Himatsingka Seide Limited (HIMATSEIDE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Himatsingka Seide Limited Q3 FY '21 Post-Result Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Prerna Jhunjhunwala from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, ma'am.

Thank you, Malika. Good evening, everyone. On behalf of B&K Securities, I would like to welcome you all for 3Q 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; Mr. K. P. Rangaraj, Group CFO; and Mr. Dilip Panjwani, CFO, Strategic Finance. I would now like to hand over the call to Mr. K. P. Rangaraj for business updates as well as comments on financial update. Thank you, and over to you, sir.

Thank you, Prerna. A very good evening, ladies and gentlemen. On behalf of the company, we would like to welcome you all to the Q3 FY '21 earnings call. At the outset, I would like to wish you all a very, very happy New Year. My update will be in 3 parts. One, I'll start with the business update. And then there will be a brief on -- comments on the consolidated financial performance. And the third will be an update on the debt profile of the company. So I'll just start with the business update. The ramp-up of capacity utilization levels at our new Terry Towel facility remains on track and is expected to continue to rise during Q4 as well. The capacity utilization levels for our manufacturing facilities during the quarter ended December stood as follows: sheeting division, 71%; Terry Towel, 45%; and spinning division operated at 102% of the capacity. During the quarter, revenue streams from brands stood at INR 551 crores versus INR 579 crores during the last year. In line with Himatsingka's strategy to expand its global brand portfolio, during the quarter the company entered into a new licensing agreement with The Walt Disney Company for the European region. The license will give Himatsingka the rights to design, develop, manufacture and distribute a broad range of home textile products inspired by Disney's vast archives and characters from all its franchisees, including Disney, Marvel, Pixar and Lucas. As a part of Disney's relaunch strategy with a leaner and deeper partner base, Himatsingka will distribute an expansive range of license-owned textile products across Germany, United Kingdom, France, Italy, Spain, Central and Eastern Europe, the Nordics and South Africa, among other countries. This agreement marks the commencement of Himatsingka's relationship with Disney, the world's largest entertainment franchisee. I now move on to my next section, which is comments on consolidated financial performance. The consolidated total income for the quarter ended December '20 stood at INR 681.65 crores versus INR 675.85 crores in the previous year, an increase of about 0.9% year-on-year and versus INR 659.55 crores in Q2 FY '21, which translates to an increase of 3.4% quarter-on-quarter. Consolidated EBITDA for the quarter was INR 157.33 crores versus INR 124.71 crores in the previous year, an increase of 26.2% and versus INR 96.9 crores in Q2 FY '21, which translates to an increase of 62.4% on a quarter-on-quarter basis. EBITDA margin stood at 23.1% in the current quarter compared to 18.5% in the previous year. The improvement in margin was due to enhancement in capacity utilization levels and product mix. Consolidated PBT before exceptional item for the quarter ended December stood at INR 74.64 crores versus INR 39.35 crores in the previous year. For Q3 FY '20, FY -- which is the current quarter

Last, last year.

Which is the last year -- sorry, I beg your pardon, exceptional items included reversal of incentive benefits of MEIS to the extent of INR 25.65 crores and the European business restructuring expenditure of INR 8.38 crores. The consolidated PAT for the quarter was INR 45.06 crores versus INR 2.78 crores in the previous year. We remain focused on optimizing working capital and have reduced inventory levels by INR 313 crores during the 9-month period ending December. This translates to an inventory reduction of 28.7%. I move on to my last section, which is on debt profile. The consolidated gross debt as of December 31, '20 stood at INR 2,536 crores compared to INR 2,814 crores at the end of FY '20, a reduction of INR 278 crores. The total term debt stood at INR 1,712 crores, and the working capital debt stood at INR 824 crores. The cash and cash equivalents stood at INR 231 crores as at 31st of December '20. Consequently, the company's net debt outstanding as of December 31 stood at INR 2,306 crores compared to INR 2,591 crores as at 31st of March '20, which translates to a reduction of INR 285 crores. Just to give you some updates on ratios. Our capital efficiency ratios as of the end of the quarter, which on an annualized run rate basis, are as follows: The return on capital employed stood at 11.9%, and the return on equity stood at 13.3%. With this, I would like to complete my update. We shall be happy to take your questions now. I would now request our Managing Director to answer the question-and-answer session. Over to you.

[Operator Instructions] The first question is from the line of Bharath Subramanian from Sundaram Mutual Fund. [Operator Instructions]

Congratulations upon an improved set of performance...

Sorry to interrupt, sir, your voice is not audible, I would request you to come closer to the phone, sir.

Hello, is it now audible?

Yes.

Yes.

