S.P. Apparels Limited (SPAL.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to S.P. Apparels' Q1 FY '26 Earnings Conference Call, hosted by Elara Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Prerna Jhunjhunwala from Elara Securities for her opening remarks. Thank you, and over to you, ma'am.

Thank you, Shruti. Good afternoon, everyone. On behalf of Elara Securities Private Limited, I would like to welcome you all to Q1 post results conference call and business update call of S.P. Apparels Limited. Today, we have with us the senior management of the company, including Mr. P. Sundararajan, Chairman and Managing Director; Mrs. S. Latha, Executive Director; Ms. S. Shantha, Joint Managing Director; Mr. S. Chenduran, Joint Managing Director; Mrs. P.V. Jeeva, Chief Executive Officer; and Mr. V. Balaji, Chief Financial Officer of the company. I would now like to hand over the call to the management for opening remarks. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, for joining us to discuss the performance of Q1 FY '26. The first quarter of FY '26 has been one of both transition and the opportunity for S.P. Apparels. Global trade dynamics are shifting, particularly with the recent duty hikes in the U.S. However, our diversified market presence, strong customer relationships and proactive capacity expansions have enabled us to respond faster than many peers. The industry update is the textile export sector faces headwinds from the recent U.S. tariff changes, though, it is still early to gauge the full impact. At SPAL, U.S. exposure keeps direct risk contained. Our Sri Lanka facility has another layer of operational flexibility and acts as a hedge against tariff-related disruptions. The Young Brand Apparel segment, being more U.S. focused, has seen softer demand. We are mitigating this by pursuing opportunities in the Europe, with early [Audio Gap] already underway. The recent U.K. FTA has supported growth with the stronger order volumes and deeper engagement from existing U.K. customers. This reinforces the strength of our diversified approach. Let me begin with the Garment division. Cotton and yarn prices have remained stable, providing a steady operating environment. Our dyeing unit is running at full capacity, underscoring our commitment to quality and efficiency. And we plan to increase its capacity by about 6 tonnes per day. In addition, we are actively enhancing our printing and embroidery facilities to cater to the evolving requirements of our customers. As you know, the U.S. accounts for roughly 10% of our revenues, so while the recent import duty hikes will have some short-term impact there, our exposure is limited and our portfolio is well hedged through strong European and the U.K. demand. What we are seeing in the U.S. is large retailers splitting their sourcing strategy essentially keeping a separate supply chain for U.S. bound products while pricing differently for other markets. Over in the U.K., business remains very strong. Long-standing customers continue to scale with us. Now, we are keeping a close eye on the proposed India-U.K. FTA. While it could bring more competition into the market, our deep positioning in the Babywear niche gives us a natural moat. In Europe, the momentum is equally encouraging. Several brands are actively talking to us, and there is a noticeable shift in sourcing away from Bangladesh that is opening more opportunities. With regards to Young Brand, the duty hike in the US or headwinds for certain categories, particularly where Bangladesh retains their cost advantage, our response has been to move faster in Europe and U.K., widening our customer base so that revenue growth is not dependent on one region. Regarding SPUK businesses, we are in a sweet spot. This business is insulated from U.S. duties and could be a beneficiary of the India-U.K. FTA, which we expect to come into effect by March next year. That will enhance margins and deepens already strong customer relationships. SPAL is similarly well shielded. U.S. exposure here is only about 10%, and the customer base is steady. We do have the flexibility to move some woven products to Sri Lanka while continuing to produce major items in India. Margins should hold steady unless there is an extraordinary cost situation, in which case, our customers have typically shared the load. On retail trends, Angel & Rocket is right on track to bring even this year -- sorry, to break even this year. The small preoperative loss in Q1 was fully expected. It's just part of investment phase as the brand grows and transitions. From the capacity standpoint, our Sri Lanka operations are progressing exactly as planned. This is not a reaction to any single market change. It's part of our long-term plan to create diversified capacity for Europe and the U.K., while giving us the flexibility to balance production between India and Sri Lanka. We are currently running about 650 machines in Sri Lanka. And by March 2026, we are targeting 2,000 machines that includes acquisition and job working. Across the group, including Young Brands, we should reach around 7,800 machines by FY '26 end. That capacity, including export incentives, will keep us on track for our FY '27 topline targeting of INR 2,000 crores. On the investment side, we have added 6 tonnes per day to our dye's capacity, and our expansion at Salem of 300 machines is progressing well. Lastly, on customer appreciation, and this is where the pipeline is looking very healthy, we have already added 2 customers from Germany, Mainland Europe. Post the completion of our factory association in Sri Lanka by September-October 2025, we expect to onboard at least 2 more U.K. customers. Another via a separate channel on the U.S. Babywear customers through Sri Lanka by March 2026. All of this combined with the disciplined execution across every business line gives us confidence in delivering our growth and profitability targets for the year. Thank you, and over to Mr. Balaji.

