Indo Count Industries Limited (521016) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Indo Count Industries Limited Q3 FY '20 Earnings Conference Call. This conference call may contain forward-looking statements about the company which are based on beliefs, opinions and expectations of the company as of the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. KK Lalpuria, Executive Director and CEO of Indo Count Industries Limited. Thank you, and over to you, sir.

Good afternoon and a very warm welcome to everyone. Happy to connect with you all once again to discuss the Q3 FY '20 performance. I hope everyone must have got a chance to look at the presentation and the press release by now. Let me start with giving you some industry perspective and then move on to our strategy. U.S. retail sales registered growth for third straight month in December, strengthening the view that the economy maintained a moderate growth pace at the end of 2019. On expected line, India continues to perform well in made-ups category. I'm happy to announce that we have clocked a volume growth of 21% for Q3 FY '20 and 10% for 9-month FY '20. I'm also happy to announce that we have recorded the best-ever quarterly revenue of INR 637 crores, registering a growth of 20% plus. The growth was on account of greater customer and market penetration through innovative products, modern design and functional products. We continue to increase our utilization levels thereby increasing our revenues and market share. With a focus on ensuring environmental sustainability, our company has joined Walmart's project Gigaton to reduce greenhouse gas emissions resulting from manufacturing operations and supply chains. The company has been recognized Giga-Guru status for the contributions made towards environmental sustainability. The company has collaborated with CITI CDRA to launch Project GAGAN to improve sustainability in cotton farming for farmers in Maharashtra state. These initiatives will help farmers in increasing productivity of their farms along with judicious use of water, pesticides and fertilizers. Now let me discuss on the exceptional item reported for the quarter. The Ministry of Textile and the Ministry of Commerce, Government of India have issued notification dated January 14, 2020, and January 29, 2020, respectively, withdrawing the benefits entitled under MEIS, with retrospective effect from March 7, 2019, on certain products exported in the past by the company. Without prejudice to the company's legal right as a matter of prudence, the company has written-off an amount aggregating to INR 36.91 crores in Q3 and 9-month FY '20 towards amount accrued on the affected products for the period from March 7, 2019, to September 30, 2019, and this is shown as an exceptional item. Further, the company has not accrued MEIS benefits of INR 19.34 crores for the quarter ended December 31, 2019. Now coming to the financial performance, starting with the volumes. For 9-month FY '20, volumes stood at 48.9 million meters as compared to 44.6 million meters in 9-month FY '19, a growth of 10%. We are on track to meet our volume guidance of 63 million to 65 million meters for FY '20. We strongly believe that Indian manufacturers are gaining a stronger foothold in the global home textile market. Brands are very keen to create a credible supply chain and derisk themselves from the large supply exposure coming from a single geography. With integrated manufacturing base for textiles in India, we believe we have a significant opportunity for sustainable growth in times to come. Consolidated total income. The consolidated total income for the company stood for Q3 FY '20 at INR 637 crores as against INR 517 crores for Q3 FY '19, registering a growth of 23%. Total income for Q3 FY '20 does not include MEIS benefit of INR 19 crores. For 9-month FY '20, consolidated total income stood at INR 1,743 crores as against INR 1,503 crores in 9-month FY '19, registering a growth of 16% on a Y-o-Y basis. Consolidated EBITDA. Consolidated EBITDA for Q3 FY '20, registered a growth of 176% and stood at INR 81 crores versus INR 30 crores for Q3 FY '19. EBITDA margin was at 12.8% in Q3 FY '20 versus 5.7% in Q3 FY '19 registering a growth of 709 bps on Y-o-Y basis. We are pleased to inform that the company has reported an EBITDA of INR 235 crores for first 9-month of the financial year, surpassing the FY '19 EBITDA INR 166 crores, even though we have not accrued MEIS benefits of Q3 of INR 19 crores. Consolidated EBITDA of 9-month FY '20 registered a growth of 56% and stood at INR 235 crore versus INR 151 crores for 9-month FY '19. EBITDA margin was at 13.5% in 9-month FY '20 versus 10% in 9-month FY '19, registering a growth of 348 bps on Y-o-Y basis. PAT, Q3 FY '20 PAT stood at INR 20 crores as against INR 9 crores in Q3 FY '19. Q3 FY '20 PAT is derived after accounting for exceptional item of INR 37 crores on account of reversal of MEIS benefit earned from 7th March 2019 to 30th September 2019. 9-month FY '20 PAT stood at INR 65 crores as against INR 64 crores in 9-month FY '19, even after considering exceptional items totaling to INR 131 crores pertaining to INR 37 crores reported in Q3 FY '20 on account of reversal of MEIS benefit earned from 7th March 2019 to 30th September 2019 and INR 94 crores towards refund of excess export benefits of earlier years. Net worth. As on 31st December 2019, the net worth of the company crossed the milestone of INR 1,000 crores. Net debt, the net debt position of the company as of 31st December 2019 stands at INR 402 crores. The net debt-to-equity ratio is at 0.39x. That's all from my side. And further on the domestic business, I -- just to add that we are focusing on this business and have recently strengthened our team and are taking appropriate steps to improve this business. Our long-term view is to see our own brand finding reasonable space in the domestic market. That's all from my side. I now leave the floor open for the question and answer.

