory corrections, but that has not really affected us because our volumes are more or less flat.

So volumes, yes, it's -- overall volumes are still down 3%?

Yes. So they are more or less flat, I would say, because it's seasonal. It can -- 5 lakh meters plus/minus will happen in a given quarter. So that will not be materially, I would call it. So the -- what I'm trying to, again, let me repeat. The market for wovens are -- continues to be reasonably good. We have a dip in exports more because we have diverted a lot of material in Indian markets for converting them into garments, including in some of our factories, where we have expanded capacity. In the last quarter, there has been a -- though our sales in domestic market have increased, there has been a reduction in the demand for fabrics from some of the brands because of inventory correction.

Okay. So that inventory correction, do you see that getting over? Or is there still...

So as I said in the earlier question, that we don't see that basis our order book as of today for the month -- for the quarter 4. It was -- I was specifically talking about quarter 3.

Okay. Fair enough. And overall, on verticalization strategy, where are we at the moment. Would denim and woven put together versus, let's say Q2?

So it is similar. I mean, because it is -- we have done about 10-odd million, about 11 million pieces as compared to slightly below -- around closer to 10 million in the quarter 2. It's ramping up. It should go even higher than this in quarter 4. And we are planning to do close to 50 million in the next year.

This is for the garmenting division you're saying?

That's right. I thought you asked that, right?

No, I was asking on the verticalization of denims and wovens into garments.

So what is that? What is...

So how much are we internally using from the fabrics of -- from denims and wovens into making garments?

So still, it is much smaller. It is like 10%, 12% in each case. But aim is to take it to 15% to 20% in the coming year.

Okay. And on the garmenting division, if I take the revenue and the volumes, the NSR per piece is significantly lower as compared to last year, which is about 12% lower. Any specific reason for this? Or would you probably attribute this to the MEIS going down?

Nothing to do with MEIS. MEIS can affect only the top line by 4%. The -- it is a product mix. So it is a product mix, which will change the fabric itself. It will change the cost itself. So it has -- the price per piece will be not a very correct way of looking at -- I think, it is a pure contribution or the profit margin that would be relevant.

Okay. So how much would that be, the pure contribution of pure profit margin per piece?

So we are not disclosing that. But we are inching towards -- we are -- our aim is to go double digit in the next financial year.

With this MEIS of 4% reduction, you still are confident of double-digit margin in garments?

So as I said, we are aiming towards it. Let us see. We have not prepared the -- fully the budget, bottom-up budget for the next year. We'll talk about in the next quarter.

Okay. Okay. And on your debt reduction, you mentioned about INR 300 crores for this financial year. We seem to be on track for that. What's our strategy for next financial year, FY '21? How much would -- how much should we consider for debt reduction?

So directionally, we would be further reducing the debt. We do not have much capital expenditure. Again, for me to give you a target because we haven't prepared a bottom-up target, so it will be premature. But directionally, it would be a further reduction of a debt in the coming year.

Okay. So but we -- the interest cost still continues to be higher even sequentially, if I see, INR 60.5 crores has gone to INR 61.6 crores in spite of debt reduction. So...

That is correct. The reason is that we have changed some borrowing mix in the -- in this last 6 months. And because we had a asset liability mismatch, we repaid the CPs, which are really cheaper than the other borrowings that we have done. But you will see the reduction in quarter 4 because the debt reduction in real sense has happened in this quarter as compared to what we were in March. So -- and the further reduction is expected in quarter 4. So you will see the reduction in quarter 4.

The next question is from the line of Maulik Patel from Equirus Securities.

Jayesh sir, what kind of CapEx we are looking at in this financial year and the next?

This year is close to about -- slightly above INR 300 crores. Next year, really speaking, it's going to be -- we are not looking at any addition in the manufacturing capacity. So it will be like close to INR 150 crores, INR 185 crores -- INR 175 crores kind of a CapEx. So as I said, we need to still prepare the plants, but it should be in that range because currently, the capital expenditure plan or the expenditure that we will have to incur next year based on current orders that we have placed, we don't see that number being significantly different than this.

Okay. And I think, in an earlier question, you replied that our pre-operating loss in garment, which used to be around INR 15 crores in a couple of quarters back has now probably come down, and probably next quarter onwards, it will be almost negligible. So are we attending into, that is, one, on the margin? I mean, post after that, will there be a further improvement in margin? I mean, once you are there in the...

