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 1 financial year 2021 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, Nirav. Good afternoon to all of you, and thank you for participating in this first quarter call for FY 2021 of Arvind Limited. Joining me today is Mr. Jayesh Shah, our Executive Director and Group CFO; as well as Mr. Ashish Kumar, who is the CEO of our Garmenting as well as Advanced Materials businesses. As you all know, this first quarter saw extraordinary business circumstances in our history. COVID-19 and associated lockdowns have had a deep impact on most businesses in practically every geography around the world. Arvind's core business being tied to a discretionary consumption got really hit hard. The good news, however, is that things have started to recover since June, and we are already on our way to a much better second quarter. In terms of specific Q1 results and numbers, the overall revenues stood at INR 599 crores as against INR 1,896 crores in the first quarter of the previous year. EBITDA for this period was negative INR 29 crores and profit after tax stood at negative INR 96 crores. In the Textiles segment, the total monthly volumes for June have recovered to almost 67% of our previous year's volumes in case of Denim and 64% in case of Woven. If we further segregate that, especially the export volumes in Denim have bounced back to the pre-COVID level since the June month. Domestic market is still quite challenged, and we are seeing a demand recovery only to the tune of 30% to 40% across various segments. Further, a large part of recovering demand in India is in the rural and semi-urban areas, which traditionally buy value merchandise. Urban India is yet to resume apparel consumption in a substantial manner, also reflected in the results of leisure apparel brands and retailers in the country. For us, our garment factories have also resumed the volumes to 60% plus of the previous year's monthly run rate by the June end, and we are seeing continuing improvement over the following months. Textile margins have recovered to a healthy 12% level, primarily aided by larger portion of export sales and a favorable exchange rate. Rupee has been around -- dollar has been around INR 74, INR 75. Our Advanced Materials business has been much more robust and resilient in comparison. Monthly revenue run rate has recovered to last year's average of around INR 60 crore per month. EBITDA margins in this business have also returned back to 13% level, which was in the pre-COVID Jan-Feb time frame. We continue to see strong market demand, and we have a solid order book position for AMD products. So the only sort of disruption we had earlier in the Q1 was around the supply side. As we had shared in our last discussion in June, we have swiftly implemented multiple measures to rationalize fixed costs that have already yielded 15% to 20% structural cost savings which are likely to sustain over time. Our working capital discipline also continues to remain tight. The net borrowings, which stood at INR 2,371 crores as of 31st March 2020, did increase to INR 2,702 crores by end of June. However, this is already declining, and we are quite positive that this will likely to return to the March end level by the end of second quarter. Our cash accruals have been positive since June month, and our liquidity position is quite comfortable. Looking forward, we expect the second quarter to recover our Denim and Garment revenues to almost 80% levels and Woven revenues to 60% levels of the previous year's Q2. We expect EBITDA margins also to recover to a positive 10% to 12% range. So that's pretty much what I have in the opening remarks and commentary. Now I invite you to ask any questions that you may have. Thank you.

[Operator Instructions] First question is from the line of Bhavik Shah from S&P Global.

Just we would like to know that what will be the cash flow position in the coming quarter vis-à-vis increase in sales and increase in export from various sectors?

So you are talking about sales or the cash flow or cash accruals?

No. Cash accruals, basically.

Okay. So as we have stated in our presentation that we have sent across as well as my colleague mentioned that since June and July and August have been -- have seen a positive EBITDA as well as cash accruals to the tune of around INR 30 crores cash accruals on a monthly basis, and we expect this number to rise as we increase our utilization over a period of time. So quarter 2, you may see an improved -- I mean significantly higher cash accruals or positive cash accruals compared to quarter 1 which was a loss.

And 1 more question that I think we have invested in some of the countries outside India. So do we see any advantage over that because of arbitrage situation or any geographical advantages or disadvantage?

So the reason why we invested in Ethiopia was because of the Agoa treaty which helps African nations to have duty-free access to Europe and U.S.A. and that thesis continue, and we continue to increase our revenues on a periodic basis. Of course, it got also affected in the first quarter. But that advantage is there with us, and we continue to enjoy that benefit.

Last question from my side. Are we positive in Ethiopia as well as Bangladesh or in Mauritius?

We do not have investments in Bangladesh or in Mauritius. We have investment in Ethiopia and we are positive in Ethiopia.

[Operator Instructions] Next question is from Prerna Jhunjhunwala from B&K Securities Private Limited.