[Operator Instructions] The first question is from the line of Vikram Suryavanshi from PhillipCapital.

Sir, congratulations on good numbers. Sir, I just wanted to -- your view on cotton pricing and how -- what is happening in China currently? How that will impact overall textile or home textile in particular?

See the Cotton Association of India have provided estimate earlier, which are still maintained at 355 lakh base. The crop is good. The supply is meeting the demand very well. Cotton yarn and raw cotton exports to China are impacted due to this coronavirus, and enough cotton is available. So we believe that the cotton prices would remain stable unless the exports are happening to China once again. So we expect that to remain in the range.

Okay. And what is current price of cotton?

The current prices are around INR 41,000 a candy.

Okay. And compared to last year for us?

Last year, we had around INR 44,000 plus.

And sir, was there any Forex gain in this quarter compared to last quarter? So if you can give that because of the hedging policy, how it has changed -- how it has impact on this quarter compared to last quarter?

Basically, we have in place a hedging policy to cover around 65% to 70% of our exposure. So the rates realized this year are far much better than last year. The last year, we had realized around 68.50. And this year, we are realizing 71 plus. So this year, we expect, on an annual basis, gain in the foreign exchange rather than a loss.

All right, sir. Okay. Okay. And the MEIS amount for last year also would be -- per every quarter would be around in the range of INR 18 crores, INR 19 crore. Is that right? If we look at last year, just to look at the MEIS amount?

So the MEIS amount actually percentage-wise was on the value. So it is 4% on the value. So whatever the value we clocked in the quarter, the MEIS varies accordingly, on a quarter basis.

Okay. And last question, sir, if you look at -- it is not right away, but broadly, what we see that along with the volume we also seems to be better pricing this quarter for the product. So is it mainly because of revenue mix? Or how basically, that is shaping up?

Because of mainly the product mix, and you have to look from an annual basis, our complete business because we supply both replenishment, promotional and all other types of products to different channel. So you have to take into consideration our annual numbers to really understand the game.

Okay. And is there any significant change in our like fashion bedding and revenue share from this value-added or fashion bedding?

So we have reported earlier that the fashion utility and institutional business is around 15% which we still maintain.

Okay. And how is the growth in domestic retail expansion, what we are basically looking at?

Domestic, as a company, we are focusing, and we have just restructured our team and strengthened it. And we are focusing in this business going forward. We have a 5-year plan, and we expect to promote our brand to reasonable space in the domestic area. So we are focusing as a company in the domestic business now going forward.

[Operator Instructions] The next question is from the line of Dipan Mehta from Elixir Equities.

Congratulations on good set of numbers. My question is regarding the volatility in the EBITDA margin. So at some point of time in 2016, it was 22%, 17 -- FY '17 was 21% and for FY '19 around 8.8%, true, and the turnover remained more or less the same. So can you explain that why there's so much fluctuation in the EBITDA margin and even quarter-on-quarter, we see a lot of fluctuation in the EBITDA margin? Can you please reason why -- can you explain why such volatility is there in the margin structure?

Okay. First of all, you see, you have to see our EBITDA from an annualized basis because you see in between the quarters, we are supplying to both the existing customer, and we always look out for new customer and new territories as well. So you have to look from an annual standpoint. Secondly, you see the structure of the incentives provided by the government keeps on changing. And plus, there are other moving averages like the raw material cost, the Forex and plus the product mix being sold in the importing country. So you -- we have to consider everything. And plus the geopolitical changes in between different countries like Europe, U.K. and the developed nation also impact the business to certain extent. So all these things put pressure on the pricing as well as on the margins. So that's the reason you see the volatility are there, but the good thing is that the margins are improved going forward.

And any guidance on what stable EBITDA margin, one can expect on an annualized basis just to factor into our forecast?

See, we have already given in our last con call that the EBITDA margin, we are maintaining at 12% to 14%.

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

Congratulations on good set of numbers, sir. Sir, I wanted to know the quantum of Forex gain or loss in this quarter?

See, as I mentioned earlier, you see the realizations are better from the last year, because last year, it was quite volatile, and we were around 68.50 as a realization and this year, we are far better around 71 plus. So whatever the accounting part that impacts the Forex gain are in the books.

