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

Ladies and gentlemen, good day, and welcome to Indo Count Industries Limited Q4 FY '23 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. R. Lalpuria, Executive Director and CEO of Indo Count Industries Limited. Thank you, and over to you, Mr. Lalpuria.

Thank you. Good afternoon, and a very warm welcome to all of you to the Indo Count Industries Q4 and FY '23 earnings call. I have with me Mr. Muralidharan, our CFO and Strategic Growth Advisers, our IR advisers. Happy to connect with you all once again to discuss the Q4 and FY '23 performance. Let me start with the industry and business scenario during Q4 and FY '23. We have a successful close to FY '23 as we continued to sustain our performance despite numerous external challenges. During the year, the industry has faced multiple headwinds, such as the demand slowdown in export markets due to high inflation, the supply chain disruptions due to logistics, which affected inventory levels and a record high commodity costs which severely hit margins. However, after navigating these headwinds, the sector is seeing signs of revival. We believe the worst is behind us. Coming to our key markets, we have experienced improvement in demand due to normalized inventory levels at the retailers and hence, there is an uptick in the order bookings, and we are optimistic that the growth phase should return. Domestic scenario, Indian consumer continues to improve its economic status and spending capability. We believe this will lead to an increase in household numbers and a consequent surge in demand for home product for both the medium and long-term. Hence, we are seeing an opportunity to tap into this market. We are confident on sustainable growth for Indian manufacturers since India has an integrated manufacturing base for textiles. This coupled with various government initiatives has also bolstered domestic manufacturing, including the Make in India campaign, PLI scheme Textile MITRA Parks, which is overall aimed at promoting local manufacturing and exports. Coming to our recent performance and update. I am delighted to share that Indo Count has successfully navigated the challenges in FY23. Given the circumstances, we concentrated on expanding in value-added segments such as fashion, utility and institutional side. As a company, we focused on-brand building initiatives. During FY23, we have seen growth in the e-commerce side of the business, which contributed 10% of revenue in FY23. I'm happy to announce that we have been able to achieve volume guidance for FY23 with a sales volume of 74.7 million meters. Our consistent efforts over the last few quarters helped us to sustain our margins. Our strong execution capabilities ensure that margin sustainability does not compromise our balance sheet. Over the last 2 years, we have built capacities through organic and inorganic routes by investing over INR 1,000 crores and positioned the company as the largest global bed linen player. Our prudent capital allocation strategy has helped us to be ready to achieve 2x revenues for the future. In spite of CapEx spending, our strong free-cash generation was further re-utilized towards debt reduction, which reduced our net-debt from rupees INR 900 crores in FY22 to INR 589 crores in FY23. For FY24, we expect volumes to be in the range of 85 million meters to 90 million meters, which translates to a 15% to 20% Y-o-Y growth, our EBITDA for FY24 to be in the range of 16% to 18%. For FY23, branded business stood at 14% of sales, domestic business at 2.5%, e-commerce at 10% and fashion utility and institutional business contributed 19% of our revenue. We are embarking on increasing the contribution of this value-added segment and have accordingly set our targets for FY24. Let me now talk to you about our ESG initiatives. We at Indo Count are an ESG-focused organization with clear goals, roadmap and guiding principle, in all of our operations, including the sourcing of raw materials, manufacturing, supply chain and waste recycling, we enable a sustainable approach. Our key updates are during the quarter, ICIL has achieved 90.6% score for Higg Index versus Global Benchmark in Home Textiles verified score, which is 59%. Hohenstein, Germany, a recognized world lab has lauded our contribution and efforts towards water consumption, saving and recycling and all of this happened on the event of the International Water Day. We have received the certificate of merit from CITI Birla Sustainability Award under contribution towards zero carbon emission at a ceremony held in Jaipur. On the awards and recognition, we are happy to announce that our domestic brand, Layers is recognized as the FEMINA POWER BRANDS for the year 2022-23 for introducing exquisite designs wrapped in superior fabric at affordable price. In addition to the above, ICIL has been awarded by the Federation of Indian Export Organizations, FIEO for being the highest foreign-exchange earner in textiles in Maharashtra for 2 consecutive years, 2018-2019 and 2019-2020. Now let me share with you our consolidated financial performance. Kindly note the previous periods FY22 figures are restated on account of RoSCTL of timing benefit of INR 49.99 crores, approximately INR 50 crores. Total income, INR 810 in Q4 FY23 versus INR 690 crores in Q4 FY22, a Y-o-Y growth of 17.3%. Total income is INR 3,043 crores versus INR 2,932 crores in FY22, a growth of 3.8%. EBITDA, INR 147 crores in Q4 FY23 versus INR 132 crores in Q4 FY22. EBITDA, INR 486 crores in FY23 versus INR 524 crores in FY22. EBITDA margin stood at 18.1% in Q4 versus 19.1% in Q4 FY22. EBITDA margins stood overall for the year at 16% in FY23 versus 17.9% in FY22. PAT, INR 95 crores in Q4 FY23 versus INR 85 crores in Q4 FY22. Overall, INR 277 crores PAT in FY23 versus INR 359 crores in FY22. EPS is INR 13.97 in FY23. Net debt; the net-debt to equity is 0.33 as at 31st March, 2023 against 0.57 for the previous year. For FY23, our ROE is 15.4% and ROCE is 17.7%. The Board of Directors has recommended a final dividend of INR 2 per equity share of INR 2 each, that is 100%, subject to the approval of shareholders at ensuing Annual General Meeting. That's all from my side. Now I leave the floor open for the questions-and-answers.