Fine, sure. My first -- congratulations for a good performance in the current quarter. My first question is with regard to our towel utilization which we have reached 45 percentage. In the previous year, the utilization would have been lower. So despite that, the revenue growth seems to be little muted at less than 2 percentage. What are the reasons despite, say, good ramp-up in the towel utilization, revenue growth is muted?

A fair question, Bharath. The -- we've seen some increase on the manufacturing throughput driven by our Terry Towel utilization seeing an upswing Y-o-Y. At the same time, we have seen some reduction in traded revenues. So as a result, manufacturing -- as a result, consolidated revenues have stayed range bound with marginal growth. But what's really happened is our overall margin profile has improved. The way we look at things now, we continue to feel that the order books are strong, and we should see organic growth going forward, including the continuing ramp-up of our Terry Towel facility.

Okay. Sir, any guidance you wish to give on the -- either of the division's utilization going into FY '22? Or the -- or is the current margin sustainable for either of the 2? What is your view on either of the 2 aspects?

Well, I think we don't give guidances. But I think what we will be happy to share with you is we feel that our sheeted utilizations should continue to rise. Our Terry Towel capacity utilization should also continue to rise. And as far as our EBITDA margins are concerned, we've always shared with investors earlier that it's in the -- our consolidated EBITDA margins normally should be in the range of 20% to 22%. And we feel that the current margin profile, 20% to 23% sort of band, is something that we should see continuing as we go forward. So while our EBITDA margins remain stable, I feel that our utilizations should continue to see an organic rise going forward into '22 and into Q4.

Sir, last question from my side. Sir, there are uncertainties with regard to the RoSCTL/RoDTEP, what is the rate, we don't know as of now. That's one aspect. And second thing is on the imported cotton and Indian cotton prices being different and also the pricing being on an increasing trend, what are the steps you have taken to mitigate or overcome these 2 challenges which we are seeing in the short to medium term?

So as far as the government -- the export incentives are concerned, Bharath, your guess is as good as mine. The new rates are yet to be announced. And so one would have to wait to see what the government announces on that front. Last year, we saw the withdrawal of some of the incentives during the third quarter of fiscal '20. So it would be incorrect for me to state my views on what the government will be doing at this stage. So my request is that we all wait and see what they come out with. As far as the increase in duties on raw cotton is concerned, it is something that, as it stands at this moment, it is something that will impact any imported cotton. And so it will impact the industry, because the industry widely uses raw cotton that's imported either from the United States or from jurisdictions like Egypt. And to that extent, there will be a duty component that will come and hit the P&L. Some of it will be absorbed, and some of it will be passed on is the way I see it. As far as we are concerned, thankfully, in our case, some of the cotton prices were a little higher earlier. So we won't see as much of a reduction as we would have liked to see. Maybe it will be more range bound. At the same time, we'll not -- we -- so therefore, we won't be able to see the benefits we would have been seeing. And we largely remain range bound as I see it. Thank you, Bharath, I hope I've answered your questions.

Yes, yes, yes. All the questions were answered.

The next question is from the line of Bhavin Chheda from Enam Holdings.

Yes. Sir, overall good set of numbers and strong traction across both your facilities. Sir, a continuation of the earlier question on the cotton duty. First question on, how much is the cotton imports you currently do? And second, if I understand correct, for the -- since the home textile companies export a large part of their product there is already a duty drawback available but I think the industry as...

Sorry to interrupt Mr. Chheda, this is the operator. There's a disturbance coming from your line, sir.

Sure. Now it is fine? Hello?

Yes, sir.

Yes. Yes.

Yes. So there is already a duty drawback duty, so has the industry already applied for increase in duty drawback post increase in cotton import duty?

Yes. The industry is in dialogue with the concerned stakeholders. And as I said, the government is yet to announce its new rates on the export incentives. So let's wait till that comes out. In the meantime, the way the duty will be dealt with, Bhavin, is that there'll be an element of absorption and an element of passing on that will take place. In -- and broadly, that's how the impact will be digested by the industry or by Himatsingka for that matter.

Sure. And how much is the Himatsingka's cotton imports as a percentage of overall or whatsoever number you look at?

It varies by quarter -- from quarter-to-quarter, Bhavin. It's not something that is linear in nature. But if there's an impact in the mid-teens, in rupees crores, mid-teens, partly, it will be dealt with, as I said, on a pricing front and partly absorbed. And as I was answering Bharath's question earlier, in our case, we have had some pricing on cotton which was a little steeper because we went long on it. And so instead of seeing a reduction to the tune that we expected, we may not see it to that extent. So I don't think the numbers will get significantly impacted in any consequential manner.

