Himatsingka Seide Limited (HIMATSEIDE) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I am Pavitra, moderator for the conference call. Welcome to Himatsingka Seide 3Q FY '20 Post Results Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note this conference is recorded. I would now like to hand over the floor to Ms. Prerna Jhunjhunwala. Thank you, and over to you, ma'am.

Thank you, Pavitra. Good evening, everyone. On behalf of B&K Securities, I would like to welcome you all for 3Q FY '20 post result conference call of Himatsingka Seide Limited. From the company, we have with us the senior management including Mr. Shrikant Himatsingka, Managing Director and CEO of the company; Mr. K. P. Rangaraj, President, Finance and Group CFO; Mr. Ashok Sharma, Senior Vice President, CFO, Strategic Finance; and Mr. Ashutosh Halbe, Executive Vice President and CFO, Operations. I would now like to hand over the call to Mr. K. P. Rangaraj for the initial comments. Thank you, and over to you, sir.

Thank you, Prerna. Good evening, ladies and gentlemen. On behalf of the company, we would like to welcome you to the Q3 FY '20 earnings call. As always, I will start the call with a business update, followed by comments on financial statements, and thereafter, some key leverage -- key ratios. So I'll start off with a business update. The commercial production at our Greenfield Terry Towel facility commenced on 3rd of October 2019. The ramp-up of production has been on expected lines. Restructuring of our Italian arm is largely completed and has had an exceptional item impact of INR 8.38 crores during the quarter ended FY '20 -- of Q3 FY '20. The Ministry of Textiles has retrospectively withdrawn benefits under MEIS scheme with effect from 7th of March 2019. As a result, during the quarter, the company reversed the MEIS benefit of INR 36.93 crores for the period from 7th of March 2019 to 31st of December 2019. Of this amount, INR 11.28 crores pertains to Q3 FY '20 and has had an impact on the revenues. The balance amount of INR 25.65 crores has been disclosed as an exceptional item. During the quarter, revenue streams from brands stood at INR 579 crores versus INR 571 crores during Q3 FY '19. I now move on to my next section, which is on consolidated financial performance for the quarter ended Q3 FY '20. Consolidated total income. The consolidated total income was higher by 2.2% during the quarter ended 31st December 2019 and stood at INR 675.85 crores versus INR 661.25 crores in Q3 FY '19. Consolidated total income has been adjusted for reversal of MEIS amounting to INR 11.28 crores. Consolidated EBITDA for Q3 FY '20. The consolidated EBITDA for Q3 FY '20, after considering the reversal of MEIS, stood at INR 124.71 crores from INR 151.07 crores in Q3 FY '19. The EBITDA margin for Q3 FY '20 was 18.5% as compared to 22.8% in Q3 FY '19. Corrected for MEIS, the EBITDA margin for Q3 FY '20 would be 19.8%. Consolidated EBIT. The consolidated EBIT for Q3 FY '20 stood at INR 89.74 crores versus INR 123.68 crores in Q3 FY '19. Consolidated profit before tax before exceptional items for Q3 FY '20. The consolidated PBT before exceptional item for Q3 FY '20 stood at INR 39.35 crores versus INR 82.66 crores in Q3 FY '19. The exceptional item of INR 34.03 crores represents reversal of MEIS benefit of INR 25.65 crores and restructuring expenses of INR 8.38 crores. In addition, PBT was impacted by higher provisions on account of TUFs amounting to INR 5 crores. This provision was taken on the basis of aging of receivables. Consolidated PAT before exceptional items for the quarter ended December '19. The consolidated PAT before exceptional items and the MEIS impact for Q3 FY '20 -- adjusted for tax for Q3 FY '20 stood at INR 35.32 crores versus INR 51.16 crores in Q3 FY '19. Consolidated PAT. The consolidated PAT for Q3 FY '20 stood at INR 2.78 crores versus INR 51.16 crores in Q3 FY '19. I now move on to my next section on consolidated financial performance, YTD FY '20. Consolidated total income stood at INR 1,973 crores in -- for the quarter -- for YTD FY '20 versus INR 1,961 crores in the previous year. Consolidated total income has been adjusted for reversal of MEIS scheme amounting to INR 11.28 crores. Consolidated EBITDA. The consolidated EBITDA for the 9-month period ended FY '20, after considering the reversal of MEIS, stood at INR 408.36 crores versus INR 439.5 crores for the previous year. EBITDA margin was 20.7% as compared to 22.4% in the previous year. Corrected for MEIS, the EBITDA margin for the 9-month period would have been 21.15%. Consolidated EBIT. The consolidated EBIT for the 9-month period ended December '19 declined to INR 320.54 crores versus INR 359.55 crores for the previous year. Consolidated PAT before exceptional items. The consolidated PAT before exceptional item adjusted for tax for a 9-month period stood at INR 113.9 crores versus INR 148.47 crores in the previous year. The exceptional item of INR 40.67 crores represents reversal of the MEIS benefit of INR 25.65 crores, restructuring expenses of INR 8.38 crores and impairment of investment amounting to INR 6.6 crores. In addition, PAT was impacted by higher provisioning on account of TUF, amounting to INR 9 crores. This provision was taken on the basis of aging of receivables. Consolidated PAT. Consolidated PAT for the 9-month period stood at INR 82.09 crores versus INR 148.47 crores in the previous year. Adjusted for the exceptional items, the PAT would have been at INR 113.9 crores. The next section is on the debt profile. The consolidated gross debt as of 31st December stood at INR 2,813 crores compared to INR 2,738 crores at the end of Q2 FY '20. Gross debt includes lease liabilities in line with Ind AS 116. The total term debt stood at [ INR 7,773 crores ], and total working capital debt stood at INR 1,001 crores. The cash and cash equivalents and current investments stood at INR 206 crores as of 31st December 2019. Consequently, the company's net debt outstanding as of 31st December stood at INR 2,607 crores compared to INR 2,524 crores as of Q2 FY '20. Leverage ratios, on TTM basis. The net debt-to-EBITDA was 4.75x at the end of the quarter as against 4.39x at the end of the previous quarter. The debt stood at -- DSCR stood at 1.45x at the end of the quarter as against 1.59x at the end of previous quarter. The net debt-to-equity stood at 1.82 at the end of the quarter versus 1.77 at the end of the previous quarter. Capital efficiency ratios, on a TTM basis. The ROCE at the end of the quarter stood at 10.4% as against 11.7% at the end of the previous quarter. The return on equity ratio stood at 11.6% at the end of the quarter compared to 13.6% at the end of the previous quarter. With this, I would like to complete my update. We will be able to -- we will be happy to take all your questions now. Thank you for your patience.

