Himatsingka Seide Limited (HIMATSEIDE) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen, I'm Momita, moderator for the conference call. Welcome to Himatsingka Seide Limited 2Q FY '21 Post-Results Conference Call hosted by Batlivala & Karani Securities Private Limited. [Operator Instructions] Please note, this conference is recorded. I would now like to hand over the floor to Ms. Prerna Jhunjhunwala. Please go ahead, ma'am.

Thank you, Momita. Good evening, everyone. On behalf of B&K Securities, I would like to welcome you all for 2Q FY '21 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; and Mr. Ashok Sharma, Senior Executive 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.

Thanks, Prerna. Thank you, everyone, for taking the time to join us for the call today. I'd like to start the call with a business update and outlook section. And then Mr. Rangaraj will share with you some comments on our consolidated financial performance, and then we'll go through to Q&A. So on the business update and outlook front, the retail environment has witnessed significant buoyancy during the second quarter of FY '21 as compared to the situation that prevailed during the first quarter of the fiscal. The notable developments on the retail front have been as follows. There's been the completion of phased store openings of all major retail chains across North America and the European region. There's been a strong demand for home improvement products that's been visible. E-commerce sales that the retailers are clocking, continue to see substantial increases Y-o-Y and Q-on-Q. And big box, department stores and specialty chain stores continue to enhance their focus on their home assortments. So these are some of the -- this is some of the pulse that's coming through to us as far as the broad retail environment goes and specifically to home products in terms of pulse. And as a result, these developments on the retail front have led to stronger order books and volume demand for products. Therefore, keeping all this in mind, we have covered substantial ground during the quarter and have been focused on ramping up our operations across all our facilities. We have made significant progress vis-à-vis the previous quarter, but we were unable to operate our facilities at required levels at utilization on account of COVID-related interruptions this lower manufacturing throughput has had an impact on our product mix, gross margins and cost efficiencies, resulting in lower operating EBITDAs for the quarter. Going into H2, FY '21, the capacity utilization levels at our sheeting and Terry Towel facilities have seen improvement and are likely to surpass pre-COVID levels of operations. So broadly, this is what we basically have seen. Our -- ramping up of our manufacturing facilities is progressing well. But undoubtedly, we have some more ground to cover. Going into Q3, we have seen improvement in our ramping up of capacity utilizations. And we continue in that direction. But during the second quarter, we've had these interruptions, which has impacted our performance at the operating level. I request Mr. Rangaraj to share some of his views on the consolidated financial performance, and then we'll take it on to Q&A.

Good afternoon, ladies and gentlemen. And just give you a brief observations and comments on the consolidated financial performance. Our operating performance was also impacted by foreign exchange translation losses of approximately INR 10 crores during the quarter. In addition, Q2 FY '21 numbers exclude MEIS incentives to the tune of INR 11.5 crores versus the same quarter last year. The MEIS impact will however be compensated in due course, driven by increase in volumes and the ramping up of new Terry Towel plant. We remain focused on optimizing the working capital cycles, and has reduced inventory levels by INR 290 crores during H1 FY '21. The consolidated gross debt as of 30 September, '20 stood at INR 2,592 crores compared to INR 2,814 crores at the end of FY '20. The total term debt stood at INR 1,755 crores and the total working capital debt stood at INR 837 crores. The cash and cash equivalents and current investments stood at INR 238 crores as on 30th of September 20 as compared to INR 224 crores as of March 31 '20. Consequently, the company's net debt outstanding as of 30th of September stood at INR 2,354 crores compared to INR 2,590 crores as on 31st of March '20. I complete my short update. I will be happy to take on any questions now. Thank you for your patience.

[Operator Instructions] Our first question is from Mr. Ritesh Gandhi from Discovery Capital.

Sir, just want to understand, compared to your other home expenses I mean, our numbers haven't shown as high recovery. Just wanted to understand if there was anything specific with regards to the product mix or something else, which is leading to this. Or is it just some specific issue to us against some other companies?

