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

Ladies and gentlemen, good day, and welcome to the Q3 FY '24 Earnings Conference Call of Indo Count Industries Limited. 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 very much. Good afternoon, and a very warm welcome to all of you to the Indo Count Industries Q3 and 9 months FY '24 earnings call. I have with me Mr. Muralidharan, our CFO; and Strategic Growth Advisors, our IR advisers. Happy to connect with you all once again to discuss the Q3 and 9 months FY '24 performance. Let me first highlight the industry and the business scenario. The calendar year 2023 exhibited resilience, concluding the year with an above normal holiday season. Going forward, we anticipate gradual improvement in consumer sentiment, thereby showcasing the adaptability and strength of the U.S. and other economies. Of late, the global logistic issues have posed challenges, which needs to be monitored closely. Overall, inflation along with geopolitical crisis and conflicts have been the biggest challenges in international trade and commerce. In this backdrop, we at Indo Count have fared well and improved our position. Domestic industry scenario. Indian textile industry has witnessed a steady momentum fueled by strategic initiatives and a commitment to the innovation. Domestic cotton prices have aligned favorably compared to international rates, positioning Indian companies for increased competitiveness. The home textile industry in India is at a pivotal moment embracing opportunities both globally and domestically. There is a large opportunity in the global home textile industry for India, and we believe the domestic industry is ready from capacity and capability perspective to capitalize on this. Coming to our recent performance and updates. In the Q3 FY '24, we achieved a 33% year-on-year growth in volume. Accordingly, for 9 months FY '24, we reported volume of 68.2 million meters, a growth of 26%. It is pertinent to note here that there were bunching up of orders, which led to increase in inventory during this quarter. We are reaffirming our volume guidance of 90 million to 100 million meters for FY '24 and believe we would be able to achieve the midpoint of the guidance. This is considering the near-term challenges caused by shipping delays and assuming no further deterioration of the geopolitical situation and shipping situation. Our confidence stems from the healthy order book position and better retailer confidence and the feedback. As a strategy, we have been penetrating across markets, keeping the tepid consumer sentiment into account. And this, we believe, has yielded desired goals. The softening cotton prices, along with product mix, aligning to customer sentiments has made us competitive. Our objective is to sustain the growth trend in medium to long term for optimum utilization of our capacities. Additional ESG measures in the form of investment into Solar would continue, which would not only reduce energy cost, but also help boost circularity. Now I would like to quickly talk about our recent announcements. As all capital expenditures are now aligned and synergy creation is complete, our focus has shifted towards a proactive approach, incorporating sustainability and strategic IT measures for process improvement. With a diverse product portfolio spanning multiple geographies, we have adeptly navigated challenges and sustained consistent growth. Our commitment to reinventing and enhancing business operations through digital technology reflects in our collaboration with Accenture. This partnership aims to standardize, optimize and reengineer key business processes including manufacturing, supply chain, logistics and procurement. We aim to better serve our customers and stakeholders by fostering a culture of ability and innovation, making this initiative a significant step in that direction. These developments position us to elevate customer service and amplify the value-added aspect of our business. The seamless implementation and integration of the facilities boost our competitiveness and efficiency to meet the growing demand. With India's promising economic growth and the rising disposable income and aspirations of the middle class, there is expected increased demand for branded home textile product, creating significant opportunities for local brands to prosper. Now let me talk to you about our ESG initiatives. I'm delighted to share that Indo Count has debuted in the DJSI, which stands for Dow Jones Sustainability Index 2022, securing a decent score of 42. We consider it as a significant milestone, highlighting our strong commitment to ESG. We eagerly anticipate the continued journey of sustainability where every step is a stride towards a better and a more responsible future. On awards and recognization, I am thrilled to share that Indo Count Industries Limited has been honored with the prestigious Businessworld Sustainable World Awards 2023 for India's most water-efficient organization. This accolade recognizes our commitment to improving water utilization efficiency and our dedicated approach to wastewater management, including recycling, recovery and reuse of industrial affluence. This recognization underscores our dedication to sustainable practices, and we are proud to be acknowledged as a water efficient organization. Now let me share with you our consolidated financial performance. Volume, sales volume for Q3 FY '24 stood at 19.5 million meters versus 14.7 million meters in Q3 FY '23, a growth of 33% on a Y-o-Y basis. Sales volume for 9 months stood at 68.2 million meters versus 54.3 million meters, a growth of 26% on a Y-o-Y basis. Total income, INR 727 crores in Q3 FY '24 versus INR 662 crores in Q3 FY '23, a growth of 10% on a Y-o-Y basis. Total income, INR 2,507 crores in 9 months versus INR 2,233 crores in 9-month FY '23, growth of 12% on a Y-o-Y basis. EBITDA for Q3 FY '24 stood at INR 118 crores versus INR 78 crores in Q3 FY '23, a growth of 51% on a Y-o-Y basis. EBITDA margin for Q3 FY '24 stood at 16.2% versus 11.8% in Q3 FY '23, growth of 442 bps. EBITDA margin for 9-month FY '24 stood at INR 437 crores versus INR 339 crores in 9-month FY '23, a growth of 29%. EBITDA margin for 9 months FY '24 stood at 17.4% versus 15.2% in 9-month FY '23, growth of 227 bps. PAT, INR 58 crores in Q3 FY '24 versus INR 38 crores in Q3 FY '23, growth of 54% on a Y-o-Y basis. PAT of INR 246 crores in 9-month FY '24 versus INR 182 crores in 9-month FY '23, growth of 35% on a Y-o-Y basis. EPS is INR 2.93 in Q3 FY '24, and EPS for 9-month FY '24 is INR 12.42. Now I would leave the floor open for the question and answers.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Jatin Damania from Svan Investment Managers.