[Operator Instructions] So we have, first, questions from Nihal Jham from Edelweiss.

Sir, I may have missed this in the opening remarks, but wanted to check how has the ramp-up of the towel business been this quarter?

The ramp-up has been satisfactory, Nihal. In fact, I would say that we are -- as you know, it's a 25,000 tonne per annum plant. It's a greenfield facility. So naturally, the ramp-up will be in phases, and I think, we're off to a good start. So the overall objectives that we had vis-à-vis our new Terry facility have not changed. Obviously, as it's the first quarter of commercial production, it will have its pressures as it did. But I think the direction that we have seen and the response that we have seen is very encouraging.

Could you give a ballpark utilization number that the facility operated at?

I'm sorry, we don't discuss utilization numbers. But as I said, it's been off to a good start.

Sure, sir. And just checking in terms of the order book for the current orders that we have for the towel business. So currently, what is the visibility in terms of revenues or orders that we have for the business?

So as I've shared with investors the last time, we see that -- we see our towel facility, which is up 25,000 tonnes per annum, we see close to full utilization over a 2-year span, of which we have done with the first Q. And ramp-ups are in line with keeping that sort of time frame. I think Q3 and Q4 will be sort of similar in terms of utilization levels at the plant. And then we will see ramp-ups going into next year.

That's helpful. Sir, the second question was on the overall performance in, mainly, the bed linen unit, if I had to say, commissioning towel indiscernible] commissioned that, if I look at the revenue trajectory, at least for the last 2 quarters or even for the first 9 months, I do get a sense that, when I compare it to how the industry has been performing in terms of exports to you, it seems as if we've underperformed how the industry has done and could be a possible piece of market share loss that we may experience. So just wanted your comments if, as you mentioned last quarter that some orders do not come through, is the current trend continued for us specifically? Or there are other factors that you may want to elaborate on?

Well, I'm not sure what data you're looking at, Nihal. To my knowledge, we are not...

I'm looking at the OTEXA data.

