Raymond Limited (RAYMOND) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Raymond Limited Q2 FY '21 Earnings Conference Call, hosted by Antique Stock Broking. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Abhijeet Kundu from Antique Stock Broking. Thank you, and over to you, sir.

Hi. Thanks. On behalf of Antique Stock Broking, I would like to welcome all the participants in the earnings call of Raymond Limited. I have with me Mr. J. Mukund, who is the Head of Relations, Investor Relations of Raymond Limited. So without taking further time, I would like to hand over the call to Mr. Mukund. Over to Mukund.

Mr. Thank you, Abhijeet. Good evening, everyone, and thank you for joining us for 2Q FY '21 earnings conference call. I hope all of you would have received a copy of the results presentation. I would like to urge you to go through the -- this along with the disclaimer slides. Today, we have with us Mr. Amit Agarwal, group CFO; Mr. Joe Kuruvilla, who is recently joined in middle of October as CEO of Lifestyle Business; Mr. Ganesh Kumar, Chief Operating Officer Lifestyle business; Mr. Suman Saha, Chief Operating Officer, Apparel. I will now hand over the call to our group CFO, Amit, who will give you the summary results before we open up for Q&A. Over to you Amit.

Thank you, Mukund. Thank you, Abhijeet, for hosting this call. Good evening, ladies and gentlemen. Thank you for joining us today on this earnings call to discuss our results of second quarter of fiscal 2021. Let me give you an overview of the market in the second quarter of fiscal '21, which we saw. The first 2 months of July and August witnessed localized lockdowns. Progressively, the market started opening up as well as consumer sentiment started recovering. From September month of recovery, our secondary sales were seen, which resulted in corresponding improvement in primary sales as well. The government stimulus package under Atmanirbhar Bharat Abhiyan and related measures, coupled with good agricultural harvest resulted in improved liquidity in the hands of rural consumers. Now let me talk about Raymond and give you an update on various steps and initiatives undertaken during the current financial year. Firstly, safe shopping experience and processes for health and safety for our customers and employees have been a key focus area, and the same continues. As of September 30, 2020, 99% of our stores had been operational, complying with stringent safety guidelines, including contactless payments. Secondly, the cost rationalization measures undertaken in the areas of sales and marketing, manpower, rental and Others has enabled the restructuring of the organization, thereby improving the efficiency and overall productivity of the company. In the second quarter, our operating costs stood at INR 304 crores, which is 48% lower on a year-on-year basis and similar to Q1 levels, while revenues have been up by 3x as compared to first quarter of fiscal '21. This includes a portion of our cost, which is directly linked to operational level of performance. On a half yearly basis, the OpEx cost was lower by INR 497 crores, which is 46% lower on a year-on-year basis. Additionally, the rent cost savings for the full year amounted to INR 53 crores at about 30% of the previous year level. This has been achieved through adoption of a collaborative approach with landlords, mainly through combination of rent waivers during lockdown as well as realigning the rentals. Thirdly, during the current pandemic time, keeping healthier liquidity has been critical for our business. The company continues its focus on cost reduction and working capital management which resulted in positive free cash flow and a positive operating cash flow during the quarter as well as first half of the year. Our operating cash flow was INR 138 crores and free cash flow was INR 32 crores during first half of this fiscal. Collections during the quarter continued to remain strong, similar to first quarter of fiscal '21. And with reduction in inventory, our net working capital stood at INR 1,359 crores, which is INR 191 crores lower as compared to June and INR 495 crores lower as compared with March. With these efforts, we have been able to maintain September-end liquidity at around INR 600 crores, which is similar to June and March levels. Considering all the above initiatives, our net debt as of September 30, 2020 stood at INR 1,817 crores as compared to INR 1,827 crores in June 2020 and INR 1,859 crores in March 2020. Our gross debt was in line and was also lower at INR 2,409 crores compared to INR 2,423 crores at the end of June -- and INR 2,450 crores as at end of March 2020. The average interest cost is around 8.6%, which is similar to June level. Fourth, our initiative in PPE product manufacturing continued to perform well under the Garmenting segment and product in sanitizing and hygiene categories and FMCG business. The PPE business contributed close to INR 90 crores in the first half of this year. Now let me talk about the quarterly financial performance. Our consolidated financials for the quarter at the revenue level stood at INR 732 crores with an EBITDA loss of INR 52 crores, resulting in a net loss of INR 133 crores. As per Ind AS accounting, the rent concession of INR 20 crores received during the quarter has been recognized under Other Income. Now let me talk about various segments. In terms of the Branded Textile business, July and August months were reeling under local lockdown and primary markets remained impacted. Slowly the market opened, and we witnessed strong increase in September sales as compared to July. This was driven mainly from improvements in secondary sales with the onset of festivity and upcoming wedding season. The secondary sales in our pan-India 630 town TRS network showed significant improvement with recovery clocking to 65% in September month. We have also recently launched an antiviral technology-based fabric called ViraSafe, which protects against bacteria and virus and it's also anti-odor and sustainable. This was launched in autumn/winter booking in August '20, and we have received a good traction with wide dealer coverage. In the retail outlet, it has received good customer response during the festive season starting in October. Our another initiative, garment exchange program was also very well received by the customers. This is an initiative where a customer can avail free tailoring on fabric purchase and exchange of old garments. Overall, about 1.45 lakh garment were exchanged. Overall for the quarter, the sales was INR 250 crores with an EBITDA loss of INR 6 crores. The EBITDA margins were impacted due to lower realizations on account of higher proportion of PPE sales. In terms of our Branded Apparel segment, the retail channel that is the EBO store