Sir, in your opening remarks, you indicated that the global logistics has posed a challenge. So just wanted to understand what was the volume loss during the quarter because of this global logistics? Because if you look sequentially, there is almost 30% decline in the overall volume growth. So can you help us understanding that number?

See, as I mentioned earlier too, that maximum sales of ours are on FOB basis, so this loss is on terms of bunching of orders, which we need to ship in the current quarter and which has already happened as well. So the loss was not tremendous to us. As far as volume is concerned, it only got carried forward to a certain extent because of the bunching of orders, not because of the Red Sea. Because the Red Sea impacts the U.K. and the EU much more than the U.S.A. The U.S.A. is more cost centric than the frequent -- and the frequency of the ship rather than the availability of containers. So we need to watch very closely, and we need to see that how we tide over this issue going forward.

So in terms of bunching of the order that you said of the inventories, which you have shipped in the current quarter. So what movement in terms of the quantity from the last quarter to this quarter, which was for month of January?

See, it always gets carried off to a certain extent because of the GIT. Because when we ship to our U.S. company, then it is accounted for in sales when the sales really happens at the other end. So this time, in this quarter, particularly, we have a rollout wherein we have bunching of orders, so that will get carried forward and we need to ship at one time, so -- which has happened. So that is a normal course of businesses many of the times. So I cannot give you a definitive number that the quarter has been impacted due to the volume.

But we are sure about maintaining our guidance, mid-level guidance of the number that we have given?

Yes, I've already reaffirmed that we should be somewhere in the midpoint of our guidance achievement according to the order book position. Nevertheless, the logistic issue is there, it should not deteriorate further. But you see, as far as what we observed is that it is much more cost centric than the availability of the containers. So we feel confident that we should be able to maintain both the guidance and we should be somewhere around the midpoint of the guidance achievement.

Okay. And sir, secondly, you also alluded your capital allocation program is mostly done, so just wanted to understand that our fashion has already started production. So in terms of the overall revenue contribution, have you seen any improvement compared to the last year?

Definitely, and what we have been able to achieve on the volume side, definitely, the capacity utilization has improved and which will be around, say, 64%, 65% for the full year according to whatever guidance which we have reaffirmed to you. So the revenues also will correspondingly increase, but not to the similar extent because the cotton prices have corrected. And we have to pass on the price difference to a certain extent. And also the product mix due to the consumer sentiment is also impacted. So we have to adjust according to the consumer sentiment and keep our offerings accordingly. So all these situations will decide upon the revenue going forward.

