Himatsingka Seide Limited (HIMATSEIDE) Earnings Call Transcript & Summary

Okay. So Anurag, the way it works is now the latter that you referred to. So Himatsingka has the right to design, develop, manufacture and distribute the licensed brands that it undertakes. So -- and therefore, it is responsible for all sales, all distribution, all inventory management, all client-facing dialogue and so on, all product development, all manufacturing. So it's a full suite of responsibility that comes with brand licensing. And it's a know-how that we have sort of developed over the years. And so that's really how it works, and we then pay a royalty for what we sell. That's traditionally how brand licensing works in most textile categories.

Understood. Understood. So is it higher profitability, higher return business versus manufacturing, more resilient? How do you see this business?

I've been asked this question before. It's not necessarily higher margin. It could be in some instances and it may not be in some other. But what it does -- do for us is, since these licenses are exclusive to the group, those revenue streams are not subject to billing pressures and things like that. They also create, I would say, enhanced stickiness as far as our revenue streams are concerned. Sometimes slightly marginally better pricing path. And of course, global access and reach across client networks and channels from time to time have also benefits that one -- that sees from a strong portfolio of brands. These benefits are not necessarily always measurable and they're not necessarily linear. But these are definitely, broadly speaking, the kinds of benefits we have experienced over time.

Understood. But just one last follow-up on this. So this is exclusive global rights for the brands that we have, right?

Some global, some more region-centric. So some might be just for North America, some are global in nature, some are North America and Europe, some are -- and things like that. And then there are some own brands that the group has, which operate in certain regions, et cetera. So it's really -- it's not always global. It's what makes sense for the brand.

Understood. Understood. And just one last question. At what rate is this business going? If you can say that? That's all.

It broadly follows an organic growth rate in -- it's -- I would say, in the high single digits to low double-digit numbers thereabouts is what one could reasonably see in these businesses, if I take a medium-term perspective.

The next question is from the line of Prerna Jhunjhunwala from B&K Securities.

Yes. Am I audible now?

Yes.

Yes. Go ahead.

Congratulations, sir, on improving traction on capacity utilization. And I just wanted -- I know you said that you'll give more clarity on expansion this time. But by when should we assume that these capacities would the -- expansions would complete maybe in 1 year or 2 years? And what really gives confidence on such huge capacity expansion, especially in the bedsheet business because 108 million meter is very high improvement on current capacity? So just wanted some clarity on brand B2B, region-wide clarity would just help in understanding the direction in which we are moving.

Prerna, fair set of questions. So first time lines are concerned, I would think it's over the next 12 months. So it can be implemented in phases earlier. As I said, we'll be more specific about it with time. But it could come into in phases earlier, but it will all be sort of implemented over the next 12 to 14 months' time period, if not a little earlier. To the second part of your question, let me start with terry towels first. Himatsingka commissioned the plant in October '19 with a capacity of 25,000 tonnes per annum. We operated the plant performance before hitting a lockdown in March, and then we started our operations in June, July, then the lockdown was lifted. In a sense, we have operated the plant in and of its entirety for maybe, whatever, 14 months. We have ramped up the capacity to close to 66%. So we've topped 66%, from 0 to 66% in about 14 months, which we feel is quite satisfactory. And it is on this ramp-up and this strength that we see in -- that the debottlenecking from 25,000 to 40,000 tonnes per annum should be something that we can easily sort of navigate. Of course, it doesn't mean that everything is going to happen overnight, and there will be some challenges along the way. We are used to challenges. But this is essentially what's driving the thinking when it comes to the terry towel plant. When it comes to the sheeting plant, yes, it is a jump of sorts. But there are certain minimum configurations that need to be -- that are optimal and that need to be put in place. One doesn't have the option of increasing capacities in small marginal increments. So therefore, the next logical step, will be our infrastructure and our configuration is that number of 108 million. But it would be more like part of that capacity sometimes is not available because of product mix and other challenges that come in from time to time. But given the current visibility we have even on the sheeting front, and things like that, we think, it's a good thing to have in terms of capacities because sometimes opportunities also present themselves in very substantive ways. Be mindful of the fact that there's a lot of sociopolitical undercurrents that may cause opportunities to crop up for Indian players in going forward and one must be equipped with capacity at that time to be able to tap into such opportunities. The cost of idling some capacity, if the need base, isn't really much because these are all debottlenecking initiatives and within our organic CapEx bandwidth. And therefore, keeping the social political movements and other macroeconomic forces that are acting on global demand patterns at this point, we find it prudent to be able to equip ourselves over the next 12 months with some incremental capacities even on that junk.

That's quite enthusing, sir. Also, if you could just highlight on the traction in the Europe region, that will be helpful.