network, which is more or less equal presence in malls and high street stores and LFS, large-format stores, which are mostly present in malls were impacted in July and August due to intermittent lockdown. However, with the opening up of malls from September onwards and with the onset of festive season, we have seen an uptick in sales. Coming to our trade channel, that is the MBOs and the TRS, we have exercised control on primary sales to them due to weaker secondary sales during the first half of this year. The focus has been to support the channel partners to liquidate inventory to speed up our collections. The quarter also witnessed higher proportion of online and clearance sales to realize cash as we continue to focus on working capital management as well as liquidity. Overall, from a margin perspective, while we have been able to bring in OpEx cost reduction. However, the gross margin was impacted on account of higher discounting on account of higher EOSS this period, which lasted about 30 days more than normal, controlled primary sale, adverse channel mix in terms of online and clearance sales as well as inventory provisioning for older season stock as per the policy of -- on a smaller revenue base. The primary focus in this business in the current time -- testing times has been working capital management and the measures that we have taken. We have been able to achieve the same 30% reduction in net working capital from March '20 to September '20. Our Garment segment recovered to close to 80% levels to INR 187 crores in second quarter, mainly led by improvement in bulk and institutional MTM business to key markets in U.S. and Europe, along with contribution from sale of PPE products. EBITDA higher at 10.1% vis-a-vis 5.3% in previous years, led by better product mix and cost optimization. Let me talk about high-value Cotton Shirting segment performance, which remained impacted mainly due to weak demand in the market. Both of our engineering businesses are back on track with Tools & Hardware segment back to previous year levels to INR 100 crores led by growth in domestic market and well supported by exports to Latin America and the U.S. market. EBITDA margins also improved to 15.2% vis-a-vis 15.8% in previous year, mainly led by cost optimization measures. Now Auto Components recovered by 93% to INR 49 crores led by revival in demand from domestic markets and well supported by export markets. EBITDA margins improved to 20.7% vis-a-vis 15.4% in previous year, mainly led by cost optimization measures. Let me consider the real estate business, where we have seen the traction in bookings quite good. The physical visit for the customers are back to 60% to 70% of the pre-COVID levels. Factors such as launching of bank subvention scheme, along with stamp duty reduction and low home loan interest rates have helped overall demand in the market. We also launched our 7th [ service ] in August 2020. Overall, there have been 49 bookings in second quarter, resulting in total 1,012 bookings till September 2020, which is over 60% of the total inventory booked in the 7th tower having 1,688 concluded with a booking value of nearly INR 1,000 crores. In the pandemic situation, certain customers were facing temporary challenges and were evaluating cancellation of booking [ of plans ]. However, we were able to retain them through bank subvention scheme and converting 2 BHK bookings into 1 BHK bookings with the labor strength coming back to normalcy in September, our construction is on full swing. And currently, the status is that we are working on 14 [ flats ] work in progress in tower A, B and C. Ground floor is in progress in tower D. And in tower K and J, excavation work is in progress. Let me talk about an important factor about the demerger of the group. We have received approval from stock exchanges and already filed application with NCLT. Due to COVID-19 pandemic and related lockdown, the entire business environment and the processes, including the regulatory approvals have been impacted due to temporary closure of business offices and government departments. We expect the overall process to be completed in the next financial year. As and when we have a meaningful update, we will inform accordingly. Now let me cover the outlook as we see under the most challenging environment. With the opening of the economy, continued government measures including advance to government employees and waiver of interest on interest for loans in addition to the similar package recently announced provides an impetus to consumer spending and accelerated economic activity. Additionally, with salary and bonus restoration, adequate savings and willingness of people to go out for shopping in the current festive season and the winter wedding season, we expect demand momentum to continue in second half of this fiscal. Also, our TRS network, having presence across 630-plus downtown cities, the sales are back to 70% of the previous year level in the TRS network in the month of October. We are witnessing very strong recovery of 85% to 90% in the Tier 3 to Tier 6 markets, where we have a strong distribution network. In Branded Apparel segment, 99% of our EBOs are operational with consumer demand back to 50% of previous year levels. Festival sales have been encouraging. And if you look at comparable sales, the Diwali festival recovery is higher than the Dashera, Navratil recovery. As the marriage season begins now, we are hopeful that the secondaries in the trade channels will further pick up and lead to reduction in inventory at the channel partners [ hub ]. Now if we look at the export markets, we saw in second quarter of fiscal '21, the global demand had been progressively recovering, especially in the European market had opened up. We received also good traction in orders from U.S. and Europe market in Garmenting business, and from Latin America and U.S. market in Tools & Hardware business. The bulk and the MTM orders in the U.S. -- in U.K. market witnessed gradual increase in second quarter. However, with the second wave of COVID-19 pandemic in Europe region, we expect lockdown may impact demand in the short term. We continue to see customers planning to shift their purchases from China to India, and we expect to benefit from the same. With the sales improving in the second half of this fiscal driven by festivity and winter wedding season and cost optimization measures already undertaken, we expected to reduce our cost by 32%, 33% on a full year basis. With our focused working capital management and lower CapEx, we expect to maintain adequate liquidity. With the various initiatives undertaken, the restructuring of the business will bring in better efficiencies for a sustainable growth and profitability. Thank you very much. Now we will be taking your questions.