Okay. But sir, our target of reaching 30% in fashion, utility and institution of the overall revenue, are we impacted on that number? Or we may see a delay on that number?

No, no, we are on target on achieving those value-added sales numbers, which we have already formulated the strategy 4, 5 years back. We have also invested into a world-class facility for fashion bedding, which is under production. So we are quite confident that going forward, we should be able to achieve 30% of our revenues from the value-added segment as what we had indicated earlier.

And sir, last question from my side. I want to understand that since we are focusing on the newer geographies, if you can highlight the contribution of revenue from the non-U.S. markets?

See, our entire efforts are to see that how we spread our business to more countries other than the U.S. And we have been quite successful into getting a good visibility on the U.K., Europe, in Australia and UAE. And we are trying to further see that how we can make a sales mix of geographies of 60% in the U.S. and 40% to non-U.S. market from the 70-30 ratio as of now. So we are working on that. We are engaging the customers, and as the FTAs are being like signed between Australia and UAE, there is definitely an uptick in the demand from these countries, and we expect, like once the FTAs get signed with GCC and U.K. also, there will be an uptick into Indian exports. So definitely, we are working on this. And we are quite successful into adding up new customers from new areas, so that improves our confidence that we should be able to build this ratio going forward.

Our next question is from the line of Ashwini Agarwal from Demeter Advisors LLP.

Yes. So what I was asking was, first is congratulations on a very strong volume performance during the quarter. Sir, 2 questions. One is that, obviously, you said that cotton prices have fed through to realizations and the sales mix has also changed because of customer preferences. But is there a product mix change? Because of seasonality, you might have sold a lot of top of the bed or quilts in the previous quarter. Is there a seasonality impact as well during the quarter?

So definitely, there are seasonal impacts in our business according to spring-summer and fall-winter. So these are 2 big seasons where we deliver a lot of goods, definitely. So according to the seasons also, there are some changes. But as we had earlier indicated that we are working on the value addition segment, like the fashion, utility, institutional bedding and the branded business, plus the domestic business, another vertical where we are strongly working. So all this will help us to increase the product mix to a richer base going forward, both midterm to long term. And that's where -- what we are aiming for. In the current scenario, because of the gradual demand, which is picking up, we need to adjust according to the consumer sentiment. And that, to a certain extent, where the product mix gets a little bit diverted, so that's the only thing. But as we have more market share and we have more customer base, as we have more product channel base, I think this is like going forward, we can strongly believe that the value addition will provide us a much better realization as well as margin.

The realization trend that you've seen in Q3, that will continue for Q4 and Q1 next year as well?

No, as you mentioned, and you also mentioned about the seasonality of the product when we sell, so the spring-summer and the fall-winter are 2 big seasons wherein Q2 and Q4 get impacted with more value-added sales. And that's how the market responds. So definitely, it will improve to a certain extent. And definitely going forward, as I mentioned, in FY '24, '25, we have already started working on how well the market normalizes. We get a better realization and better value-added mix.

Okay. And sir, on your announcement of the major initiative with Accenture, how much is the CapEx that will be involved in this IT upgrade? And what is the gross debt and net debt as of December 31? Those are the last 2 questions.

Yes. As far as the CapEx on the Accenture side is concerned, it is almost close to [ $3 million ], which we would be investing into it to reprocess, to reengineering our business processes so that we have -- we provide all our employees with better decision-making tools and also cater to the overall digital challenges going forward. As far as the gross and net debt is concerned, we will come back to you, say, by end of -- by the fourth quarter call. So that will be giving you a true picture because currently, the cotton season is on and we are investing into our supply chain, so it will not project a true image. But at the end of the day, our entire endeavor, apart from allocating money for dividend and term loan payment is how we can reduce our overall debt.

Our next question is from the line of Archit Joshi from B&K Securities.

Sir, can you comment a bit on how we have fared in the value-added segment, especially in utility bedding or institutional beddings and fashion beddings? And how is the global competitive landscape for these 3 segments, especially the imports that are coming into U.S. from China on these 3 accounts, specifically, if you can give some information?

