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

Ladies and gentlemen, Good day, and welcome to Indo Count Industries Limited Q1 FY '22 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on 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. K.K. Lalpuria (sic) [ Mr. K. R. 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 all of you to Indo Count Industries Q1 FY '22 Earnings Call. I hope you and your family are keeping safe and healthy. I have with me Mr. Muralidharan, our CFO; and SGA, our Investor Relations Advisors. Happy to connect with you all once again to discuss the Q1 FY '22 performance. During this unprecedented times, the Indo Count has remained committed to the well-being of all its stakeholders, employees and frontline workers. We believe vaccination is the only way to defeat the virus and revive economic activity. We have successfully covered almost all our employees through at least the first round of vaccination drive. We hope the situation will be under control with a rapid vaccination drive across the country. Now let me highlight the opportunity unveiling in our industry, textile sector. We believe the long-term growth prospects of the Indian textile industries are intact. The key export markets focusing on shipping to India for a long-term supply, along with the government support policies, provides scope for textile companies to post robust growth in the long run. Global companies have stepped up efforts to implement the China Plus One strategy of diversifying their supply chains in the wake of COVID-19-induced disruption, and the U.S.-China trade tensions. Also, the trade conflict between China and the developed countries have further intensified due to banning of cotton coming out of Xinjiang area. The province contributes more than 80% of overall Chinese cotton production and 20% of global cotton production. This is a big impact to China exporting cotton manufactured goods. India also enjoys a comparative advantage in terms of skilled manpower and production costs related to major textile producers in Southeast Asia. The recent government notification of extension of RoSCTL benefits up to March 2024 is a big boost to the textile exporters, which will further help increase the competitiveness of Indian products and provide stability and predictability to the industry players. The other textile products, which are not covered under the RoSCTL, are eligible to avail RoDTEP benefits, which will further boost the industry. Coupled with this, various factors like review of the GSP status of Pakistan by the EU add a silver lining to India's great performance. India has begun FTA talks with EU and other countries. We believe the deal will be beneficial to our country. India's main focus in the talks with this country is to secure more market assets for its exports. We remain confident that we are well prepared to seize every opportunity on the back of our healthy balance sheet, financial prudence and focused approach. While the end markets have been supporting, leading to a strong rebound of -- in Q1 FY '22, it is very important to note that this growth has been a result of a conscious strategy laid out in the last few years. Having entered the largest subsegment of fashion, utility, institutional bedding, we have continued to make all-round efforts in terms of innovation, service, delivery and capacity to grow our brand equity in these segments. Our performance continues to remain on track for fashion, utility, institutional side of the business. We are making a lot of efforts on digital marketing, e-commerce, developing health and hygiene products and other innovative ways to reach out to our customers, thereby strengthening our relationship with them. We continue to remain laser-focused on increasing our share in the e-commerce and branded business, both locally and globally. Our focus on offering an integrated bedding solution with innovation and keeping customer preferences of the future in mind has resonated well with all our customers. Along with this, our value-added products on health and hygiene contributed to the rising