[Operator Instructions] The first question comes from the line of Ashwini Agarwal from Demeter Advisors Llp.

Couple of questions; one is, if you look at the fourth quarter, what would be the total value-added revenues because in the various categories that you outlined in your opening remarks, there is some overlapping elements as well.

We should see for the overall year. So we have been able to, you know, clock 19% of value-added products sales, which I mentioned in my speech. And also the investor deck that 19% came from fashion, utility and institutional business and also the license brand did well on the e-commerce front. So our emphasis is to see how we increase our B2C and B2C strategies and which we will work upon going forward also.

And out of this 19%, how much was India.

India, overall is 2.5% of our revenue as on-date.

And that would be all value-added, I'm assuming.

Of course, that's the brand for play.

So and Mr. Lalpuria you had mentioned that your aspiration is to take this number to 30%. Now that you achieved 2.5% in India and nudging 20%, what do you see as the journey to 30%. I mean how much time will it take, what will be the critical components that will drive it, brands in India, brands overseas, B2C, how do you see that journey playing out.

Yes. So as you know, we have invested in a state-of-art fashion bedding unit which has started operation. So we are focusing on the back-end as well to deliver value-added goods, not only to be exports market, but also to the domestic front. And as I mentioned, we are seeing Indian economy moving forward. So there is a good opportunity for us to leverage our brand strength in the domestic area also. So what we had earlier mentioned about our 30% revenue on the export front for fashion, utility, and institutional, and the domestic brand promotion is over and above this. So we should be looking at a good level in the coming year, as you know the economy move ahead and so it should take around say another 3 years to achieve this 30% on the increased revenue.

Okay. And sir when you gave an outlook of 17% to 18% EBITDA margin, this improvement in product mix is built into that or that's on a steady-state basis, considering your exit quarter was anyway close to whatever, 18% or so.

So we are looking upwards as we utilize our capacities going forward where we will apportion our fixed cost. Not only that what we are seeing uptick in demand and various other factors, which are helping us to bring back normalcy in our business front. So as the demand improves, definitely our target would be to improve our margin and that prompted us giving you a margin guidance of 16% to 18%. But yes, there is potential for improvement going forward.

And, sir, now that most of the CapEx is done, barring a small amount [Technical difficulty], what should we think about as ongoing CapEx for maintenance purpose, refurbishment or whatever else balancing equipment that you might want to add.

So the CapEx will be minimal because we have completed our most of the CapEx, except for the spinning, where we have reflected balance of INR 23 crores. So apart from this CapEx, it will be the routine CapEx for this year.

And that will be lower than your depreciation outlay, the routine CapEx.

Yes, INR 40 crores to INR 50 crores will be the normal CapEx.

Okay. And sir, last question from me. On the working capital side, I mean I was just calculating the inventory days on a full-year basis from March 2023 inventory days were about 240, but I'm also cognizant that this was a very volatile. But if I look at your long-term history, your inventory days have somewhere in the ballpark of 180 give or take year to year 170, 200 sometimes. Do you think we normalized to 180 days or the change in sales mix needs higher inventory days.

Well, as the supply-chain has eased out, we have come back to normal and that would be the order of the day. So currently we are at around 130 days as compared to a 171 days on 31st March 2022. So I think these are the normalized figure. So this should continue going forward.