Europe is progressing well. We are garnering market share in the European region. I think that traction will continue. This will give us a flip as well in the months and quarters to come. So we remain on course as far as our European market share sort of expansion is concerned for both bedding and bath products.

The next question is from the line of Amit Kumar from [indiscernible] Investments.

Sir, I just wanted to sort of correlate your CapEx and expansion plan whether we view on how does the demand -- the end user demand for your product is sort of shaping up now but also 2, 3 years down the line? So our understanding is that majority of the product basically, the home solutions products it exported to U.S. and the fundamental volume demand growth in that market is like 2%, 3%. That last 12 months, it has been very, very strong even compared to, let's say, 2019 levels, a double-digit kind of volume expansion. And as you sort of also mentioned, the near-term visibility also remains to be good. The question that we have is that more from a medium-term perspective, do you sort of see this kind of demand trends, double-digit volume growth essentially continue, or does demand sort of go back to normal? So our understanding is that this is more of a work from home becoming the center of your world kind of situation. But now with vaccine coming in, people in U.S., Europe, they are sort of stepping out and mobility trends are starting to normalize. So I just wanted to sort of get a sense of how you are looking at demand. I think you talked about next -- I mean, the near-term visibility. But how are you seeing this in the medium term? And an associated question with that is aside from U.S., what kind of opportunity set do you see -- and what are the other markets -- Europe you sort of talked about. What are the other sort of opportunity markets? And what kind of opportunity set for the company for the industry that you see? Because our understanding is U.S. -- India is already -- in this segment, already capturing a 50%, 55% kind of market share, maybe that sort of still continues to go up. But there are, obviously, limitations now because the level is already sort of so high. So what is the next sort of leg of growth in terms of geography or in terms of sort of specific countries that you have in mind?

Yes. Such a fair set of questions. Amit, right, you said?

Yes.

So Amit, a fair set of questions, let try and address all of your queries. So as far as demand, our sort of view on demand outlook over the next 3 years and how the sort of puzzle pieces itself. Obviously, there's no definitive binary answer to these things. These are dynamic and intangible metrics from one standpoint. But there are data points and industry experience that drives this thinking as well. So first and foremost, one must look at both the bearing portfolio and our portfolio as a combination of several subsegments which may or may not come through in plain vanilla beta extraction from OpEx side. There are several subsegments in the bearing portfolio that actually make up the total revenue streams in that segment. And you see that probably operates one of the widest -- probably operates one of the widest spectrum of products in these verticals. And so we will be looking to enhance our offerings across these verticals, which then cumulatively will translate to larger capacity throughput. If you look at it from that lens, it's not such an intimidating statistics as it is made out to be because of the several subsegments, which may or may not be covered in that piece of data that you're referring to. That's one. Second, all of this capacity is not ready to the United States of America. There are other pockets of opportunity that are presenting themselves and one has to be positioned to be able to capitalize on such opportunities. Why? Because one cannot put up or debottleneck capacities in short notice. By the time one gets plant and machinery and whatever else needs to be set up, these are fairly long lead projects. I wouldn't say -- project is a broad term, long lead initiatives which can't be implemented in 1, 2 or 3 months, but typically takes some time. And so one would have to start planning for it in advance because it's not just the United States, but it's -- there are buckets of opportunity emerging in Europe. You've all -- and we've all read some lights of [Technical Difficulty]

The line for the management seems to have disconnected. Please hold we reconnect them. We have the management line reconnected. Sir, you have been unmuted.

Yes. So I was saying that the pockets of demand are coming not just from the United States, but from various other geographies. And we have all read some lights about potential opportunities cropping up for India, in general. We will be in the European region and so on. So we feel that we need to be prepared to take on emerging opportunities across these jurisdictions. And at some point, that will include India as well as far as Himatsingka is concerned, to feed into some of the demand emanating from India and Asia Pacific regions. So that's my second point. So my first point is, there are several product subsegments. Our product offerings comprise of various kinds of products and one has to look at them in the breadth that we offer these products to be able to sort of marry capacity and product offering. Second, it's not just the U.S., it's several pockets of opportunities. And third, there could be larger movements, which are more sudden in nature and are more substantive in nature because of the sociopolitical sort of forces at play, which I briefly alluded to. Of course, these are not definitive predictions but we want to be prepared for such eventualities. And the fourth part is don't be put up by just a number of MMPA. There is always some part of capacity that may or may not be utilizable because of product mix and so on. So it may be, it may not be, one has to be mindful of that. And then the fifth part is, there are certain minimum optimal configurations of capacity that need to be kept in mind and one can't just enhance capacity in marginal increments the way we please. So these are the various points that we have kept in mind while thinking in this direction. As I said, more specific plans will follow. But over the next 12 to 14 months, this is our broad sort of direction that we would like to take. And mind you, I'd like to remind everyone that this is within the ambit of our organic capital expenditure program and nothing beyond that.