trend. Now coming to the business performance. On the B2C and D2C side, recently, Indo Count partnered with a U.K. brand, Jasper Conran, for an exclusive bed and bath collection to be launched in spring 2022. The range will be marketed internationally under the Jasper Conran London brand, exclusively through Indo Count. The partnership will support Indo Count's long-term vision to be the cornerstone for home textile across the globe. At Indo Count, we are strongly moving towards the B2C and D2C segment through high-quality product offerings across varied price point, building visibility through digital campaigns and leveraging omnichannel and e-commerce distribution. We are focusing on brand promotions in the U.S., U.K., Middle East and India through 10 active brands. We believe with innovation and technological capabilities, along with licensed brands, patents and trademarks, this will further strengthen our brand offerings to our customers. I'm happy to announce that during the quarter, Indo Count has been awarded with 2 golds at TEXPROCIL Export Awards 2019/'20 for the second consecutive year for the highest export performance in cotton madeups; bedlinen, bedsheets and quilts. We also bagged the Special Achievement Award in cotton madeups for the entire nation. Our brand, Boutique Living, felicitated by The Economic Times as "ET Iconic Brand of 2021." Also another brand, Layers, is recognized as "The Femina Power Brand of the Year 2021." We are honored by the Nava Bharat Group with "Healthcare CSR of the Year" award. The recognition was conferred to us by the Governor of Maharashtra for our work towards corporate social responsibility. On the sustainability side, we continue to remain an ESG-focused organization with well-defined principles, road map and targets. During the quarter, we have been recognized by Walmart Corporation as a top performer at Walmart's Global Sourcing Sustainability Summit. We are now an official member of The U.S. Cotton Trust Protocol. They are an approved supply chain partners for brands and retailers who are sourcing more sustainability grown cotton. Let me now share with you our operational and financial performance. I am happy to announce that we have achieved a quarterly sales volume of 18.13 million meters for Q1 FY '22. Volumes during the quarter were impacted by COVID-induced lockdown, resulting in shutdown of our manufacturing activity from 15th May '21 to 23rd May '21. Our order book continues to remain healthy, and we remain optimistic and expect volumes for FY '22 to be in the range of 85 million to 90 million meters. Total income. Total income, INR 759 crores in Q1 FY '22 versus INR 336 crores in Q1 FY '21, a growth of 126% on a Y-o-Y basis. Normalized total income is INR 709 crores in Q1 FY '22 versus INR 336 crores in Q1 FY '21, a growth of 111% on a Y-o-Y basis. Normalized total income excludes RoSCTL benefits of INR 49.99 crores for the period of January 1, 2021, to March 31, 2021. EBITDA. Reported EBITDA of INR 178 crores in Q1 FY '22 versus INR 39 crores in Q1 FY '21, a growth of 357% Y-o-Y. EBITDA margin stood at 23.4% in Q1 FY '22 versus 11.6% in Q1 FY '21, an increase of 1,184 bps Y-o-Y. Normalized EBITDA, INR 128 crores in Q1 FY '22 versus INR 39 crores in Q1 FY '21, a growth of 229% on a Y-o-Y basis. Normalized EBITDA margin stood at 18% in Q1 FY '22 versus 11.6% in Q1 FY '21, an increase of 644 bps on a Y-o-Y basis. This margin of 18% has absorbed the impact of higher raw material prices as well as freight cost. Normalized EBITDA excludes RoSCTL benefits of INR 49.99 crores for the period, January 1, 2021, to March 31, 2021. We expect FY '22 margin to be in the range of 18% to 20%. PAT. INR 117 crores in Q1 FY '22 versus INR 18 crores in Q1 FY '21. PAT margin is at 15.4% in Q1 FY '22 versus 5.3% for Q1 FY '21. PAT includes RoSCTL benefits of INR 49.99 crores for the period of January 1, 2021, to March 31, 2021. Debt. Our net debt stood at INR 291 crores compared to INR 263 crores at the end of March 31, 2021, implying a net debt-to-equity of 0.21x. That's all from my side. I now leave the floor open for Q&A.

