Himatsingka Seide Limited (HIMATSEIDE) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I'm Pavitra, moderator for the conference call. Welcome to Himatsingka Seide 4Q 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 from Batlivala & Karani Securities India Private limited. 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 4Q and Full Year FY '20 Post Results 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; and Mr. Ashok Sharma, Senior Vice President and CFO for Strategic Finance. I would now like to hand over the call to Mr. Shrikant Himatsingka for initial comments. Thank you, and over to you, sir.

Thank you, and thank you, everybody, for taking the time to join us today. I'd like to spend some time on business update and outlook, followed by a brief narration of the financials, which Mr. Rangaraj will take you through. Clearly, the Q4 operating performance has been impacted, and I would like to share with you a business update on that. So the operating performance for the quarter has been severely impacted on account of COVID. Outbound shipments and operations at our manufacturing and distribution facilities were impacted beginning the second week of March. So this is just a little bit prior to the lockdown. As per requests received from clients, a substantial portion of shipments for the month of March 2020 had to be held back. And consequently, consolidated revenues saw an impact of approximately INR 200 crores for the quarter ended March 2020. Subsequently, on account of the lockdown in India and other major international markets, all our manufacturing and distribution facilities remained nonoperational through April 2020. While we commenced partial operations in compliance with central and state government guidelines at the end of April 2020, operating conditions remained challenging on account of demand and supply chain disruptions. Therefore, the impact of the lockdown has affected the operations both in April and in May severely. Given the above, the severity of the COVID-19 impact has affected our operating performance, both for Q4 FY '20 and obviously, given the lockdown for Q1 FY '21 as well. However, we have begun ramping up operations, as I indicated, partially in May and we have gained momentum in ramping up operations during June. The ramp-up of operations are progressing well, and I'll also like to state that the Q2 order books at this point look relatively robust given the overall economic environment. So all in all, while we've had a challenging and volatile Q4 and obviously, one will also see the impact of COVID during Q1, the ramp-up is progressing well. It has gathered momentum in June. And now that we are in Q2, things look much better and our order books seem to see a bounce as far as Q2 is concerned and relative to the overall situation that prevail. On other updates, FY '20 was also an important year for us because our calibrated capital expenditure program came to a close with the commissioning of our Greenfield Terry Towel facility during October '19. So with this, 3 major projects have been commissioned over the last 3 years, all 3 on schedule. And this brings a close to our calibrated CapEx program that we had embarked upon during FY '17 and concluded during FY '20. The -- with these 3 projects completed, Himatsingka operates large facilities on the spinning front, on the sheeting front and now on the Terry Towel front. During the year, we've also completed the restructuring of our Italian operations. This was also a challenge for us during this year. And it has had an impact of approximately INR 35 crores, both in the form of exceptional items and regular items for the year. So this is another development that I wanted to share with you all. We continue to expand market reach and depth in all our major operating markets. And while we -- while, of course, North America continues to be an important and most important market for us, we continue to increase our presence in Europe, the Middle East and Asia Pacific regions. And the momentum and pipeline that we are building seems to be progressing well for us. And we're likely to see more benefits coming through for all these initiatives in FY '21. In addition, in order to navigate the challenges on account of COVID, we've undertaken several cost optimization measures while attempting to ramp up operations at the fastest pace possible. Both the cost optimization and the ramp-up of initiatives are progressing well. And we also continue to have healthy cash reserves to meet any contingent challenges that might come our way during the ramp-up process. Lastly, during the year, revenue streams from brands came in at INR 2,122 crores versus INR 2,255 crores during FY '19, a small reduction on this front on account of the Q4 revenue fall that I had explained to you earlier. So these points are some of the points that I wanted to share with you on the business update front. Some broad thoughts from my side as how we look at the outlook going forward. So as far as Himatsingka is concerned, Q4 was particularly more challenging than maybe the overall industry, also driven by our specific client mix because a lot of clients who offer essential goods and services remained open during the lockdown period while other major clients who did not have essential goods and services to offer to consumers had to remain shut. And so we were a little more heavy on the latter and, therefore, our revenues were probably a little more impacted during Q4. However, from an outlook standpoint, I'm pleased to say that most of -- all of these retailers opened their stores commencing the end of May and through June and have achieved, I would say, pretty much over 85%, 90% door openings during the month. I'm referring to retailers vis-à-vis our client mix. So therefore, the first point on the outlook front is store openings continue to be robust. The work were robust during the month of June, which is a heartening sign in these circumstances. And the second point is, as a result of these openings, we have seen pretty buoyant demand coming through from retailers. Plus, we have also been tracking retail sales that they have been clocking vis-à-vis our products which have also been fairly buoyant since these stores have begun to open. So that's another encouraging sign and is also explaining the robust order book that we see for Q2 relative to the situation. On the order book front, of course, while Q2 looks -- while Q2 sees demand coming back as far as we are concerned, we also see a positive movement for the second half of the fiscal across product categories, both in bedding and bath fronts. And we have seen retailers interact with us as they did in the ordinary course of business vis-à-vis launches that take place during H2 of the year. So therefore, I think all in all, given the current situation, we are encouraged to see not only a reasonably strong Q2 but regular conversations and demand flowing through for H2 as well. This includes a healthy ramp up for our Terry division going into H2 as well. That's something we are definitely seeing. So while sheeting will recover, we feel that Terry will continue its ramp-up going into H2 FY '21. So that's, broadly speaking, how we look at the rest of the year panning out. And therefore, in a sense, the damage that we have seen is largely to do with Q4 and Q1. And I think, of course, it's anybody's guess at this point to predict other impacts that the pandemic may have. But with the knowledge and pulse of the various things that we currently enjoy, while there will be challenges as we go through the year, this is more specifically speaking, the visibility we are getting through from our retail clients, both in the EMEA and APAC regions as well as in North America. So this is -- ladies and gentlemen, this is just a few points that we wanted to share with you. I'd like to request Mr. Rangaraj to take you through the financials and then we'll obviously be happy to take any questions that you might have.