[Operator Instructions] Next question comes from the line of Kapil Jagasia from Nuvama Wealth Research.

Sir, my first question is, has all inventory at retailers been exhausted and are retailers going for full order replacement or there is still some inventory at some of the retailers, it's still there, could you help us with this inventory situation.

It has considerably improved. And as I mentioned, you know, it is more or less normalized now. So we should see uptick post second-quarter onwards.

Okay. So in that case, what would be your order book position as on-date.

The order book position is good, that prompted us providing you a guidance of 85 million meters to 90 million meters.

Okay. So that is for, like the order book would be for 6 months or like, this is for a longer period now.

Normally, it is 5 to 6 months in consideration, but we have a longer view because we are into supplying core businesses to major retailers. So that gives us some visibility on the order book position going forward. And as the inventory levels have reduced considerably, this gives us the confidence that as things normalizes, they will be back in business.

Sir, just one follow-up on the fashion, utility, and institutional business. The contribution here remains the same at 19% vis-a-vis if I compare to the previous year. So would it be fair to assume that standalone business contribution of this segment much have been much higher, as this integration of new unit of GHCL would still not be getting to the premium segment.

No, we are slowly integrating the product mix what was sold at GHCL earlier and I'm happy to say that we have been able to uptick their margin to somewhat our level of business, which is getting reflected into our overall performance of 16% for the full year. So we are pushing the value-added products to the customers, which were existing at GHCL and we are confident that we should be able to impress upon them to have that on their shelf. So we are quite confident that going forward, as we have invested into the back-end as well, will give us lot of confidence to promote this product across our customer base globally.

Just this final question from my side. Realization on a Y-o-Y basis [indiscernible] that has come off a bit, though it is still higher if I compare to last 3 years of probably pre-COVID levels. So according to you, how much more would still be needed to be passed to the end retailer or that is true for now.

So the realization is in proportion to the raw material prices as what we have seen an uptick in last year. So as this get corrected, there will be calibration in the overall pricing, but since we are into value-added segment and since we have a good collaboration with the customer and understanding, we are confident that we should be able to add value to their business as well as to our business going forward. So we will try to see that we can maintain higher margin and earn higher margin for the Company on value-added products.

Next question comes from the line of Nirav Savai from Abakkus AMC.

Sir, I have got 3 questions. The first one is, with large part of the CapEx which we have already done, FY24 onwards there will be only maintenance CapEx. How do we allocate those funds. Is there any dividend policy which we have decided or any buyback plans in future.

We already have a dividend policy and according to that the Board takes decisions. Going forward, we have held this year in-spite of our profitability getting reduced So the Board has taken a view and given back to the shareholders a higher dividend payout, and we have maintained our 100% dividend that is INR 2 on a fair value of INR 2. So we do believe that we should reward the stakeholders as we move ahead with the company's performance from time-to-time. But looking at the growing company, we do need cash. And as you can see that through investment, we have made the company a global leader, and there are requirements going forward to like renewable energy like other areas where we need to invest into CapEx from time to time. So the cash is also needed for growth. And that's the reason we are having a dividend policy where we are moderating at times to see that the dividend payout is healthy and consistent and maintained.

Right. So we stick to a guidance of about INR 70 crores to INR 75 crores kind of CapEx for next year? Over and above that, can you say anything for renewables or anything?

INR 23 crores is the balance on the PSML side and then there will be, as Mr. Muralidharan has said, around INR 30 crores. So adding that up, it comes to around INR 60 crores to INR 70 crores of routine CapEx.

Right. Second thing is what would be a cotton inventory as on March closing? Because last year, we had loaded a lot of cotton inventory because the prices were going up. So compared to last year, what would be the cotton inventory which we are holding.

As far as our hedging policy on the raw material side goes on, we believe into having investment into supply chain so that not only we ensure the buyers from a price standpoint, but also from a security of supply chain point of view, our philosophy is to exist on the supply chain. This wants us to have at least 6 months cotton inventory. And as we are seeing the season this time of the year, we have created a 6 months inventory going forward since September and…

Hello.

Can you hear me?

Yes.

So I already answered.

Right. So we have a 6 months quarter inventory as on March 31.

Yes. And sir, on the freight side, last year, the freight cost was highly elevated, which has cooled off now. Going forward, next year, what can be the potential gains with this lower freight cost compared to what has happened last year in FY '23.

