EFC (I) Limited (512008) Earnings Call Transcript & Summary

Ladies and gentlemen, a very good morning, and welcome to the earnings conference all of EFC India Limited for Q2 FY '25. We have with us today Mr. Umesh Sahay, Founder and Managing Director of EFC India Limited; and Mr. Nikhil Bhuta, Whole-Time Director of EFC India Limited. [Operator Instructions] I would now like to hand the conference over to Mr. Nikhil Bhuta, Whole-Time Director to give his opening remarks and discuss further on Q2 FY '25 performance. Thank you, and over to you, sir.

Thank you. Thank you, Steve. Good morning, everyone. I'm Nikhil Bhuta, Director of EFC India Limited. I would like to extend a warm welcome to all of you for joining our earnings conference call today. We greatly value your ongoing interest and support in our company. In today's call, we will review our financial and operational performance [indiscernible] 30th September 2024. We will also highlight key strategic decisions made by our group and share our outlook going forward. For quarter 2, EFC India Limited has achieved impressive financial results with consolidated revenue reaching approximately INR 171.08 crores and an EBITDA of around INR 84 crores and PAT of INR 36.56 crores. For half year ended 30 September 2024, EFC India Limited has achieved impressive financial results with consolidated revenue reaching approximately INR 276.36 crores and EBITDA of around INR 133.59 crores and PAT of INR 52.33 crores. These results underscore our resilience, strategic focus and the management's unwavering commitment to driving the company's growth. Effective breakdown revealed that the rental segment generated approximately INR 89.20 crores, accounting for about 54% of our total revenue. In comparison, the D&B, the design and build business contributed INR 77.24 crores, representing approximately 46% of the total revenue through 30th September 2024. At EFC, we create synergies through our dynamic workspace under brand EFC [ Sprint ] and Bigbox. Additionally, we offer exclusive furniture through Ek Design Industries Limited and provide meticulous internet designing services on a turnkey basis under our company, Whitehills Interiors Limited. Starting from the Managed Offices business sector, we have significantly enhanced our capacity in this quarter by increasing the leasehold area by around 135,000 square feet, adding over 3,600 seats across 4 centers in 4 existing cities. We have set a strong foothold in 8 cities in India, covering about 2.4 million square feet under management. We have now total 61 sites under our management across these 8 cities in India. The total seat capacity has crossed 50,000 mark. In addition to the concluded transactions, D&B division has got an additional order book of more than INR 70 crores in their hands. One of the largest deal wins that the D&B has successfully secured during this quarter is a contract with the TCS of INR 18 crore plus. In the Furniture Manufacturing division, we have successfully completed our first ever order post our commencement of commercial production, 20th September. This order book being strong and the Furniture division is poised to achieve much better in the coming quarter.

Sorry to interrupt, sir. Could you please come closer to the mic and speak?

Sure. With this, I thank you all and I now open the forum for question-and-answer session. Steve, you can please open the forum.

[Operator Instructions] The first question is from the line of Sahil Sharma from Columbus Capital.

First of all, I'd like to congratulate the management. It's quite remarkable performance, especially the Board meeting for results was for 5 hours from 9 p.m. to 2 a.m. and then to attend the conference call at 9:30, it clearly shows your dedication to the business, and it's reflecting in the fantastic performance in our best ever revenue and profits and most importantly, the cash flows which have really improved in the first half.

Yes. Thank you so much, Mr. Sahil.

Yes. So my first question is, sir, first of all, I wanted to understand the seasonality in the margins. Just to understand why it is that our margins are typically the lowest in Q1 and then highest in H2, Q3 and Q4? And how is it tied to the business development cycle through the year?