Thank you. Good evening, ladies and gentlemen. I will now take you through some updates on the financial performance. I will start off the update with the quarter financial performance and then give you some highlights on the consolidated for the year. Starting with consolidated total income for the quarter. The consolidated total income declined by 32% during the quarter and stood at INR 471.4 crores versus INR 692.74 crores in the previous -- Q4 FY '19. As may already mentioned, there has been an impact of approximately INR 200 crores on the consolidated total revenues given the interruptions faced due to COVID. Consolidated EBITDA. The consolidated EBITDA for the quarter stood at INR 96.6 crores from INR 140.43 crores in the previous year, a decline of 31.2%. The decline in EBITDA largely -- has been largely driven by the reduction in total revenues. EBITDA margin for the quarter was 20.5% and is range bound as compared to 20.3% in the previous year. Consolidated profit before tax and before exceptional items. The consolidated PBT before exceptional items for the quarter stood at INR 4.7 crores versus INR 66.7 crores in the previous year. The exceptional item of INR 58.18 crores represents inventory provision of INR 43 crores on account of changed economic environment due to outbreak of COVID, nonrecurring restructuring expenses of INR 3.72 crores in our Italian business and loss of INR 11.42 crores on the hedging instrument on account of lower-than-expected realizations in the current quarter due to COVID. Consolidated PAT before exceptional items. The consolidated PAT before exceptional items for the quarter was a loss of INR 10.66 crores versus profit of INR 48.37 crores in the previous year. Therefore, the consolidated profit after tax for the quarter was a loss of INR 68.84 crores versus profit of INR 48.37 crores in the previous year. I now move on to an update on the consolidated financial performance for the year. The total consolidated -- the consolidated total income stood at INR 2,419 crores in -- for the year ended March '20 versus INR 2,654 crores in the previous year. This resulted in a decline of 8.8%. Consolidated EBITDA. For the year, the consolidated EBITDA stood at INR 479.31 crores versus INR 579.93 crores in the previous year. The EBITDA margin was 19.8% as compared to 21.8% in the previous year. Consolidated PAT before exceptional items. The consolidated PAT before exceptional items for the current year stood at INR 86.46 crores versus INR 196.84 crores in the previous year. The exceptional items of INR 73.2 crores represents inventory provision of INR 43 crores on account of the changed economic environment, as already explained, nonrecurring restructuring expenses of INR 12 crores in our Italian business, loss of INR 11.4 crores on the hedging instrument on account of lower-than-expected realizations and impairments of investment in equity of INR 6.6 crores. Therefore, the consolidated cash profit after tax for the current year stood at INR 13.25 crores versus INR 196.84 crores in the previous year. I will now give you a brief update on the debt profile. The consolidated gross debt as of 31st March 2020 stood at INR 2,814 crores compared to INR 2,790 crores in the previous year. The total term debt stood at INR 1,782 crores and total working capital debt stood at INR 1,033 crores. The cash and cash equivalents and current investments stood at INR 224 crores as at 31st March 2020. Consequently, the company's net debt as of 31st March 2020 stood at INR 2,591 crores as compared to INR 2,422 crores in the previous year. The -- some updates on key leverage ratios. The net debt-to-EBITDA was 5.4x at the end of March as compared to 4.18x at the end of the same year -- last year. The net debt-to-equity ratio stood at 1.9x at the end of March '20 versus 1.7x in the previous year. Capital efficiency ratios. The return on capital employed at the end of March 2020 stood at 8.9% as compared to 13.1% in the previous year. The return on equity, excluding exceptional items, stood at 6.2% at the end of March 2020 compared to 14.9% at the end of previous year. The capital efficiency ratios have been largely impacted by COVID-19 interruptions, retrospective removal of MEIS benefits during quarter -- Q3 FY '20 and restructuring of the Italian operations. With this, I would like to complete my update. We'll be happy to take on any questions. Thank you for your patient listening.

