Rupa & Company Limited (533552) Earnings Call Transcript & Summary

Hello, and good afternoon, everyone. I welcome you all, and thank you for being with us today. First and foremost, I hope all of you are keeping safe and doing fine and your loved ones are good. I hope I'm audible, quite [indiscernible]. Today on the call, I am joined by our CEO, Mr. Dinesh Kumar Lodha; and Mr. Deven Dhruva from Orient Capital, our Investor Relations partners. Friends, as we all know, financial year '21 has been a very difficult year for all of us. But in last 1 year, our company, your company, Rupa, has given a stellar performance. And despite all the challenges during 2021, we have seen a record growth across all our key financial parameters, revenue, EBITDA or PAT. Just to share the numbers, revenue grew by 35% to INR 1,313 crores from INR 974 crores. EBITDA grew by 12 --by 126% to INR 257 crores from INR 113 crores. PAT has grown 6 -- 3x from INR 62 crores to INR 175 crores, which is around 183%. And the company has been able to generate operating cash flow of INR 211 crores. And year-end, we have a cash balance of INR 118 crores, which we tend to deploy in capital expenditures and other growing plans what the company has. The EBITDA margin has also seen a healthy improvement of 790 basis points, which stood at 19.6%. So from 12%, we have grown to 19.6%. The return on capital employed stood at 30.8% from 18%, a stellar performance of 17% growth higher year-on-year. Return on equity stood at 26.8%, a stellar 1,610 basis point higher year-on-year. Our company delivered record revenues and profitability on back of a strong volume growth, operational efficiencies, better product mix and cost specialization programs. And we are also happy to announce, the Board of Directors have recommended a total dividend of INR 5 per equity share, including a special dividend of INR 2 per equity share as a mark of gratitude to our shareholders during this time of pandemic, which is 500% of face value for the financial year ended 31 March 2021. Going forward, we see a CAGR of at least 15% to 20% for next 3 years. Coming year, we also have aggressive plan of growing at least by 15% to 20%. Internally, we target 20%, but we will say anything between 15% to 20%, because quarter 1 will be subdued because the challenges we know, all about the second wave of pandemic. And yes -- and in terms of EBITDA margin and all, we are quite confident, although this year, we had 20%. Coming year and all, we should be able to maintain at least 18% to 19% and maybe higher, all depends upon the market and other factors around. And with this, I would like to hand over the call to our CEO, Mr. Dinesh Kumar, who will take you through our growth strategy and outlook for the coming year. Thank you so much. Over to you, Dinesh.