See as we had been mentioning about these particular categories, which were dominated by China, China is still strong there. And that's the reason we are expecting that they should contribute to Indian market share going forward, and that is visible from the OTEXA data. So as far as the opportunity is concerned, it is quite good in all 3 segments. And our company is working since last 3, 4 years into establishing a name in these 3 areas specifically. And we have been quite successful as we have reported since end of FY '23 a business of 19% in these 3 segments. And our entire endeavor is to see that how we can take this forward to almost 30% on our increased revenue going forward. And this is visible, and we will come back to you with the numbers in our Q4 con call because that will give you a correct picture. Because in our earlier answer -- in my earlier answer, I had mentioned that there are 2 big seasons in the U.S.A., the fall-winter and the spring-summer. The spring-summer gets delivered in Q4 and the fall-winter gets delivered more in Q2. So you will have a correct picture for you in our Q4 con call. So there, we will give you the number how we have traveled in FY '24 on these 3 product categories.

Sure, sir. Just one follow-up on the same thing. While you're kind enough to give out that data by the end of the fourth quarter, could we also have some segmentation done around the U.S. imports of cotton sheets, divided into these 4 categories, the basic sheets and the other 3 value-added sheets? I think, in the presentation, you have already given some broad level data wherein we can definitely see that China has launched quite a bit of market share to India and Pakistan. But I think this is more on a broad-based cotton sheet terminology. If you can have also some segmentation around it, that would be very helpful.

See, the overall home textile retail sales in the U.S. has gone up from USD 32 billion to USD 34 billion, first of all, in which around USD 16 billion is bed linen alone. And in this USD 16 billion, USD 5 billion is the sheet market and USD 11 billion is the other 3 categories markets. In this other 3 category markets, India is having a share of just 15%, where China is having around 50%. India is having just 15%. So we as a company have increased our target market by $11 billion in the last 3, 4 years. And therefore, we have established both the back end and the front end in order to capture a market share in this market. And that's why we are quite upbeat about it on the value addition front. And as you know, sheet is a commodity, whereas fashion bedding, utility bedding is more service-oriented, and institutional bedding is more service oriented, where you add value to get a return on your overall value, which you deliver. So that's where the catch is and that's why it looked quite promising going forward. And we are working towards it as a company. We have recently established and invested around INR 60 crores in a fashion bedding unit, which is world-class. And we have shown this unit to our top customers, and they are showing a lot of confidence to see that they should reduce their overall sourcing out of China and ship some of the categories to India. So that's a positive sign, and that's where we are looking at much more value addition going forward in these 3 particular categories. I hope it is clear.

Our next question is from the line of Vikram Suryavanshi from PhillipCapital.

Basically wanted to understand your views on margin front. This quarter, particularly, we have seen change in the composition to gross margin and other expenditure, so how does the margin expectations look like going forward?

See, Vikram, you need to look at the 9 months because there are seasonal changes and there are product mix changes and also the consumer sentiment, as I explained, we need to adjust accordingly to the marketplaces due to the inflationary measures. So all this together, we should look upon what we have achieved in the 9 months and what the margin guidance, which we have given between 16% to 18% for the full year. So that explains our margin, so that's what I wanted to convey.

Okay. And if the Red Sea issue continues, will that impact at least our like Europe sales, whatever we do? Or how are the feedback coming from that side?

See, as I mentioned earlier, of course, there are logistic issues and the frequency of the ship is impacted, the cost is impacted, the overall transit time is impacted. If it was a good season, like I would say, a booming business, then there would have been a problem that you could not have delivered the material for the growth side. But since the consumer demand itself is above normal and it is still treading along, the issue is still on the cost side and not on the availability of container side, so we need to monitor this closely as we move ahead. So far, the impact on us is not that high because of our lesser exposure on to the European and the U.K. markets. And so I would say that we are watching the situation closely, keeping our fingers crossed and see that because it's a global issue, it should get resolved in the next 3 months or 4 months, so that's where we stand.

Got it. And just last point to add because the similar situation on much bigger scale we saw during COVID. And there was a huge inventory built up by the companies, so that there should not be disturbance. So is there any possibility that we may get a demand, the cost to built-in inventory, just to create a buffer in an uncertain time?