[Operator Instructions] The first question is from the line of Anil Jain from LKP Securities.

On the real estate business, one, Q1 [ are -- or your ] booking was around [ INR 960 crores ]. And this quarter, we are showing was around [ INR 948 crores ]. So the INR 12 crores difference was [ due to the combination of 2 ] BHK, 1 BHK or there was a translation as well?

No. Primarily, you're right, the first point. That it is primarily, as I mentioned also in the script, that people have converted because of their cash shortfalls from a 2 BHK to 1 BHK, but they continue to remain invested into our projects because of the sheer locational advantage and the amenities provided by this project.

Okay. So there are no cancellations during any of the quarters.

No, nothing significant.

The next question is from the line of Manish Dhariwal from Fiducia Capital Advisors.

Thank you for this opportunity and thank you for an excellent commentary and your presentation basically gives a very good perspective. Now, sir, I have a question...

[Operator Instructions]

So I basically want to complement the management on an excellent commentary and on the -- and on a very good presentation. Now the question was basically pertaining on the management team. I note that there has been a change in this last quarter, wherein, Mr. Vipin Agarwal, President Corporate and Mr. Mukund Raj, who was the CEO of Real Estate seem to be hard to find in the Q2 PPT. And obviously, I welcome the gentlemen that moves -- [ that will be join them ] in the FMCG space. So maybe you could just share a few inputs on that and its indication on the restructuring process, which is something that is very important in the scheme of things.