[Operator Instructions] We have first question from Nihal Jham from Edelweiss.

Sir, I have 3 questions. My first question was, would it be possible for you to break up the growth in this quarter, till what growth we are tracking till the end of Feb and how March turned out for us?

Why don't you complete your list of questions, Nihal, and then we'll...

Yes, sir. Just -- the second question was related to that only that if I see the OTEXA data for Jan to March, it's just a 3% de-growth in the sheeting business from India's perspective whereas our manufacturing business is down more than 30%, which includes a component from Towels too. And in the past -- in the last 4, 5 years of tracking the business, there has rarely been such a discrepancy despite, as you said, a difference in our customer profile. So just if you could highlight a little more on that. And I'll put the third question after this. It's not related to this line of question.

Yes. So as far as this is concerned, I mean, I don't know how much of the correlation to OTEXA at this point will help because this is a client and company-specific matter for the Q. And while we don't have the numbers broken up by month in Jan, Feb and March, we'll be happy to take that off-line for you. But as far as Himatsingka is concerned, the extent of the impact was close to approximately INR 200 crores of shipments that were put on hold on account of COVID. And that's what we saw unfolding for us. And as I said, a large part of that is also driven by the fact that a lot of our clients did not provide essential goods and services and sort of were locked down themselves and, therefore, the whole came through as far as we are concerned. So that's the only way we see it in terms of an explanation.

Okay. But even with the U.S. retailers I'm getting excluding Walmart which does serve essentials, most of them had a lockdown across all cities starting March 15, right? So 75, 80 days for the quarter would have been normal or is it that is a part of March...

No, it's not a linear quarter, at least not for us. A lot of shipments happened in the second half of March which are seasonal in nature for us and specific to our client mix. And therefore, that lump-sum sort of second half of March shipments were those that were infected in our case. So unfortunately, that's what happened for us, and now we have to make that up.