My second question, just one sort of small follow-up on this. Looking at, again, not sort of specific to your company, but looking at sort of across the spectrum of listed companies in this space, typically see a lot of discussion around the -- for the traditional retailers, although I understand they also have the -- they have also progressed quite further in their e-commerce plans. So the Targets of the world, the Walmarts, the Bed Bath & Beyond and so on and so forth. So I think we're very -- supposedly very little discussion on Amazon. Now our understanding is that Amazon right now is very, very -- I mean, in terms of sourcing, China is, of course, they are major sourcing hub. So 2 questions, really. I mean the scale of opportunities that are very, very clear. But in the -- within the ambit of this entire China plus one theme, what are the challenges that you face in terms of breaking into Amazon? And with respect to the scale of the company also that the discretion is a specific to the company, I mean, is there sort of opportunity because our understanding is that Amazon, obviously, likes to work at scale and at lower margins. So is that an opportunity, sir, which is right now available only to the biggies like the wealth fund of the one? Or is there sort of opportunity set open to you as well? And then of course, what are the challenges that you have not really seen anybody in the listed space that really talk about Amazon in a very big way, so to speak?

So within the 3 or 4 or whatever names in the industry, in the listed space. Everybody's capacities are beyond the threshold which will give them the essential qualification to tap into any retailer, right? So no one's capacity is small or undesirable in the eyes of the retailer from a standpoint of scale. So that's my first question. And therefore, everybody qualifies to be able to sell to everyone vis-a-vis the lens of the qualification, if the qualification criteria was scale of capacities. So therefore, there's not big or there could be relatively big or small, but the absolute scale across the major players make them qualify to be able to tap into any retail opportunity from a standpoint of scale, right? The second point, assuming more into the world of Amazon to the best of our knowledge, Amazon does not have a geographical preference as such vis-a-vis our products. Amazon has a proposition preference. Amazon purchases and/or sources things that makes sense to it, right? That either give it a stronger brand presence or a stronger private label presence or a stronger value proposition and so on. And it is largely driven by what's on offer, not where it is strong. So I don't think -- and again, this is our personal view. This is our view at Himatsingka. We don't think that opportunities vis-a-vis Amazon are driven by -- are restricted either by scale or by geography. They are directly correlated to the quality of propositions that we make to that client vis-a-vis brand and private label opportunities and how it makes sense for their universe. So therefore, I don't think one should be feeling that these opportunities are capped directly or indirectly, vis-a-vis any of the players. I hope I've clarified your point.

To a large extent, yes but then again, the question is that Indian home textile manufacturers are able to tap into the Walmart and the Targets of the world in a very big way. It's not Amazon. Is there any sort of specific...

It's also the pattern of shopping. The e-commerce channels don't shop the same way as the brick-and-mortar channels do. Therefore, the volumes and things of that nature are not comparable when it comes to the regular shopping that the brick-and-motor arms of the retailers do or in this case, Amazon, of course, doesn't have a brick-and-mortar piece, but the difference between these 2 is sort of ways of shopping. And that -- and then the e-commerce is way more fragmented like infinitely more fragmented in terms of approach than just regular brick-and-motor revenue streams. And that's why you feel that we, as an industry/a bunch of players tap more successfully into the brick-and-mortar space than the e-com space because of the underlying fragmentation.

The next question is from the line of Akhil Kalluri from Franklin Templeton.

I had a couple of questions. First, on the revenues itself. So the current revenue run rate quarterly is reaching up about $100 million to $110 million and you're talking about potential expansion in both sheets as well as towels. So just wanted to understand is still a reasonable amount of visibility of achieving optimal utilizations maybe over the next 12 to 14 months or so, which is giving us confidence of expanding capacities further? And in that case, what can this potential revenue run rate be by these over the next, say, 4 to 6 quarters from now?

So yes, as I was sharing with -- earlier, we have enhanced our capacity utilization in our terry plant, which was recently commissioned. So from 0 to close to 70% over the last 14 months having been interjected by the disruptions of the pandemic. So in that backdrop, we thought that the ramp-up has been pretty robust, and that gives us the confidence along with the fact that we are seeing demand on the horizon with the confidence of debottlenecking our capacity, potentially speaking, over the next 12 to 14 months. I'm just saying that's sheeting. So we have -- I would say, we have reasonable visibility and a reasonable confidence to be able to undertake these things. There are more ordinary cost in nature and will be within our organic expenditure program. Should we succeed in placing these capacities and operate at reasonably high utilizations post such debottlenecking, the revenue pattern will be largely pro rata in nature. So for example, if we were to look at close to 75%, 80% utilizations post debottlenecking of capacities, then that versus where we are today would be, broadly speaking, range down pro rata journey. It could be slightly lower than pro rata or slightly higher than pro rata depending on product mix. But for a thumb rule estimate, which is the best one can do at this point, is assume that it would move in a pro rata manner.

