Arvind Limited (500101) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and a very warm welcome for the analyst and investors for post results discussion for quarter 1 financial year 2021, '22 of Arvind Limited. [Operator Instructions] 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 thanks for participating in this call to discuss our results of Arvind Limited for the first quarter of FY '22. Joining me today is Mr. Jayesh Shah, our Executive Director on the Board and Group CFO. This quarter was marked by a strong sort of headwind, which our businesses had to weather. And I'm very happy to say that we delivered a relatively strong performance in that backdrop. So there are 4 sets of challenges, which were kind of faced at our businesses. First is related to the lockdowns. So the garment factories, especially in the Southern India, including our own factory were closed down for a large part of this quarter, which led to the loss of business volume as well as pile up of textile and garment inventories. Factories, which were open, including those in Ahmedabad area for us faced significant absenteeism as wave 2 impacted our employees and their families. Overall sentiments remain subdued in April and May in terms of domestic market, which led to the betterment of buying by domestic buyers, both at the retail level as well as the wholesale level. So the closure and reduced offtake in the domestic business drove higher inventory levels, which reflects in our working capital as well. The exports business did well, but they faced continued challenges around logistics, availability and high freight costs. Overall, all input costs, including fuel, packaging and freight charges, of course, including cotton and yarn as well, continued to put a lot of pressure on our bottom line. On the other side, in terms of positives, what we see is that the bounce back in June has been quite assuring and July continued the positive sentiment at the retail level. We have also started seeing initial traction on the revival of wholesale buying from our large domestic customers. Export demand remained strong throughout the quarter. All our U.S. customers reported strong growth in quarters ending May or June and have upped their guidance for the rest of the year. So if you see their commentaries, they are quite positive as well. European brands and retailers have also started coming out with positive commentaries around the outlook. So our export businesses continue to remain strong, and that's a really positive driver for us. Further, our businesses have made strong progress on efficiency gains and cost management, which has helped blunt some of the impact of the input cost increases. In order to offset the impact, we also have secured price increases in most segments we operate in. Finally, as a result of debt reduction, which we have achieved during the last year, the interest outgo has been lower for us. So as a result of all these factors, which I just described, we delivered a relatively strong performance in the Q1 of this quarter compared to the Q1 of last year, which, of course, is a very impacted quarter. So in some sense, it's not a usual comparison. But just to share the numbers, the overall revenue stood at INR 1,439 crores, which was 140% higher than INR 599 crores in June of last year. Overall EBITDA margin stood at 7.2% positive as against negative 4.8% last year in this quarter. As with the lower borrowing costs, we achieved breakeven at the PBT level this quarter. During the quarter, the company has booked RoSCTL income of INR 13 crores of Q4 -- from the -- INR 13 crores from the Q4 of the previous year. And similarly, we've paid about INR 14 crores as a onetime reward for the employees who had been with us and there were a lot of impact and hardships. The RoDTEP rates for fabrics have not been announced. And hence, we did not book any income on this account. Textile revenue stood at INR 1,176 crores for the quarter, which was 170% higher than last year. Fabric monthly volumes reflect the bounce back which we are seeing, especially in June. So just to give you some numbers, Denim dispatched 6 million meters each in April and May and 8 million meters in June. And this -- compared to last year of Q4, if you see, we did about 6.7 million meters per month in each of the month of Q4 on an average, right? So compared to that, we did 6, 6 and 8. On the Woven side, the monthly dispatches stood at 8.3 million, 5.4 million and 9.3 million meters. Again, our average last year in the Q4 was 9.3 million meters. So what we're saying is we are seeing a reversal of volumes, which we saw earlier by June. Export demand stayed robust throughout the quarter, specifically for Denim which exported almost 15 million meters during the quarter after a gap of 3 years. So this was a very good performance on Denim exports side, especially. Garment volumes stood at 6.8 million pieces for the quarter, which was 83% higher than the last year's Q1 number of 3.7 million pieces. Apart from the volume recovery, the price elevations remained quite healthy at INR 202 per meter for Denim and INR 159 per meter for Woven, respectively. Input cost pressures continued as cotton prices continued to go sky-high. I mean just as a reference, Shankar-6 is almost trading at INR 56,000 per candy upwards on ex-gin level. As mentioned, other input costs like dyes, chemicals, packing materials and all also remained quite high. What helped us is a fairly tight operating discipline, which gave us an EBITDA margin of 8.9% for textiles as compared to 7.9% in the last year of Q1. Our Advanced Materials business continues to robust. It delivered top line of INR 193 crores, which was higher by 81% over -- of INR 106 crores last year. And the EBITDA margin in this business was INR 13 crores. So this business continues to do very well for us. It has not been impacted by any of the consumer market challenges, which we have seen in the other businesses. During this quarter, our net borrowings increased from INR 1,950 crores at the end of March to INR 2,141 crores, which was in line with our guidance. We believe it's a temporary increase caused by higher levels of f gross working capital, and this was caused, like I explained earlier, because of the slowdown in April and May. That has resulted in higher inventories as explained earlier. Looking ahead in Q2, we expect domestic demand to pick up as markets reopen and apparel brands, the domestic brands, resume ordering. Export demand should continue to be strong across most markets. In fact, Europe, which was a slightly more guarded, is trying to kind of up the buying. On the supply side, reopening of garmenting factory should help us increase the volumes. If normalcy returns and continues, we expect Denim and Woven volumes to reach 24 million meters and 30 million meters and garment volumes to reach 9 million pieces. On the policy front, RoSCTL for garments has been announced but for fabrics, it is still awaited. Due to continued increase in input costs, the margins will be impacted in percentage terms as well in short term, in rupee terms, due to lag effects in passing on the cost push. As we had mentioned during our earlier meeting, directionally, we will continue to focus on deleveraging. Our debt levels which went up in Q1 will start showing a downward trend and we expect that we will come to near March FY '21 level of INR 1,950 crores by end of quarter 2. Just -- there was a typo in the review note. So it was written as March '20, it's March '21. So now I invite you to ask any questions that you may have.