Fair enough. Or I'll probably take the break up later. The other question was you mentioned that obviously, INR 200 crores of shipment have got stuck because of the deferment. If I look at your inventory, it has actually fallen for the year and even if I approximately compare to what it was last quarter or from September. So is it that we've seen such a big reduction in inventory or -- if you could just help me understand that better.

I'm not sure I got your question, Nihal.

Yes. I'm sorry. What I was trying to say is that if INR 200 crores of shipment have actually been locked up, ideally, our inventory should have increased by a commensurate figure. But I see that our inventory has actually fallen compared to last year. So has there been a strong liquidation or reduction in normal inventory from our side?

So if you look at our inventories, it's corrected from INR 1,175 crores last year to INR 1,087 crores this year at the end of March 2020. We have consistently maintained with all our stakeholders that we are not satisfied with the quantum of inventory we are holding, and we're working on improving our working capital cycles, which include reduction of inventories. Now having said that, we were clocking consistent reductions in inventory Q-on-Q up until Q3. But during Q4, we have seen an over INR 90 crore, close to INR 100 crore increase in inventories during Q4 on account of the sales conversion. Therefore, if you look at it from that standpoint, and in addition to the foreign exchange translation impact that we've had Y-o-Y, 31 March last year to this year, there's been an approximately INR 60 crore impact on inventory translation on account of the rupee depreciation. And therefore, all in all, we would have actually landed up reducing our inventory by another INR 160 crores had it not been for these 2 impacts.

That's very helpful, sir. Just last couple of questions from my side. On the debt side, I wanted to check, have we availed the moratorium? And what are the repayments that we have for FY '21?

We have availed the moratorium because given the uncertainties at the time the lockdown was imposed and given the fact that all revenues were shut down on account of the lockdown, we thought it prudent to avail of the moratorium, and so we went ahead and availed the moratorium, which at this point is effective through the end of August. Just hold on one second. So we availed of the moratorium wherever we could. And now at this point, we have approximately INR 155 crores of debt that's to be repaid at this point for the rest of the year, and we are comfortable in meeting all these obligations. We see a pretty robust ramp-up at this point given the current visibility. And we have reasonably healthy cash reserves. So we don't see any challenges on that front.

The last question from my side. You mentioned cost optimization. If could you just elaborate which aspect and approximately by how much you think we will be able to bring the costs down?

Well, I wouldn't like to comment on the quantum at this point. But I would say it's a substantial component of costs that we have worked to realign and reorganize ourselves to be leaner. Even pre-COVID, we were clocking fairly robust operating margins for a substantial part over the last 5 years. It's only the last couple of quarters that have been impacted. But we still took on the challenge of trying to revisit and reinvent our ways of working. In some cases, it will show up in incremental benefits and in some cases more substantial benefits depending on the cost bucket. But I think overall, it should contribute substantially to our efforts to recoup our operating performance going forward.

We have next question from Chirag Lodaya from Valuequest.

Sir, I just wanted to know, what is our gross debt currently?

INR 2,814 crores.

And cash -- subsequent cash is INR 226 crores, right?

As of March, it was approximately -- it was INR 225 crores. It's a little higher now.

Okay. And sir, in terms of our capacity utilization, what would be across the segments?

Unfortunately, we don't specify utilization levels that we clock by segment. But obviously, it's safe to assume that during Q1, the utilization levels were very low. But of our 3 major plants, Sheeting and Terry and Spin plants, going forward, obviously, Spinning will go back to full utilization. Terry just got commissioned in October '19. We've barely had 5 full months of operations of the plant before the COVID hit. But our order pipeline and work-in-progress initiatives look fairly robust. So I think Terry should ramp up well and as far as going forward is concerned, specific -- more specifically during H2. And Sheeting should recuperate lost ground and inch back to pre-COVID levels.

Okay. And sir, just lastly, what would be the impact of lower cotton prices and ForEx volatility on our numbers margins for first half at least?

