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

Absolutely right.

Okay. And what is the current gross debt and cash in the book, sir?

That we will provide you offline.

Okay. No problem. And sir, again, last question on the current numbers. If we were holding inventory because what I'm trying to gauge is GHCL quarterly run rate was between INR 170 crores, INR 200 crores with 10% margin. And if I try to knock that number, then your reported margins come roughly 23% to 25% odd which looks substantially higher. So was there any inventory benefit because obviously, there have been a lot of price hikes and cotton prices have been going up. So this particular quarter, were we holding any low-cost inventory and that benefit has come into margins? Or these are sustainable margins of 20-odd percent.

Yes, I've been mentioning about that as a company, we are consciously investing into the supply chain. If you must have heard our earlier previous call and as a policy, we are hedging our raw material properly. So that benefit definitely of lower cost inventory is there in this result. Secondly, the focus on the value-added product has also got accumulated in this quarter. So that has also helped us, to some extent, the product mix is better than the ForEx gain also is coming through. So I think in this particular quarter, our margins are better. And that's the reason you are seeing this higher level of margin. But definitely, this margin will moderate out to a certain extent going forward. But our entire focus to promote value-added products is bearing fruit. So whatever which we have been doing in order to promote fashion bedding, utility bedding as well as you see our B2C, D2C and licensed brand and the domestic brand promotion are all helping the company to realize much better.

Sure, sir. So any volume and margin guidance would you like to give for '23, you used to give earlier the same. But obviously, considering a difficult environment is difficult, but any sense of business targets for this year on volumes and margin front?

Yes. As we've already answered, the things are very uncertain at the moment, and they are very clear.

That's why I'm asking internal targets.

Yes, yes. So that's why you see it prevents me not to mislead to a certain extent. And -- but we are, as a company, as you see, we are a focused player. We are working upon very hard and trying to be more efficient to our customer base. And our customers are also responding as the market start responding, we are quite confident to build up and utilize our capacities and sweat our assets.

The next question is from the line of Abhineet Anand from Emkay Global.

Last few years, if I can call or '21, '22 and even this year, there has been lots of ups and downs in terms of RM and demand, which has led to very different type of gross margins and EBITDA margin, right? I just want to understand from a medium-term perspective, given the product profile that we have and now we have added some part of GHCL, what could be a normalized gross margin be? I mean leaving all the demand scenario or where cotton is, let's assume cotton stabilizes at INR 65,000, INR 70,000 and demand is back to normalized numbers. So next 2 years, hence, or 1.5 year hence, where do you see your gross margin of the company based on the product profile that we have.

See, as I mentioned, Abhineet that we are focusing on the value-added side of the business, which are bearing fruits. And there are other areas also in the distribution channel, we are trying to scale up our operations so that we can be closer to the customer. And based on our service level, we derive advantage out of it. So all these are paying off. Now the gross margin will be decent going forward and will also depend upon the new season, because as it pans out today, the futures are traded at INR 65,000. But we need to see how the rainfall is, whether there are issues on the supply chain side due to the bollworm pesticide, et cetera. So we need to wait and watch and observe the situation, even though we are optimistic about it. But they will moderate from this level to a certain extent, but we are quite positive to at least sustain as per our last year.

This, you are saying for the current year, we'll step up sustain compared to last year? Or in a normalized?

Yes. We are focusing on that only. We are trying to build our business accordingly so that we maintain our gross margin. That's the whole point.

Second thing is right, as you rightly emphasize as well, we have invested in value-added products, right? So as of today, what is that percent in terms of the whole revenue wise, how much is this value-added product? And what incremental margin do we get compared to a simple bedsheet versus a value-added product on that?