Yes. Fair question, Ritesh. So as far as certain -- so normally, I wouldn't comment on any peers. And I don't intend to at this point either. But generally speaking, there are some peers whose numbers are not comparable because they have other segments that form a part of their numbers. And some others who are more pure play, textiles/home textile players. Best of our knowledge, the difference really is arising out from the -- arising from the fact that Himatsingka was largely shut down during the lockdown and because our clients really were not those who are providing essential goods and services. And therefore, they remain shut as well for the most part. And so the whole process of recovery vis-à-vis the impact that has hit us on the pandemic front is taking a little longer for us vis-à-vis others. So our manufacturing operations were pretty much shut through -- for the most part of Q1. And we've had a gradual -- we've had a ramp-up that's been reasonable as far as Q2 is concerned. But we could have done a little better on the ramping up front. Unfortunately, we were interrupted on account of some of these COVID interruptions, mainly arising from workforce availability and things like that, which improved in the latter half of the second quarter and continues to improve. So I don't think there is anything structural as far as Himatsingka is concerned. There's no structural concern. It's just a timing issue with regard to ramping up our facilities. Our order books and visibility remain robust. We have seen a fair rebound on the top line front, but we have some ground to cover manufacturing operations, which we hopefully will address in the second half of the fiscal.

Good point. And then just to understand because, obviously, this entire Q2 between July, August and September, each part of it would be sort of at different levels effectively over productivity. So as we exited the quarter and as it's going into October, now are we like running at optimal capacity? Or we are still in the phase of ramping up to an extent?

Yes. There are some parts which are optimum and some parts which are still ramping up. And they are covering that distance. It's unfortunate...

And the reason that we aren't able to, call it, ramp-up because everyone else has sort of indicated that the ramp-up is already on and they all are running flat effectively because demand is so high, is it because where our plants are actually located have had higher impact of COVID? Or just wanted to understand all that -- we've been slightly -- actually cautious with regards to the opening up.

No. I think as far as location is concerned, I don't think it's a location-specific issue. But the central issue, the central challenge that we did face in ramping up our facilities was making sure that the right workforce and the right skill was on the shop floor and the measure that we wanted. That's the piece that's taken us a little longer than estimated. We've also suffered more specifically, in our case, vis-à-vis our product mix. We've had some disturbances in the supply chain, which has been set right as well during the second quarter. So I think the workforce piece was central to the time that Himatsingka is taking to ramp-up. But as I said, going into Q3, we now have certain facilities which have entirely been ramped up and certain others, which are still in the process of ramping -- much better position quite honestly due to...

Got it. And if you could also underscore from your end, if you see this demand being -- I mean, temporary as people are actually working from home, therefore, home improvement is becoming a priority? Or is there any amount -- we're hearing from a few people that there could be a structural gain in India share in actually fashion bedding where our share is slightly lower. So I just wanted to understand, any cyclical versus maybe structural aspects from showroom perspective on this.

Yes. Fair question. So there are a bunch of triggers out there that could potentially influence India share of the pie in major markets and so on. So as far as India share vis-à-vis China or other competing economies are concerned. I mean, look, there is a case that's out there for us to gain some market share, given the issues that China and the U.S. have faced off late and things like that. It's translating into numbers with different intensities depending on the corporate. So it's difficult for us to predict whether one sees -- or whether one will continue to see sustained, let's say, shifts from China to India. But as far as Himatsingka is concerned, we have definitely seen an uptick in interest and inquiries that pertain to capacity requests of products that were cheaper to make in China. So that is -- there is a visible uptick in such inquiries and requests. How much of this is going to translate to actual ships remain to be seen, but the process has definitely begun. In other words, there are some conversions that are taking place. And so that -- so that's as far as some of the supply shifts from China and other economies into India. Then there is the second sort of macro, let's just say, theme that's playing out, which is -- is this heightened demand going to sustain. Look, as far as we are concerned, the demand that's coming through is definitely higher than it used to be. The absolute numbers are not astounding, what is astounding is the urgency because the pool at the other end is high vis-à-vis the shelves. So I think, at least for the near term, one foresees that this demand pattern should sustain. And as far as we are concerned, the heightened demand is not just coming because of, let's just say, bunched up of demand on account of the pandemic. We are also seeing demand uptick because of the increase in capacity utilizations that we have at our Terry plant, which we're seeing it because of a host of new product offerings and a broadening client base that we have been focusing on over the last year as so. So as far as Himatsingka is concerned, we are also seeing demand because of those reasons.

