Iris Clothings Limited (IRISDOREME) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Iris Clothings Limited Q4 and FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Bhatt from EY Investor Relations. Thank you, and over to you, sir.

Thank you, and good morning, everyone. On behalf of Irish Clothings Limited, I welcome you all to the company's quarter 4 and FY '24 Earnings Conference Call. The results and investor presentation are available in our filings with the exchanges. To discuss the company's business performance during the quarter and outlook, we have with us today Mr. Santosh Ladha, Managing Director; Harshvardhan Sarda, Business Head; Niraj Agarwal, Chief Financial Officer of Irish Clothings Limited. Before we proceed with the call, a disclaimer. Please do note that anything said on this call during the course of the interaction and in our collaterals, which reflects the outlook towards the future or which should be construed as a certain forward-looking statement must be viewed in conjunction with the risks the company faces and may not be updated from time to time. More details are provided at the end of the investor presentation and other filings that can be found on our website, www.irisclothings.in. Should you need any queries or need any further information at the end of this call, you can reach out to us at the e-mail address mentioned in the company collaterals. With that, I would now like to hand over the call to Mr. Harsh. Thank you, and over to you, sir.

Thank you, Abhishek. Good morning, everyone, and thank you for joining us on today's earnings call. It's a pleasure to share with you the strides and accomplishments our company has made in fiscal year 2024 as well as our strategic vision for the upcoming year. For those new to our company, Irish Clothing is a rapidly growing children's apparel brand renowned for our comprehensive in-house process from design to sales. Our DOREME brand caters to the mid-premium segment with products ranging from INR 200 to INR 2,000, and we boast a production capacity of over 33,000 pieces every day across our 7 manufacturing units. We have established a robust retail network with over 170 distributors and more than 12,000 retailers bolstered by our proprietary B2B platform, which we launched this year. Moreover, Iris has expanded its international presence with exports to nations such as Portugal, Nepal, Mozambique, Zambia, Saudi Arabia, and the UAE. Reflecting on our growth trajectory from FY '20 to FY '24, we have achieved a revenue CAGR of 19% and EBITDA CAGR of 18% and a PAT CAGR of 33%. This fiscal year has been good for the kids apparel sector, and I'm proud to report that our company has not only matched the industry's demand growth, but has also shown better performance across all fronts. Our revenue has grown and profitability has seen substantial gains, underscoring the persistent demand for our products and the efficiency of our business strategies. This year, we have broadened our reach by adding 10 new distributors across Maharashtra and Uttar Pradesh, which has been instrumental in expanding our geographical footprint. A standout achievement this year has been the exceptional growth in our Infant Wear segment. With strategic emphasis on this category, we foresee it gaining a larger share of our revenue in the years to come. Along with that, our partnership with Disney has been pivotal, enriching our kids wear range and captivating our young audience with the iconic Disney characters and their narratives, further propelling our market growth. Domestically, our distribution sector has thrived this quarter. Our B2B digital platform has been a significant growth catalyst, allowing us to tap into a broader customer base and adapt to changing consumer shopping habits. Looking at our strategies, Iris Clothings is actively expanding its reach by venturing into new export markets and fortifying our current distributor network with a goal to significantly increase our distributor count by FY '26. We are reinforcing our Indian market presence by inaugurating new exclusive brand outlets and diversifying our product line through our Disney collaboration. In quarter 1 of FY '25, we plan to launch 4 to 5 new exclusive stores with an aim to open about 15 stores over the fiscal year. This expansion will also be driven by the franchisee model, which are attracting considerable interest from prospective partners. We are set to enhance our product offerings, including kids undergarments and sportswear, and we are anticipating a notable contribution to the revenue from our Infant Wear line. We are committed to increasing our production capacity to 35,000 pieces per day by the end of FY '25 and are modernizing our operations so. On the digital front, we have launched our D2C platform and are amplifying our online presence while consistently refreshing 90% of our designs each year to stay ahead of market trends and fuel the revenue growth. Looking ahead, we are optimistic given the positive market trends and the robust trajectory we have established for our growth. We anticipate the upcoming year to be yet another extraordinary period for our organization, and we are poised to achieve a 35% to 40% increase in both our revenue and profits in FY '25 with expectations to maintain this rate of growth going into FY '26 as well. I want to express my heartfelt thanks to our dedicated team, our valued customers and our esteemed shareholders for your unwavering support. Together, we are on course to make FY '25 a year of significant achievements and sustained growth. I will now hand over the call to Niraj Agarwal, our Chief Financial Officer, who will walk us through the Q4 and FY '24 financial numbers. Thank you, and over to you, Niraj.