I wanted to understand the domestic demand scenario and inventory in the supply chain across retailers or the middlemen? And how do you see it against pre-COVID levels?

So as my colleague mentioned that the domestic demand has been quite subdued. There is a challenge both for the end consumer-led like B2C businesses where we supply fabrics or garments to branded apparel companies and retailers where the sales have been quite affected. Similarly, our retail sale of fabric is also impacted because of that. So the goods which we sold in the last quarter of Q4 -- or last quarter of last financial year are still not really sold out by them because most of the period so far have been under the lockdown. So they are holding inventories. They have postponed purchases. We believe that most branded apparel and retailers will not purchase. They'll skip a buy for 1 season. And I believe they will start buying in quarter 4. So we will see a gradual reduction in inventory levels of this -- our customers over next 3 to 6 months, particularly in quarter 3, where it's a Diwali festival season, where we believe that a lot of inventory will get pushed out. And they will not be buying something new for next 4 to 5 months. So the demand from domestic market will remain subdued for the domestic consumption. However, the demand for -- from the domestic market for exporting garments because a lot of our customers are also buying fabrics to convert them into garments, a lot of garment factories in India, that demand has started picking up and it is reaching to pre-COVID level.

Okay. Can you bifurcate this for Denim and Woven because these are 2 different segments and different demand drivers because one is casual and one is purely formal...

Not really. Both are -- I mean our -- bulk of our woven fabrics are also casual in nature. But jeans is -- or the Denims are doing far better. And as you know, even in the current period up to July or August, our sales in India as well as exports are better in Denim. They have reached almost like 75%, 80% in Denim, but they are lower at about 60% in woven fabrics. So woven fabric, we expect it to take off in the quarter 3 once this demand or the supply or oversupply or a stock which is there in the system dries up.

Okay. Sir, my next question is for a benefit of cost -- lower cotton prices. Are they visible in your current numbers? Or they are expected to -- or partially visible and expected to improve further going forward?

See, the -- fundamentally, the cotton is -- it should be in a bearish zone. However, in recent past, in last 2 weeks, as you possibly know that [Foreign Language] cotton prices have increased a little bit, possibly because a lot of cotton that is -- there is a bumper crop in India, but that crop is also being picked up by Cotton Corporation to support the prices. As a result, the cotton actually has increased from where it was about a month ago. So we don't see too much of different margins than what is there today on account of cotton. So -- however, as the component of domestic sales improve, there would be a little bit of reduction in the margins that you are seeing now because both cotton as well as currency have been very favorable in quarter 1 and also in July and August. But as the sales of domestic markets improve, you will see a little bit of reduction in the margin of Textile business.

Okay. Sir, last question would be on this unorganized competition because in the fabric, also, there is a lot of unorganized market. Do you see that there is some kind of consolidation happening as -- spinning players talking about it, but do you see any consolidation happening in the fabric space which will improve the bargaining power of fabric suppliers also going forward?

I think the way we are seeing is that, yes, there is going to be some kind of reduction in the capacities in the country, at least temporarily, if not permanently because of both demand as well as the working capital-related challenges that these smaller units are facing. As such, the kind of sales or the customer mix and the product mix that we have, we don't really necessarily compete so much with that strata for our sales. Actually, bulk of our sales are to branded apparel players where really -- it is more on the designs, on the service, on the quality, on the turnaround -- fast turnaround that we are giving, which is why we are able to sell at a healthy margins. And I think that those advantage will continue.

Next question is from Nihal Jham from Edelweiss Financial Service.

Hello, can you hear me now?

Yes.

Yes.

This is Nihal Jham. Sir, my first question was on Wovens. In the last call, you had mentioned that...

Sir, sorry to interrupt you. Can I request you to speak a little louder, please.

Okay. Is it audible now?

Yes.

Sir, I was asking that in the last call you had mentioned that specifically because of higher share of leisure, there was a lower demand. I just want to check that if that the trend you continue seeing in the domestic business or that.

See, the formals per se are selling less, obviously. It is the Denims, it is the mix and it is the casual even in the Wovens which is where the demand is. So as you see both in export as well as domestic market, the Wovens have -- they have recovered, but they have recovered at a lesser pace as compared to Denims. However, in quarter 3, we expect Wovens to pick up momentum and reach a much higher level of sales, which could be 75% to 80% as compared to 60%, which it is today in August.