See, there are different types of value additions which we do. The value addition, as I explained is 1 on the product side. Secondly, on the positioning side, third on the segmentation side, fourth on the supply chain side, distribution side. So there are various kinds of value additions which we are trying to scale up and bring about a dramatic change in our overall sales strategy -- sales and marketing strategy. So -- and that is paying off. So we are a complete solution provider and not just we believe into supplying a product to our customers. So this -- definitely, this solution will have better margin than our normal businesses. And definitely, when you ask that what kind of margin do you get from a normal product, it is somewhere between 8% to 10%, which we derive additionally on a normal product. And so you see the entire focus of the company since the last 3, 4 years has been to promote this value-added businesses. And we are getting success in that.

The next question is from the line of Aman Madrecha from Augmenta Research.

So what I wanted was like in the recent quarter, so the Indian market share in the U.S. imports of cotton seeds fell from around 57% in FY '21 -- 2021 to 50%. So what could be the market share currently? Like is it at the same level? Or it has increased? And like where is this market share shifting?

Yes, you rightly mentioned that, for the moment, Indian exports have taken a hit because of the raw material cost, and they have come down to a certain extent. And because the overall numbers look a little bit weak, our percentage levels are also down as compared to Pakistan and China to a certain extent. Also because you see the raw material cotton, which has increased to this level, there were options available for the buyer to ship into different fibers and different product mix, which where India do not enjoy the advantage as such that is in NMF. So going forward, we are confident that the way how India is positioned due to the China Plus One strategy and the Xinjiang cotton fiasco, we will be better able to service the brands and retailers, and that will give us once again the market share which we had momentarily dipped. So we are confident as a country and as a company to scale up our market share going forward because what we also see that the cotton coming back and quoting at the level of INR 65,000 in December future. So this all these happenings going forward will certainly help us to derive a better market share, not only in the U.S., but also the FTAs in different countries will help us gain market share over there to where currently, we are not able to gain. So we hope we are confident that this market share should revise.

Okay. Just a follow-up on the same, like how has been the market share currently is that -- it has increased? Or is there at the same level like if you have the numbers handy?

What we saw in May, it was around 53% as per OTEXA data, but June numbers are still awaited. And once that is -- July numbers, I feel and once they are -- June numbers. So once they are out, we will definitely we'll be able to report those numbers, and you may also see some uptick in that.

And sir, second question on like as you mentioned that we did around 90 million meters of volume in this quarter. And if you look at the realization, so the realizations are coming at around INR 360 per meter. So despite like sluggish demand or sort of an inventory buildup to global retailers, we have been able to maintain the margins or the realization. So like as I understood that we are focusing on the branded products. We are moving on to the fashion, utilities side. So like so there's a sense like how is the order inquiry or the order book standing as compared to last year's same period. Like just some sense on the order thing from the retailers?

See, of course, as what we are focusing on the value addition side, some of the order book positions have changed as we compared on a Y-o-Y basis, definitely because we also haven't picked up the commodity business this quarter, because of the raw material hike as well as the demand sluggishness. So we have left some commodity businesses. Going forward, when things normalize, we will add up that depending upon the strategies which we adopt. So I think the margin profile, which we are trying to achieve depends on not many factors. It depends on the product mix, the market demand depends upon what we intend to supply to the customer, depends on the raw material prices and various other factors. So being a global company, there are many global impacts, which puts pressure on both the margin supply as well as the demand. So those we are trying to tackle. And going forward, we are quite confident that we should be able to maintain our value-added businesses.

Okay. And sir, 1 more question. Like currently, for example, as the yarn prices have also reduced. So what has been our like inventory further strategy. As in like are we on a wait and watch mode or we are slowing gradually acquiring and building up the inventory for the coming H2, like what is the stance on that?

So we have hedged into the next 2 quarters, fortunately, and that will definitely pay off as a company to us. And post that, as we all see that the prices are reducing and the futures are quoted at a lower level, we are all waiting to see how the crop comes up. The sowing is better, the rainfall is better. And what we hear about that the cotton crop yield also will improve, this will help us to make available the required cotton to the mean consumers. So definitely, it will normalize the prices, and that will also help us to formulate our strategy going forward for the next financial year.