Sure, Mr. Sahil. First of all, thank you very much, and thank you for joining the call. With regards to your specific questions, I'd like to explain to you that the first quarter is the quarter where generally all our for current -- for that particular financial year, the new sites that we kind of have identified that those will add new seats for the company will get under construction during this period. These are the sites which we have taken from the landlord on leasehold rights. And then obviously, we will do a fit out at those sites. And then they will come under development. So generally, if you see in the first quarter, the expenses because all the standard expenses, maybe except for the rental, would be on the higher side because the sites will not have come for occupation and they will come from occupation during the later half of the year, the later half of the quarter. And then if you look at the those seats, they will come for full activation in the forthcoming quarters. So obviously, the seasonality is relating to the way the development cycle happens, so that typically all our development for a particular financial year happens in quarter 1 and quarter 2. Quarter 2 also, there is a substantial development, but then also the benefit in quarter 2 becomes is that because there are quarter 1 sites, which have become fully live would become fully available for building during the quarter 2. And whatever sites, which have come up for development during the quarter 2, they would be partially available naturally. And this trend will keep increasing in the ongoing quarters, let's say, quarter 3 and quarter 4 onwards. So I think the -- it is not about the seasonality rather, but it's about the way the development happens in each site and the way they come up for occupations and how the billing happens to them. So the buildup happens over the quarters and accordingly, the profitability, income, everything builds up over the quarters, please.

Understood, sir. Sir, my next question is I wanted to understand the general receivable cycle for all the segments, which is rental, design and build and the furniture business what we expect because we could see that the receivables have come down from INR 120 crores in Q4 FY '24 to INR 60 crores now around in Q2 FY '25. And it would be nice to understand the normal receivable cycle. And also a request is possible we could share the breakup for the receivables either now or in the next balance sheet update.

Sure. Sure. I mean with regards to your request for sharing the breakup for receivables for all the different segments, we will definitely take that note and we'll show that as an independent piece of information. With regards to the receivable cycle in general for all 3 verticals, with regards to the vertical for rental business, the receivables are generally less than 30 days because what happens is we have generally received the receivables in a year and maximum of the clients would pay during the first half of the month. And then there are a few clients who would probably come a little later and so. So I mean, if you take out average, it is around 15 to 30 days maximum on the rental revenue side. On account of the design division is concerned, design and distribution, it runs around -- average is about 90 days because what happens is, as we have discussed in past, that from the day we get a contract and the day we fully execute the contract and the final payment is released to us, that period goes from 0 to roughly around 180 days. The day the PO is received, then the designs are approved, then we go into execution. Once executions are going on, then there are running bills which are submitted and the running bills which are approved and then at the end when the PMC or the client really approves the final work that has been delivered and then they process the balance retention money that they have kind of kept under the contract. With regards to specific to your question about why the receivables was larger in the financial year ended 31st March, 2024, again, the major reason was that we had been doing this business for now close to 2, 2.5 years. And if you would have seen that, it needs some time for us to establish ourselves in the business, create our own credibility, create our own standing so that we are able to serve now large customers like TCS and like Hobart of this world. And earlier years, obviously, we had to -- in order to remain relevant in the business, we were also taking contracts which were even smaller in size. When I say small means that which are around 10,000, 5,000 square feet development. Now I am in a position that considering the kind of work that I'm able to kind of attract, I'm in a position to do much better contract values, where I am able to do more than 20,000, 25,000 square feet for contract. So what that means is that I have been dealing with much more organized players where the cash flows and the [ funds ] availability is much more organized than what it is available with some of the unorganized players. It's not the question of non-recoverability, it's about just the timing and that kind of had made that recoverability, the cycle increased a bit from 90 days to, let's say, 120 days in the last financial year. But this financial year, there has been great improvement and as you can see in the results, and this trend will generally continue going forward. With regards to the Furniture division, also, it's a little too early to say. But typically, there also, the receivable will remain between 60 days to 90 days with quite a bit business will happen on an institutional level and that business -- once the business happens with large institutions, you would appreciate that the receivable cycles, they would always prefer minimum of 60 days and sometimes they go up to 90 days as well. So that's where the entire receivable cycle works for us for Mr. Sahil.

Understood, sir. Last question from my side.

Sorry to interrupt Mr. Sahil. Could you please come back in the question queue for further questions? [Operator Instructions] The next question is from the line of Manohar Rao Yadav, an Individual Investor.