Sure, sir. Sir, the second question was on the export side. First, just wanted to understand that the revival in demand is [ seen in ] both across the 2 major geographies of U.S. as well as for us or right now...

It is on both. We are seeing sales across Europe, and the customers have come back from both U.S. as well as Europe, all retailers as well as brands from both the continents.

Sure. Is there a possibility, sir, that this could initially be a demand or -- sorry, inventory filling and possibility of demand flattening out? Or you see that this is actually regular demand which has come back...

So we are seeing with the -- some of our key customers have reported increase in consumer sales over last few months. So it has -- for example, one of the large customer reported that they are back to 80% of pre-COVID levels from 60% 2 months back. So it shows that there is an increased momentum towards consumption. Also, based on the inquiries and based on indications of what they would like to buy in the coming few months, we believe that this is sustainable and the -- that we should be able to increase our capacity utilization going forward.

That's helpful. Just 1 more question from my side. As we've been hearing some of the other textile companies also mentioned, there is an increase in inquires, specifically on the garmenting side where [indiscernible]. Specifically in our case, are we seeing any traction or there has at least been an increase in inquiries on the garment side, you could just highlight...

Yes. So I think it is across the board, whether it is -- whatever fabrics, we also sell, they all are eventually converted into garments by us or by some of our customers. So indirectly, entire fabric supply from our side gets converted into garments. And to answer your questions in short, yes, there is a pickup of demand in both garments as well as fabric for us.

Sure. Sir, specifically, I meant rather than a verticalization, is it that overall for the country as a whole, there is an increase in inquiries or, say, business shifting away from China, specifically in garments?

Ashish, would you like to take that question?

Yes, sir. So most of these big customers are relooking at their entire supply chain footprint. And as a country risk mitigation strategy, they are definitely looking at India as one of the destinations. However, what happens is that like at this point of time, these customers our planning for the fall '21 assortment. So definitely, there is a flow of inquiries, but this will result, I think, in real business in the fourth quarter of this financial year.

Next question is from Nishit Rathi from Chanakya Capital Wealth Creations.

Jayesh bhai, I just wanted to understand what kind of cost measures have we taken? And does that mean that will it reduce our capacity also to some extent? Or there's nothing -- no effect of that sorts?

No. So we have not looked at -- we have temporarily looked at reorganizing some production facilities so that capacity utilization is optimum wherever we are operating, and that has resulted into temporary reduction in fixed cost as well as in the capacity. However, as we discussed earlier, as we move forward and go towards higher utilization, the fixed cost will get -- some of the fixed costs that we have kind of currently not incurring will increase. There are structural changes that we've done into the way we are doing business, the way automation is being implemented across the board. That permanent structural advantage will stay with us without losing the capacities of various products.

Okay. And so the related question to that is the structural reduction in costs that we are talking about 15% to 20%, just 2 parts to that. One, if you could just share some sense, one, you said is automation. But where -- which are the line items where we see the impact of that? And second is now to reach -- see, by Q3 FY '20, we were run rating at INR 200 crores of EBITDA in fabrics. So now to get to that number, what utilization can we just get the -- the cost will be a lot lower?

At -- almost at 80% level, we should reach there.

80%, 85%, so which means that by Q3, you're already 80% in Denim, and you believe that in fabrics, also, you might get to that level. So is it possible to assume that Q3, Q4, you will be almost close to your pre-COVID kind of level...

I would like to refrain from giving forecast in a very uncertain time. So -- but we are aiming towards 2 things. On a month-on-month basis, increasing the utilization on one side; and secondly, of course, retaining the cost advantages. So -- but they are -- currently, the times are uncertain. There are other challenges of even if there is a demand, you don't want to expose yourself to open credits, and there are other challenges that we want to -- are there. So even if there is an opportunity to sell, we may want to constrain it by the risk of account receivable or cash flow. So these are various considerations. So I would not be able to, in a very abnormal situation, give a forecast. But as we have given that we are hoping to grow top line by -- or reach those levels of 75% and 80%. One thing you should note that Denim in quarter 3 is generally much lower because it's a season change. And as a result, we may be lower than 80% in quarter 3 whilst our volumes in Wovens may rise to much higher levels.

That's a very fair point, Jayesh bhai. Jayesh bhai, but this would mean that since we would be not reaching capacity, there will be very little CapEx that we'll do this year and next year, right? Is that...