[Operator Instructions] The first question is from the line of Sudhir Bheda from Right Time Consultancy Services.

Good to see that your volume is recovering from the month of June. Sir, my question is I've just analyzed your 2, 3 quarters. And it is seen that your gross margin is around 51% kind of thing, 50%, 51%. So is it fair to say that your breakeven level of sales is around INR 1,300 crore, INR 1,400 crore? And anything above that would go into -- 50% would go into the gross margin for us. Is it the right understanding, sir?

No. I think our contribution level is not -- I think one should look at not the gross margin, but the contribution level. And the contribution levels are in the range of about 29% as a company. So any incremental sales beyond the breakeven sales would contribute 28% to 29% towards the profit.

So what would be our breakeven sales? Is it around INR 1,300 crore, INR 1,500 crore, INR 1,400 crore kind of sales?

At what level are you looking at breakeven? EBITDA level?

Yes. PBT level.

So PBT level, as you saw this quarter, it was INR 1,400 crores, and we almost broke even. So that would be the level.

So that would be level. And how do you see that as an industry as a whole, there is a lot of buzz around the textiles? So how do you see that particularly in the export market? How do you see that sector performing, particularly Garments and Woven in the international market in view of China factor and also opening of the economy over there.?

Yes. So as you rightly said, there are 2 reasons. One is that, of course, globally because most of the brands and retailers did not have much inventory, so when the markets opened up, the demand for product suddenly shot up and that resulted into kind of, in fact, shortage of products within the textile industry. That has led to a sharp increase in demand across the board. Of course, second is the China factor, as you said, as there are certain customers who are opting to rebalance their portfolio of purchase and that is helping to some extent India as well. So to answer your question, yes, the export markets are looking good. One caution, of course, is that currently, there is high amount of quantitative easing all across. So as and when it tapers off a little bit, we have to see how the markets react, particularly in the U.S. However, the good thing is that Europe is just about to start buying. So that will be a positive factor and would balance out some of the reductions, if at all, there is one in the U.S. market.