[ Good morning ] on the wonderful set of results. My first question was, sir, I wanted to understand a little bit on the SMREIT side, sir, like now that we would list a subsidiary and the owners would be the unitholders of the REIT. So will the revenue recognition happen on the books of EFC or that revenue would directly go to the unitholders of REIT and we get the PAT and the margins increase? And also, is there any scope of recognizing the revenue from the furniture and D&B section because now the asset would be owned by the unitholders of the small REIT?

Yes, Mr. Manohar, thank you so much, and thank you for joining. With regards to the REIT that you are referring to, first of all, as you know -- as you may know that the SMREIT that we are forming and registering right now with the SEBI, so all the assets that will be acquired at the SMREIT, they will be independent and they will not be having any threat linked to the assets that our company owns. So what will happen is that means that we will be adding new assets to this under the REIT and these new assets will we managed by us as the manager to the REIT. Since under the SMREIT, the contract of sponsor and management has been merged, as also the sponsor and the manager, we are supposed to contribute 5% of the total requirement of the fund for acquiring those assets that we would acquire under the SMREIT. Now, out of the total assets that we have acquired, the revenue will definitely go to the SMREIT and it will be registered under the books in the SMREIT. But the management fees will come to us, which would obviously somewhere equivalent to the kind of margins that we are making under EFC. You've got to appreciate that, obviously, since the asset is owned by the REIT, then the assets revenue will also go to the REIT. But as far as we are concerned, we will be -- and to ensure a complete transference, we did want to create a structure where the asset is leased to us and then we manage and then we pay only to the rental to the REIT. So the way the structure is created that the entire revenue transparently needs to move to the REIT as EFC -- from an EFC standpoint, the asset under management will increase because earlier if I am managing, let's say, right now, I'm managing 2.4 million square feet under REIT, let's say, we have acquired, another 50,000 square feet, another 100,000 square feet, that will be added to the overall asset under management and it will add to my bottom line because the bottom line would remain almost for the same for the services that we offer to the REIT. With regards to our dividend from the REIT, it would obviously proportionate to the investment that we make to the REIT, which will be 5% as a company that we're going to meet. So that is how the structure would work. With regards to the D&B division and the Furniture division, both these divisions can separately and obviously will contribute in development of the assets whenever and wherever so required. Generally because under the REIT, we will have to take already a rental deal generating asset, that means that those assets would already be furnished and those assets would already be kind of occupied with the right type of furniture. But yes, obviously, the asset would require repair maintenance, asset would require refurbishment, asset would require replacement of the old and new age furniture and that would obviously be provided on a competitive basis by our other divisions to the REIT. I guess I have kind of answered your question, Mr. Manohar.

Yes. My second and last question, sir, is when I see the industry, sir, I see most of the competitors working under the managed aggregation model, where the landlord is a part of the occupancy. They get based on the occupancy because they are doing the CapEx. But I see our company very unique here because majority of our properties are on a straight lease model, where we are giving them a fixed rental. So prima facie, the managed aggregation looks to be a more a safer model because the downside is protected. So why we, as a company, have strategically decided to do the straight lease model instead of the managed aggregation model?