Thank you, Harsh. Thank you all for joining us today. I'm pleased to share that we have delivered a robust performance in Q4 FY '24. Talking about the key financial highlights for Q4, our total revenue stood at INR 42.1 crores, a growth of 12% year-on-year and sequential growth of 79%. EBITDA was INR 7 crores, which has significantly grown by 34% year-on-year and 31% quarter-on-quarter. EBITDA margin stood at 17% due to the advantage of low fabric cost and also optimization of our operation expenses. Our enhanced profitability can be attributed to the strategic focus on expanding exclusive brand outlets, onboarding new distributors into our network and diversifying our products offering. Additionally, profit after tax for the quarter was INR 3.5 crores in Q4 FY '24, witnessed a robust growth of 56% year-on-year and sequentially surged by 75%. PAT margin was 8% compared to 6% in Q4 FY '23. To summarize our financial performance, we remain focused in driving operational excellence and capitalize on growth opportunities. With this, we can now open the floor for questions. Thank you, everyone.

[Operator Instructions] The first question is from the line of Riya Gupta, an individual investor.

Sir, my first question is what is our revenue target for next 2 years? And do we have any CapEx plan?

So our revenue target going forward this year is, we are expecting a growth of around 35% to 40%. And we are maintaining a similar growth rate over the next year as well.

Okay. And CapEx?

And CapEx, we are still figuring out. We will be needing a bigger CapEx for the growth -- for the upcoming growth for the next 4 to 5 years. But this year, we'll finalize the CapEx amount, once we go ahead with it.

My second question is, going ahead, what is our -- what is your outlook on margins? Can we expect margins to be in the range of 20%, 23% in the upcoming quarters?

Absolutely. I think EBITDA will remain at the levels that we have. In fact, we are looking at 1 to 1.5 basis point improvement in this year.

The next question is from the line of Kruttika from Sharekhan by BNP Paribas.

Firstly, with respect to the volume growth for the current year. So the revenue growth was around 8%, so if you can help us with how much was the volume growth for the current year? And what is the expectation for the next 2 years?

So volume growth this year was approximately 5%, and we have done a value growth of, say, 3% to 5% as well. Going forward, I think volume growth will also stay somewhere in the 30% to 35%, and we'll look at a value growth also of 10% to 15%.

10% to 15%?

Yes. We'll be using product mixes to improve our value.

Okay. Okay. And margin, if I can just call back, you said 1% to 1.5% improvement in the margin in the coming year, right?

Yes.

And that will be mainly due to the premiumization or any other factors as well?

So that will be primarily driven by margins built in our products. We don't see a lot of movement in the raw material prices happening, but it will be mainly driven to value in our products.

Okay. Okay. And next on the working capital cycle. So currently, in FY '24, the working capital days rise to around 325 days, so what can be the reason for the same? And what is the outlook going ahead?

So working capital cycle was increased because of primarily driven by inventory. And that inventory increase was there for approximately 3 reasons, right? One was there was a delayed summer, so a lot of that inventory has been converted in the month of April because of the delayed season. Secondly, we have also started building winter inventory, autumn/winter inventory a little earlier, so that has also been built in the inventory. But going forward, we see the cycle coming down to 170, 180 days easily.