And sir, the last question. What is the sales growth you are seeing for the next 3 quarters? We did around INR 5,200 crores...

We are right now in absence of -- because of the uncertainties, we are not giving our yearly guidance. Also, please keep in mind that the sales is going to go up very sharply because of the inflation on prices and the cost. And so that will not be a correct way to look at the performance. I think if you look at the volume growth, which is what we've just -- my colleague spoke about, I think we are looking at a reasonably high volume in Q2 both in Denim and our mainline products, Denim and Woven. And our Advanced Materials division continues to remain strong and continue to grow at 20%, 25%.

The next question is from the line of Nihal Jham from Edelweiss.

Sir, 3 questions from my side. First, on the margins. If I notice, it's not as if that the gross margin has gone down so significantly, but our other expenses are more or less constant from Q4. So is it right, as you said in your opening remarks, that if I bifurcate that the impact of the freight cost and these other components is much higher on the margins versus, say, the cotton price hike? Is that a right reading, first of all?

So 2 things. One is that the fixed cost, the cost, unlike in the earlier period -- right -- this time after having -- we having reduced the fixed cost, we haven't done any cuts in the fixed cost, even though the plants were not operating unlike in the past where we had reduced salaries and all of that. So the fixed costs are at a lower level, but remaining now constant. The Q1 impact is that because when you operate plants in a suboptimal manner, there are a lot of hidden semi-variable costs, which hit you. And that is why it will not give you any kind of a very clear indication of what's happening on the margin front. So I mean, the way we would look at it is at -- on the days when the plants ran full like in the month of June, we were in a reasonably good shape as far as margins are concerned or our EBITDAs are concerned or contributions are concerned. But April and May would give you a very, very awkward all -- because some days, the absenteeism will be 15%. Some parts of machines will not work, some will work and all of that. So however, on margin front going forward, there is -- as I was just mentioning in the earlier question, there is a very sharp cost increase which has happened in the month of April, May and June, and we have 3, 4 months of lag. So we have orders for 3, 4 months at any point in time. So as we keep on taking new orders, we keep on changing price for taking care of the inputs. Since the price rise is very high, the rupee margin as well will also take a few months before it goes back to where it was in Q4. But the percentage margin will continue to remain low, if the prices remain elevated. Because you will see on these volumes, around 7%, 8% increase coming out in the Q2 only on the price front because our prices are going up fairly fast in Q2. So margins are likely to get stabilized in unit terms sometime in September if the cost push doesn't keep going up. And in percentage terms will remain lower because of -- purely because the price increase is not going to give us extra rupee profit.

Understood. Just on the unit terms, but we've managed to keep our contribution per unit constant to factor in for all the inflation that is currently happening?

No. Not in one. It is just at the gross level you are seeing possibly. But I think if we look at the contribution level, we were lower in Q1.

Understood. Sir, moving on to the next part. As I noticed that the Woven segment has seen obviously quite a strong improvement, especially on the export side. whereas garmenting, which naturally has a much higher proportion of exports, maybe was not able to see that improvement?

In Q1? Nihal, in Q1?

Yes, in Q1 only I was saying.

Out of 90 days of Q1, 45 days the factories in Bangalore were shut actually. Yes. So in this time, what happened was that the Karnataka, where most of our garment factories are situated, has allowed most industries to function, but singled out garment industry because it is a very high number of people who work in a small factory are very high. And they didn't want that chance. So they had specifically prohibited garment factories to operate for almost 45 days.

Understood. Sir, last question from my side was that you've given the disclosure, but just to have a better sense in the future that what proportion of our revenues are eligible for RoSCTL and what proportion of the revenues are eligible for RoDTEP?

Proportion, I don't know. Maybe in some time, my colleague will do some number crunching and come back in the next 10, 15 minutes. [ Vinay ], can you please help us with this?

Yes. So, Nihal, we can approximately consider 50%...