[Operator Instructions] The first question is from the line of Jiten Doshi from ENAM Asset Management Company.

Many, many congratulations on a wonderful performance in Q1 FY '22. This has been a very big relief compared to what the environment and the challenges that we are seeing now. And despite COVID, you have been able to do about 18 million meters despite the second wave, that's a very commendable achievement. So big congratulations to your entire team.

Thank you.

Right. Mr. Lalpuria, we would like, from your side, just to get an update because the -- recently, the commerce Minister has announced a very big policy for the textiles plus the entire benefits that have come to the industry, how do you look into that basically in the medium and long term? And what are you really seeing for the textile industry in general and Indo Count, in particular? What do you think is the pathway ahead for your business as you go forward?

No, it's a very important question to all of us being related to the textile sector, Mr. Doshi. First of all -- I will answer this question in 2 sets. First of all, let us assess the demand creation because that is very important from a business point of view. So the demand has been created because of the China Plus One strategy, which we have been talking about. And we are clearly seeing the visibility in the numbers in OTEXA data where India has moved from a market share of 50% to 61%. And because of China's cost going up, because of the issues relating to Xinjiang cotton on the supply chain side and because of country's major markets like U.S., Europe, to some extent, and U.K. are blocking China, cotton coming from that particular area, which constitutes almost 80% of Chinese cotton and 20% of the global cotton, is phenomenal. And this will further provide opportunities for India to grow their market share in the textile sector overall, both textile and apparel. And you see this China Plus One strategy, as I had mentioned earlier also, will play in the next 3 to 5 years. But I think with Xinjiang cotton impact, this will prove its impact much closer to this 3 to 5 years. It will be also medium term. The second is about the home becoming the center stage. And home textile, in particular, market share has improved because this work from home culture is a new norm, and that has triggered the home textile consumption to a new level, which we are having clear visibility as what we reported our revenues in FY '21. The third is the FTAs which are being discussed with EU and 9 other countries. Particularly, EU is a large trade block where India is missing its market share. So there will be a huge demand creation if India signs India-centric trade packs with EU, U.K., Canada, Australia and all these major developed countries where home textile consumption is to a high level and where India is missing the market share. India, over all these years, has created integrated manufacturing facilities of world-class, and it has got capacities and capabilities to cater to global brands and retailers. And it has proved post quota that it can really be a formidable player to supply all the major brands and retailers. And this has created a very good, strong perceived value for Indian textile overseas. India as a country is well positioned with its raw material supply, with traditional labor workforce, with its expertise, experience. So I think this demand creation will be absorbed by the Indian -- India as a country. And we as a company since in India are also witnessing Indian economy also moving up. So there is a dual impact that India is also moving up to a INR 5 trillion economy from INR 2.5 trillion. So I think both from locally and globally, we are seeing demand creation, and India is well positioned to absorb this demand creation with its all capacity and capabilities. So I think going forward, this will help Indian textile sector to prove itself because they have invested into design studios, into research, into various e-commerce and digital businesses and are also catering to large investments into the textile sector with the latest technology. So I think the overall performance and the perceived value of Indian textile sector has improved considerably, which are visible through its market share in the bedlinen segment, which has grown to 61%, and in other home textile products to almost like 45% to 50%. This proves that we have a competitive advantage to fulfill the needs of the brands and retailers. So in China Plus One strategy, as China was dominating in textile, we see a new era opening for textile sector to grab this opportunity going forward. The government also supporting and putting on this RoSCTL clarity will help the textile sector to plan its investment because you can predict going forward for almost 3 to 4 years. So the investments, the development, the marketing -- investment into marketing, distribution, front end, all will come up. And India will certainly do well in this particular sector. That's what my submission is. Over and above this, you see textile is a priority sector and has been recognized for PLI Integrated Textile Park. So the government is also under Atmanirbhar Bharat and Make In India are making full attempt to provide justice to the textile sector because they are also seeing that there is a big opportunity for growing this market share in the world global textile trade. So I think all these opportunities, demand, et cetera, will work in favor of the textile sector overall out of India.

[Operator Instructions] The next question is from the line of Kapil from Edelweiss.

Congratulations on a very good set of numbers. I have a few questions. Firstly, in this quarter, 18 million meters of volume was being achieved. So to achieve your FY '22 guidance of 85 to 90 million meters, we will have to deliver around, say, 23 million meters of volume for each of the next 3 quarters, which would be as per our average run rate of last 4 quarters. So do you think it is achievable?

Yes. That's what the guidance which we have provided that we will be achieving this 85 million to 90 million meters based on our order book position in normal circumstances.

Okay. And any disruption seen in the month of July because of COVID? Like in Q1, there was some disruption. So anything in the month of July?