Yes. That will only mean that we are not losing money, but that doesn't mean that we are making money for those plants. So that capacity ramp-up as it happens through -- as we move more towards 60 million, which is the rated capacity. Obviously, the margin should come and should help us to improve overall margins. And that's why we said that as we move forward, we would want to aim towards double-digit margins over next 12, 18 months.

That double digit is on the garment side, right?

That's correct. That's correct.

Okay. And in terms of an ROC, because earlier the thought was that garment has been on the lower CapEx and it's also a part of the verticalization process, our overall ROC will be much better. So what kind of ROC, which probably one could look at it into the garment business once you have one in the margin expansion, probably next...

So even on the existing plants, we are in excess of 20% for the plants which are matured, for particularly a given plant, for example. Overall -- so we should be aiming towards those numbers for that capacity over next 12, 18 months.

Okay. And what kind of capital has been invested into the garment business as of now? And in the last -- even if you can give me the last 2 years of numbers?

Correct. So the CapEx and not the capital, total capital, but the CapEx has been close to about slightly below INR 400 crores, other than that would be some working capital so.

Okay. And working capital cycle is not as stretched as what we have in the denim business, which is -- or the woven business? Or is it -- how the working capital in the garment business?

So in garments, because it's just a short cycle of conversion of fabrics into garments, it's a much smaller cycle. So if the gross -- on a gross basis, your raw material inventory to garment inventory will be like 45 days. Most receivables for exports are under LC, which we factor it. So it doesn't require too much of -- so it will be net-net, say, 2 months to 75 days kind of a cycle as opposed to 90 to 105 days in fabrics.

The next question is from the line of Prerna Jhunjhunwala from B&K Securities.

Congratulations on a good set of numbers, sir. My question is largely related to inventory. Now that cotton prices are lower, what will be your inventory strategy for coming period, fourth quarter or maybe for FY '21 as well?

So on the overall inventory rather than just the cotton because cotton is something which would -- will play as we look at how market is moving or likely to move. But overall, if I were to look at, as of -- compared to March, the overall inventory that as of December on consol basis has come down by INR 370 crores. And our overall gross current assets have come down by slightly below INR 500 crores. And of course, the liabilities have come down because we have bought less, so we have a less liability also by about INR 250 crores. So this is one reason why we have been able to reduce our debt this year or we'll be able to reduce our debt as we have planned, and on -- because it's -- we have been able to contract the inventory as well as overall current assets. But to answer your question on whether we will buy and stock off cotton, that would be a little -- also it's a company -- this is a little sensitive information as well. So we'll rather deal with it as it comes. Our belief is that prices of cotton will remain soft in near term, especially because the -- 2 things have happened. The one sphere or the issue was whether -- what will happen after the U.S.-China trade deal happens and when CCI starts buying heavily, both events have happened. And we are at a slight -- there has been a slight uptick in last few months. But we don't think -- it's going to remain within a bank. It will not shoot up, is our internal assessment.

Okay. And my next question is on input costs. You've mentioned in your slides that your input costs have reduced, that's why your costs -- your margins have improved. Apart from cotton, have you seen any correction anywhere in input prices?

So there have been some improvements in -- both in certain dyes that we bought -- which we buy for our fabrics. There has been also some reduction in the power cost. If you look at the overall Open Access power rates at the exchange, you will see that last 3, 4 months, there has been a reduction in the overall energy cost, and we buy quite a bit from Open Access. So that also has been helpful.

Okay. Okay. And sir, could you just brief about the current capacity of garmenting? And where do we see it reaching in the next 2 years? And...

So we have -- we will be -- we are -- we've invested in a capacity, which will off of about taking our total capacity to 60 million. We should be ending this year at 40 million, 41 million. And I think we should be -- we would want to aim to reach 50 million next year, though as I said, we still have to prepare our plants and -- but it looks like that we should be able to sell 50 million garments next year.

And what can be the optimal utilization of these capacities?

It should be closer to 60 million.

Closer to 60 million, okay. And sir, when do we see we reaching margins to -- at our historical levels or denim demand improving, which would actually mean a scenario change in the textile industry and these liquidity scenarios changing. Do we see that thing coming up...