No, no, no. [ Vinay ], we have to say how much is exports and of that, how much is garments and how much is RoDTEP.

Yes. Of our total sales, our exports are close to 54%. And it is equally divided between garments and fabrics.

I got that partially. I'll take this offline also.

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

So firstly, did I hear it right? You said 7% to 8% is the price increase in Q2 due to the input price going up. Is that the right way for -- across products?

Yes, it is.

Okay. So that is -- over quarter 1, I mean, over Q1 FY '22, right?

Absolutely, it will not be like on 30th June to 1st July, Sagar. So I'm just giving you an indication, like, for example, we are taking a 4%, 5% increase in certain products starting 15th of August, some price increase has happened. So it is -- I'm saying at the exit, you may see that number. You may not see it on 1st July as a number.

Okay. So this contribution level of overall of about 26.8% for quarter 1, as you said that despite the price increases, the percentage might remain lower. So this would be -- 26%, 27% would be a sustainable number going forward?

Q2 should be, yes, it should be. If the prices remain elevated, but remain steady, this percentage is 4. But if prices -- till the prices keep the -- cost keep rising, we will continue to have that lag effect for a few months.

Correct. But if the prices cool off then? Then this contribution level then keeps going up?

In fact, in percentage terms, when we -- if prices were to come down, our percentage margin should ideally improve because it is -- you are calculating in percentages. So if my cost goes up by INR 10 a unit and if I increase price by INR 10, the percentages will drop.

Yes, yes. Understood. Okay. And secondly, on this Ethiopia, last year, we saw losses continuing in FY '21 also. So in quarter 1, how has Ethiopia been?

Ethiopia has been marginally profitable, though they were also affected, but it has turned profitable since Q -- or H2 of last year.

Correct. So Q1 would be still profitable at EBITDA level or PBT level?

No, it is not at a PBT level, it was profitable at EBITDA level. Some of the profits are also getting booked in our Dubai company because of the way the trading arrangements are. So -- but purely from an MIS perspective, if I were to look at it, Ethiopia operation is profitable.

Okay. So has that also got impacted during the quarter due to some local level lockdowns over there or they are...

Yes, yes. It was across the board. Also, there is a challenge also, Q1 challenges are also in form of availability of containers across. So even in India and in other parts, we were not able to ship goods in time. That was another challenge that we faced. Also, let's say, our Bangladesh border was a big challenge because goods were not moving because of several restrictions. I think all of that has eased out in June and July. So it should be okay now.

How should we look at Ethiopia numbers -- Ethiopia plus Dubai, if I have to take it for FY '22?

You want to look at it? We don't give division or a district-wise number.

No because -- no, the reason why I'm asking is because we -- last 2, 3 years, we have been showing a reasonable amount of losses from that business. So if that turns profitable, that can significantly add to our consolidated EBITDA.

Overall, we are looking at total business and not unit because there are a lot of units within the company which are doing not so well and doing extremely well. So I think one will have to -- even within Denim or in Woven, there are certain products which don't do well, Sagar. So I think the way to look at it will be the whole business and not a particular division or a lineup of products. And overall Garments is shaping up and thanks to RoSCTL. It should continue to do well as we increase our throughput and take it to -- back to the normalcy in terms of capacity utilization.

Okay. Understood. And on this other segment, I understand that it's a very small part of our business, but still it is -- every quarter, it's showing losses.

It is not -- it has businesses, which are all AMC driven businesses. There is a lot of annual maintenance business we do across all of -- most of the businesses which are part of others. And those businesses were the worst in terms of in the COVID period. So we had to kind of have 0 revenue in those businesses with fixed costs remaining high. It has turned and it is not slow in July onwards. So you will not see such challenges July onwards.

So others will become profitable from Q2 onwards at EBIT or EBITDA level?

It will be marginally profitable or marginally loss, but it will not be a size. It is because of the challenge of that service sector that we are in that affects us. Yes.

And any color on -- or any thoughts on this? I mean the real estate monetization that we had embarked upon last year?