Come again, I'm unable to...

Like our manufacturing facilities were shut for around 8, 9 days because -- on account of COVID in Q1. So anything in July, any disruptions witnessed in July?

See, there are challenges as far as both COVID and a little bit of flooding is concerned. But I think our team has put up a good effort to see that they continue serving our customers. And we will overcome it in all normal circumstances, and there is nothing in July as such so far.

Okay. Secondly, how much of the cotton price increase has been passed on to customers? And how much more it could be passed on in the coming quarters? Because this cotton price has been on a rise since quite some time now.

See, we have held our position til October as far as cotton is concerned, and we will wait for the new season to start. We have good monsoon. There is a good sowing. So let us wait and observe, and this should be viewed overall on an annual basis. We cannot view cotton prices going up and down during the quarter. We have been able to manage this situation earlier also. And as I mentioned, whenever there is a mismatch in demand and supply, the prices tends to move up. But overall, cotton demand has gone up. There are challenges, of course, on the price front. We have been able to pass on to most of our customers. We are engaged with them. And it is an evolving situation, and we have good relationship with our customers. They do understand that this is -- the commodity prices across the globe have gone up. So it's -- we are also in the same fray, and this we will address as and when it needs to be addressed.

Right, sir. So probably I'll come back on the next quarter for an update on cotton price. Sir, just last question from my side. Can you put some color on your partnership with Jasper Conran brand? Like what would be the terms of this deal? And how much it would aid company's margins?

See, first of all, Jasper Conran is a very recognized brand in the U.K. home textile area because they have been associated with a large multi-brand outlet [ governance ], which we all know. And they were doing pretty well in the home area and not only in home textile, but he is also in apparel, footwear, in bags, et cetera. So he is a very well recognized mid- to high-position brand in U.K. We have made a 5-year arrangement with them, and there are royalty percentages which we need to pay to them on the businesses which we gain. So those are some of the terms which we have committed to them. And the royalties range between 5% to 6% globally. So according to the market in which we sell, the royalty will be calculated at the end of the day and that we need to pay.

The next question is from the line of Bharat Chhoda from ICICI Securities.

I had a question on the average realization. Sir, usually our average realizations were around INR 315 to INR 320. So this quarter, it is around INR 360. So is it because of some price hike or we have been able to entirely pass on the input cost inflation? And what could be the realization that we could look in FY '22?

See, it is both. Like we are able to pass on some of the cost as well as you see the product mix because there are certain products which are upscale, and what we had mentioned about the health, hygiene and wellness product, then we have started selling on the branding side, 10 active brands we have. So branding, distribution, e-commerce sale and the higher value proposition which we are offering to the customer has been well accepted. So I think both on the product mix side as well as the customer acceptance of the price increase have impacted this realization. And also, I have always mentioned that we should not look at from on a quarter-to-quarter basis as far as realization is concerned because it's a seasonal business. We all know it moves up and now, and that's not the right way to calculate.

Correct, sir. Sir, one more thing. Like on the gross margin front, we have been doing healthy gross margin in excess of 50%, and that is after adjusting for RoSCTL. So what has been the reason for this healthy gross margins? And will we be able to sustain these margins going ahead? And probably what could be the gross margins we can work with in FY '22?

See, it should be on similar lines like FY '21. As I mentioned, you should see on a yearly basis. Since we had hedged some cotton position and yarn position, we have been able to gain this. Over and above, we had a better realization, as I mentioned. So I think all these factors helped into improving our sales realization and that is the impact. But you should always consider on an annual basis the gross margin.

Sure, sir. Sir, just one more thing. Like our other income has been significantly higher. So is there a ForEx impact over there? And the other income increased quantum is significantly higher, if you could quantify some details in that.

See, the other income normally is because of the exchange gains, but that is a part of our revenue because when we get an order, we hedge our position and that is part of our pricing policy. So that we had also mentioned. But just because of accounting standard, we have to show it separately. So we have been maintaining the same dialogue that we have to consider it as part of our revenue.