Sure, sir. My question was more about the existing capacity itself. Because on towels, it's really commendable that within 14 months, we leased about 66% kind of utilizations. But given that the company is already planning further expansions, and then about a few quarters back, the entire focus was on sweating the existing assets? And the other question was, over the next 12 months or so, do we see -- do we have a reasonable amount of visibility about these existing capacities in both sheeting and towels will probably hit close to optimal utilizations.

Per the current run rate and per the current visibility, we are -- we feel reasonably confident to be able to place the current capacities because we don't have much left. We are at 80% initiating, and we are at close to 70% in terry towels. And we are looking at progressive increases in fiscal '22 itself, as we indicated earlier. So we don't have much headroom there. Please be mindful that once one starts hitting the 90% mark, there could be product mix variations and/or other sort of restrictions that sometimes come into play in stating assets in their entirety to 100%, although that's also possible. But keeping all these factors in mind, we are taking steps in advance to be able to debottleneck capacities. I'm cautious to use the word expansion, although it's a resultant enhancement of capacity. I'm more comfortable with using the term debottlenecking because we are essentially tapping into a lot of existing infrastructure that exists at our campuses.

Fair point, sir. And just for our understanding, this -- while you indicated that the CapEx will be in line with the organic CapEx that we generally plan in the year, would you be able to quantify a ballpark number over the next, say, 24 months? What is the kind of CapEx outlay that we're looking at?

No. Every year -- so our major CapEx is over -- is what we have shared with stakeholders. And every year, we spend INR 60 crores to INR 80 crores on organic CapEx, which is also something that we've always shared with stakeholders. So it is -- it's going to be within this ambit -- gambit in the next 12 to 14 months. So maybe it will borrow some from this year and borrow some from the next year in terms of buckets and be within that.

Fair enough. So in the ballpark on the INR 6 crores to INR 80 crores per annum here or there over the next couple of years. The second question I had was also on balance sheet and the leverage, which is there. Sir, if I look at the net debt number for about 4 quarters now, it's in that range of between INR 2,300 crores to INR 2,400-odd crores, and that's despite healthy EBITDA run rates over the past 4 quarters. I understand that there would have been certain amount of working capital increase which has happened. And so there could be certain government receivables as well, which should be stuck. But if you can help us give a little more color in terms of the nature and potential for working capital release from current level on books?

I think it will be -- so if you look at FY '21, we reduced net debt by approximately INR 268 crores during FY '21. So...

Right. But sir, what -- if I remember the numbers, sir, I think bulk of the deleveraging happened in -- during the second quarter itself and from 2Q to 1Q for '22 for about 3, 4 quarters now the debt levels seem to be broadly flattish.

Yes. So I don't recall which quarter it was, which saw the highest movement. But essentially, during FY '21, we reduced by just under INR 300 crores in terms of net debt. It's been flat of late, but it's also on the back of pretty high inflation levels that we are witnessing and capacity utilization enhancements at our facilities. But our major CapEx having been sort of largely concluding, I'd shared with stakeholders that there's some small parts that are still left and are underway, but bulk of it's all over. And therefore, we're focused on deleveraging our balance sheet. So we will continue that focus. There could be some timing differences from Q to Q. You're right in your observations in some capital being stuck with the central government on account of the incentives and so on. But I think largely one will see deleveraging patterns shape up or surface going forward.

So sir, any numbers that can be shared in the form of money which is stuck with government, if there is anything of extraordinary in nature which you can probably expect over the next few quarters?

It is usual that the industry has as well. It's nothing specific to Himatsingka. So once that comes -- I mean, that's one bucket. And otherwise, as well, we will -- we had some working capital pull this Q, but directionally, we should see it correct on the one hand. And on the other hand, our EBITDA should hopefully continue to climb. And so our leverage ratios will correct from both the reduction in debt standpoint and the increase in EBITDA standpoint because it will be the results of our investments in the various plants over the years, over the last 3 years, et cetera. We'll finally start to show up -- it's already started, but that show will continue to be able to rationalize our leverage ratios.

Due to time constraints, that was the last question. I now hand the conference over to Mr. Shrikant Himatsingka for closing comments.

So as usual, it was such a pleasure to interact with everybody. I do hope that I threw light on most of your questions. If you have anything that remains unanswered, get in touch with us and we'll make sure that you have the clarity that you need. And until then, stay safe and speak soon. Thank you very much.

Thank you. Ladies and gentlemen, on behalf of Batlivala & Karani Securities India Private Limited, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.