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 of quarter 2 financial year 2020/'21 Arvind Limited. [Operator Instructions] I now hand the conference over to Mr. Samir Agrawal. Thank you, and over to you, sir.

Yes. Thank you. Very good afternoon to all of you, and thank you for joining this Q2 earnings call for FY '21 for Arvind Limited. Joining me today is Mr. Jayesh Shah, our Group CFO and Executive Director. Talking about this quarter, overall, the momentum continued along the theme of the volume recovery, which we had indicated in our last quarterly call with all of you couple of months back. So if I have to just summarize the key themes, there are 3 themes which I'd like to highlight before I dive into specific numbers. First is, clearly, the sequential volume growth, so the momentum which we saw in the end of Q1 has continued through Q2. And this growth, obviously is led by Export segment, again something which we had indicated earlier. Secondly, the domestic markets recovery also is there. It's slower but definitely it's on. And thirdly, the return to the near usual EBITDA margin levels. So the results which we have shared with you, and we will talk about in a minute, will kind of underpin and highlight these 3 themes. In terms of specific second quarter results, the overall revenues stood at INR 1,305 crores, which was in terms of comparison to the last year's run rate, it was 62 -- 67%, I'm sorry, 67% of the Q2 of last year, which was at INR 1,932 crores. If you compare this with the first quarter, we had done about 32% of the previous year. So we had done INR 599 crores which was 32% of what we had done in the Q1 of last year. EBITDA for the Q2 stood at INR 122 crores. So we turned positive on that parameter this quarter compared to the last quarter. And this was -- in terms of margin, it translated to 9.3% of revenues. And as a comparison, we were at 10% in the Q2 last year. So we are pretty close to how we were doing last year in the Q2 on margins. In the Textile segment, the total monthly volume for July have recovered to 80% of previous year in case of Denim and 59% in case of Wovens. Especially, the export volumes of Denim have bounced back to pre-COVID levels since June. And for the quarter, they have exceeded the FY '20 levels. Domestic market has recovered to 54% for Denim and 60% for Woven in terms of fabric volumes. We are seeing a strong demand in the value segment, which is reflected in the price realization also in the Woven segment in the data we have shared with you. Garmenting volumes in Q2 have recovered to 66% of the previous year Q2 and will likely inch back slowly over next few months towards the full capacity. Textile margins in Q2 were a healthy 11.6% as compared to 10.8% in the Q2 of FY '20. Talking about our Advanced Materials business, this continues to be robust, and it delivered Q2 revenues of INR 186 crores, which was marginally higher than the revenue of INR 183 crores in Q2 of FY '20. In this business, the EBITDA margins expanded by about 100 basis points and are nearly at 15% for this quarter. We continue to see smart -- strong market demand and solid order book position for our AMD products. We have shared about our cost rationalization measures. As a recap, these have already yielded about 15% to 20% of structural cost savings which have contributed to this healthy EBITDA margin which we have shared, and we expect this to sustain over time. Working capital discipline continues to remain strong. Our net borrowings, which stood at INR 2,371 crores as of March 31, 2020, at the end of last financial year. If you remember, these had increased to about INR 2,700 crores in end of June, and these have come down to below March level. So these are at INR 2,291 crores. So once again, to recap the numbers, this borrowing used to be INR 2,371 crores in March 31st and has come down to INR 2,291 crores as of September 30, 2020. We expect to further reduce this borrowing over the next 2 quarters. In terms of the Q3, we expect a sequential growth of around 10% in terms of the revenues over Q2 as the volumes continue to recover, especially in the Woven segment. We expect the EBITDA margin in Textiles to be around 12.5% and in AMD to be about 14%. So that concludes my opening remarks, and I invite you to ask questions that you may have, which we'll answer. Thank you.

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

Congratulations on the good performance to the management. So 2 questions from my side. First, on garmenting. If I were to check garment performance in terms of recovery, which you say is around 66%, it's just a tad lower if I compare to some of the peers. So I just wanted your comments on that. And second and more importantly, there has been a lot of talk and discussion and I think even in our last call, we mentioned about potentially a lot of orders from China, we are having discussions with clients. So I just wanted an update on that about how the industry scenario is going ahead. I'll ask my other questions after this.

So your first question was regarding the garment. So garment activity, as you saw has been picking up. There are -- within the Garment, we have various product groups. So when we look at the mix of product group, it is 100% utilized. In fact, we are converting some of these Woven products also within the -- to knit products. As far as Denim is concerned, it is again very going close to the 100%, but the Woven fabric, which is shirting fabric, it is still at a much lower level. So that is the reason why we see overall percentage may be lower. However, some of the segments are reporting very close to 100% utilization. Quarter 3, you will see a further significant boost to the garment capacity utilization, and we are hoping that if things don't deteriorate from where we are today, we should be going back to normal levels of garment capacity utilization in the coming 2 quarters. So that's about -- the second is that our -- as you saw, our exports are rising pretty fast. And we are not only looking at existing customers who have been placing orders with us now to the extent of what they used to place or even sometimes more. But also, we are also getting customers who are new and we are also enrolling them and we work for redoing new product development and for them and pricing and everything is happening. So to answer your question in short, yes, the demand for our products in export market is fairly robust as of today.