Thank you, Manish. So let me give you the perspective that Mr. Vipin Agarwal has retired from the business. And Mr. Mukund Raj, who used to look after the Real Estate business, had decided to pursue some other career opportunities outside the group. As far as Mr. Joe is concerned, he has come and joined from Unilever group from the FMCG, but he is looking after -- he is the CEO of our Lifestyle business. So he a valuable experience in terms of how our businesses can be shaping up. So it is a part of a major change which we are looking at and seen this company to go to the next level. So he is part of this process, and he takes over as the CEO for the Lifestyle business. On the FMCG business, we have the management, which continues to be there.

Right. So as you -- basically Vipin retired.

Yes, Vipin retired, yes.

Okay. Okay. Okay. My second question was on the ongoing efforts, which are there, there are continued costs. How much of that is sustainable? I know you mentioned that the OpEx is like down a significant amount, 48-odd percent quarter-on-quarter and continued in Q1 to Q2 as well. So if I ask you that what is going to be the position, say, in the Q2 of the next year? I mean, what kind of cost profile would you see? Obviously, your variable cost or the operating cost will be low, but then in terms of the total cost savings, how much [ savings has came? It is the -- understanding that was in the K ].

So look, as I mentioned, that a portion of this cost is obviously in line related to the revenue and the operation level of performance. So to that extent, we will see that cost going up. However, the kind of savings which we have achieved especially in terms of the manpower, the way we do spend money on the digital advertising or the trade shows which we do, renegotiated the rentals, that all are more permanent in nature. So as we talk about, I would say that, let's say, close to INR 400 crores of the total OpEx cost will be permanent in nature.

That is fantastic. That is wonderful, wonderful. Okay. Now, Mr. Mukund Raj, CEO of [ Realty business has been dealing with B2B or with the L2 business ]?

Yes. So you see, we have able team, led by the one age, very long in this business, Mr. Pokharna who is looking after the business. And then we have the able team under Mukund, both in the sales and operations front who are looking after this business.

Okay. It is Mr. Pokharna who is President commercial team who will now sort of responsible for the [ L2 ] business, right?

Yes.

[Operator Instructions] We move to the next question from the line of [ Brogan Laviandia ], an Individual Investor.

So my first question is, currently, sales is down by 92% versus [ India ] sale is down by something around 60%. Why does this variance [ exist ], being in same business, apparel?

So look, as far as our apparel sale is concerned, we are primarily into the primary, and we wanted, as mentioned in our script, that we wanted our channel partners to reduce their inventory, and therefore, we restricted to an extent our primary sales to the channel partner. As well as some of the sales, which would have gone through the online and through the other channels are at a discounted price. And we all know in this period, in this quarter, there was an extended EOSS. That has impacted the revenue for the apparel business. Do you want to add something?

No. This is perfectly fine.

Okay. But I don't know being in [ sales should ] they have done a lot better. So I was a little unhappy on this ground. Another thing why we have taken a cut to employees other than we have removed [ some employees ]. But the salary cut for most of the company now restating that they have cut salaries back because going to be a better future. So anything on that still our service cut are continuing or we are restoring again, cut what you have done?

So basically, what we do is we are doing this business by business, level of operations as we continue to improve, we accordingly adjust. And we strongly believe that in terms of the rationalization which has been done across the businesses and across the line items of cost, whatever is really needed at that point of time is being restored back and rest continues to be the cut.

No, no. Still the answer I want, this cut has been discontinued or still continues?

As I mentioned, wherever it was required, it has been restored back. Wherever it is not required, it has not been restored.

So partly it has been restored and partly not restored, still not 100% has been restored.

Yes.

My last question is that to earlier participant, you had replied that out of 700-something operating savings on cost we are doing right now, a run rate. So even out of that almost 60%, INR 400 crores is permanent. That is right, what you said?

Yes, that is correct.