170 to 180 by this year-end or by FY '25 end?

Yes, definitely.

Okay. And next, with respect to distributors. So we added 10 distributors during the whole year, right? And for the Q4, what would be the account that we added?

Yes, we have added 10 distributors. In Q4, we added 3 to 4 distributors.

Okay. Okay. And going ahead, how many do we plan to add in the coming year?

Going ahead, we plan to add approximately 10 to 15 more.

Okay. Okay. In the coming year?

In the coming year, yes.

Okay. Okay. And just to confirm my numbers, you said that installed capacity is currently around 33,000. And going ahead for FY '25, we are targeting for 35,000, right?

Yes, 35,000. So we'll incur a small CapEx in just the stitching sector and improve that capacity. We're not looking at a big CapEx this year to improve capacity.

Okay. Okay. And for '26, what would be the use or we are targeting the large CapEx for '26? Is that so?

Yes, we are planning a large CapEx for '26, but that's still in the works. It's a little early to talk about it. Okay.

[Operator Instructions] The next question is from the line of Priyam Poddar from Value Equity.

So I have some questions with regards to the export mix. What I want to ask is, how do you see the export demand shaping up for the current fiscal? And what is the share that you are planning that export would be garnering for this FY '25?

So if you look at it, FY '24, we had an export share of approximately 3% to 4% this year. And going forward, we see export -- we see a few improvements in the export demand because we are doing a few activities in the marketing front on the export side. So we look at around 7% to 8% in terms of export share of our revenue by the coming year.

Okay. And this would be coming via acquisition of the new customers or new geographies?

Yes, acquisition of new customers may be in similar geographies or new geographies as well.

Okay. So it would be a mix match of both, the existing customers plus new customers?

Correct.

Okay. And one more with regards to the manufacturing facility. So how -- like what is the overall purpose for getting into the manufacturing?

I'm sorry, can you come again, please?

Yes. So this manufacturing facility that you are planning, what would -- what edge that we would be having over others?

So the current manufacturing capacity that we have, right, it's already state-of-the-art. We have the best technology available in the whole sector, in our plant with all kinds of licenses. So those licenses allow us to manufacture for other brands as well if needed. So that is an extra edge that we get because of the good licenses that we have and, of course, our quality improvement in the products that we do under our brand.

The next question is from the line of Karan Sanwal from Niveshaay.

Congratulations on the good set of numbers. So I wanted to understand like what was the current spend on advertising and marketing for the year? And how do we see it for the next year?

So the current spend on advertising was under 1% for this year. And going forward, since we'll be opening our own stores, so we'll be spending a lot more on consumer marketing. But this year, we expect it to remain under 2% of our revenue.

Okay. And also like I wanted to understand like we have seen an increase in the infant category contribution. So if you could quantify what was the contribution for the FY '24 considering it was receiving a good traction?

I'm sorry, your voice was a little fumbled. Can you please come again?

Yes. So I was asking about the contribution for the infant category for the current year.

Right. So Infant Wear contribution this year was around 10% to 12%, and we see it improving to approximately 20% by the coming year. So we are spending a lot on growing the Infant Wear category, and we have seen a stellar response in the last couple of years as well.

So can we assume this is a better margin business than the other categories?

Yes, definitely. It's a better margin business, and it has a lot of scope in terms of demand as well.

These products are cotton-based, right, the entire products range for the infant category?

These products are -- sorry?

Cotton-based? 100% cotton-based products, right?

Yes, yes. Our -- most of our products are 100% cotton or it's either cotton blends, which is like 95% cotton and 5% elastane for stretch, but that's about it, apart from our sportswear, of course.

Yes, that would be more of polyester.

Sportswear is polyesters, polyamides, those kind of products.

Correct. And also I wanted to ask about the plans for EBO. Like are we opening it in the base of COCO model? And how do we see it going forward? We are saying that we will be expanding to 10 to 15 stores, so would it be more of a franchise-based or is it more of -- be of COCO model?