We'll have to take that off-line because that's a complex number to just sort of come up with. It's very interlinked with product mix and all of that. So that's something that we wouldn't be able to ascertain just like that, but there have been no specific movements that have taken place more recently which will cause our raw material prices to materially change from what they were pre-COVID levels. Cotton had settled down pre-COVID levels and now, of course, they have reduced a little. So maybe there could be some benefit on that front, but we'll have to ascertain that vis-à-vis our product mix and pricing and so on. So we'll have to take that off-line.

Okay. Sir, there would be no inventory losses on account of lower cotton prices, that's what you are trying to say?

Yes, there won't be any inventory losses on account of cotton.

We have next question from Mr. Vikas Jain from Equirus.

My first question is about the inventory. You talked about the INR 200 crore lost sales because of the shipment halt. So are these now being shipped to our customers? Or they still sit on our inventory at this point in time?

No, Vikas, the hold on shipments and the provision on inventory are mutually exclusive phenomenon. The hold on shipments arose on account of clients asking us to hold shipments given the situation. But because COVID [Audio Gap] global markets, we did a technical evaluation of the net realizable value of our inventories and on account of COVID deemed it fit to take the hit. They are not interconnected events. The hold on shipments and the provision on inventories are not interconnected. The only connection between the 2 are on account of COVID. That's the only similarity, yes.

Got it. So please correct me if I'm wrong in my understanding that whatever the orders that had been placed, we were -- we could not ship those orders because of the lockdown period, right? So what I'm trying to ask is, are these -- those shipments that were previously ordered are now being -- has reached the customers or probably have we booked the sales on those inventories? That's what I'm asking.

Yes. So the inventories that were held back and could not be shipped have begun shipments partially in May. The same has ramped up further in June. And as I said in Q2, the order book is looking good. So I guess it will -- the momentum will come back in Q2 relative to the situation.

Right. So my second question is on the European operations. So since now -- is it the restructuring complete by end of FY '20? Or anything is left now on that part?

Yes. It's -- I would say, it's substantially complete, if not entirely. The -- I mean some of the inventory hits that we have taken during the quarter include inventories that were part of our European operations. That's something that we evaluated as well. And so I would say the Italian operational restructuring piece is pretty much over. [Audio Gap] to also just share with you, if you look at FY '19, on a turnover of INR 2,654 crores, we clocked an EBITDA of INR 580 crores, which was up from INR 466 crores in FY '18. Now -- so the momentum which was actually scheduled to continue during FY '20 has obviously not been the case. And the reasons for this have been: A, we have had a restructuring going on during the year of our Italian operations; B, we have had the COVID interruption that led to what you saw in Q4; C, we have had policy flip flops during the year, and that's not a Himatsingka-centric phenomenon, it's an industry-centric phenomenon, wherein the [Audio Gap] has been impacted with the impact of the reversal of MEIS. So that's the third piece. And I think, of course, there are a couple of other smaller pieces to the puzzle. But largely speaking, these 3 issues have affected our operating performance. Now having completed our calibrated CapEx program that I outlined in my update, any CapEx going forward is largely debottlenecking/maintenance CapEx, some brownfield movements here and there, nothing substantial going forward. And so 2 things will begin. The deleveraging of our balance sheet will begin once the ramp-up is in progress and our capacity utilizations will sweat better now that we are through our main CapEx phase. So that's what we are really looking forward to and, therefore, surpass FY '19 numbers in due course, obviously. I mean we have a long way to go in terms of what we can achieve with these assets. And therefore, we will now be focused in achieving those numbers. So I think the second half of this year, we will be focused really, on an annualized basis, trying to clock superior operating performance numbers vis-à-vis FY '19.

Got it. And sir, just last question from my side. When you said that the order book has now been healthier every month, can you just state any ballpark range as to what are the ordering levels of the customers versus the pre-COVID levels? Has it reached 40%, 50% or 60%? Any idea on that front?