Yes. But to -- I mean, I don't see us underperforming industry. So I don't know where you're getting that from. But listen, we've had a stable -- we have had some -- we have had broad stability on the revenue front overall after the commissioning of towels. But -- therefore, if our revenues are stable after having commissioned towels, means we have seen some softness in another bucket, which we have. We have seen some softness on our bedding division, vis-à-vis revenues, which has got offset by the Terry coming into play, which has been a little challenging for us, although it's a mild correction, but even then. So while I don't see underperforming industry as such, it's been a slight correction on that front, which has caused some pressure on the earnings. I see there are 2 or 3 kinds of sort of challenges I see going forward over the next couple of quarters. The MEIS removal will have to be factored in and priced in as we go forward. Therefore, it can't be done in a single quarter. It will take a couple of quarters to attempt to correct that reversal. Secondly, while our Terry Towel plant ramps up, we'll see some challenges coming through, but those are on expected lines. And thirdly, we had some softness on the sheeting division that we are seeing. Hopefully, that will correct going into next year. I would also like to say that some of that softness is also on account of the fact that we are focused on bringing down our working capital. And therefore, one should continue to see reductions in inventory vis-à-vis our existing businesses. Having said that, I've also shared with investors in the past that we've had headwinds from our niche businesses, mainly our Italian arm and our legacy business, which is the Drapery and Upholstery division. We have largely completed the restructuring required at our Italian arm, which Ranga spoke about earlier, that is the INR 8.8 crores charge that came through the exceptional items. However, we continue to see headwinds in our Drapery and Upholstery division, which we are attempting to address. So the challenges -- the immediate challenges over the next Q or 2 will be attempting to fill in for the withdrawal of MEIS; ramping up the Terry production and therefore, overcoming some initial challenges that our greenfield facility faces. The softness -- the slight softness we have seen in our sheeting division ex manufacturing is being addressed. As I said, that's also partly due to inventory reduction measures that we've taken. The fourth is the Italian arm restructuring is largely completed. There could be some residuals going forward, but that's been largely addressed. And Drapery and Upholstery division continues to throw up some challenges, which we are addressing. So NAV, if you see, you see our INR 124.7 crore EBITDA for the Q, corrected for MEIS is closer to INR 136 crores, which is off by a few crores vis-à-vis the EBITDA that we've been clocking over the last 4 to 6 Qs. And -- so therefore, that same EBITDA is now coming after Terry is being capitalized and carrying with it greater depreciation and interest. So therein lies the challenge. And I think with the measures I just spoke about, which is addressing the softness in the sheeting division, ramping up the Terry division, addressing the challenges in the legacy Drapery and Upholstery division, these things will -- is that -- is the challenges that we're facing on the EBITDA front and also unleash some growth on the revenue front.

Sir, that's helpful. I just had one last question. We completed our CapEx program last quarter once the towel unit was commissioned. So is the increase in debt this quarter related to working capital for the tower ramp-up? And what is our debt guidance going forward? Those are the only questions from my side for now.

So for the Q, our interest expense Y-o-Y is higher by approximately INR 5 crores on a like-to-like basis because we have made a INR 3.5 crore provision on TUFs, wherein we've taken a view that if there are tough subsidies, which are running behind schedule, vis-à-vis payments to be made from the central government, we will take a provision on that front. So this interest and finance charge includes a INR 3.5 crore impact that's coming in from there. And it also has an additional impact of close to INR 1.5 crores for the Q and approximately INR 4 crores for the 9-month period ended December on account of recognition of the top subsidy as well. So the impact on a quarterly basis vis-à-vis Q3 FY '20 is approximately INR 5 crores, which has resulted from this TUF adjustment. Corrected for that, it stands at around INR 45 crores, INR 45.3 crores for Q3. And as far as our debt is concerned, it's largely remained range-bound, going up and down INR 50 crores, INR 60 crores a Q. But directionally, we should see the debt correcting as we go forward. Our CapEx program has largely come to an end. There's still -- there will always be some organic CapEx going on, and we have some residual CapEx left at a campus level that's still being incurred, although the plant's being commissioned. So the direction that debt will take from hereon overall will be that of going south. There could be some movements at a quarterly basis, but overall, that's where it will [ end ].

[Operator Instructions] We have next question from Sushrut Ghalsashi from JM Financial.