And just pointedly, have we seen any customer or new customer who has shifted, say, some of the business where you're sourcing from China to us or it's still in discussion?

So we have got inquiries from several of the customers who are new for us and we have got orders from a few.

That's helpful. Sir, the second question on this was that, I think, we've taken a INR 19 crore exceptional item related to the diminution...

Yes. So we had -- it is not -- it is just a provision required by the Audit Committee and auditors, so diminution in value of one of our associate companies. We have a joint venture with one of the big customers in Ethiopia for manufacturing products for that customer. We have invested some capital in it. That -- due to pandemic, that plant is shut for some time, and that required us to kind of make a provision. It's not a loss that we have reported, but we have made a provision in the diminution in the value in that event.

Okay. That's helpful. Sir, just last question on the net debt side, as we see, I think we are running ahead of what we were looking at, at the start of the year in terms of paying down INR 400 crores. I just want to do a check again that is our target for pay down on a Y-o-Y basis still the same or you're expecting more considering how this is going to...

So we have -- we are -- as we have made -- earlier made remarks and spoken about our overall guidance to pay down debt over a period of time and that got a little bit halted in quarter 1, but we are on a back to normal CapEx -- I mean, debt reduction program with the no capital expenditure that we see of any significant number between this year and the next year because we have invested in the earlier 2 years. We are seeing a quarter-on-quarter reduction in debt. As we have stated in our note, which we have circulated, that we see at least a INR 100 crore reduction in quarter 3 as well. And we are not commenting on quarter 4 because, as you know, the world is not the same and there has been increased level of cases in Europe and U.S. and all. So difficult to talk about quarter 4. But directionally, the answer is that every quarter, you will see debt reduction happening.

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

A few questions. One, what kind of a recovery you expect in the domestic market? I understand that last 2 quarters were relatively better for the export. And you also mentioned in the earlier comments that the cases are going up in Europe. So the recovery might -- may not be as good as one probably could have seen in 1 month back trend. But how is the things panning out in domestic market?

I think domestic, we are seeing the brands placing orders now for spring-summer '21, which it was a complete halt from various large brand houses. But there has been -- as you would have noticed, all the customers of ours are -- as they are reporting their numbers and as you see from the commentary that they are making, that they are -- every month, they are also growing by 8% to 10% compared to the previous month. And since they have not bought for 1 season full, which is autumn-winter season, our understanding is that the inventory levels are coming down and they will be starting to buy, and they have started taking small orders already. So you will see a reasonably high level of recovery in sales or rather, I would say, large part of sales recovery that you will see in Q3 will be on account of domestic sales.

Okay. Okay. I got it. And what has been the more profitable for you? I think export has always been the more profitable business for us?

No. So like it is a product-specific profitability. So some of the -- like some of our sales that we do to the branded apparel -- premium branded apparel companies in India is very profitable because the kind of service and differentiation we provide to them. That is missing as of today, as you know, because they are not buying. Similarly, the retail that we do in India, which is through our own stores as well as through other stores is also very profitable in high price differentiated products. Exports has, it's a mix. Some of the customers who buy very differentiated are profitable, but we also supply to many retail chains, which is a large volumes but at a reasonable price. So it's not that export is more profitable.

Okay. Okay. I got it. And the cost initiatives, I think I asked this question the last time also. We have almost around 20% drop in our employee cost this quarter -- so 30% drop in the employee cost and still 35% drop in expenditure. If you look at for the first half, almost 35% drop in employee cost and close to 40%, 45% drop in other OpEx. So what part is sustainable now? I mean compared to what you have seen in the previous quarter and with...

So my colleague made a statement in the opening remarks that he made is that some of this, which is, we believe that, about 15% of the FY '20 cost, if you look at the fixed cost of FY '20 and compare with this, 15% of that cost we believe, is structural changes and that should stay with us as we go to the next year.

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

Am I audible now?

Yes. Now you're audible.

Congratulations, sir, for the debt reduction that you've done this quarter. Just wanted to understand on this debt reduction only that since we have been focusing a lot on debt over the last 1 year, what is your target to achieve in terms of either debt to equity, debt-to-EBITDA or net debt position, where you will be comfortable and then you will look at a growth path or keeping up further balance between expansion and maintaining the debt level?