Okay. And sir, coming back to my previous question, like a highlight, sir, about the realization piece. So like as in -- like as you mentioned that from now I'm considering GHCL and Indo Count as the same entity, but like, for example, what could be the GHCL? How is the realization from the GHCL operations? Like is it lower, like some broad view on the realization from the GHCL capacity?

See, we are focusing on that as well how to scale up that business to a better productivity level overall. And with the kind of customer base, which we have and what GHCL have, we have found positive responses from our customers accepting this and they look upon to us for solution today. . Definitely, we -- the margins at GHCL when what we acquired are currently low. But going forward, are all emphasis in how we can sweat those assets and make better margin out of their. So that's what we are focusing upon. And given the strategy, what our company has been following so far, if we implement -- if we are able to implement that at the GHCL level, we are very confident to scale up that their margin too, which will be one margin for the entire company.

The next question is from the line of Komal Maheshwari from Anubhuti Advisors.

Most of the questions have been answered, but still I do have 2 questions to ask. So on the first question -- I mean the first question is on the capacity utilization. You just explained the calculation. So on the basis of that, we come up at 70% capacity utilization. But sir, is it fair to say that since 25 million tonnes that we are not using inflation is a concern. And on the base of total capacity of 135 million tonnes that we have, including GHCL plus Indo Count. So on a quarterly basis, we are getting a 34 million tonnes. So that was giving a capacity utilization of 57% or 58%. So is it fair to say that we are at 57% or 58% of capacity utilization level?

See technically, you are right. But you see -- you have to see from a practical standpoint, when we acquired these businesses, there are 2 situations. One is you invest into a capacity, and 1 is will you acquire some business. Now this business has been acquired in this quarter, which was at 20 million meters against 45 million capacity. And we have mentioned that as a company, we have acquired this for medium term and long term. And we will build and utilize this capacity. We'll build this business going forward in the next 2, 3 years that we have already explained and the revenues from this capacity utilization will be an additional to the extent of INR 1,300 crores to INR 1,500 crores we have already explained. Now we are at 90 million meters capacity today. We are scaling this up to 108 million, which will happen by the end of FY '23, as I mentioned in my earlier answer. Now with all practical reasons, if you consider this 90 million, and the 20 million business, which we have acquired, we were again 90 million at 75 million, which was 85% of the capacity utilization. Now this 20 million capacity, which we -- business which we acquired, if you add up to this 90 million in the first quarter, if we are at 19 million, if you divide that -- 110/4, you get at 27.75 roughly. And we are at, say, 19 million. So it is fair to say that we are at 70% utilization as a business. Technically, you are right, at 135 million.

Okay. Sir, I do have another question on the comprehensive income, so which comes at INR 48 crores which says that item that will be reclassified to the P&L. So is it -- I mean, majority of [Technical Difficulty] coming from the -- because of the foreign exchange loss?

These are in respect of our MTM on an unexpired contract. So these are notional and we'll adjust itself into the P&L and carry forward also according to the position of exchange hedge we have at periodically.

Okay. Okay. And current position of the hedge?

Yes. So I think we have delivered an exchange rate of about 78.50 around we have realized in this quarter.

The next question is from the line of Harshil Shethia from AUM Fund Advisors.

Sir, can you just break up the volume in terms of how much you have from Indo Count capacity and how much you have from GHCL's capacity for the...

Sorry to interrupt you Mr. Shethia, your audio is not very clear.

Hello.

Yes, now it's better. Please repeat your question.

Sir, can you just break up the volume capacity data meters into how much was from Indo Count capacity and how much were from GHCL's capacity?

Yes, I have already mentioned, we have to look at jointly now as a 1 company and 1 business because you see for all practical purposes, we are trying to build upon the synergies between the 2 units and see where -- how we can achieve more efficiency and productivity when we deliver to a customer. So you have to take this as 1 company now and one volume.

Understand your point. I just want to understand how is GHCL being scaled in terms of acquisition, where are we in terms of the processes? And I understand that you just said the product of GHCL is well accepted with Indo Count customers. But just to understand the whole process of integration, what's going and what's not going?