Very, very -- I think that will be very negligible CapEx. We have incurred CapEx of about INR 20 crores in quarter 1, which was still over of committed expenses which we paid out in quarter 1. There is hardly any CapEx during the financial year going forward. There is some CapEx which we want to do in our Advanced Materials Division. But all in all, not more than INR 50 crores during the year. I don't think there will be any very significant CapEx even in the coming year because I think we have enough capacity, and our approach and our thing is to try and reach full utilization, keeping cost at lower levels. And if required, resort to outsourcing rather than manufacturing in-house.

That is great to hear. So which means you're saying that we are -- the first priority is to get to a full capacity utilization. And even after that, resort to outsourcing rather than to do it yourself, right? Which you mean that this year...

Yes. Earlier question of Prerna regarding the unorganized sector, I should have mentioned this that one of the opportunities that we see is that right now -- and we believe it is for medium term. There are a lot of opportunities to outsource intermediate products rather than doing it ourselves, and that saves us on CapEx as well as on working capital.

And Jayesh bhai, just 1 last question. Just -- if you could just give us some kind of guiding principle, how should we think about the next year? What is the best way to think about it? Keeping everything in mind, the uncertainty that you raised today versus -- because you are the best person who's seeing things on the ground. So on one side, you're seeing the supply chain conversations happening. On the other side, there is very little bit has been ordered but...

We believe that we should be reaching almost between 90% and 100% of capacities in the next financial year from where we are today and -- subject to currency and cotton, which we will not be able to predict. Subject to those 2 parameters, we should be able to slightly improve margins compared to FY '20 levels because we would have saved on fixed cost and also the currency anyway is unlikely to appreciate significantly, so it will be better than FY '20 any case. So we believe that margin should be better. And we should be aiming to reach almost between 90% and 100% next year.

And which will mean that you will be back on your debt reduction targets that you had set for yourself?

We are -- as we have spoken earlier that this year, by end of September, we should be back to March levels. And in Q3, the debt should come down, which means that even this year, subject to uncertainties, we should be able to reduce our debt by a couple of hundred crores.

Next question is from Prerna Jhunjhunwala from B&K Securities.

Sir, just wanted to understand this cost reduction method that -- measures that you spoke about earlier in this call. Will it result in a sustainable improvement in margins by around 100 to 200 bps at least? Because our cost structures have got leaner. I mean our cost structure -- because everyone was at 0 sales and every possible cost has been reduced now, so can we assume that we are at the best cost structure possible ever today?

So the costs that you are seeing in quarter 1, reported costs are misleading because every month the costs have been very different. So it will be -- for example, if you look at April, we reduced costs very sharply. However, government has mandated that the full wages should be paid. And as a result, the costs are higher than what we had originally anticipated. May cost came down very, very sharply. So mid-June -- but from June, the cost started going up because whatever planned complete shutdown were there as you start incurring and getting more and more people to work, the costs went up. So it will be wrong to see June -- April, May, June cost make an estimate for the future. However, where we are today from, say, in financial year '20, if I took take the average what my fixed cost base, it was about 1,400 -- between INR 1,400 crores and INR 1,500 crores. From there, we believe that we should be able to reduce our cost structurally by 15% in the coming financial year.

Okay. So FY '21 will be largely 51 -- 15% lower and if...

Again, I'm saying that FY '20 every -- '21 is and every month is a different month.

No, '22, sorry. My bad.

Yes.

Okay. Okay. And just wanted to understand, sir, depreciation. Your depreciation of Q-on-Q base -- it's a bookkeeping question only, on a Q-on-Q basis is lower. Any change in policy or something?

No, there is no change in the policy whatsoever. It's just that the period, some assets may just go off but otherwise, there is no change in the policy.

Okay. Okay. And sir, your tax structure for the -- tax rate for the year would be around?

So this year, it will be practically very small tax on the PBT because the PBT itself will be very small. But having said that, otherwise, we are on a full tax. So whatever PBT you come up with we should take off 35%.

35%. And when shall we go to the new tax regime -- newer tax regime?

I think 2 more years.

Ladies and gentlemen, that was the last question for today. I will now hand the conference over to Mr. Samir Agrawal for closing comments.

Yes. Thank you, everyone, for joining us today. We will meet again in one quarter. Thank you. Have a good evening.

Thank you, everyone. Bye-bye.

Bye-bye.

Thank you very much. On behalf of Arvind Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.