Thank you, Vikashji, and good afternoon, everyone. I hope you are all keeping safe and healthy. Fiscal '21 -- fiscal year '21 has been the highest ever revenue and most profitable year for Rupa & Company. Similar to the quality and durability, Rupa and its sub-brands are integrated across the hosiery value chain. The company enjoyed top-of-the-mind record across all segments and have earned the trust of millions of customers across the globe. In line with evolving consumer preference and market demand, the company has introduced a variety of new brands and sub-brands where the product has the latest fabric innovation, cutting-edge production techniques and advanced design element to give the finest experience of style and comfort to the end user. Rupa has a strong pan-India presence. Rupa enjoys a very solid position in East India and gained a significant presence in North, followed by western region. One of the strategy we have to really get into new markets like South as well as some of the weak markets where we had a huge -- market is huge where we have a huge opportunity to grow. We are building new distributor and building experienced team to further strengthen our share in those markets as well as existing markets. Currently, the company has about 1,200-plus dealers and presently have 125,000 retail outlets. This would lead to increased investment in brand development across new geographies. During the year gone by, the company has spent 4.2% on brand development. This has reduced as there was no branding which was done. As you know, due to some of the COVID in the first half, there was a lower spend on brand development. We expect the branding advertisement come back to the normalcy of 6% to 7% this year. Rupa exports its products in Middle East countries like U.A.E., Saudi, Kuwait, Iraq as well as in Algeria, Indonesia, Nigeria, Congo, many of the countries. And currently, we are around INR 20 crores. The first 9 months, we had a negative growth. But last quarter, Q4, we have a 17% growth. We expect our exports to be doubling in 2 years, if not this year. Coming to growth strategy, the company is planning to scale up high-margin revenue business, as Vikash just said, which includes the brand like FCUK, Fruit of the Loom and M Series. The reason is to occupy the consumer mindset in this category with the aspiration Indian consumers perhaps show off with style as well as his vivid taste. Our aim is to make premium innerwear based on comfort accessible to the consumer. The company is also reinforcing high-growth segment like athleisure, women wear, thermal wear segments. Again, when I say athleisure, it includes the outerwear segment, too. The company is present in modern trade, having a presence in over 150 stores. Our strategy is to increase brand footprint across our brandies, creating special product line more relevant, more dedicated product mix, modern trade, improve our time and serviceability to avoid revenue loss. Further plan is -- future plan is to have presence through 300 counters in 2 years, so doubling the counters what we have. The company is also opening EBOs. Currently, we have about 11 -- by now, it will be 13 EBOs, and the plan is to create a midsize franchise store model. Our models are all franchised on. It is all owned and spend by -- the money by the franchise. And if you have the best of the associates, we want to establish in the 50 -- top 50, this model, and our plan is to have 150 outlets in 2 years' time. Rupa is also present across all e-commerce sites and future planning to enhance brand visibility through increasing online presence. Coming to the current situation in our country, we are witnessing a second wave of COVID-19 infection, and this has once again resulted in disruption of our business as several states have announced restrictions. Going forward, we expect business to start getting traction and -- as restriction is being lifted. One of the things we are seeing actually in the market that once -- last week onward, we are seeing emergence of demand once the COVID restriction has lifted. The company's focus is to increase share in premium, super premium category, improve focus on women, casual, thermal wear and foray in new markets with a higher penetration in existing markets. We expect our revenue to be higher than industry growth, and that's something we have done. You have seen this, this year. And also coming next 2, 3 years, we are seeing that we will be growing faster than the industry with our strategy in place. Coming to the financials, some of the things have been covered by Vikashji. Our company reported strong growth for the quarter year ended 31 March 2021. Revenue, quarter 4, is INR 454 crores against INR 179 crores. EBITDA has a strong growth of 1,000% plus with INR 91 crore against the INR 8 crore in quarter 4. And similar to our -- growth has been seen in PAT also. On yearly performance, our revenue is INR 1,313 crores, which is against INR 975 crores with a 35% growth. EBITDA has grown about 126%. And PAT also has grown over INR 175 crore against INR 62 crore. I think the return on capital employed is 30.8%, which is a (1710) basis points. Return on equity again at 16.1 (sic) [1610] basis point increase. Net debt, which was earlier INR 177 crores, now it is INR 27 crores, and we are a cash-plus company now. Net debt, which is now -- equity is 0.4x, reduced from 0.3x. Working capital has significant reduction from 219 days to 165 days. And going forward also, we will see some more improvement coming on that. So again, first of all, I want to thank you all. And with that, I will now open the floor for question and answer.

[Operator Instructions] The first question is from the line of Shikha Mehta from Equitree Capital.

Congratulations on a good set of numbers. I just had a couple of questions. Could you explain the revenue structure with FCUK and Fruit of the Loom? Is it like a royalty structure? And the exclusivity and stuff like that, could you just explain the structure of it?

So right now, the royalty is payable for both the brands. As far as the FCUK is concerned, we had a 10-year contract with them. On a revenue number, we have about INR 33 crores approximately on the FCUK and FOTL. I think one of the things which we shared last time also, for us this year was a year to reset the business into profitable path. As you remember, we used to have an EBITDA loss of INR 10 crore. And this year, the first time in history, in the last 3, 4 years, we have EBITDA positive. And going forward, now we are looking into the business in the right path in terms of what segment which we have chosen. We have taken the call in the company to really focus on e-commerce and GT and not focus on LFS a lot. We are seeing a significant increase in our profitability. With the revenue base of INR 33 crores, we are EBITDA positive now. And this year, we are looking at significant growth in this segment with this step on the business.

Right. And our contract is for 10 years from now, right, with both of them?

So we have 10 years with FCUK. And FOTL, we have a discussion to have similar.

Okay. Also, sir, you said that for exports, we're looking at doubling our exports this year or next year. Currently, our export base is quite low. So if you could give a guidance for, say, for the next 5 years, what kind of CAGR you see, because even on doubling, it would not be very significant.

So the management expectation on export is to have 5x number in 5 years. But right now, we are giving you guidance that we will be doubling the export number in 2 years. As you rightly said, the export number is just INR 21 crores -- INR 20 crores, INR 21 crores. But I think the opportunity what we have, we will look forward to have this as a 5x growth in 5 years. But immediate basis, we are seeing a significant road map coming up to have increase our presence in Middle East. We're seeing a presence coming on Russia. So we are clearly seeing a good visibility. And with the right team in place, I think we'll be able to execute this.

Okay, sir, that sounds very positive. Sir, also, are we looking at inorganic growth? Are we looking at more acquisitions?

