Raymond Limited (RAYMOND) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Raymond Limited Q3 FY '21 Earnings Conference Call hosted by Antique Stock Broking Ltd. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhijeet Kundu from Antique Stockbroking. Thank you, and over to you, sir.

Thanks, Inba. 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 Investor Relations of Raymond Limited. Without taking further time, I would like to hand over the call to Mr. Mukund. Over to you, Mr. Mukund.

Yes. Thank you, Abhijeet. Good evening, everyone, and thank you for joining us for 3Q FY '21 earnings conference call. I hope all of you would have received a copy of our results presentation. I would like to urge you to go through this along the disclaimer slides. Today, we have with us Mr. Amit Agarwal, Group CFO; Mr. Joe Kuruvilla, CEO, Lifestyle Business; Mr. Ganesh Kumar, Chief Operating Officer, Lifestyle Business; Mr. S.L. Pokharna, President, Commercial. I will now hand over the call to our group CFO, Amit, who will give you the summary of the results before we open up for Q&A. Over to you, Amit.

Thank you, Mukund. Good evening, ladies and gentlemen. Thank you for joining us today on this earnings call to discuss our results for the third quarter of fiscal 2021. Let me give you an overview of the market. During the quarter, overall [ consumer ] [indiscernible] improved post unlock 5 and 6 from October onwards, with normalcy restoration, allowed community gathering and bidding. We witnessed higher recovery levels in the Tier 4 to 6 market, largely driven by reverse migration, good harvest and lower COVID-19 impact. The demand was driven by festive and wedding season in the month of October and November. Besides the festival season of Navaratri and Diwali, there were a higher number of marriages in November, as a lot of summer marriage events happening in June quarter had been postponed to November winter wedding season due to lockdowns. In the month of December, the secondary sales were lower due to fewer walk-ins as certain restrictions on travel and mall timings continued which could be partly offset by the early launch of end-of-season sale or called EOSS. Now let me take you through the key financial highlights for the quarter. Our third fiscal quarter of FY '21, revenue saw a recovery across all businesses, with our top line at INR 1,286 crores, a recovery of 68% over the previous year. On a sequential quarter-on-quarter basis, the top line has grown by 76% from INR 732 crores in the second quarter of fiscal '21 to INR 1,286 crores in the third quarter of fiscal '21. The cost rationalization continued, which enabled us to improve our EBITDA margins to 12.2%, which is marginally higher than the previous year level of 11.8%. We reported an EBITDA of INR 157 crores and a net profit of INR 22 crores for the quarter. Our continued focus on efficient working capital management led to further reduction in net working capital by INR 169 crores vis-à-vis September '20 level. Free cash flow from operations as well as relief from working capital management helped to reduce our net debt by INR 234 crores compared to September '20. Now let me elaborate on each of the points. Revenue recovered by 68% over the previous year. The Branded Textile segment recovered by 70%, led by festivities and wedding season, while in Branded Apparel, the recovery was lower mainly due to controlled primary sales to channel partners. In the Garmenting business, the revenue was well contributed by PPE products. However, in bulk business, certain sales orders were deferred due to fresh lockdown in the U.S. and Europe. Our engineering businesses are fully back on track with auto components having a strong 44% growth over the previous year. And our Tools and Hardware business is in line with the previous year level. Now let me talk about the EBITDA and profitability, where we reported an EBITDA of INR 157 crores, with EBITDA margin of 12.2%, driven by our continued efforts on the cost rationalization and various control measures in the area of sales, marketing, manpower, rental and others, coupled with obviously the top line recovery. In Q3, our operating costs stood at INR 334 crores, which is 42% lower on year-on-year basis. This includes fixed cost, which continues to be maintained at quarter-on-quarter level, and variable cost was lower mainly due to controlled advertisement and sales promotional spend. From a 9-month performance perspective, the OpEx was lower by INR 743 crores, which is 45% lower on a year-on-year basis. Additionally, the rent cost savings for the full year is INR 64 crores, at about 35% of the previous year level. This has been achieved through an adoption of a collaborative approach with landlords, mainly through a combination of rent waivers during lockdown as well as realigning the rentals. Also, as already stated, our store rationalization is in progress to make retail mainly the EBO portfolio very healthy. Net store closure is 18 for the third fiscal quarter of '21 and 79 for the 9 months fiscal '21, taking our retail network to 1,559 stores as of 31st of December 2020. During the current pandemic time, healthier liquidity is essential for the business. And we have been able to maintain about INR 600 crores of cash and cash equivalents throughout the period, while reducing the debt at the same time. 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. Our operating cash flow was INR 277 crores and free cash flow was INR 222 crores in third quarter of fiscal '21. With reduction in inventory and strong collections during the quarter, net working capital stood at INR 1,190 crores, which is INR 169 crores lower as compared to September and lower by INR 665 crores as compared to March 2020. With this above initiative, our gross debt was also lower at INR 2,191 crores vis-à-vis INR 2,409 crores as at end of September and INR 2,430 crores as at end of March 2020. The average interest cost is 8.55%, very similar to September levels. Also, our net debt reduced by INR 234 crores, with our net debt standing as of 31st of December 2020 at INR 1,583 crores compared to INR 1,817 crores in September and INR 1,859 crores in March 2020. Now let me talk about the various segments in detail. About the Branded Textile, we -- this segment witnessed a recovery of 70% in the third quarter, led by primarily from the domestic market pickup in the wholesale and trade channels on account of festivity and wedding season. The secondary sales in our pan-India [ 630 ] town spread TRS, so-called The Raymond Shop, network also has shown significant improvement, with recovery clocking to close to 80% in the quarter. However, the recovery was lower in exports due to lower demand on account of second wave of lockdown in