So as told in the last conference call that we are likely to realize about INR 150 crores. We have started to get that money. And we are hopeful that at least that amount will come during the year.

Okay. And on deleveraging part, how much should we expect the total deleveraging for the year? And what would be the CapEx number for FY '22?

So CapEx I can tell you because that's in our hands. Deleveraging will depend upon how the market and the COVID uncertainties play out. So directionally, deleveraging will happen. But CapEx number, I can tell you, will not exceed about INR 100 crores during the year.

Okay. So similar to last year's level. So if we do about INR 800 crores, INR 850 crores of operating profit this year, then with the INR 150 crores additional coming in from land sale, then we can safely assume about INR 400 crores to INR 500 crores of deleveraging this year?

Numbers are with you. I wouldn't comment on EBITDA or anything, Sagar, because it is very uncertain. I would love to give a guidance, but there are challenges which are absolutely beyond us for us to be able to give you a number.

The next question is from the line of [ Ketaki Jain ] from Canada Life.

Sir, my question is with regard to the ramp-up. So should we -- given the July has been very favorable, we have highlighted in the presentation. In the Textile division, can we expect the turnover kind of INR 1,500 crores kind of turnover next quarter, sir?

Which division?

Textile division. Can we expect INR 1,500 crores next quarter given the July ramp-up we have shown in the presentation?

Again, I want to highlight one sector. You can expect that kind of a number or even slightly higher turnover, but it is also a very -- some portion -- I wouldn't call it large portion, but some portion is because we have a very high level of price increase, which will affect the overall sales or rather the sales will get inflated to the extent. But in short, answer to your question, yes, it is possible for us to have that kind of turnover in this quarter, if everything remains normal and there is no lockdown.

Sure sir. Sir, then my question is with regard to our subsidiaries. Sir last year, we had shown in the annual report, INR 14 crore loss in the Westech Canada and INR 52 crores kind of loss in the Arvind Smart Textiles. So how do you expect in these subsidiaries' performances?

So we do not look at individual company units as I just mentioned. Overall, the Smart Textile is a company which is running some of its garment plants. And garment plants are one of the worst affected plants in the last year. This year, as we said that it is coming to normalcy, and we are hoping that the business will -- garments per se business will turn profitable.

Sir, any incremental cost reduction initiatives you are trying to improve cost structure, sir?

So it's a continuous exercise, but nothing very drastic or significant as we implemented a very large cost rationalization program last year. So -- but it is always a continuous exercise.

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

I wanted to understand your geographical exposure of sales with respect to U.S., Europe and other countries.

So 46%, Prerna, is India. Within 54%, I would consider almost 2/3 of that would be U.S., and about 20% will be Europe and balance will be rest of the world.

Okay. And sir, given there is no lockdown, what kind of garment volumes now we can see for the entire year [indiscernible] commentary if you have given it earlier?

So if I were to say there is no lockdown, then of course, Q2 will be a little slower to start because the ramp-up is happening in July, but August-September should get to normalcy. So with that, we are expecting to reach a run rate 12 million odd so per quarter in H2.

12 million per quarter. Okay. So sir, also wanted to understand from China plus 1 perspective on this garmenting thing. How is the demand per se from...

So after all, obviously, we have a very limited capacity. And for us to fill that capacity is not at all difficult because we are -- garment for us is an extra added layer over our main business, which is fabric business. And so if we are selling, say, 10 million meters of Denim to one customer, we do 1 million of that customer in garment form and 9 million we give them in fabric form. So for us filling orders for garment is not always -- it is always possible. So we will not be the right company to understand the garment scenario in the country, honestly, because for us, it's a vertical integration and if we are selling lot of fabrics to a company and we take some orders when they want us to do some orders in garment form, we do it. We don't chase them for garment orders, we chase them for fabric because that's our main business. So we are not the right company to look at what happens to garment in the industry in the country. But we believe that with the China factor, India is getting a lot of orders. I think India, across the board is filled with the orders for garments, which we see in our orders that we get for fabrics from various garment factories. I think India is constrained by the capacity and the efficiencies that we have. Now that RoSCTL has also been brought back, I think it's a great opportunity for Indian companies to grow garments.