Definitely, I think this is something with a continuous effort. It is -- always, we look for a good value as far as acquisition is concerned. As and when we see a good opportunity, we'll definitely target that.

Okay. So do we have any idea like which segment would we be looking at acquisitions? And also, if you could give a peak debt number that you would expect?

We talked about earlier our growth engine. And I think those -- the growth engine will be connected to these acquisitions. Whether it is athleisure or in the premium segment, I think this will be connected with that. Clearly, women, athleisure and premium, these are our growth engines, and we will look for that.

Right. And if you could just give a peak debt number or a debt-to-equity ratio, which you would not want to cross even through your acquisitions and growth and all of that?

I mean right now we are a cash-plus company. So we should have internal accrual, most of the money to have some acquisitions, yes.

All right, sir. And sir, we said we want to grow at around 15% to 20% for next year. This is, again, in spite of Q1 being subdued due to COVID. So can you just give us some broad guidance on how the different segments will do and which segment would be growing, just ballpark for those?

So outer wear, we will be growing at faster pace than the innerwear to start with as we've seen a lockdown. Whenever lockdown gets -- open up the lockdown, we see emergence of the outerwear. So brands like Bumchums and M Series and all, we'll be seeing some significant growth, immediate basis. But as a year, we see that -- clearly, we will be seeing a growth as per our strategy where we are focusing. So we will be seeing a good growth in thermal. We are going to see a good growth in the women segment. And also, we'll see a good growth in athleisure. So with that, I think we should be able to grow what we have targeted. Though we have said subdued quarter, but we -- as we are seeing right now, lockdown is opening up. We have seen a good emergence of demand. So which should be capitalized on that in June to come back strongly in the quarter, and we will go for that. But I think the things will more and more get clearer in a week time as the emergence of the lockdown opening up happening.

And sir, could you tell us how much we did in thermal and in women for the year, for FY '21?

So thermal, we are at about INR 120 crore to INR 125 crore right now, and we are looking to grow at 25% plus. Women is about 10% of our business. I think we should be looking to 20% growth in women segment.

Okay. And sir, could you also give us some guidance on the raw material pricing and how that would move for the year, if you have any...

So the gross margin remains as it is. We may have some improvement in gross margins, but we don't see -- whatever price the raw material has gone up, we're able to pass on from most of the things to the consumer. And overall, it will not impact gross margin as such.

Do we have a lag in passing on the prices to the consumers?

What's that?

Do we have a lag of, say, a quarter or so in passing out raw...

Not much.

Okay. And last question from my end, sir. Could you give us a figure for the maintenance CapEx and if you have any other CapEx plans going forward?

CapEx, normally, we don't have a very high CapEx, as you know, this industry. As a standard, we spend about INR 20 crore to INR 40 crore in between for our regular CapEx. I think the more money will be required when we look for acquisition, and that's something we'll have -- will happen as and when we see a good opportunity. But on a regular basis, our CapEx will be between INR 20 crore to INR 40 crore.

The next question is from the line of [ Dhruv Kashyap ] from Edelweiss.

Firstly, Mr. Lodha and Mr. Agarwal, heartiest congratulations for an absolutely exemplary performance from the company in such tough circumstances, and I personally like to thank you and your team on behalf of all the shareholders. Coming to 2 specific questions, sir. The first is on the exports part, could you give some color on which kind of products or brands, in which product categories to which countries and where does the opportunity lie? So if you could just give some more granular insight into this next 5 years of exports.

See, currently, at this point of time, our major export is in the innerwear. But as we go forward, we see opportunities in outerwear and athleisure. So clearly, I think there will be -- there are a lot of opportunity, including Bangladesh and Africa, which is a significant opportunity we have, and we will go all out to tap those opportunities. As I said, export is still a very early stage. We are still not penetrate what we should have, and we see opportunity to grow this business 5x in 5 years' time. But as far as countries are concerned, I just said, Middle East, where we have a strong presence right now. We have a strong presence in Algeria. We have a strong presence in Russia. But we are seeing a significant opportunity coming up in countries like Bangladesh, countries like -- deeper penetration in Russia and Singapore. So those opportunity, which we are now tapping, should give us a good momentum on export, and that should give us a huge opportunity to grow.

And the basic reason for this is the brand is already familiar there. Because of the satellite channels, people are aware about the brand. I think one of the things we do is most of the big companies -- the export we do, it is our own brand, which helps us to grow and have a loyalty for our product. We don't do that much of contract manufacturing. We are more focused on our own brand so that it has a loyal customer base for the future.