I want to understand, sir. So okay, right now, it looks feasible. But suppose you see go back to earlier kind of sales and operations, so I want to understand how is this possible? Same level all that. So I mean that earlier, we are doing some inefficiently operations spending more? Or how now we will justify savings of INR 400 crores ongoing same level of operations, again. That I want to understand.

So first of all, let me tell you that there is a concept called continuous cost reduction and improvement and productivity improvement. And through productivity improvement, you can achieve a lot of things. And this is part of that. Second thing, once you grow an organization, what happens is, over the period, some of the costs get added, but you need certain time to correct the cost. And there has been a major correction in the cost has happened. For example, in terms of rationalization of some of the stores, which you put it and which was supposed to be profitable, has not become profitable. Some of the stores tend to be very, very profitable. So those stores, if you are cutting down, [ you cost cut some ]. Some of the people who work somehow into the excess, they have been taken out. There has been a productivity improvement because of the rationalization that is helping the cost. There has been certain changes, the way you source the material, that has helped on the cost. Certain offices all across the country, which you had, which you may not require has helped the cost. Certain advertisements, which were used went on the print media, you are moving to digital. Certain trade shows, which you were doing physical, you are moving away. You are taking 2 or 3D -- sorry, digital mode. So all those various things, and it is not 1, 2 items, we have a laundry list of more than 150 items, which have been scanned through and such cost rationalization has been done. So it is an effort which has been performed. And if you look, many organizations undergo those kind of cost rationalization and they achieve. And it has been demonstrated in our case very clearly, if I'm saving today 47% of the cost in the first half, clearly reflects upon that it has been already delivered. It is not any more that we will deliver that.

So I understood. I'd appreciate if this comes to nothing like that. So you mean to the net net, we can go back to INR 6,500 crores of sales what we have done in '19, '20 with the INR 400 crores of saving that is possible [ even with the limits ] given that kind of operations also with INR 400 crores of cost saving which ended.

First of all, let me tell you, I'm not giving a guidance, that whether the -- let me complete, let me complete. Now INR 6,500 crore sales is something, which is at a certain level of operation. Considering the impact of COVID and everything, we do not know that whether that is happening tomorrow, 2 months, 6 months, 12 months, 24 months or in 3 years or 5 years. So I know based on the prognosis, which the company internally has deliberated, it seems feasible at based on the level of operations we foresee that is possible going forward this is the right level of expenditure for the company, and we continuously evaluate and monitor that.

No, no. I'm not saying that this is something that is going to happen next year. It may happen after 2 years, 3 years, 5 years. Like you told us, we don't know whether it happens 2 years, 3 years, 5 years. But only thing I am making clarification from you is that when this INR 6,500 crores of sales what we have done in future, whenever it happens, that time also this INR 400 crores cost cutting can we do with same kind of operation? That's what I am asking. Or again, this cost will go up?

So this is Ganesh Kumar here. Just one line of statement. The variable cost, which is linked to sale, those are the costs will proportionately go. But otherwise, the fixed cost, what we are seeing as of today will continue as per the guidance that Mr. Amit has given.

Sir, that means out of INR 700 crores [ or other figure you don't know ]? My simple question is that when that kind of operations, again, we go back to INR 6,500 crores level for basically in what right now out of INR 700 crores. So again, what cost will be giving us, how much permanent cost savings were out of there. That is my question.

So that's what as a permanent cost savings, we have considered INR 400 crores.

Okay. So typically, you see even INR 6,500 crores of operations also whenever it happens in the future, we will do INR 400 crores of cost savings. So let us say, INR 150 crores PBT was there, right? So I suppose in future, it will be there, so another INR 400 crores will be adding, so that is what I wanted to understand.

You need to do your math on your own.

Sir, math, earlier, we used to do INR 150 crores PBT. Suppose same run rate is happened after 3 years, 4 years, then INR 6,500 crores sales, this INR 400 crores is the added benefit because of cost savings. That is what I [ did on math then, logically, that wasn't it ]. I am not telling that 150 will come. 150 will come or not. Earlier, it used to come at INR 6,500 crores operation sales level, INR 400 crores is the extra, whatever company's future, it depends upon, again, it is dynamic. I'm not telling that earlier you have done, it will be done. As an example, I'm just telling. Earlier, we used...