It's a long-term and medium-term strategy as I explained, to integrate the 2 companies together to scale up to what we desire as a business. And definitely, as I have mentioned in my speech also that the integration is happening similarly between the 2 companies and the customers have also accepted it and they are quite hopeful and very happy to deal with us going forward. And they are showing positive signs to increase their business with us. And that prompts us to say that we'll be able to utilize that capacity going forward very well. And that is the reason we have acquired this because we wanted to be market-ready when the FTAs gets signed, and we are also looking at the demand increase in all major markets going forward. As home has become the center state and because of the scale up like the China Plus One strategy and the Xinjiang cotton we are -- India as a country is also better positioned where brands and retailers are derisking their business to a second source, which is apparent. And we -- whenever we enter a meeting in today's world with a customer, they do mention about shifting their business from China. So those are positive signs. Also the quality which this GHCL unit has been making is very well accepted by the customers, and we are further scaling it up to see that how we can increase our product profile from there and see that how we can sweat the assets going forward and utilize that capacity. That's no concern for us because we have made a strategy to see how we can scale up our business going forward in all directions, whether it is domestic market, whether it is overseas market, whether it is omni-channel distribution, whether it's brands and license. So there are so many avenues open to us to scale up our resources and those are bearing fruits because we have been working upon this for the last 3, 4 years. And that's why you see those getting reflected in our results.

Okay. And secondly, sir, I had that if you can just give a 3- to 5-year vision, where do we want to see that and business to be in the next 3 to 5 years?

So we had already mentioned in our earlier con call that as a company, we would like to in the next 3 to 5 years, double our revenues were at decent margins. And we are working towards it. And that's part of our strategy to acquire GHCL because this had a complete synergy with our businesses. And GHCL was also operating on a good quality basis and having a good customers, which were not overlapping. So there was a good addition of assets and businesses only thing these circumstances today are certainly difficult at the moment. But as I mentioned, we are quite hopeful that it should get normalized from third quarter onwards, and we should see our business moving up in the right direction.

The next question is from the line of Riya Mehta from Aequitas.

Hello, can you hear me?

Yes, a little bit louder please?

I would want to ask 2 questions. So first will be, what would be the percentage of the value-added products this quarter? And how much margin or how much EBITDA would be attributed from that? And how much would be inventory gains for us?

See, we had reported in our earlier con call that our fashion bedding business is almost 17% of our business, which is a value-added business. Secondly, we are doing 10% of branded business in our revenues which also overlaps in our fashion bedding businesses. Our e-commerce business would scale up to 8% plus, where we have an opportunity to promote licensed brand businesses. Our domestic brand businesses, both Boutique Living and Layers are scaling up to 3% plus going forward. So all these branded business distribution basis in omnichannel, et cetera, are paying -- are providing us the necessary value addition. So as I mentioned in my earlier statement, that our focus is entirely to fragment our business not to focus upon more commodity business, but to rather scale up our value chain and see that how we can drive better margin and provide better services. And for that, our company is regularly investing into innovation, research and development, new technology, digitization to scale up the service level to our customers, which is helping also us to see that we become a one-stop shop for our customers. That is providing them the necessary confidence. And we have performed as a company, if you see our investor deck in the last 4 years, a constant growth of 15% on our revenues. So all these are motivating us to see that we scale up our call it value proposition, we scale up our competitive advantage and being a debt-free company almost, we are seeing that how we can invest more into customers and markets to see that we gain more market shares going forward in the value-added business.

Okay. I think that would be great. My second question pertains to what would be the percentage of inventory gains in this quarter?

This, I think, we will be able to provide you later, but that we'll provide you offline. Yes.

Okay. But if you could just give a directional sense on it?