U.S. and Europe markets, where customers [ dispersed ] their dispatch schedule. Overall, suiting segments in domestic market recovered at 80% levels compared to the previous year. The B2C shirting business recovery has been slightly lower at the level of 60%. Overall, the EBITDA margin for this segment has been -- for the quarter has been 16.9%, driven by operational efficiency. Let me talk about now the Branded Apparel segment, where the sales stood at INR 211 crores, witnessed recovery, led by festive and marriage demand in October and November in the retail channel of the EBOs and LFS. However, in December month, secondary sales were impacted due to lower walk-ins as certain restrictions on travel and mall timings continued. On our trade channels of MBO and TRS, we have been prudent on our primary sales to channel partners to support them in liquidating the inventory and speeding up their collections. Overall, from a margin perspective, EBITDA margin for the quarter was 3%. While we have been able to bring in OpEx reduction, however, the EBITDA margin was lower on account of higher discounting, controlled primary sales and adverse channel mix in terms of online and clearance sales. The primary focus in this business has been on the working capital management. And with the measures that we have taken, we have been able to achieve 35% reduction in net working capital from March '20 to December '20, mainly led by inventory reduction. In terms of our wide reach on the retail network, as on 31st of December 2020, we had 1,559 stores spread across [ 630 ] towns. We are providing safe shopping experience and processes adopted during peak of COVID time for healthy and safety of our customers and employees. 100% of our retail network is operational, complying with stringent safety guidelines, including contactless payment. As already explained, while we are strongly focused on making our EBO portfolio healthy, at the same time, we are continuously evaluating opportunities where we can improve our retail store footprint. And on the same basis, during the quarter, Raymond added 19 stores, mainly in Tier 3 to Tier 6 towns. In terms of the Garmenting segment, the sales stood at INR 137 crores, witnessed a recovery of 57%. Revenue includes contribution from PPE sales and in bulk business. Customers in U.S. and Europe placed orders. However, due to fresh lockdowns, there have been deferment of some orders. EBITDA margin for the quarter was 6.6%. High Value Cotton Shirting segment sales was at INR 86 crores, witnessing a recovery of 51%, mainly led by higher yarn sales. Our fabric performance was impacted due to lower demand in the domestic market. EBITDA margin for the quarter was at 14.7%. Tools and Hardware segment sales was at INR 104 crores, back to the previous year's level, led by growth in domestic market and well supported by export market. EBITDA margin improved over 20% compared to 12.9% in the previous year, mainly led by operational efficiencies. In terms of the Auto Components segment, sales were at INR 59 crores, reporting a growth of 44% over the previous year, led by strong growth in domestic as well as exports market. EBITDA margin improved to 24.3% compared to 14.6% in previous year, mainly led by improved plant utilization as well as operational efficiency. Real Estate business has recorded one of the strongest quarterly bookings in the third quarter since the launch of the project. Factors such as stamp duty reduction, low home interest rate and launch of new towers during festivity period of October and November have helped improved sales in the quarter. Overall, we have made now 179 bookings in the third quarter, resulting in a total of 1,173 bookings, which is 50% of the total inventory made available of 2,350, has been sold, so till -- with a booking value of INR 1,121 crores. During the pandemic period, certain customers have faced temporary challenges due to various reasons, resulting in cancellation of bookings of certain flats. We have been able to retain most of them through the bank subvention schemes and converting 2 BHK bookings into 1 BHK bookings. However, there has been some cancellation. Our construction is on full swing. And currently, the status is we are completing the work on the 26th slab in the towers 1, 2, 3. And seventh floor slab is in progress in tower 4. And excavation has been completed and foundation booked in the towers 5, 6, 7, 8. Let me update you about the demerger. Demerger has been an important step for 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 processes, including regulatory approval, has been impacted due to temporary closure of business, offices and government departments. We expect the overall process to be completed in next financial year. As and when we have a meaningful update, we will inform accordingly. Now let me talk about how we are seeing the ensuing quarters. In terms of improvement in the consumer sentiment, coupled with continued government measures, including progressive union budget, which is focused on infrastructure development and health sectors, with more disposable income, we believe it would boost or provide an impetus to consumer spending and accelerate economic activity. Additionally, from primary sales perspective, we expect traction in trade channels, driven by higher number of wedding days in the coming quarters of the next fiscal year. From an input cost perspective, in Branded Textile segment, the wool prices have remained stable at low levels for the last 6 months and we expect improvement in our overall performance in this segment. In our B2B shirting business, there has been increase in the cotton yarn prices. However, we expect to largely offset through a combination of internal cost efficiency and small price increase. Let me cover the export segment. While the global [ demand ] has been progressively recovering till the second quarter fiscal '21, however, due to the second wave of COVID-19, there have been lockdowns in the U.S. and European market, which has resulted into deferment of certain orders in our Garmenting business. We are closely monitoring the situation and would do the shipments as soon as the situation improves. In our engineering business, we continue to expect good traction from both domestic as well as export markets. With cost optimization measures already undertaken, which is expected to reduce our costs by 30% to 33% on a full year basis, and a focused working capital management and lower CapEx, we continue to maintain and expect to maintain adequate liquidity. With the various initiatives undertaken, the restructuring of the business will bring in better efficiencies for sustainable growth and profitability. Thank you very much. Now we will be taking the questions. Operator?