Yes. Mr. Manohar, as I said, I mean, most of the companies typically in our industry would work on a straight lease model. The revenue share model is not really something which is prevalent. Yes, there are few companies which are in the market today, and they are obviously working on the revenue share model, and we can also work on that model, but we have, in part, used such models and have faced certain kind of difficulties, which primarily the difference of working styles, difference of expectations from the landlord and giving away larger share of revenue to the landlord in compared to the amount of risk that we are taking. You've got to appreciate Mr. Manohar, that let us say, even if I'm doing under the managed aggregation model, I am supposed to commit contractually to the landlord, number one, I am supposed to commit a minimum fees to the landlord, minimum guarantee amount to the landlord. So what difference I'm making is that a bit of delta which is, let's say, hypothetically, I am giving an example to you that, let's say, a particular property is going to cost you INR 100 rental. Under the managed aggregation, you might be in a position to commit, let's say, INR 60, INR 70 as a minimum guarantee and balance INR 30, INR 35 as an upside, which would come later. And that INR 30, INR 35 would not be a fixed amount. It would be as a percentage of, let's say, your revenue or your profitability that would make the actual cost of your property going up from INR 100 to INR 125. Because naturally, a landlord with whom you are sharing the risk, now he is bearing the risk, he is not going to give you at the same price at which he would have otherwise given on a straight lease. So it is a 2-edge sword. If we don't have confidence on the market, we don't understand the market, we don't understand the micro market where we perform or where we operate, then it is better that we go for revenue share and even account for this little bit of risk that we are taking. Because at the end of the day, when you are doing an entry, you are anyway doing a contractual commitment to the landlord. It is not a case that one fine day, you can just simply say to the landlord that okay, fine, sorry, I'm not able to fill the place, and I am leaving. So -- I mean if you look at the commercials, you look at the contractual terms, in our opinion, yes, one can argue that there is a minimum guarantee, but there is a delta, which is -- we are covering by way of revenue share. But then on the other hand, I would like to bring it out to them that, that delta is hurting well to the company because then it is taking away your margin because if you give your cost increases substantially on the rental side because of the managed aggregation model and the profit sharing model, then your profitability at the bottom would certainly severely head in it because there is no other players who are doing the efficiency building, and operational efficiency would be totally and totally where you can control those costs. So I think that is what one has to appreciate and we are confident of this model. We have been working with this model for more than 10 years now. We've been -- our sales teams and our marketing team is strong enough to be able to maintain an average occupancy of around 90%. And we strongly believe that we only take or add as much seats or properties that we feel that we will be able to continue to occupy them and sell them with a 90% plus occupancy and largely, most importantly, as you know, there's more than 65% to 70% of the business is with the corporates, large corporates, which kind of are committed for a longer duration so that my risk, which is -- which I'm exposing myself with the landlord is getting equally taken care by these large contracts where I have 5-year contract with 30-year lock-ins and 4-year lock-ins. I hope I have tried to kind of explained it to you.

The next question is from the line of Yash from Stallion Asset.

I just wanted to understand. So I think in your balance sheet, you've got INR 247 crores of loans for first half and in our current assets. I just want to understand what is that?

Yes. So the loans is primarily that we have taken to acquire the property that has been acquired by the company. So we have taken lease rental discounting facilities and the terminal facilities from the bank to acquire the properties. So what has happened is that what this means is that right now, let's say, if I'm paying rental to the -- when we see an opportunity where the EMIs have become equivalent to the amount of rent, which I am paying, plus/minus here and there a bit, then we try to kind of acquire those property on our books through our lease rental discounting. Because what happens is that at least here, if I keep paying the rental, I'm not building an asset. Here, by paying the EMIs instead of paying rental, I am actually building an asset on my book that makes our company's -- the balance sheet stronger, that makes our company's ability to withstand any downside stronger because when you own those centers yourself, your ability to manage them and your ability to stand in the difficult times becomes much better. So those loans are primarily towards the -- we have the -- as you may know that there are 4 floors that we owned at Marisoft IT Park in Pune. And then the -- which is about 100,000 square feet. And then we had acquired 48,000 square feet at Wakdewadi, Pune recently as you -- as we have announced in the past, as all -- another 80,000 square feet has been acquired so this -- under this lease rental discounting model and that is largely the loan that is which is there on the books of the company.

Got it. Got it. And I think in the last call, we have mentioned that our guidance is INR 350 crores, north of INR 350 crores for the year. So you would like to revise the guidance given the strong performance that we've got in first half?

INR 350 crores on account of the rental you're talking or on account of the overall performance you were referring to?

No, I think this was for the rental, but you can tell me if you have any plans for the overall, including both the businesses.