Just one from my side. Have you been seeing any impact of coronavirus, especially on the Chinese exports to the U.S.?

Well, we have certainly been hearing of it. We haven't, specifically, vis-à-vis Himatsingka, we haven't seen any benefit and/or impact of such incidents as yet. But obviously, what we hear from clients is that inbound shipments are running late from China. And there are obviously concerns going forward vis-à-vis expanding of shipments. So that's one thing that we are hearing. And we are also seeing, let's say, medium-term concerns as we [Technical Difficulty] translated to any specific opportunity and/or request from any client [Technical Difficulty]

[Operator Instructions] We have next question from Sunil Rawtani from Artifice Advisors.

There has been a significant rise in the other expenses. And the purchase of goods has reduced substantially. The reason for both?

Other expenses remain range-bound. Y-o-Y, it's INR 139 crores versus INR 147 crores. So I don't see much of an impact on other expenses. And as far as purchase of traded goods is concerned, it's a movement in product mix. So that could probably explain it, there's nothing else to it.

There's a significant variance in the quarter-on-quarter. But if you can give a breakup, what has led to, because there's a very big variance Q-on-Q?

You're talking about -- actually on the purchase of traded goods, I'd also like to say that until now, as the towel plant ramps up, all the bath requirements that the group was earlier outsourcing will be in-house produced. And therefore, that will reduce, to some degree, purchases of goods. And as far as the Q-on-Q movement of other expenses is concerned, which is approximately INR 20 crores, I think that's what you're referring to, we'll be happy to take that off-line and share with you the reasons for the movement.

And what is the shift? Means, how much we are doing in-house as compared to the...

Like, for example, some of that schedule will also include, until Q2, Terry was not capitalized. So all energy expenses and all other expenses to do operating expenses of the plant sits in the other expense line. And therefore, it looks a little larger than Q2 because the Terry Towel plant in Q2 was not a part of the P&L.

And the outcome of the same when it comes to the purchase of the goods and the adding to the revenue front, is others the expenses?

No. I mean it's -- that will basically lead to better EBITDAs as we produce goods in-house. Of course, it's been offset by certain other challenges. But we will always have a portion of products that are sold in the market that are traded goods because we don't produce it in-house. But the proportion of in-house production will keep increasing, broadly speaking, as we ramp up Terry. And as I explained, the other expenses has just to do with the onboarding of the Terry plant vis-à-vis commercial production starting 3rd October.

Sir, in the coming quarters, can we assume the purchase of goods would decline further and the expenses would cap at this level, what we have seen in this quarter?

No. I think that one -- yes, I mean, look here, as the Terry plant ramps up, the absolute expense base will also go up naturally because it will consume more energy and have more operating expenses. So I don't think that's the right way to look at it. But when we look at it from a standpoint of proportion, I think the proportion should be -- the margin profile should be protected as we have seen. The only thing is the withdrawal of MEIS and the impact of the Terry ramp-up will even out in a couple of quarters as we go along.

And the purchase of goods would decline further?

At an absolute level, it should remain range-bound. But as a percentage, it could reduce.

Because that is leading to better gross margins, so we can expect the same to continue or to improve in the coming quarters.

Yes. These are -- these things move Q-on-Q. So I'd say, directionally, it will reduce the proportion. But I cannot comment on our specific movement Q-on-Q. So directionally, it should reduce as a proportion.

And a brief on the inventory levels. We have been trying to improve it. So what's the progress? And how do we foresee it in the near future, proportionately in the absolute both?

We'll be happy to take that off-line, Sunil. We have been directionally reducing inventory over the last couple of Qs, maybe 3, 4 quarters. And I think the focus continues. So we should directionally see it reduce. But on specific quantum, we'll take it off-line because that's a more complex question.

Like, how do we foresee any significant reduction in the working capital? Or as the Terry Towel comes, they improve and more into the streamline? Do we expect the working capital to go higher, proportionately?

Well, Terry will certainly -- as Terry augments its utilization, it will certainly have a full-on working capital. But hopefully, with all the other measures we're taking on reducing working capital cycles, we'll also see that getting offset. So that will be our endeavor, and therefore, trying to hold it constant, if not improve.

And a ballpark figure for the residual CapEx?

Ballpark figure for what, sorry?

The residual CapEx, you said, will continue. So what would be that on an annual basis, before the CapEx, as we've done -- completed our CapEx cycle?