See, as you know that there is a sluggish offtake. And in order to service business, we need inventory. And as a company, we have been investing into inventory. Secondly, we have advantage getting reflected into our quarter also in form of gross margin, which you can observe very well. Next, you see in order to service the business also, like, for example, when we promote e-commerce, we need inventory, when we promote domestic business, we need inventory, when we promote distribution in the U.S., we need inventory, when we promote in the U.K. distribution, we need inventory. So we have to service the businesses where we need to invest into inventory to provide the necessary supply chain security to our customers. So that's what is making us as a company to invest into the supply chain. So we are looking up to this as an opportunity to do business and to improve is our competitive advantage overall, plus the funding of our today's business in exports is also the rates prevailing in India, minor fee interest utilization are at a lower end. So that is also helping us to finance the business. If I'm investing to, say, 5.5% into inventory, I get 18%, 19% EBITDA on my resultant business. So what is wrong in that?

Yes. Yes, completely understand. Also, directionally, since you're saying that the cotton future crisis are reduced at INR 65,000-odd levels. But the current levels of INR 86,000, INR 87,000 the current prevailing level. What kind of -- are you seeing any orders or any inquiries at these current levels? Because I think industry perspective that there is no such order booking which is happening right now. So what's your take on it?

See as I mentioned earlier, we are ahead for the next 2 quarters. And this is -- are at lower level than what the current candy price is. Going forward, as you rightly mentioned that the levels are being quoted for December futures at INR 65,000. So we are waiting and watching the situation very closely, and we are updating our customers, communicating with them more and more to see that they have a full track of the trend, which is following. And we take them into confidence to see how we can jointly make a business plan and scale up our business to gain their market share in their own markets.

Okay. Okay. And from a demand perspective, I just wanted to have a sense on -- since U.S. is drying up, U.S. and Europe is seeing some slump. So in this coming next 1, 2 quarters, apart from inventory getting the clustered, what are the headwinds or tailwinds do we see in the export market?

See, as I mentioned, even in the U.S., the retail is doing well, only the discretionary purchase is not there, which the end consumer was doing sometimes back. The inventory built up happened because of the mismatch in the supply chain because the goods arrive delayed post the holiday season, and that's why they carried up. And then the third wave of the COVID broke down the couple of months sales, and this accumulated inventory, they are getting a traction as of now, as we speak slowly, and the demand is -- we can see that getting revived in the third quarter, hopefully. And this is for the U.S. market. The U.S. market do have inflation, but we all believe that the inflation will be tackled by their respective government going forward in FY '24. And this year, of course, the inflation would be there. But looking at the holiday season, the demand should revive by the third quarter. In the other areas, like, of course, U.K., Europe, we are looking prospectively towards the FTAs getting signed. But whatever market share is existing, they are all believing in Indian supplies as India is well positioned in raw material. And they feel that because of the disruptions happening due to China Plus One strategy and the cotton coming out of the Xinjiang area, where reliance on India has increased substantially. And that's what is more positive for all other countries to show South of India. Now there are only 5 countries in the world supplying textile. The major ones are China, India, Pakistan, Bangladesh and Vietnam. We all know that Bangladesh and Vietnam do not have the desired raw material, whereas Pakistan's raw material is saturated. This leaves China and India where China is facing the China Plus One strategy and overall cost competitiveness decrease. So the advantage is India and the Indian government has also realized that in order to build up employment, they should invest into this core textile sector. So they have come out with various schemes like the PLI, the Atmanirbhar Bharat, the Mitra Park and the RoSCTL continuity for the next 2, 3 years. So these are all signs by the government that they are taking positive steps in order to support the textile sector. And this will definitely go a long way once the FTAs are signed for the revival of market and India building up market share similar to what China has gained. So we all feel positive about going forward. As far as the demand is concerned, from our major markets like U.S. and the other developed markets like EU, U.K., Australia, GCC countries, South Africa and Latin America. So we feel quite confident that going forward, as a country, as a company, we are well positioned and should do well.

Ladies and gentlemen, due to time constrain that was the last question for today. I now hand the conference over to the management for closing comments.

With this, I would like to thank everyone for joining on the call. I hope we have been able to address all your queries. For any further information, kindly get in touch with me or Strategic Growth Advisors, our Investor Relations adviser. Thank you.

Thank you. On behalf of Indo Count Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.