So what is the quantum, sir, in this quarter, the ForEx gain?

Around INR 30 crores.

Around INR 30 crores.

The next question is from the line of Pritesh Chheda from Lucky Investment Managers.

Sir, will be -- the benefit status to Pakistan getting waned off by Europe, what happens to the -- now the competitiveness between us and Pakistan? And how big is the Europe market vis-a-vis the U.S. market?

See, the matter is under review because of some issues regarding blasphemy law, which EU has raised against Pakistan. So they are -- this is still under consideration. But if it does happen, this will be a big boost to Indian textile industry because it will open up because we are not at a level-playing field as we are paying 9.6% duty more than Pakistan. So the competitiveness is not there. So once we have competitiveness, and I think if we have done well in the U.S. market, we can do well in the EU market as well. So this is a big opportunity for all of us if it does happen. And secondly, even if it does not happen, India is in the process of discussing FTA with EU. So sooner or later, there will be some changes in this mechanism. Either the duties will be similar for Pakistan and India or India will also get the duty advantage. So either of these 2 will be a benefit to us. Now as far as the market size is concerned, EU is a fragmented market, we all know, because it is 28, 29 countries with different pace, sizes and design streams, et cetera. And it is much more bigger -- larger than the U.S. market. What we have been saying all the time that U.S. is around $28 billion at retail, the EU market is around $31 billion at retail. So it is a large market, where India do not have much larger share. So going forward, if we -- if this happens, there will be a very big opportunity for Indian players.

Okay. Sir, just a continuing here. So if you could just translate that into meters -- million meter market for -- in EU?

I cannot translate that million meters. But you see if India has done so well in the U.S. with so much of export built up in the last decade, certainly when this market opens up, India is geared up because India has capacity, capability, expertise, knowledge, everything to supply -- to become a good supplier. And we are also today existing there, like we are supplying to major retailers who are in our price point. So I think we'll certainly scale up the metric -- meters, exports. And it is anybody's guess that it will be quite substantial. It will not be a small game.

And just 1 clarification on this margin number. So in your presentation, for quarter 1, you're reporting normalized at 18%. This would include the INR 30 crore FX, which we are talking about in the quarter 1?

Yes, please, because it is part of our revenue, as I mentioned.

Okay. And in FY '21, 16% margin reported. What would be the FX net in your EBITDA of INR 415 crores?

That was not substantial as what I remember. I can provide you off-line, but it was not substantial. So the prices -- the ForEx prices are really stagnant at that time.

So what you do? You tend to book a fairly longer-term forward? That is the reason why the gain or the loss tends to come in the quarter?

No, because you see, as I mentioned, the ForEx is a transactional thing for us because, see, whenever we get a business, we hedge our position. And we hedge 70% of our position because of our good order book position. So we do not seem to -- see this as a gain. We see as a competitive advantage whenever the ForEx rates go higher. So that's it. And -- plus it's the accounting entry, what we have to show it separately as an other income, which I've mentioned earlier.

So just a clarification here. So you would tend to book your -- so let's say, if you have an order, which is deliverable over the next 2 quarters, you would tend to book the entire 70% of the deliverable in forwards? That's how you do it on the day of receiving the order?

See, normally we -- I'm Muralidharan here. Normally, what we do is that we know what is our order book position. So we take not at one go -- we don't book anything based on order at one go. We keep doing it month-over-month on a rolling basis, okay? The policy of the Board is that we hedge about 70% of our forecast basically. So we do that on a rolling basis. So sometimes, the -- whenever the rupee is not so volatile, we don't get any gains basically. When there is a volatility, then the day we account for the sales and when we position it as of the closing period, the differences will arise basically. This has been more of an accounting entry. But as Mr. Lalpuria said, this is part of the -- our income any time.

So the margin of 18% to 20% would be including assumption -- forecast would be including FX and including RoSCTL, right?

Right. You're right. Yes.