No, I think the business is doing really good and the way the trends are and it has been in the past also that quarter-on-quarter, the business is really performing and the order books are on hand for both the divisions, the D&B and on the Furniture division. And on the rental division, as you know, it's pretty linear. So the business is doing well with seats getting added, seats coming up for occupancy. The business is growing, and it will continue to grow in a similar fashion. I mean, in terms of guidance, yes, we do stand by that we will be able to achieve around 70,000 seats by end of this year. And we will be able to achieve at least, if not more, 100% improvement in our performance in the WhiteHills division as well. And naturally, in the Furniture Manufacturing business, this is the first year. So we are certainly looking forward that we look -- I mean, we kind of capitalize and really build the business. The way the factory looks back on us is that if you look at the factory, the way it is built and the way the entire infrastructure has come up, we are really hoping that it will deliver whatever all our expectations have been over the years.

The next question is from the line of Vineet from [indiscernible] PMS.

Sir, my question is with respect to the guidance, like just now you told it by you will be reaching 70,000 seats by the end of this year, right? In the Q2, you are adding 3,000 seats. So how are you planning in the next half of the year? Like will you be adding 20,000 seats?

No, no. So 3,000 seats is adding in the capacity this financial year, this quarter. And it is also going to get better because there are certain properties which have already been identified as one large property, which is -- single property, which is identified and which will come up for fit-out in the third quarter is -- it is going to have more than 5,600 feet in a single center. So we have a couple of such centers already identified. We have already reserved and booked, which is coming up for fit out. So we will certainly be able to -- we already have the visibility, and that is how we are talking that we will reach about 65,000 to 70,000 seats by the end of the year. Obviously, all the 70,000 seats would not come up for occupation during the third and fourth quarter. They will come over the period. But what we are taking as guidance is that by end of this financial year, as on 31 March 2025, we are expecting to touch this mark of anything between 65,000 to 70,000 seats and that's the guidance that we are still committed and stand by it right now.

Okay. Okay. Sounds great.. My another question is with respect to the segment-based economics like can you explain me economics in individual segments? And also for the Furniture segment, can you tell me if we have any order book pipeline or how are we looking like it's been 1 month, right, 1.5 months since it has got operational? So...

Correct, correct. It's been about a month now. And the commercial production has started and obviously, the things are picking up. The team has really worked very hard to kind of deliver the first order within the first quarter itself. And then they are also in the process of building up their order book into different business verticals that we are working on. And the order book is certainly looking pretty promising. And we are, as we have earlier mentioned that our targeting that we could achieve anything, I mean, the estimates and the projections that the sales teams has given is that we would definitely achieve anything around INR 60 to INR 75 crores of revenue for the Furniture division. With regards to the margins that you're talking for the segments, both the rental and the D&B division, we have discussed in past that the rental division typically on a central level, we have a margin of about 3% and on a corporate level, it is about 25%. While in terms of the D&B division, average margin comes around 17%, 18%. But the division or the contracts where we have a lot of difficult work to be carried out, let's say, where we are doing a contract for laboratories or research centers or any other contracts that are developing office infrastructure, which is pretty competitive, the margins improved significantly, which is more than around 24%, 25%. I mean this I'm talking obviously the average numbers, and that's what the broad margins are for both these verticals.

Okay. Okay. And with respect to the outlook that you shared like 100% growth in D&B segment, and what was your guidance with respect to this rental segment?

So rental segment, as I've explained, sir, that we are expecting anything about 65,000 to 70,000 seats. We would certainly maintain our seat rate at INR 6,250 minimum per seat. And right now, as you know, that we already have 50,000 seats. So you are talking about 50,000 seats as already available for occupation for the entire next half at this rate, and the balance is another about 15,000 to 20,000 seats, which will get built up over the next 6 months' time. So on an average, let's say, they would come for occupancy at about anything between 40% or so of the total seats because on an average -- because they will come up for occupancy over a period, right, over the next 6 months. So that would be the broad number of seats that would get achieved. And the rate that we are talking about is about we will certainly maintain at least INR 6,250 per seat. And going forward, the rates would increase because now on the average rates per seat for the new seats getting added are on an increasing trend. So yes, that's the broad guidelines, sir.

The next question is from the line of Rahil Shah from Crown Capital.