So as I said, relative to the current circumstances, we see our Q2 order books to be pretty robust. And I guess I would define that as upwards of 75% of pre-COVID levels, if not better.

Correct. Correct. And sir, 1 last bookkeeping question. Sir, what was the CapEx that we incurred for FY '20?

FY '20 CapEx would be in the region of -- we'll get back to you on the specific number of that, Vikas.

[Operator Instructions] We have next question from Deepak Poddar from Sapphire Capital.

Sir, I just wanted to understand, like -- you expect from second quarter onwards your operational performance or your operations to be at near normalized situation, right? Is that the right thing to understand?

Yes. I mean, I would -- the nuance here is how do you define near normalized? And as I was answering Vikas earlier, he was asking the same question of how we define that vis-à-vis pre-COVID level. So I would say that at this point, upwards of 75% of pre-COVID level is what I would look at, and we'll try to better that number definitely, is what we're looking at. And then going into H2, we hope to continue to improve on that.

Fair enough. And as you mentioned earlier that this year your operating performance or the margin specifically has been impacted by 2, 3 things in terms of Italian restructuring or annual removal or the COVID impact. So how do you -- so any comments on your operating performance or operating margins going forward would be helpful here?

No. As I said, Deepak, we were supposed to continue to improve on FY '19 performance. We were supposed to continue our improvement vis-à-vis FY '19 performance during FY '20. But that didn't happen for the reasons I just outlined, mainly because of our Q4 interruptions, the Italian restructuring and, of course, the policy issues that we faced during the year. We also had some headwinds on product mix and some demand on the sheeting front, which were more short-term in nature. But we are likely to resume that same momentum going forward because all our assets are in place, our calibrated CapEx is over. Himatsingka controls -- I mean operates the world's largest spin plant under one roof, probably amongst the 4 largest Terry plants and same for sheeting as well as the most robust brand portfolio in the home textile space. And so we'll go back to focus -- being focused on sweating our assets and churning out the maximum EBITDA as we can from this, which is substantially higher than what we clocked in FY '19. So the room for EBITDA generation is substantially higher than obviously what we clocked in FY '19 because FY '19 did not include Terry numbers and things like that. So we have a lot of sweating to do on the sheeting plant, we have the entire Terry plant to sweat and we have to continue our growth on the brands front. And all these various things in tandem, along with the fact that we have largely finished the restructuring of our Italian division because I've outlined to investors even earlier during the year, that we are getting headwinds from both our Italian operations and also our niche, Drapery and Upholstery operations, which is the legacy business of the group. It's a very small division but has not been faring well over the last couple of years and has been clocking operating losses, which we are trying to reverse. So both these divisions have weighed also heavily on our operating performance, one which we have completed restructuring of and the other that is something that we are grappling with. So basically, all these things, sweating of our sheeting utilization, taking our Terry plant to the next phase of ramp-up, sweating our brand assets, having finished our Italian restructuring, trying to focus on our domestic -- I mean, our Drapery and Upholstery division to sort of turn around. All these things in tandem, along with the [Audio Gap] we have completed our CapEx, and we will hopefully begin deleveraging our balance sheet going forward, all these initiatives together should provide us a reasonable amount of operating strength.

Yes. Understood. So basically, what you're saying is that in the second half, maybe if we exclude the second quarter, we are looking at a superior performance as compared to what we did in FY '19, right?

On an annualized basis is what we are hoping for. But obviously, we have to remember it's COVID time, so are there things that are unseen and unpredictable? Yes, there are. But this is [Audio Gap] hitting at this point. Of course, I'll keep stakeholders posted if we see material movements vis-à-vis what we are currently seeing.

Fair enough, fair enough. And my final query is on your revenue front. Now given you have a strong order book in your hand and the good visibility from second quarter end onwards, so at least are you trying to maintain at least what we did in last year, FY '20 in terms of revenue? Or is there any potential for any growth? So any comment on that also would be helpful.

Is there any potential for any growth on what, sorry?

On the topline revenue during the current situation?