Sure. Second one was on the sheeting capacity and utilization once you reach optimum capacity probably by next year, is there a scope of debottlenecking current capacity? Or you will have to go for a CapEx for brownfield or greenfield?

Well, any debottlenecking in the industry is driven by CapEx. The only difference is when we use the term debottlenecking, typically, the CapEx is not pro rata as to what's required to set up that capacity in the first place. So the act of debottlenecking and thereby, enhancing capacity has come at marginal CapEx requirements. And the answer to your question is, yes, Himatsingka has the ability to continue to debottleneck and increase its capacities with -- at marginal CapEx rates both in its sheeting division and its Terry Towel division.

The next question is from the line of Aman Sonthalia from AK Securities Limited.

Yes. Sir, recently, we have seen there is a cost increase in the cotton prices, the yarn prices, and there will be some negative news as far as incentive on export is concerned and thereafter the currency is also hardening against dollar. So after taking all this, whether we will be able to maintain the 20%, 22% margin in the short to medium term?

Yes. Fair question. So actually, while we -- some of your -- some of the earlier questions were pertaining to the duty on raw cotton prices and its consequential impact, what you have raised is about the inflation in yarn prices that's being seen in the industry and in the market. They are both not -- they're not entirely interlinked and to a large extent, they are mutually exclusive events. I mean, the -- there has been significant inflation on the raw material prices, including yarn. And that is something the industry will see an impact of in the short term. So in Q4, the industry and us will be grappling with this challenge. And so I'm talking for Himatsingka, so Himatsingka will be faced with this challenge of an increase in yarn prices that is unfolding over the last 3 to 4 months. To the extent that we have our integrated spinning capacities, we will not be impacted. And to the extent that we buy from the outside world, we will have to face inflation. But it's more short term in nature. I think in our specific case, with some increase in manufacturing throughput, that we should continue to sort of -- that we continue to aim for during the fourth quarter, we should be able to mitigate some of those impacts and hold our margins range bound.

And sir, also the freight rate has increased a lot. I think it has more than doubled or tripled in the last few months. So that cost is also borne by us or by the buyers?

Well, in most cases -- I mean there's certainly -- some parts of it that's borne by us. But for the large part, it's borne by the buyer.

Okay. And sir, one more question, that how big the China opportunity is? So going forward, how much demand you will expect against China in the long -- medium to long term?

I'm not sure I can answer that because it's a very broad question. But the China opportunity seems more realistic than it did a few quarters ago, at least in our case. And -- but it's difficult to pinpoint what this would translate in, in terms of demand. But there is an unfolding China opportunity that seems to be around the corner. But it is not possible for me to put a finger on it.

But definitely, there will be some positive impact in favor of India?

In all likelihood, yes.

Okay. And without China, sir, how is the demand outlook for next few years in the home textile segment?

The demand looks reasonably strong. Soft home as a category has been looking strong all through these last few quarters because of the underlying nature of the product. So -- and the visibility we have at this point, it should continue to be reasonably strong as far as we have visibility over the next couple of quarters.

[Operator Instructions] The next question is from the line of [ Rishikesh Ojha from Tobo Capital ].

Just one question from my side. Sir, can we expect the Terry Towel capacity that, that expects to go to 80% to 90% level in FY '22? And what to the -- what revenue -- what kind of revenues and EBITDA margins can it generate given the utilization level crosses 80% to 90%.

We -- let me take the margin piece first. So the -- to the consolidated EBITDA margins of 20%, 22%, thereabouts, plus/minus, is something that is applicable to the Terry Towel division as well just as it is to the sheeting division, and so we think that the margin profile of that division should be in that region. There could be some short-term movements because of inflation but other than that, the margin profile of Terry Towel as far as Himatsingka is concerned, is in that region. To your second point on utilizations, we have started -- we commissioned the plant in October 2020 -- sorry, 2019. We had the third and partially the fourth quarter of FY '21 -- of FY '20. So FY '20, we operated the plant for about 5 months and a few days. And then the pandemic hit us. And so the Q3 was a good pickup as far as we are concerned to be able to hit utilizations of over 40%. As we had -- as Ranga had indicated in his business update, we expect the utilizations to continue to go north in the fourth quarter of the fiscal and continue to rise going into FY '22. So all in all, we are directionally headed in the -- in enhancing our capacity utilizations in Terry quite significantly going into '22.

Okay, sir. But given that if it crosses more than 90% in FY '22, what kind of revenues can the segment generate?

I had answered this earlier, but it should be range bound in the region of approximately in -- at full capacity, approximately INR 1,100 crores to INR 1,300 crores, INR 1,100 crores to INR 1,200 crores somewhere there, depending on product mix.

Okay, sir. That will do.

[Operator Instructions] The next question is from the line of [ Rakesh Sharma ], an individual investor.