So right now, for this quarter, we'll be opening 4 to 5 company-owned company-operated stores. And we plan to open a few more stores in the next quarter in the COCO model as well. We want to understand the whole model and run the stores ourselves to understand the nitty-gritty of the business, to understand the systems, the refilling systems and all of it, the operations end of the business and then eventually open up the franchisee model by, say, post-Diwali this year. We have seen a lot of inbound interest coming from our current distributor channel, people who are selling our products already for the last 10, 15 years. They are supremely interested to open the franchisee stores. So going forward, as soon as we open up the franchisee model, I think we'll be able to open a lot more stores because of the inbound interest of franchisees that we have. So we are building the franchisee pipeline, but not opening up the model until, say, Diwali this year.

And what would be the approximate payback period for these stores? Like in how much time would we realize the investment that we have made?

So what we are looking at based on our expectations, we are looking at a 2.5 to 3 years payback period for our stores in the CapEx.

And this retail would be a better margin business?

Definitely. Because -- so right now we are passing over 50% of the MRP margins to the channel, right, the distributor and the retailers. So we have that much margin to play with plus the additional product margin that we build. So we're definitely seeing retail being a better margin business for sure. And that allows us to be directly connected to the consumer. It increases the brand presence in the mind of the consumer as well. So we are strongly focusing on retail as a strategy going forward.

Understood. That's very helpful. And one last question, like you have highlighted that you would be growing at a rate of 30%, 40% for the year. So if you could highlight the major growth drivers because for the last 2 years, as an industry, I guess the kids wear has been a bit on the single-digit growth rate. So if you could highlight why -- what gives us the confidence to grow at such a high pace for the next year?

Ladies and gentlemen, we have lost the management line connection. Please stay connected while we reconnect them. Ladies and gentlemen, thank you for patiently holding. We have the management back on the call.

Yes, Karan. I think you had one last question.

Yes. So I was asking about the major growth drivers that we are anticipating, which gives us the confidence to grow at 30%, 40%. Because as an industry, I guess, we -- the industry has been a bit slower growth for the last 2 years. So just wanted to get your idea about the future outlook for maybe the next year and the year after that.

Yes. So the major growth drivers, there will be 3, 4 primary drivers. One will be on the product front. So we are expanding our product range. We have already expanded in the last year or so. And this year, with the infant -- the Innerwear segment coming in and the Infant Wear segment doing so strongly, along with the Sportswear segment. So I think these 3 major pillars will definitely improve our value for growth in the coming year. These will be 3 major drivers on the product front. And on the distribution front, we are expanding heavily on the distributor front by investing in the B2B platform that we have developed. Along with that, we are also expanding our presence on the EBO channel. So that will eventually spill over some kind of demand on the distributor, retailer, multi-brand retailers as well. So I think primarily on the product and the distribution front, along with exports will be the 3 major drivers for our growth this year.

The next question is from the line of Rikesh Parikh from Rockstud Capital LLP.

Congratulations on a good set of numbers. Just wanted to understand this Disney license what we have, is it exclusive with us? Or -- and what is the -- till what period we are having this license?

So the Disney license that we have, it is -- the license is exclusively for us for one of the segments. But of course, Disney does not give exclusive license for the entire segment to you. What we have is, we have yearly agreements with them. And every year, it gets renewed, in terms of the period. And we have already renewed it for this year.

Okay. And does it allow exports per se?

No, we cannot do exports for them. But what we can do is because of the FAMA license that we have, we can manufacture for someone who wants Disney products, so we can manufacture in their brand for them so that they can sell in their country. And the other person also...

Any chance we are doing that in-licenses work under -- currently right now?

We have not done anything as of now, but we are now building our capacity to get some line of business there as well.

Okay. That's great. Second is, what is the export contribution in overall sales currently?

Currently, the export contribution is 3% of our overall sales, 3% to 4%. And going forward, we see a 7% share of exports this year.