[Operator Instructions] Our first question is from the line of Kirthi Jain from Sundaram Mutual Fund.

Congratulations for an improved [ job ]. So my first question is to our Real Estate division. Despite, say, revenue recognition picking up, our margins still continue to be low despite the land being bought at a very low -- historical low cost. So when do we see the margin coming to a normal rate of whatever we had expected? That's the first question from my side. And second thing, what is the launch plan? And what is the current sales trend we are targeting in the upcoming project, in the Real Estate project?

Okay. So first of all, if you see, the sales of [ Realty ] division, as you rightly pointed out, it is based on a percentage of completion methodology, we book the accounting. And as we continue to see a stronger development coming and the faster progress on the project, as we outlined, that now we are achieving good level and faster construct, as well as the good traction, the sales velocity is improving, over the next few quarters, you would see an improvement in the margins. Because it is just mathematics, the accounting norms, which enables us to account for in this business. Now going forward, on your second question, we have been very -- seen a very good traction on our project. As you would witness that in the Thane region, this is -- this location couldn't have been better. Any location could not be better than this. We have reflected, based on the 179 bookings made during the quarter, which shows the people's conviction about this project with that level of amenities in the affordable housing, which we are providing. That is clearly the testimony in terms of. And it is not that the bookings have shown a drop in the month of January and February. We continue to be higher. We continue to see a good level of bookings, very similar the way we saw in the third quarter. So I think, in our project, the progress is very good. And if I look at it, on total inventory which has been launched, if 50% has been already booked, that reflects upon that the project has gained the right traction.

So any further launches will take place, sir?