Perfect. That gives a lot of clarity. The second question, sir, is that the premium segment, which is Fruit of the Loom and super premium FCUK, there's a lot of imagery and optics that also gets added by that segment, right? And there's a lot of action in terms of Jockey, ABFRL, Van Heusen, et cetera. Could you just give us some sense or insight, again, a little more detail in terms of how are we going to build FCUK and Fruit of the Loom to really become potentially as big brands as Jockey or Van Heusen or bigger?

As you rightly said, there is a huge, huge opportunity lying there for both these brands. But what we did this year, or I'll say, last 15 months is to really reset the business, as I said earlier. Just growing the business without profitable part does not make sense. So as a company, we decided to have the right focus in terms of segment and right team, and which is what we did in the last 15 months, and that has resulted in terms of not top line, but focus on first to start the business set right to have a profitability where EBITDA negative INR 10 crore now becomes EBITDA positive. And we are looking this to a PAT positive business, and we are right path now to take this business to next high, both on GT and e-commerce. E-commerce, we have significant focus now, while we are seeing that we'll be doubling our e-commerce business in FCUK and FOTL. GT also, now we are penetrating in other places. We have increased counters. But what I'm happy or I want to share with you, the business model which we needed to correct has been corrected now. And now this is a good way to take the growth path, and also profitability will be there.

And sir, my last and final question is that if you could give some color on geographies of strength, like citadels and geographies where you are seeding in their big markets where you aim to sort of gain potentially in times to come. So almost Citadel, making an entry, but big market. So if you could give some color on where we are strong and need to defend and where we are going to become bigger in terms of the market we are going to take on, let's say, a Page or a Lux or a TT or a Dollar or whatever else. So if you could give some geographical flavor to the Rupa parent and potentially envisaged footprint.

Sure. I think we have shared most of the things in our presentation. But as you rightly -- as you know, East is our big area where we are very strong. Whether it's in Bihar or Jharkhand or Odisha, we are pretty strong in Eastern regions. I think where we have to focus or where we are focusing right now, within the North, we have states where we may not be doing great. To give you example, UP, we are doing good. But within the UP, Western UP, it is such a big market, we are not that great, and there is a huge opportunity to penetrate there. Same way, MP, Chhattisgarh, Gujarat, in the Western side, again, Central India, again, opportunity lying for us, which is not a strong base for us. But there is no reason why we should not -- why we'll not able to penetrate those markets with the right focus, right team, right distributor. So Central India, some of the part of Northern India and Southern India will be big focus for us.

The next question is from the line of Shalini from Quantum Securities.

Fantastic results. Sir, I just wanted to -- wanted a breakup of -- wanted to understand how the various segments have grown during the quarter, economy, mid, premium, thermal, women's, athleisure.

So in the year, I was just -- I think it's good to talk about the complete year rather than talking about just a quarter. On a year basis, what we are seeing that we are seeing a good growth coming up in athleisure. We are seeing a good growth coming up on our premium, like M Series where we are seeing a significant growth from last year. We are also seeing a good growth in our premium -- our mid-premium brand like Frontline and Macroman. So clearly, we are seeing a good growth. Where we have not done well, the women segment still not done well, because of the COVID restriction. As you know, more and more women, when they come out, we'll have more legging sales, we will have more other sales. So that is where we are seeing some drop in revenue this year or not grown as per our expectation, I will say. But most of the other places, we are seeing good growth coming up. But within that, the highlights are outerwear and the premium segment.

Sir -- but sir, if you could please just put some numbers to like economy segment for the year and preferably for the quarter. But if you prefer to talk about for the year, if you can please give some numbers.

Sure. So on the value side, we are seeing a growth about 35% to 40% against the overall growth of 35%. We are seeing values in products like Jon where we are growing at 40% plus. Thermal, we are growing about 21% plus. And on the mid-premium, we'll be growing over 30% plus. And outerwear, we are growing -- as I said, Bumchums, which is our main premium outerwear brand, we are growing at 70%. So that is a significant growth, just to give you a split a little bit what you're asking for.

Yes. And sir, thermal and athleisure specifically, athleisure, if you could say how you're growing.

I just talked about Bumchums is where the main athleisure brands are where we are growing at 70% this year. But going forward, we're expecting this to grow 30% on top of this.

Okay. And sir, thermals?

Yes. Thermals is 21% -- this year, we are expecting 25% plus.

Okay. Okay. Then sir, my next question, I just wanted to -- the participant before me also asked that question. In terms of growth coming in the premium segment, because the number of brands are increasing every day in the premium segment, you have ABFRL also now. And lots of these shops, like they have introduced their own brands, like your -- what is the name of that shop? A lot of people have introduced their own brand. So do you envisage a situation where there'll be EBITDA margins in that segment, in the premium segment, will come up? Is that what you can envisage?