I don't think so at the moment. This is just the inventory has increased during this quarter due to the bunching up of orders and the rollout. That's what I already explained. So we do not think because the cotton season has eased out on the raw material side, the overall availability of container is not impacted so far. So the shipments are just taking 12 to 15 days more for the frequency of the ship to come back, and that's it. So as of now, it's not a big concern. Going forward, it is uncertain. So we need to monitor it closely. That much only I can say. But no investment into supply chain has to be done similar to COVID. That much I can say. But as a strategy, of course, when you look at the various disruptions, we, as a company, have done investments into supply chain so that during the critical time, we are standing behind the customer and ensure that the supply chain is continuing. And that's where the whole strategy lies rather than building on just like in COVID, what we did earlier.

The next question is from the line of Nirav Savai from Abakkus.

Most of my questions are answered. Just wanted to know our CapEx plan for the next couple of years, '25 and '26?

See, as I mentioned, we are investing in renewable energy so that our cost gets reduced as well as we comply with the circularity and sustainability. So that is one area where the company is investing. Otherwise, there is the Accenture, where we are investing on the business processes. And then the normal CapEx is around INR 50 crores to INR 60 crores, that's what we are aiming to continue with, going forward.

All put together for '25, would it be safe to assume it would be roundabout INR 60 crores, INR 70 crores or maybe more than that?

Including the solar and the routine CapEx, maybe INR 100 crores.

Okay. And beyond that, any further expansion plans, which we have laid out until now or we will evaluate it as and when things progress?

No, no, no. Nothing as on plan.

Sir, any other category beyond bedsheets, which we aim to also get into? I mean, bedsheet, obviously, we have such a large presence with such a large capacity already in place. So any new product, which is complementing our existing products to the same customers? Are we looking at anything like that?

See, as I mentioned earlier in my answer, Nirav, that already we have gone ahead with a plan to have a target market of $11 billion. Now the other categories in home textiles are all around $2 billion, $2.5 billion. So I should be better off into targeting this $11 billion rather than a $2 billion category, which I have already mentioned, so there is a big -- and plus you see that the FTAs are around the corner, which will increase our overall competitiveness where we are missing our market share. So like in U.K., Europe, we have around 5% to 10% market share, which is negligible as compared to Pakistan and Bangladesh, who are having 35% and 25%. So there are large tracks of economies where we can really do a good business, and let me also reiterate that countries like Russia, like Latin America, like South Africa, like even China to a certain extent, post 3, 4 years, they will be net importers. So there are large tracks of markets, which are available. As far as our business is concerned, we have just so far had the low hanging fruit in the U.S. So why we should bother about because the bedlinen itself is a 50% category in the overall home textile market.

Right. The 70-30 ratio, which you are saying in U.S., non-U.S., can come down to potentially 60-40 now. Any time lines? Would it be next 2 to 3 years or something, which you're looking at?

Absolutely. We have already given a guidance that we would like to double our revenue in the next 3, 4 years.

Okay. So the higher growth we expect from the non-U.S. markets, but it's U.S., which is a large part of our overall revenues.

U.S. is also growing at 4%. The overall textile trade is growing at 4%. Our industry is growing at 7%, 9%, and we are growing at 10% to 12%, ahead of the industry.

Got it, sir. And lastly, sir, on this fashion bedding side, now our production has already started and the plant is there in place, so what can be the potential revenue from the existing capacity, which we have? Or is it booked completely right now for fashion bedding?

See, we would like almost to double our existing revenues going forward. Say, we are at 19% on the current revenue, so when I say 30% on the increased revenue, we are almost going to add that much of revenue in the next 3, 4 years in these businesses, so that is the plan. And we are inching towards it. Our customers have shown a lot of confidence once we have built up this facility. And because you need to be like having a back-end completely and ensure them the security of the supply chain rather than just placing an order. So you have to show that capacity to them that you can deliver to the larger customers. So far, we have been catering only to the smaller customers. But now we can go to the larger customer and give them assurance and show them the capabilities to deliver large quantities as well.

Right, right. It's again a 2-, 3-year kind of a horizon where we target this 19%, going 30%, which is a combination of all the 3; fashion bedding, institutionals and also the B2C product, right?