Got it. Got it. And sir, the last question from my end is that...

Ritesh, sir...

Okay, I'll go back in queue..

[Operator Instructions] The next question comes from Resham Jain from DSP.

So I have a couple of questions. So first is very good to see substantial reduction in the inventory over the last 18 odd months actually. And if you can just explain what has led to this sharp drop in inventory? Obviously, that was your key focus as well. And how sustainable will this inventory be going forward?

Yes, fair point, Resham. So we've reduced the inventory by INR 290 crores during the first half of this fiscal. We have been sharing with our investors the fact that working capital optimization remains a priority for us. While we did carry through with optimization, it wasn't to the levels of our satisfaction. But we have used this period to make sure that we have reduced inventory fair bit. Obviously, the reduction in inventory will not continue at the same pace because we have seen a substantial reduction of close to, I would say, whatever, 26% 25%, 30% of our total inventory from INR 1,087 crores levels to INR 797 crores levels during the first half. So the rate of reduction will not be quite as near as what we've talked. But I think we should be range-bound from here. Because one has to be mindful of the fact that we're also ramping up our Terry capacities. So there will be some pull as well. And we'll continue the optimization efforts. So hopefully, we should be range-bound.

Okay. Understood. Sir, my second question is on gross margin. I understood your initial remarks on the overall disruptions which you face because of employees and all. But when we look at the gross margins, it has come down significantly, actually, given your past numbers. So what explains this significant gross margin numbers? And what kind of gross margin will you expect for the coming quarters?

Well, I can't be specific about the -- what we will expect for the coming quarters, as you know. But we will go back to our normal levels of gross margin that we've had in terms of a band. So we are -- for this Q and for that matter, the first Q we've been off as far as our gross margin numbers are concerned for reasons, as we've explained. And we -- as we see it, we'll go back to settling at gross margin bands that we normally clocked earlier. That's as far as where we expect to be headed. As far as why we are clocking lower gross margins, it's essentially linked to lower manufacturing throughputs. And we'll be happy to take you through it in greater detail offline, but essentially, the lower manufacturing throughputs in addition to FX impacts have hit us on the gross margin front. There's nothing else to it. It will revert back to its normal bands.

The next question comes from Mr. Vikas Jain from Equirus Securities.

Sir, my first question is with respect to one of the earlier participants' question, you mentioned that the demand -- the currently robust demand that we are seeing is majorly because of the 2 reasons: the work-from-home culture and because of the anti-China sentiment. While we can understand that anti-China sentiment as a process to retailers to other countries will -- may sustain for a much longer period of time, how do you expect this work-from-home culture driving the overall demand to continue? And for -- so how long this demand from this region can sustain? Any -- your views on this?

No. So it wasn't -- my assessment was not that these were the only 2 factors driving demand. It was the gentleman who had the question. It was his observation that he felt that these were the 2 factors that were driving demand. These were, in our assessment, this is one of the many factors driving demand. And so the other reasons for the demand uptick we are seeing is that our client expansion, our product expansion and our capacity expansion initiatives that have unfolded recently. So they have equally added to larger demand that we have seen. In addition to the fact that there's a theory that the work-from-home shift has generated additional demand. No doubt it has. The China piece, as I said, has not, at least in our opinion, created any measurable uptick in demand as far as Himatsingka is concerned. There has been a much larger pipeline of inquiries, and there has been some conversion, but nothing substantial at this point. And therefore, I think overall, given all the factors that we spoke about and given the fact that our client expansion, product expansion and capacity expansion initiatives have come through and are coming through rather. As far as Himatsingka is concerned, we feel that the broad buoyance in demand is something that we foresee going forward at least in the nearer term. And then we'll review it as we go along.