No. I think let's see tomorrow what -- let's see what government does tomorrow. Yes, it's a question of boosting confidence in the industry and the -- kickstarting the consumption cycle. And I think the good thing is that it's not going down. But we'll have to wait and see hopefully...

So is it -- you mean to say that if demand improves, then this cycle, which has choked will start?

So it should. I think because, ultimately, the money should come from the customer to the trade and trade to the producers. And secondly, also in denim, if you -- as you may have already, you may -- you will know. A lot of capacity -- a lot of companies are going out of production. And because of the current market conditions. That also, in a way, there will be some balance that will come over next year or 2.

The next question is from the line of Deep Master from One-up Financial Consultants.

I just had a couple of questions. So on the woven side, as you mentioned, the current quarter saw some destocking. If you could just give some qualitative comments on the general demand in the economy at the moment for garments. Is that improving?

You are talking specifically for India?

Just the domestic -- yes, sir.

Yes. So demand for -- so I mean, the Diwali season was in -- decent. I think most companies had a good like total -- like pre-Diwali 30-day sales grew by 8%, 10%. So that's a good sign as compared to what happened a year ago, where it actually, degrew. So that is one. Secondly, even the -- what you see this value retail players have been expanding in at a very rapid pace. And that also, in a way, is increasing the demand for fabrics from organized player like ours. So in general, the demand -- there is a softness in the trade channel, but from brand segment side, it is doing fairly well.

Right. So as we increase verticalization across denim and woven next year, could we expect at least a single-digit growth in the overall woven and denim volumes? Or would it be too early to tell?

Not really. I think our game plan would be to sell almost at a full capacity in the coming year, both in woven and denim, either through conversions or through fabric -- real fabric sales. And we would want to aim that in the next financial year. So yes, growth will be there.

Okay. Great. And just on the garment side, as we scale up next year, it would require a significant ramp-up in volumes, almost 35% to 40% on the run rate. So how are we sort of preparing for that kind of growth, essentially? If you could just give us some qualitative comments on all the groundwork that is being laid.

So the -- there are 2 key things that you have to prepare yourself. One, one thing which you have to do is to create a pipeline of workers who we train and put it on the commercial machines. And it's -- because the attritions are high generally, you'll need to do a very serious work on trying to get. So you're putting training centers, getting people from all around the areas and trying to train them and then putting them into -- onto machines is a one big activity that one has been doing. The other is that every time you set up a new plant, the buyers would like to do a complete compliance audit and -- inside the factory. So that's also a very big activity because the buyers would want to make sure that everything from compliance side, be it labor, be it safety, be it other parameters, the factories come up. It's like a -- in some ways, a pharma kind of a thing, not so rigorous but similar. That's another activity that we are undertaking, and we have almost -- got almost all our key buyers to certify practically all factories that we have set up. So these are the 2 big things that we have been at it, and I think the progress has been quite satisfactory.

Great. And just lastly, you mentioned your endeavors to get to double-digit margins at scale in garments. But also, the reduction in MEIS would kind of entail a direct reduction in margin of at least 3.5% to 4%. So would it still be possible to get to those double-digit margins?

I mean it should. I mean it is a question of, it may take some more time as you scale up the capacity, as you look at the cost differently, as you do more automation. But it is not -- it is a difficult task without MEIS, but it is not an impossible task.

Okay. And how many years do you think it would take us to get to those to an optimal scale using the current capacity?

I think -- because it should typically take 18 to 24 months for you to be able to reach there. So maybe another 18 months, yes.

The next question is from the line of Nishit Rathi from CWC Advisors.

Jayesh Bhai, just wanted this clarity on this EBITDA margin that you've said. So you've said that you are looking at maintaining similar level of FY '18-'19 margins without considering onetime write-off.

Yes, because it is -- yes, that's correct. So we were at about 10% last year. It's slightly below 10%, and we should be around that number this year.

So without everything meaning if you take the impact of that onetime write-off, it will be lower?

It will be very marginally lower by 25 bps, possibly.

Which means that it is possible that next -- this -- what we've done this quarter will slightly go down in the next quarter, right?

I wouldn't like to put a number for the next quarter. I've given you overall guidelines. And I think we should be around that number.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for their closing comments.

So thank you for attending the call, and we would -- we will again see you in the second week of May for the annual results and the next year's -- discussion on the next year. Bye-bye.

Thank you. Ladies and gentlemen, on behalf of Arvind Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.