I think we would want to look at, at least INR 1,000 crore reduction from where we are now over next 18 to 24 months. And we have an internal plan to work on it. Timing of 18 can become 24 or 24 may become 30 based on how pandemic plays out. But we are very clear that we want to go reduce debt by another at least INR 1,000 crores over the next -- some period of time.

So that is net debt or gross debt that you're targeting at?

It is not very different because we have only INR 50 crore difference gross and net. It's not very different. Yes.

Okay. So sir, and my second question is, as you mentioned in the previous comments that you're looking at garment's capacity coming in -- getting into full utilization very soon due to increased traction visible from the China shift to India or increased inquiries. Are you looking forward to some CapEx in any of the segments where we, as a company we had many...

As of now, Prerna, we have enough headway in terms of available capacity in-house and outsourced. For us to continue to grow beyond, if I were to say, do we have headroom to grow by, say, 10% over '19-'20 sales? The answer is yes. And we should aim to reach there before we do any significant CapEx. So for the financial year December next year, we are not proposing any significant CapEx.

Okay. And my last question will be on profitability. Sir, we have seen improvement in EBITDA margins in this quarter as well. When do you think -- what factors could lead us to reach our previous levels of 15%, 16% EBITDA margin? And is there any game plan on drawing board on -- for achieving that? Because you achieved a good improvement in EBITDA margin, but that's not percolating down to the PAT level?

So -- since we were on a CapEx cycle and we were on a -- as a result, the both interest was high and the depreciation rate or depreciation amount is higher, we, for a few years, keep the PBT level at a depressed level compared to what the improvements you see in EBITDA. However, as I said, we are looking at cutting the debt down over next few years. That will help us to reduce interest cost. As far as EBITDA margins are concerned, they are the -- one of the components of EBITDA margin for us is the new initiatives that we took in Garments, which has not still given us the -- any kind of profits because we started them in last year and then we got derailed and the entire efficiency cost that we wanted to ride has gotten a little bit of -- taken a backseat. However, as we begin again ramping it up, we believe that EBITDA margin should keep improving over next few quarters. It is also a function of cotton, it is also a function of currency and all. So I would not want to put a number to EBITDA margin. But 2, factors: A, optimum utilization of capacities; and B, our structural changes in fixed cost should help us to improve our margin.

Okay. Sir, last one question on the demand scenario. So we've seen Denim being under oversupply situation over the last few years. Could you give some idea on what kind of -- are there any unorganized players coming out of -- going out of business? Is there equilibrium coming in, in this space? And do we see domestic Denim market improving on -- and on which front?

So Denim, there are -- there has always been a situation where many of the capacities which were there were underutilized for a long period of time. And that situation, as of today, what has happened in some of the plants have shut. And as a result, the capacities have remained or actual output has remained lower, at the same levels as they were earlier. But to say that there has been a change in -- structural change in demand supply in India, it is too premature to say. As you see today, the -- one of the challenges in India for many of the players has been on the credits in the market, and that situation has not undergone a change. So there are players who may want to -- or maybe selling, but the working capital cycles are looking very bad for some of the players. Market conditions have not improved to that extent for us to feel comfortable. So our emphasis and focus has been to do more exports. And I think you will see on an increased proportion going towards export in coming period from our side.

The next question is from the line of Resham Jain from DSP Mutual Fund.

Good to see healthy recovery. Sir, I have a few questions. So first is, we have seen a very good improvement in margins despite a very low utilization. So just wanted to understand, is it that Denim has seen a significant recovery? And as of March, our cotton inventory, we were a little light and also rupee depreciated post that. So is Denim one of the key reasons why the margins are slightly on a better side?

Okay. So to answer your question in a few parts. One is that, yes, the cotton for H1 has been soft, as you know, and currency has had a positive impact on the margin. However, all the segments that we are in fabrics, not only Denim, have reported decent margins across the board. And one of the reasons, of course, is the input cost, but the other reason is also fixed cost because we are also operating at a much lower fixed cost in comparison to what we were doing last year. So it's a combination of input factors as well as the cost, which is the fixed cost, which is helping us to improve margin. The other factor is that last year -- at least till last year, if not the earlier year, we were incurring a lot of pre-operative cost on our plants. Some of the new -- which is now we are no longer in that negative zone in any of our big businesses that we are in. So that is also helping to improve the average return on sales.

Understood. Understood. Sir, another just long-term history, when we look at the textile margins, like a few years back, we used to do like 14%, 15% margin consistently. And over the last 3, 4 years, we have furthered our integration in terms of our garmenting business. So if you can just help us understand what might have led to this margin coming down to this extent? And also, do you think that a lot of these changes which you have done, we can go back to that 13%, 14% margin anytime soon?