That's what I said that you are free to do your math.

Yes. No, no, that is not -- what [ your 200 versus what ] I'm doing this INR 400 crores extra whatever [ you decide to do, the cost savings will be there ]. Yes, that's the only one I wanted to clarify.

The next question is from the line of Umang Shah from Edelweiss.

Once again, good commentary, strong performance. I just want to understand from Mr. Joe. Sir, you are moving from digital trends in Unilever to a completely [indiscernible] company. Any clue, any idea, what are your ideologies going ahead, how we are going to lead in this particular skill into getting back to the glory that we were at?

So thank you so much. This is Joe here. Yes, 24 years Unilever. This is definitely a different industry. Well, I'm 15 days into the job. So still learning all the ropes. But what I can say is that if I look at this particular business, it's obviously a lot of the consumer trends that this particular business needs to move into, right, given the disruption we see in the market. So my one big theme which I want to look at is really how do you -- in these changed circumstances, there are 2 big trends. One is, how close we can get to the consumers, right? And that's something which comes from a bit of my FMCG background. And the second is, obviously, having done digital transformation in Unilever for a considerable period of time, I clearly see there is a huge opportunity, I guess, for every organization. But definitely for Raymond, it would definitely be a competitive advantage going forward.

Okay. Sir, so just to be very clear on it, that we are looking at growing our digital front via our own website what is more versus the likes of Myntra's and Amazon's. We are looking at developing our own digital footprint in Indian market, right? I mean we would now hoping for that.

Yes. Let me just give you an answer, which comes from a 15-year-old -- 15-day kind of an experience. I think it's a combination of...

But I'm sure that with your experience, it will be easier for you to understand, that's why...

Sure. So it's going to be a combination of both, right? Because at the end of the day, we cannot say 1 or the other. But specifically, if Mr. Ganesh the CEO, will probably need to just give a much more tangible answer, if you need that.

Yes. Thanks, Joe. So let me first say that the digital space is beyond e-com for any organization. The way we are looking at this, it is getting into supply chain, it is getting into designing. It is getting into how do we reach to the consumer and even the channel per se. So we are looking at the digital transformation, and Joe is going to lead us with his experience in terms of how do we bring it all together. Thereby creating an efficiency and a very agile organization, which is responsive to changing consumer trends. That answers your question? E-com is just one part of it.

Okay. Yes, yes. So I was hoping for more of our own digital footprint versus e-com because in our business, it's more of tailoring, it's more of the customer sale that 1 has versus, I would say, more of a [ percentage ] kind of business. So yes, okay. I get my [ answers offline ].

Today is the age of disruption. So there can be many disruptions possible, and we would be looking for some of those disruptions to see in our business to take this business to a different level.

Okay. Yes, so -- and that would obviously help with our balance sheet also. So bettering our long capital cycle, that will be a more helpful hand, I would say.

The next question is from the line of [ Paschal Analigula ], an Individual Investor.

My question is regarding Branded Apparel, right? So we keep on doing [ select summons to the buyer family that there is couple. ] So how much more we need to do on this front? Because last quarter, we did INR 96 crores of turnover and INR 107 crores of minus -- negative profits, right? So how much more collection we needed to do from this Branded Apparel?

So look, in this quarter, what we had to do, we told we restricted our primary sale. We did some of the online and liquidation sales. And what has happened is certain provisions have to be taken on this. And it is based on the current situation. Whatever has been there, we have provided for and consider that. Now on a go-forward basis, this is a business of fashion, where season to season, things change. And had been seen in the quarter, the normal sales at a normalized level without the COVID, we would not have to take the effect of the online or the liquidation of such inventory. And we have explained that clearly that the EOSS has lasted longer and we control the primary sales we had adverse channel mix in terms of online and clearances as well some of the inventory provisioning which we get for the older stock, and we have a policy made in the company beyond a certain number of seasons you need to provide for such inventory. Normally, if you would have a running business, in a normal cycle, without the impact of the pandemic, that material would have gone out and sold in the marketplace. So you did not have to take such an inventory provision.