Yes. And sir, on the freight side, last year, the freight cost was highly elevated, which has cooled off now. Going forward, next year, what can be the potential gains with this lower freight cost compared to what has happened last year in FY '23.

So most of our sales are on FOB terms and whatever which we sell to our subsidiary in the US and UK, there will be reduced freight component. So as the propulsion happens, we will see that positive impact on to reduction of freight costs going forward.

Right. So that is something which is a part of our guidance of 17%, 18% kind of EBITDA what we have guided or and that will be over and above?

No, it is part of that.

Next question comes from the line of Bharat Chhoda from ICICI Securities Limited.

So probably, I just wanted to understand the gross margin expansion. What is causing gross margin expansion? And would you say that the gross margin would be sustainable for us going ahead?

See, the gross margin is resulted due to our supply chain investment, number one. Secondly, we were able to convince upon the customers to have a reasonable price increment. Third is [indiscernible] into handling our inventory management as well as financially deploying capital. So on all these fronts, it helps us to achieve and maintain the gross margin close to our FY22 result. So going forward also, our entire attempt will be to see how we can maintain this gross margin as our focus will be towards adding more value-added products in sales and our B2C, D2C strategies as well as brand promotion in the domestic area will help us garner more margin for the company in our overall revenue.

Sir, this reasonable price increase, if you can give some quantum on that, what kind of overall price increase have we taken?

That thing cannot avoid, but it is proportionate and that's the reason you see the EBITDA level being maintained.

Okay. And sir, one more, like…

And the gross margin also maintained if you look at our raw material cost.

Okay sir. Just had another question, like, could you share the cotton-polyester products mix share for us.

Mostly, it is cotton like almost 80%, more than 80%, 20% is blended and there is in blends like in polyester as well as Tencel is used nowadays.

So for this value added, would the polyester use increase or how it is, sir?

Value-added is what seen in that context, but it is seen from various products which we supply on the fashion side as well as the utility and institutional side where we specialize. So it cannot be seen in context to a ratio between polyester and cotton.

GHCL 45 capacity is fully operational right now?

Yes, it is fully operational.

Next question comes from the line of [indiscernible].

First of all, congratulations to you for the great set of volume growth and the margin in this difficult environment and a strong balance sheet after having an inventory of INR 900 crores to-date is just INR 6 billion. Sir, my first question on how we are increasing our wallet share with the existing customers as far as America is concerned, US is concerned.

So as I have mentioned, we are seeing improvement in demand due to the normalized inventory levels and the order booking is also there is an uptick. So we are quite optimistic that USA as a country should do well and even the interest rate to somewhat have stabilized the hike in the interest rate. So because of all this happening, we see that the demand outlook is positive. And secondly, on the other side, you see there were so many headwinds last year, which have now normalized. So that should also help into our overall competitiveness.

And how is the competitor behaving like Pakistan, China, Pakistan is having a lower cotton price and with the rupee also depreciated quite a lot. So how are they competing with us to get the orders from the USA.

In fact, India is positioned from the mid-to-high segment and Pakistan is into low segment. So there is no direct competition as such. And as far as China is concerned, we all know we have seen from OTEXA Data where they were 3 years back and now where do they stand and their focus is entirely on to their domestic front because there are headwinds for them, as far as tariff is concerned, in the US market, which they have increased the import tariff rate as well as the Indian cotton, which has been banned. So these are the opportunities for the China plus one strategy also because the retailers would like to reduce and derisk, they are sourcing from one country. And that's why India seems it is well placed. They are looking positively at India to have a higher allocation of sourcing.

Okay. And sir, any latest talks on the UK FDA where we can see the light at the end of the tunnel.

So UK and EU are facing challenges because of the high inflation and we are maintaining our good presence there, we are sustaining our growth over there and we are like waiting for the FDA to happen, both in UK as well as Europe, which will definitely see Indian market share improving and correspondingly, our market share going up. So we are quite hopeful that in the coming period, once the FDA happens, this will see an uptick into Indian market share building out there.

And sir, my last question on the -- like we have only CapEx of around INR 60 crores, INR 70 crores for the coming year, and I think incremental working capital requirement would be INR 100 crores. So do we see further deleveraging of credit by around INR 2 billion to INR 3 billion in FY '24, like INR 200 crores, INR 300 debt reduction is possible because we don't have further CapEx and I think working capital requirement will be also minimal.

Of course, that's our whole philosophy and strategy always that we would like to move towards more debt-free organization. And so our free cash flow will be utilized to pay back our debt at the end of the day.