Okay. Sir, my last question is, how to look at this company from a 3- to 5-year perspective if garment is not the way going forward and you were not looking at major investments in fabric as well?

So I think -- what we are looking at is the -- how -- I mean, if you look at -- we have been -- we invested heavily in FY '20 and also in '19. And then as we were ramping up, we could not -- the COVID hit us and then 18 months have not been -- we've not been operating at full utilization. So I think we have good, I would say, legroom for us to grow by 8% to 10% for next 12, 18 months without any CapEx. Beyond that, we are selectively investing. We are not doing large CapEx, but we are doing selective investments. We are in product categories where we believe there is going to be -- we'll be able to maintain, lead and maintain differentiation and pricing power. So we are investing in athleisure fabrics. We are investing in Indigo Knits. We have gone into knitted fabrics for Indigo. That's a business where we are mostly 100% realization in Q4. We are investing in polyester-based fabrics again, man-made fiber fabrics. And a very large focus is also on Advanced Materials. So we would at appropriate time talk about what is our next 3 years' plan in that. In next 3, 4 months, we'll possibly talk to all of you. But we have an ambitious plan for Advanced Materials business. We would -- I mean, after maybe a loss of 1 year or 1.5 years, we will reach hopefully INR 1,000 crore mark this year. And we want to rapidly grow at a much faster pace than what we have done in the past in this business. So we have good engines for growth without -- but we want to maintain that discipline of a much higher -- at that turnover ratio than typical textile business.

Okay. I'm so sorry, I was saying this is my last question, but athleisure fabrics, polyester-based fabrics, do you think they are -- what kind of asset turnover these fabrics can give you as compared to normal woven fabrics?

So again, we are not investing in the entire value chain. We are investing in the -- only the last mile or some processing or some weaving equipment somewhere. So we are looking at anything around 3 to 3.5 turns of assets for every incremental investment we do.

Okay. And margin profile and revenue share today in this Indian new businesses?

It's very, very miniscule, not even not worth talking because we've been investing and experimenting and perfecting these products for now almost -- I mean, it took longer because of COVID, but almost 12 months. We are now at a level where we are confident that we can achieve our internal goals of certain margins and certain product differentiation. So now we will ramp it up as when the times get to normalcy. And today, we don't believe we should take any risk because anything can go wrong in the coming 3 to 6 months.

Okay. So no further investment in garmenting for the time being?

For this year, no.

Due to time constraints, we will take the last question from the line of Resham Jain from DSP Mutual Funds.

Sir, just one question on garmenting, which has remained -- we have expanded quite rapidly, and -- but the ramp-up we had these COVID issues and all. This quarter, we did INR 270 crores kind of top line. And you mentioned we can do 12 million pieces, which is almost doubling of what we have done in Q1. So with this kind of a turnover of around INR 500-odd crores, what kind of margin garmenting business can do going forward?

So for us, we don't necessarily look at garmenting business and a margin of the garmenting. Of course, we have the concept of a 4-wall vertical margin only. And we -- as I was telling on the context of some other questions is that we look at our customer level of profitability, and we provide them extra service in form of very complex small garment orders as well, so long as overall customer is giving us enough business and the profitability. So for us, independent garment margin is not the criteria to look at from internal perspective. So that is -- I think that whole thing about comparing our garment margin with some other company's garment margin, possibly we don't look at it that way, and we would not recommend one who looks at it that way. For us it is a forewall that we look at. However, if I were to completely separate and see what could be the garment margin in our context despite all the inefficiencies that we purposely let it be because we want to earn on our fabric business from a customer. It can still be in the range of 8% to 9% with the current RoSCTL rates.

I now hand the conference over to Mr. Samir Agrawal for closing comments.

I think he may not be there. So thank you all for coming over for the quarter 1 conference. I look forward to meeting you all in the month of -- the end of October for Q2 results. Thank you.

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