Lastly, on the EBO front. So what kind of CapEx do you plan or envisage on the EBO? And will it be on the COCO-owned or it will also be franchisee-owned, when you are giving a guidance of 15 opening by the end of the year?

As I said, we are planning around 15 stores in this financial year. So we don't see a lot of contribution of stores right away. But I think next year, the year after this, EBOs will become a good share of our overall revenue. And in terms of the franchisee and the company-operated model, I think, the first few stores we'll do on the company-owned company-operated model and, eventually, open up the franchisee model post, say, October this year.

The next follow-up question is from the line of Kruttika from Sharekhan by BNP Paribas.

First is, with respect to -- we discussed what are the revenue growth drivers. So if you can help us with the margin drivers, since 1% to 1.5% margin expansion that we are expecting, so what are the drivers for that?

So margin expectations, as I said, will primarily be driven by, say, volume -- by value growth in a few products. For example, the Infant Wear segment will definitely give us better margin. So as soon as -- as the share of Infant Wear increases to, say, 20% this year, the increase in margin will primarily be driven from that segment.

Okay. So Infant Wear is margin accretive, so that's where we are targeting the margin growth. Okay. The second thing is with respect to the utilization. So for FY '24, if we see the utilization was around 76%. So going ahead for FY '25, how much are we expecting the capacity utilization to be at?

I think we'll improve the capacity utilization to 85% to 90% in this year because that is where the primary volume growth will come from.

Okay. And the rise in capacity from 33 to 35 that we are expecting, that will be majorly in the first half or in the second half?

Second half of the year.

The next question is from the line of Rohan Shah, an individual investor.

Sir, could you provide an update on customer demand observed at the 2 newly launched EBOs in Kolkata? And how significant is their contribution to the overall revenue? Additionally, have these EBOs begun to yield profits?

So the current 2 stores that we have, the customer demand has been decent. So this summer, we got a really good response, March onwards. March, April was fantastic. We had a very good response in the winter season where, right after -- right during pujas when we opened. So October, November, December was really good. And then March, April was excellent. January, February is usually a dull season for the overall retail sector. In terms of revenue share, as I already said, since we are planning 15 stores, approximately 15 stores this year, we do not see a lot of contribution coming from stores right away. But next year, we expect stores to become a good share of our revenue.

So sir, one more question. In Disney Apparel, which is the next set of apparels you are planning to launch and when?

So the next set of stores that we are planning will all be in and around Bengal. So we are planning a few in Siliguri, in Calcutta, and one in Dhanbad as well. So around the Eastern zone is what we are planning.

The next follow-up question is from the line of Priyam Poddar from Value Equity.

I just wanted to ask you, like we have very strong aspirations for the coming years. So any number that would you like to assign that we'll be growing by the double-digit run rate for the next 5 years? Any number that you would like to assign?

So as I already said, we are -- we plan to grow by around 35%, 40% this year, and we'd like to maintain the same growth for the coming year as well. Once we achieve these 2 growths, we look at somewhere around 20% to 25% over the next -- after that year. But we are very, very optimistic in the growth figures for the upcoming 2 years.

Okay. So you basically have a clear vision, how do you see yourself for the next 2 years? That is what basically you are trying to convey now?

Yes, we want to achieve this kind of growth. And by the end of next year, we'll definitely be -- so we are looking at a much bigger growth for the next 2 years. And after that, we will discuss on the going forward years.

Okay. Okay. So another follow-up that we -- we have seen that your revenue mix towards Infant Wear, that has been growing. So will it aid or will it help our company to enhance the margins going ahead also?

Yes, absolutely. As already conveyed, we are definitely seeing better margins in the Infant Wear segment. So as the share of infant wear increases from, say, 12% this year to 20%, the margins will definitely improve. That is where the primary margin will come from.

Okay. So if we are understanding it correctly, once the mix, it moves towards Infant Wear, okay? So moreover, we'll see the margin stability coming in the -- coming and then slowly, steadily, it will inch up further?