Really, I think that will not going to impact much for us because we -- this is more to do with LFS, which is where people have started their own brand on their own shops. But our focus is e-commerce and GT where we don't see this much impact. In fact, we are seeing a significant growth opportunity in some of the markets for our premium brand like M Series, which is INR 100 crore-plus brand. We're expecting that brand to grow at 25% plus this year with opportunity at many vacant or low -- weak area for us where we are going to penetrate. So your question, as far as brands, where people are creating their own brands, not going to impact much for us, because LFS is not something where we are playing very hard.

Okay. And if I look at the gross margins, gross margins has gone up by about 300 bps year-on-year. So apart from taking price increases and product mix change, is it that you have taken lesser write-offs on inventory or anything like that?

So I don't think gross margin, we have any increase like 3% what you're talking. I'm not sure where you're getting this number.

Y-on-Y, year-on-year.

Yes. So gross margin on a percentage basis, it will be same. And growth, which is coming up, it is more to do with percentage growth on revenue. The similar growth is coming from gross margin.

Okay. Okay. Okay. Sir, just one last question at my end. So Jon is basically an economy brand that you have, right?

That's right.

And that is growing how much, sir?

This year, it has grown at 40% plus. And we are expecting this to grow about 17%, 18% -- 16% to 17% going forward.

Okay. And sir, now we have -- last year, that's financial year '21, we had a lot of growth coming from the rural areas. But this year, we have a situation where the rural is not doing so well, because of higher lockdowns in rural areas, higher base and many other factors. So do you see that impacting your growth going forward?

So I just said earlier, the first 2 months lockdown definitely we have seen that impact. It is not just rural. It is rural and urban, as you rightly said. Last lockdown, the impact was more on the urban and less on the rural. This time, the impact is there, both on rural and urban. But what we have seen in last 1 week, when the emergence of the lockdown opening happening, the demands are coming back in both the segments. So we are seeing -- we are not seeing much of the challenge going forward. And though, as I said, there is -- this may be a subdued quarter, but being June still there, we feel that we will come back strongly to hit the number.

Okay. And volume growth in the quarter was how much, sir?

So volume and value, there is a gap of about 2% to 2.5% on an average. So you can just predict whatever sales we are talking about, 2.5% value will be lesser.

Just to add on your earlier point about rural demand, I think this year, monsoon has been quite good so far, and it should be good as per the prediction. So rural demand should be quite robust again. If you talk about short term, April, May, I think they are different. But going forward, I think the demand has emerged very strong [indiscernible].

Okay. And the average selling price is INR 65?

Pardon?

Average selling price.

Average selling price, yes, approximately will be INR 50 or INR 70, in between, yes.

Sorry? INR 50?

INR 50 to INR 70. You are talking about the value -- premium value segment, right?

Yes, but INR 50 to INR 70 is like 50% difference, sir?

Yes, but there is a product difference. So I cannot say INR 50, because I don't have one product. I have 17, 18 products in a similar range. So I don't think I can give you exact one price.

And what kind of growth would you be looking at here?

I just talked about that, right, that we will be growing at 15% to 20%.

15% to 20%, okay.

The next question is from the line of [ Tanay Nandalani ] from Tusk Investment.

Congratulations for this awesome set of numbers. Sir, I just had like 2 questions. Can you hear me?

Yes.

Okay. So one question is, sir, like, I've seen that the operating margins have increased. So what -- and the yarn prices are also increasing for the past few months. So could you highlight where have we got the opportunity to increase that operating margin difference?

We don't see that operating -- at a gross margin level, where the cost of the materials get reported, we don't see a significant increase, either a decrease in the margin percentage. Whatever we will be seeing is more a volume, which we'll be generating to have offset some of the increase in costs. And that's why, Vikashji and I said, we are looking to have 18%-plus EBITDA margin and that is more operational benefit, which we'll get on the volume jump as well as some of the things which we are doing. But on a gross margin basis, on a material cost basis, we're not going to have much impact.

Okay. Secondly, sir, could you also tell me that whether there has been any change in our market share? What is our market share right now as compared to other brands...

The industry has grown this year. If I take 4, 5 listed companies, the industry has grown about 14% to 15%, where we will be taking 35%. So on an average basis, we will be taking shares from competition, but I will not able to give you a specific on which competition, what -- I think that's something we need to check that out.

Okay. And what is our current market share, sir, if you could say?