We have already launched 8 towers as we speak, and we have another 2 towers to launch. So we are planning to launch in the next few months [ It is the ] -- as we say, there is a certain inventory. And in this business, one has to calibrate the inventory and the launches. So in the last 2 years, we have launched 8 towers, 2 towers are remaining to be launched, which we will also launch, let's say, in the next few months.

EBITDA margin, when -- like when we should expect improvement? And what is the level of EBITDA margin we should expect?

So we would not like to comment about the EBITDA margin per se. And as I mentioned, the activity in terms of the construction phase has begun, which will enable us to do the accounting of revenues on a percentage of completion but [ that's ] in the next few months. So that will enable us to record better revenues as well as the better margins.

See, I'm Pokharna. I look up the Real Estate business as well. I just want to add, in September end, we will be launching premium segment flats also, 3 BHK and 4 BHK.

Okay. Sir, then with regard to debt reduction, like how much debt reduction furthermore you can see, sir, from the...

Yes. The focus of the group has been very clear that whatever be the cash flow generation has been primarily deployed for a debt reduction. If you see in the -- during the pandemic period, the company has been consistently able to maintain a cash balance around the 600 mark as well as did not take any additional debt. And in this recent quarter, we have been able to reduce the debt. So that is clearly the methodology that we are going to follow. And I can tell you that whatever be the cash flow generations with our tight cost rationalization and working capital management, we will be using it towards debt reduction.

Why are we keeping such a large cash? We will be having franchise limit [ side ], sir. Instead we can go ahead and pay to the bank itself seems like you would be earning instead of, say, we would be paying to bank 10 percentage of whatever the rate, and we will be earning about [ 5, 6 percentage ] will be -- so that would be creating a loss of treasury, sir, treasury income?

So I'll tell you, what has happened is, as a philosophy of the group, what we have been doing is consistently we have been maintaining a certain cash balances. If you see, our cost of borrowing is in the range of 8.5%. So there is a small negative carry, but it provides an additional comfort in terms of these pandemic times. There, you need to keep adequate cash balance for any kind of unforeseen circumstances. Therefore, it is appropriate for us as a business, as a policy that we keep. And we are not going to increase it to INR 1,000 crores or so. And that is exactly reflected, that even in this quarter, we maintained the cash balances of around INR 600 crores. And what is beyond that, we have gone down and paid down the debt of INR 233 crores in the quarter.

Sir, how is the [ delivery ] progressing, sir? Like any improvement are we seeing from the December run rate? Or anything you want to highlight on the January progress? Or is it getting weaker business because the festivals have gone up, completed? So how you will see the [ January cool ] and the time save?

Look, Raymond is a conglomerate. You have different businesses, and every business will charge their own part. So in terms of my suitings business, the whole thing is that the weddings dramatically have been not there in the summer period. Now people had some weddings with certain restrictions in the third quarter, maybe October, November, December. Now a large part of the weddings is expected going forward in the first fiscal quarter. And if I understand, recall right, there are fairly large number of wedding dates in the first quarter. So then our stockists, our wholesalers are building up their inventory as we speak today in order to cater to such increased demand. So clearly, the suitings market is going to be very, very strong. Now if I come to back to the shirting, we have seen also that there is an adequate pickup happening. So if I look at it in the Branded Textile segment, we are seeing a very good recovery. If I look at the apparel segment, obviously, there are certain challenges faced in that segment because still, the stores in the Tier 1 and Tier 2 cities, people are bit hesitant to go out, go to the cinema theaters, go to the shopping malls. And if one goes to that places, then he picks up a shirt or a trouser pair. So that's a little bit slower recovery vis-à-vis the other products. In my engineering and auto business, as I mentioned, we have seen a full project recovery. On the Real Estate business, as I mentioned, we are seeing exactly the same traction level as we saw in the third quarter in spite of an increase in the stamp duty by 1%. But since there is a demand -- and the beauty of our project is that it is in the affordable 1 BHK, 2 BHK. So it is a real user. We don't have an investor community coming into this project, it is more the user. So therefore, people in the pandemic have realized, and I'm sure you know that we remodeled some of our apartments and provided a balcony. So we are very much in tune with the likes of the customer, the demand pattern, the behavior of the customer. We realized that clearly there was an ask from a lot of customers that we would need a balcony. Even in the 2 BHKs, we have been able to provide a balcony, which gives them -- enables them a greater comfortable living.