Sir, regarding your operations, regarding your payments, some of the payments to the vendors are not been made on time and it is not creating any paradox.

I'm not sure what you're implying, [ Rakesh ], but please do get in touch with us, and we'll be happy to take this off-line.

No. Actually, that is because you're not getting proper response from the company people, and it has been delayed by more than 4 times. So that is why we have come and we are asking the question, sir.

Yes. But this is not the forum to ask this because if there are any delays or anything of that during the pandemic, please reach out to finance, [ Rakesh ]. We hear you. So please reach out to...

Can you give me your e-mail ID or something sir we can come there.

I request you to reach out to the finance department, [ Rakesh ].

The next question is from the line of Deepak Poddar from Sapphire Capital.

Yes. Sir, just wanted to understand, first on your debt outlook, this INR 2,600-odd crores or INR 2,500-odd crores debt that we have, so how do you see the debt trajectory or debt repayment over next 1 to 2 years? So that would be quite helpful.

Fair question, Deepak. So we have reduced our net debt by about INR 285 crores during the 9-month period. And our gross debt has come down from INR 2,814 crores to INR 2,536 stores. Our calibrated CapEx cycle, as I've shared with investors, has come to a close. We do have some organic capital expenditure that will -- that's ongoing and will continue. But having completed our major CapEx program, deleveraging will be a central theme as far as we are concerned. And we feel that we would delever anywhere between INR 200 crores and INR 400 crores per annum going forward as far as our existing businesses are concerned. So if there's something new we do or something additional we do, that's over and above. But on an existing basis, that's the broad range that we would consider because we could have some working capital movements and things like that. So I guess that should be the range.

INR 200 crores and INR 400 crores, that's on a gross basis you're talking about?

That's right.

Fair enough. And my second query is regarding your revenue, now you're talking about 45% Terry Towel utilization level versus so maybe it might be contributing on an annual basis, maybe, INR 400 crores to INR 500 crores kind of a top line are going. So at full think capacity utilization, it has an ability to generate additional INR 600 crores to INR 700 crores kind of a top line. So that is what we want to achieve in FY '22 in terms of by year-end of next year. So we would be looking at 90%, 95% Terry Towel utilization level. So is that what we might be thinking about?

That's the same question the gentleman asked me earlier. So unfortunately, I won't be able to pinpoint a number whether -- I mean, ideally, would you like to -- would we like to achieve full capacity at the earliest time frame? Yes, we would. As I said, we have reached 40 -- over 40% during Q3, we are looking at an increase in Q4 and a continuing increase into FY '22. So overall, I feel that we are headed in that direction. Now whether we achieve those numbers in the second half of '22 or in the initial part of '23, I can't pinpoint. It could be earlier, it could be around that time, but we are directionally headed there. And the opportunities on revenue streams are, as I said earlier, overall, before any further debottlenecking occurs, should be in the region of INR 1,200 crores at full capacity.

[Operator Instructions] The next question is from the line of Mithun Ashwath from Kivah Advisors.

Congratulations on a good set of results. I just wanted to ask you more in terms of the medium-term outlook. What sort of return on capital employed do you foresee the company targeting? And by when we could achieve those sorts of numbers?

Our assessment was between 15% and 20% ROCE is what we would like to consistently achieve. So we were headed in that trajectory before being disturbed by this whole episode of the pandemic. And we have -- some of our ratios are a little subdued because of the new facility. But that's the kind of range we would like to achieve consistently. I'd also like to tell you all that when you're computing ROCE, other than removing the payables that you do to compute the statistic, please be mindful that the balance sheet has lease liabilities and, therefore, government grants per accounting standards that are sitting on the books that dilute these returns and need to be negated, one has to ideally remove them. Please feel free to contact us, and we'll let you know what the number was roughly for H1, but it's north of INR 300 crores on the full balance sheet. So one has to not just remove the payable component in the ordinary cost that we would have, but also be mindful of these aspects which are diluting our ROCE numbers.

Sir, any time line for the -- to achieve those numbers, sir?

I'm sorry, I can't give you time lines, but directionally, as our operating performance have improved, it's already sort of bounced back to normal, and as it improves from here, one will keep inching closer in that direction.

Yes. And one -- just one follow-up on this tie-up with Disney. What type of opportunity are we looking at with this licensee agreement?

We can't comment specifically on what a specific brand portfolio would bring us from a standpoint of revenues. But what I'd be happy to say is any -- this is not a marginal initiative and an opportunity which will result in a few million here and there. We are looking at Disney bringing us pretty substantial revenue streams going forward. And the definition of substantial would be, in our sort of brand universe, anything that does over $15 million, $20 million should be substantial for us.