We would want to go to that margin as soon as we can. Let me explain to you that on fabrics, the margins are not lower -- not so significantly lower from, say, 15% to 10%, nothing of that sort. It is that the Garment business that we are doing, that is definitely at a lower margin fabric because it's a more operating cost business, and we are not -- in the last few years, we have been on expansion mode. So we have always had businesses which were giving us less return than what other mature business are giving. And that's a process that is going on now with the [ Garments ]. But other than that, there is no reason -- I mean there is nothing like that our margins have collapsed. And with the cost savings that we have done and the -- as I said, pre-operative has not been there anymore, we believe that we should be looking at healthy margins and profit.

So basically because of garmenting business, it's optically looking lower?

That is correct.

Okay. Okay. And sir, my last question is, again, if I look at the long-term history of the stand-alone business, and you have actually a lot of subsidiaries also within textile. But the working capital, as you have rightly highlighted, it's been quite sticky with domestic market. So you feel that within the existing working capital itself, currently, the overall turnover is lower but as and when you will reach a slightly higher turnover, you can still reduce your overall receivables plus inventories from the current level?

Yes. We are working towards internal plan, and we have spoken about that in the past also. In fact, if you look at the last financial year, we improved our working capital turns, though the turnover was at a higher level, we ended up with more than 5 working capital turns from historical 3.5 or something. And that happened because of the improvements that we brought about in every part of our working capital cycle. And even current focus is that we are bringing down working capital as we speak. In fact, if you look at H1, also the working capital turn is better than what we have seen in the past. So when we grow to the pre-COVID levels, we believe that a very small incremental working capital will be required and not proportionately large working capital will be required for us to grow back to the normal levels.

Understood, sir. And sir, my last question is on the CapEx and the related debt and cash flow. So as you mentioned, the CapEx, at least for this year, we have just INR 40 crores in the first half. And over the next 18 months also, it should not be material. Is that understanding right?

That is correct.

Okay. And when you look at the normalized cash flows, actually, your cash flows for the year should be like closer to INR 600 crores, INR 700 crores in a normal situation. And with the minimal CapEx over the 18, 24 months, this INR 1,000 crore debt reduction plan looks quite -- should be sooner than later once market recovers. Is that again a right understanding?

I sincerely wish and hope that you are right. [Foreign Language]

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

Sir, I had a couple of questions on the Advanced Materials business, if you can help us understand better. Sir, the first thing is on the -- can you give us some color on the order book, what you were talking about in the opening remarks on the Advanced Material business? Like is there some size if you can give out? Or what are the type of customers?

Sure. You have any more questions on AMD?

Yes. The second one, I had one more, which is about the filtration and the composite business of AMT -- AMD, right? So how do you see that scaling up? Because -- like what is the competitive scenario in India for those businesses? And -- because fire protection, I still understand, but the other 2 parts of the business. So how do you see that pacing up going forward in the next 3 to 5 years?

Sure. Samir, you want to take these 2 questions?

Yes, Jayesh bhai. So the question is around the market unfolding for next 3, 4 years on composites and industrial filtration, right?

Right. Right.

Yes. So you see, I think currently, at least a part of the market we play in both these segments, we are largely export focused because the products which we are offering are significantly higher quality and also much better engineered. Now not to say that there is not a large enough domestic market, but most of that is commoditized. So as we kind of see in next 3, 4 years, our feeling is that the local -- so 2 things will happen. One is that the local consumption for some of these materials will become larger and larger. So if you know, today, across the gamut of construction and structural applications, metal is still a preferred material of construction. But that's changing very slowly. And as your airports and train stations and industrial structures and warehouses start to absorb more composite, there'll be demand for that Tier 1 engineered kind of composite to become more and more. So there is going to be a demand creation over next 3 to 5 years. But as of now, we are largely export focused for that reason.

Okay. Fair enough. And so -- and on the order book of the whole division, if you can give any color?

The order book is pretty robust and healthy. We maintain a good 2 to 3 months at the very least, and we continue doing that.

And is it fair to assume that large part of this 2 to 3 months would be for the human protection, the fire protection part? Or is it for like equal for each part of the business?

No, no. See, across the board, Advanced Material businesses are largely B2B businesses. A lot of what we do is serving customers and accounts which are long-standing multiyear accounts on whom we have a fairly good continuing visibility. So across the board, I would say, what I said applies to the entire portfolio.

Due to time constraints, I now hand the conference over to Mr. Samir Agrawal for closing comments.

All right. Thank you, everybody. Appreciate you all taking the time and engaging us on this Q2 results. We look forward to meeting you once again in 1 quarter. Thank you.

Thank you, everyone.

Thank you. On behalf of Arvind Limited, this concludes this conference. Thank you for joining us, and you may now disconnect your line.