[Operator Instructions] Our next question is from the line of Harsh Shah from Dimensional Securities.

My first question is a follow-up on the previous participant's question on Real Estate. So would you be able to provide numbers in terms of what is the construction cost first versus that we are incurring on our project?

No, see, look, these are some of the factors which are the basics the way we have articulated and we manage our business, so it would be very difficult for us to go into the specifics of giving a construction cost. And these are some of our unique ways. We have [ shown ] certain efficiencies. I can only give you that perspective that we have been able to cast a floor in a period less than 7 days, 5 to 6 days, which we know in the industry there has been a very different -- a much higher number. So there's a lot of efficiencies we are putting into the project. We have brought some experts who are providing a greater insight how to improvise into the project. So that benefits are getting built into the project.

When you say that the 4%...

Mr. Shah, I'm sorry to interrupt. If you're in a hands-free mode, could you switch it to handset because your volume seems to be very low while you're speaking.

Is it better?

A little better, sir. Yes.

Yes. So when you say that you follow percentage of completion method and going ahead as you book for revenue, so is it that the margins will move disproportionately? That is lower and lower costs will be recognized going forward, but revenue will be more and more? Is that what you mean?

So look, we have given clearly the guidance of profit after tax of 25% on the overall project post completion of this project. So we stick to that. And the margins still -- we will deliver a 25% margin across the project over the next 5 years.

Okay. Okay. And in terms of business, so how is the inventory in the system moving? Last time when we spoke, you had some INR 1,700 crores worth of inventory. So where do we stand in terms of inventory? And are we expecting any write-offs there? And also, in terms of debtors, if you can throw some numbers as to, are we seeing any concerns there? Or everything is under control?

Look, we have told very clearly that my net working capital stood at INR 1,190 crores, which is lower compared to March by INR 665 crores. So clearly, we have worked on our inventory, which enabled us to get the sales. And therefore, I look at it that this inventory debtor collection is our task which we are completing as we speak. Our focus has been phenomenal in this working capital reduction. So this -- and I said, the true value in this is we have been able to reduce the debt compared to March, if I look at it, from an INR 1,859 crores of net debt to INR 1,583 crores, realizing to INR 275 crores debt reduction. This is coming out of the working capital management. Go ahead, please.

Yes. Sir, just last question. It's again a follow-up. Sir, you had paid some INR 170 crores of ULC fees on, I think, conversion of your land from -- to make it commercialized -- to commercialize the land basically. So how much of that is attributable to the Real Estate project that you are working on?

That is about [ 20% ].

Sorry, can you come again?

Yes. So basically, what we are saying is this is for the entire larger piece of the land. So for 20 acres, it would be in the range of, I think, if I recall it right, around the INR 40 crores kind of a number, if I recall. That would be the number relevant for the affordable housing projects.

And have we booked -- have we expensed it entirely? Or we are doing it on percentage of completion?

Yes, percentage of completion because that's the methodology laid out as for the accounting standards.

We'll take our next question from the line of Mithun Aswath from Kivah Advisors.

Yes, sir. Just wanted to understand, in terms of the balance sheet, how much of land bank do we have directly under Raymond? Because I think about 12 to 15 months back, you did some value and docking of the land, but that was in a subsidiary of Raymond, and that money was utilized through a rights issue where you subscribe. So I just wanted to understand what is the land bank that you have. Are you looking to monetize anything which is directly in Raymond to bring down the debt further?

No, no, I think what you have picked up on is absolutely correct. The focus has been deleveraging of the company, which has been very well demonstrated during the quarter. We see cash flow from the operations, be it the monetization of the assets, we are very clear on this part. Now just to give a perspective, this bit, Thane, what we have is a 120-acre land which belongs to in this campus, of which 20 acres is to the school. So that is the piece of land which does not belong into the Raymond. The 20 acres is for the school. And in these 100 acres, we sold 20 acres -- so we are constructing this Real Estate project of affordable and the premium and so on and so forth. And the balance, 80 acres, is something which we have the ability to monetize over a period of time.