I don't understand. Can you come again, please?

So what I mean to say is if Infant Wear gives you a better margins?

Right.

Correct. So as the Infant Wear shares in the pie increases, so that would add more stability to the margins?

So I think we have done decently on the margin front this year as well. So we have been having stable margin across our business. And with the Infant Wear coming in, that will improve our margins further. So as the share of Infant Wear improves, that will improve the margin of the overall business. But we also see the margins improving in our current product mix as well. So margin has been a consistent performer for us this year, and we plan to see that growing over the next couple of years. So margin stability is not a big issue as of now.

Correct. So in the overall scheme of things, we see that the return ratios for the company going ahead, improving from here onwards?

Yes, definitely. We'll see better return ratios going forward.

The next question is from the line of Akasha, an individual investor.

So basically, I have 2 questions. Could you share the target capacity utilization for the coming years, that is FY '25, considering that we are currently utilizing 25,000 out of our existing capacity, which is around 35,000?

Yes. So capacity utilization for the coming year, we are looking at 85% of capacity utilization with -- yes, that should be the number that we are looking at.

Okay. And I have one more question. Will there be any change in our debt profile given that you are expanding the EBOs network?

No. As of now, we'll not be increasing the debt this year. Most of the EBOs will be funded through our own profits, through the company reserves and profit.

The next question is from the line of Nitin Gandhi from Inoquest Advisors Private Limited.

Can you share some thoughts on our net realization to company after paying out whatever retailer commission, how that has behaved over the last 2, 3 years? And how do you propose to take it up forward, what's your plan on that? Are you planning to do accessories or do some other blend, which can enhance realization and increase your sales overall?

So as already seen, we have already improved in terms of the net realization in the last -- from the last year. And we see that share improving over the next couple of years with the robust growth plan that we have. So that will be the primary growth driver, if we achieve a 35%, 40% growth in this year.

Can you share the number? What was the realization last 3 years?

So last 3 years, we did 9.1% PAT in FY '22, we did 7.3% PAT in...

I was asking per piece, per piece. You were INR 122...

Okay. So you're talking about pricing?

Yes.

So last year, we did somewhere around -- FY '22, we did INR 190. FY '23, we did INR 210 to INR 220. And this year, we did INR 230 in terms of the realization.

This is net of commissions, right?

Yes, net of commission, net of the market.

Okay. So any plan to enhance this to INR 300 by adding or accessorizing or some other cosmetic changes, which are not the part of fabrics, but gives more aesthetics and more realization, with this being the garment, which is more attracted to the segment because of accessories?

So not to improve it to, say, INR 300, but we are definitely looking to improve, say, INR 250 to INR 260. Every year, we are looking at a 5% to 7% improvement in value.

No, that's anyway nominal growth of 5%, 6%, and 5%, 6% of capacity enhancement. But is there something, which can drastically change the fortune by having realizations moving faster? That's what I was trying to ask.

See, as the EBO mixes start coming up, we'll start having merchandise especially for EBO, which will definitely improve, say, the net realization value by '26, '27 to, say, the INR 300 levels that you are talking about. With EBO expansion, we'll start building in products with higher net realization value.

Okay. What is the spend going to be for EBO?

For per EBO, we are looking at a INR 20 lakh to INR 25 lakh investment as of now, including inventory.

This will be primarily West Bengal, right?

Yes, primarily West Bengal. The company-owned company-operated will primarily be West Bengal. And as soon as we open up the franchisee store, we'll start with Maharashtra, Gujarat, Rajasthan, where we have a stronger presence.

No, but the first year, anyway we will stick to major cities of West Bengal, right? Howrah or near around, right?

Yes, for now.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Thank you once again for your trust in us and for being part of our journey. We look forward to sharing our success with you in the next earnings call. In case you have any other queries post this call or anything remained unanswered, you may please connect to our IR team at Ernst & Young. Thank you so much, everyone.

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