Yes.

[Operator Instructions] The next question is from the line of Akshay Chheda from Canara Robeco.

Sir, 2 questions from my side. Sir, first on the Xinjiang cotton ban. So what I understand is primarily to do with the labor issues. Now what will happen -- now if China is able to correct this, so wouldn't this be a threat again to the other countries, like if it is able to solve this issue quickly? So that was my first question. And secondly on this container availability. Like since we are into exports and there were a lot of challenges on the availability of containers, so now what is the situation? Yes, so these are the 2 questions.

Sorry to interpret, Mr. Chheda, but there is a slight disturbance coming from your line. [Operator Instructions]

See, on the Xinjiang side, there were no issues earlier. This has come to surface as of now. So earlier also, China was competing with us. And we had exported -- in spite of them, we have gained a market share of 50%. So even if this goes away, at some instance, we continue to be competitive because cotton is expensive in China. Secondly, this issue -- such issues, the human right issues, what we have seen and observed, just like Uzbekistan, they continue for a long period because they cannot be overturned within a year or 2 years and cannot be satisfied to the country to full satisfaction that they have stopped it. So I think it's a major issue, which has been recognized worldwide by all brands and retailers, and they are blocking the cotton manufacturer goods coming out of this area. And it is not only for textile, it is for other products as well. So it's a large issue, and it will not go away very quickly as what -- that's what we anticipate. But even if it goes away, China was a supplier earlier too, it was dominating and India grabbed the market share in spite of China existing there. So -- I think so we will continue to be competitive and we'll continue to play a major role. Now to your second question on the container availability. Yes, of course, there are challenges as what we hear every day that the container availability is a big issue. We are addressing it, and we are able to address it. We are investing into our supply chain, and we are providing the necessary service to our customers. And we are seeing that this gets tied over in the next 2, 3 quarters and return back to normalcy. So I think the issues are there, of course, and there has been challenges and that's the reason we had to pay higher cost to some extent, but that has been absorbed by our better margin. So I think these issues we are addressing it as and how it evolves.

The next question is from the line of Kaushal Shah from Dhanki Securities.

Congratulations to the team. Sir, I had 2 questions. One was some clarity on the cotton. Already CT has raised cotton prices. We hear that the inventory is also a little low. And I think even the increases...

Sorry to interrupt, Mr. Shah, but there is a slight disturbance coming from your line, sir.

Okay. So Lalpuria, sir, the question really was on the cotton that there has been a rise in price. There is also a drop in inventory. And apparently, I think even U.S. production of cotton has been impacted. So do we expect the margins, the guidance that you've given, 18% to 20%, that to be comfortably sustained in case there is a price rise in cotton in the coming seasons?

See, as I mentioned earlier, there are challenges as far as cotton is concerned, because the cotton consumption is moving up. Secondly, the Xinjiang area cotton has been blocked. So there is a cotton which has gone out of the system in the supply chain. So definitely, there will be issues as far as cotton availability is concerned and cotton prices are concerned, which we are addressing. But fortunately, for our company, we have been hedged until October. And we, as a company, have consciously invested into the supply chain by seeing all these uncertainties around us. And that's why you have seen a little part of our -- we getting invested into our inventories to some extent. So having said that, there will be challenges on the cotton side. And particularly, in the U.S., the crop is less, but that is Supima cotton, which we import. And this is a high-grade cotton, which goes into the best and the premium and the branded segment. So where we are able to realize the price from the customer because it is sold at a higher value. So those things will nullify. But yes, the Indian cotton challenge is still there, but we all need to watch it once the new season starts post October. And we are observing the situation, and we are going to see that how we tackle this. But since we have tackled it earlier, such commodity prices, we are confident as a company to tackle this going forward. And because the buyers and the brands and the retailers also know that this is a commodity issue worldwide, it's a global issue, and they do understand. So they are working together with us on a joint business plan how to address the raw material prices, and we are quite hopeful we should be able to address that.