Right, sir. So if I can ask, can you just throw some light on the client expansion as well as the product expansion side? In last call, you mentioned you had added a certain number of clients. As it takes a certain period of time to ramp up, can you just throw a bit light more on that? And also, what are the new products that we have launched in terms of our product portfolio expansion?

Yes. So as far as client expansions are concerned because -- I mean, obviously, I wouldn't get into names at this point, but Himatsingka is adding clients both in its North America portfolio and it's European portfolio. It's seeing a healthy addition of clients, point number one. Point number two. As far as products are concerned, when the pandemic hit us in March, it had just been 5 months that we had commissioned our new Terry Towel facility. So it was operational for literally 20, 22 weeks before the pandemic hit us. And then we have been ramping up after the lockdowns are over and so on. So the fact that our Terry Towel plant is commissioned, opens a whole assortment of new products that the group offers on the bath front. In addition to that, we have introduced several, let's just say, segment adjacencies in both bedding and bath in order to strengthen our offerings globally. So product category expansions and client portfolio expansions have been pretty robust as far as we are concerned and is a major reason for some of the demand that we are seeing. In addition, as far as client expansions are concerned, not only are we seeing -- not only are we adding to brick-and-mortar sort of place, but obviously, we are seeing an uptick on the e-com piece, both directly and through our clients. When I say directly, I mean ship directly to the consumer, and ship to our clients, we're seeing that as well. So I guess all of this put together is what's causing the uptick in demand as far as we are concerned.

Right, sir. And just one last question. Sir, as you mentioned, because one of the reasons for the lower utilization levels was some of the disturbances on the supply side. Can you just elaborate on that front?

No, as I said, the single largest challenge that we face on the ramp-up was related to workforce. And we also saw some disturbances on the supply chain for inbound supplies for products and so on. But the single largest challenge was workforce related, which we have largely addressed and continue to do so. As I was telling the gentleman who was on the line earlier, that most of our -- some of our facilities are now running at optimum levels of utilization. And the others are ramping up -- continue to ramp up as we go into Q3. Hopefully, we'll be at the levels of -- the required levels, we'll hit it in Q3.

The next question comes from Ms. Prerna Jhunjhunwala from Batlivala & Karani Securities.

Sir, congratulations or reaching the pre-pandemic level of sales at control level. It's quite hardening to see we coming back to the earlier levels of sales. I just -- you've spoken a lot on the demand. But I wanted to understand how much of your revenue would be from brands? And what would be the contribution now given the change in our strategy that we were speaking about in the last quarter? And how is the demand shaping up in our brands business versus the new client basis?

Thank you, Prerna, for your observations. So as far as our revenues from brands are concerned, they continue to be stable. And we will continue to explore opportunities to enhance our brand portfolio. Maybe we'll be making some communications to that effect shortly. But so as far as our brands are concerned, we continue to be focused on growing them. But I'd also like to add that our private label portfolio business, private label businesses are also seeing an uptick. So maybe there could be some corrections in terms of the percentage of branded revenues vis-à-vis total revenues going forward because of the uptick we are seeing on the private label front as well. But nothing beyond that, that I see in terms of change.

Okay. Okay. Actually, I would have been wanting to know the number of sales that you would have done in the revenue from then, as you report very regularly, those numbers.

We'll put that through. We'll share that with you all.

Okay. And second question is on the benefit of lower cotton sizes coming into our business. Have they started coming in? Or will may be a part of our numbers in the second half is my next question.