Yes. I just wanted to know the quantum of it so that we can understand the quantum was?

This quarter, it is negligible, like it's around INR 1 crore loss.

Okay. Okay. And sir, could you just explain us the factors that can help us go back to our earlier margins of 20% odd, is it possible? And by when, if at all, we can foresee it coming in 1 or 2 years' time frame?

See, we put a lot of effort into increasing our margin, as always. And we have given the guidance of 12% to 14%. And I also explained, there are so many moving averages like raw material prices, Forex, then you know the customer importing countries and the geopolitical reasons and the relationship with -- the country enjoys with different countries like EU and UK. So there are various factors in this. There is always an endeavor to improve the margins by selling a better product mix. We have initiated different product categories like fashion bedding utility and institutional in order to improve our margins. So there is always an endeavor to do that. And we also expect just like you that the margin should come above 20% in the future. So that's our endeavor. And we strongly believe, as a company, that we are well positioned. We have good capacity in-house. We have state-of-art plant. We are trying to utilize our capacity, modelizing the expenses. And doing all sort of innovations and investing into R&D so that you -- we can make some pathbreaking innovations in order to improve our margins. So that's what we are doing.

Okay. And sir, any outline that you can tell us about if there has been any major customer gain in the last 9 months or any kind of product innovation that is leading to improved market share in the system, maybe -- which is sustainable over a longer-period time?

See, we have to -- there's not immediate customer gains when the volume or value increases. We have invested heavily. In the last 3 years, a lot of effort has been put, which is paying now rich dividends. So this is what is happening to our business.

[Operator Instructions] The next question is from the line of Yogansh Jeswani from Mittal Analytics.

Congratulations on a good set of result. Sir, just wanted to understand on our revenue growth. So like if we look at FY '19 on a quarterly basis, you were around at 15 million kind of a run rate, which is now touching 17 million, 17.5 million run rate. So can you just throw some light on what is driving this growth? Have we added any new clients? Or have we sort of got more orders from the same client? So just throw some more light on this growth, sir?

Yes. As I already explained, you see the efforts put in by the company in the last 3, 4 years are paying rich dividends. As we have already informed that we have put in efforts into promoting our fashion utility and institutional bedding, and that is really moving ahead in the right direction. We are also seeing that the business model, which we are pursuing with our existing customers by providing them end-to-end solution, is also helping us achieve better business. The customers whom we serve are also doing well. So that also explains the increased volume and value. And our always endeavor is to keep the run rate much more higher because we already have a capacity of 90 million meters to sell. So we have a consistent growth plan, and we have a good set of customers. We are already well positioned in the marketplace from mid- to high segment. And we, as a company, are putting in a lot of effort into product development and innovation, which also helps us to differentiate in the product mix from our peers.

Right. So the point I was trying to understand is -- what I was trying to ask was, is this growth more from the new customers that we added or from the old customers? And going forward are we sustainable like even FY '21 onwards, are we looking at maintaining this 17.5% kind of quarterly run rate?

See, it is mix, like the existing customer business also grows and we're also getting new customers as well. So it is a mix of both. And also new product categories, as I explained, because that also adds on. New channel of business also, which we are attempting to drive on like supplying to mattresses, regional customers, e-commerce, domestic business, so all around effort is being put into different channel of businesses. And we expect that going forward as what already we have indicated a volume guidance of 63 million to 65 million meters, and we have already clocked in 48.9 million, we are confident that we will achieve this sort of run rate, what you are seeing around 15 million plus.

That's good to hear. So safe to assume that we have clients like Amazon, Targets of the world?

See, we supply to all these major clients, like -- as already informed earlier, we, in fact, have a brand called Color Sense on Amazon also.

Okay. And what would be the percentage of revenue that comes from, say, Amazon, sir, of the total turnover of company?

So it is still negligible, see, in this business, there is still -- the customers pays a lot of important to touch and feel. So in home textile category, particularly the e-commerce haven't grown. So we still make attempts. We have all the means back end to deliver the product, the pick-and-pack warehousing in Charlotte. So we are making attempts to make this really a good business for the company. But so far, it is like at a nascent stage.

But this one will be the one, your own brand, sir, right? And what about the business that we do for Amazon for their brand just supplying them without our brands. Will that be also part of your turnover? And is that a significant amount there?

So we do supply both, like our own brand and their -- in their own brand. So -- but we cannot disclose that, which brands we supply because they have many brands across.

Okay. Okay. Understood sir. And sir secondly, moving on to the export incentives, right, last quarter you had given us a breakup of duty drawback RoSCTL and MEIS. So now that MEIS is grown 4%, can you again just share that breakup that going forward we will be...