Well, on some of our raw materials, we were covered, so we didn't really get any benefits. On certain other parts we did. So some of it is crept in, but marginally. And before we could take sort of full advantage of a more benign raw material environment, unfortunately, the raw material environment is not benign anymore, and it's looking the other way. So raw material inflation is actually on the table unfortunately, over the last month or so, that's been the situation. So unfortunately, Himatsingka has not availed -- not, let's just say, gotten the entire benefit of raw materials. And we are already seeing a little bit of an uptick on the raw material front. So on the uptick side as well, again, we are covered to some extent. So we won't see the entire impact. And we will absorb it in certain other areas depending on the product mix and things like that. But FYI, raw materials are heading north. When I say raw, I mean cotton.

Yes. Okay. And sir, last question would be on your -- basically, projectively, yes. So last question would be on the capacity utilization that you spoke at some capacities are ramping up better than the earlier. So could you help us understand whether it is on Spinning side or Terry Towel or it or bedsheets side, which are seeing better ramp-up than other capacities?

No. So Prerna, so Spinning has nothing to ramp up because of the backward integration projects, so it's running full. As far as Terry Towel is concerned, it's a new greenfield plant commissioned recently, so we are ramping that up. The progress is satisfactory. I would say it's more than satisfactory in terms of what we are seeing. And so we are ramping that up. It's a new plant. So it's taking us a little bit of time to settle in, but it's ramping up well. And so is the case with our sheeting plant. So sheeting continues to ramp-up going into H2 and as the same for Terry Towel. So our Home Textile Solutions vertical is seeing this. And as far as the yarn and fiber solutions piece goes, it's stable because it's running full.

[Operator Instructions] Sir, the next question comes from Mr. [ Devang Patel from Lapa Asset Management ]

Sir, in Q2, if you would quantify how much revenue you would have lost because of production concerns, it would be helpful. And when you say in -- Q3 will be ramping up, so when you say full ramp-up is that closer to INR 1,000 crores of revenue run rate a quarter?

[ Devang ], unfortunately, I can't answer either of your questions specifically, especially the second one. And as far as -- I mean, the loss of manufacturing revenues that we saw -- not manufacturing, the loss of the throughput that we saw on the manufacturing front that resulted in gross margin impacts and consequently, EBITDA impacts. It's visible if you look at our stand-alone numbers. So we have lost at least that much.

Okay. Sir and to understand how the business works a bit, when you lose -- when you're not able to fulfill the demand, what does the client do? Do they have other vendors from where they try to fulfill their orders? And secondly, you've mentioned earlier, there are more inquiries because of what's happening with China. How much time does it take to onboard a new client? And are they asking for committed supplies, how much time would that take to translate to business?

Well, so to answer your first question, yes, there are other vendors, but, no, people don't -- clients don't hop from one vendor to the other because running a couple of weeks behind schedule. So that's an ordinary cost development as far as the industry is concerned and it -- and it's not across the board. So the movements in deliveries all the time. So there's no risk emanating from unfulfillment of demand unless that becomes very material, which is -- or chronic, which is not the case as far as we are concerned. Your second question in terms of how long it takes to convert a client who is currently shopping out of China, for example, is not something that's determinable because it could be as quick as a month, and it could take as long as the year. It really depends on the client. The act of onboarding and producing for them shouldn't -- is not a time-consuming process. What is all the formalities associated with changing suppliers. That is typical of large retailers because they go through a lot of procedures and protocols when they switch from one supplier to the other. That's what takes time. I would say that if they did indeed take -- if they did take a decision to move from supply A to B, I would say the average time frame would be anywhere between 6 to 12 months from when they decide or from when they've started the process of making a decision.

Okay. So this whole tailwind of China will take 12 months, almost 12 months to show up in any revenue increase?

No, from when they started looking out, so maybe they have started 6 months ago. So again, it's not 12 months from today or 6 to 12 months from today. It's 6 to 12 months from when a client starts to look out for alternate sources is broadly the time frame that I would estimate to the best of my knowledge in terms of the kind of time frames they would take.