Thank you, sir. Good afternoon, everybody. I'll just run you through the financial performance of the company. On a stand-alone basis for FY -- for Q1 FY '26, adjusted revenue stood at INR 287 crores as against INR 213 crores year-on-year, which is a growth of 34.5%. Adjusted EBITDA stood at INR 43.7 crores against INR 36.2 crores year-on-year basis with an adjusted EBITDA margins of 15.2%, and the PAT for the current quarter stood at INR 19.9 crores, with a PAT margin of 6.9 percentage. Our EPS stood at INR 7.9 per share for the current quarter on a stand-alone basis. On a consolidated basis, our total revenue for the quarter stood at INR 405 crores against INR 248 crores year-on-year, which is a growth of 63.3%, and our EBITDA stood at INR 54.6 crores at an EBITDA margins of 13.5 percentage, and the PAT stood at INR 20.7 crores. Our EPS for the current quarter stood at INR 8.2 per share on a consolidated basis. On segment-wise performance, in Garment division, including Young Brand, our Q1 adjusted revenue stood at INR 372.9 crores against INR 274.6 crores in Q1 FY '25, a growth of 35.8 percentage year-on-year, with an adjusted EBITDA of INR 54.3 crores, growth of 14.6 percentage year-on-year. On SPUK, the revenue stood at INR 14.8 crores in Indian rupee as against INR 11.7 crores year-on-year, a growth of 26 percentage. Our revenue for Q1 FY '22 (sic) [ FY '26 ] stood at GBP 1.3 million with the current order book value of GBP 3.97 million, and our Garment division order book status is INR 404 crores as on -- as of today. Our retail revenue stood at INR 14.9 crores during Q1 compared to INR 14.8 crores year-on-year. During Q1 FY '26, revenue from Crocodile stood at INR 13.88 crores, while Angel & Rocket stood at GBP 0.9 million. On the current -- our current debt position as on today on a consolidated basis is gross debt INR 382.4 crores and net debt is INR 327 crores. All the other information are available in the presentation, and we will get into the question-answer session. Over to the moderator.

[Operator Instructions] The first question is from the line of Shubhankar Gupta from Equitree Capital.

Actually, I have 2 questions. The first question is around the gross margins on a consolidated basis, which have fallen by 840 bps. So I just want to understand what is happening there. And also the capacity utilization is standing at 82% versus our target of 90%. So how do we see that going?

On the gross margin front, I think it's purely on a mix. If you look at year-on-year gross margin, which has dropped is purely because Young Brand is getting consolidated for the first time here this quarter, Q1. So there is a change in terms of gross margins.

Okay. Okay. And what about the capacity growth? The capacity utilization stands at 82%.

Yes. The capacity utilization stands 82 percentage is purely because we have added 700 machines during the current quarter, Q1, I'm saying, but our utilization level is around -- increased by 10 bps. So my denominator has increased by 700 machines. That's why there is a dip in the utilization level.

Okay, sir. Got it. And sir, another small question. Outlook for YBA, in previous calls you mentioned that 1,200 machines were active, and we have -- we were earlier targeting 1,700 machines by year-end on the YBA bit, so how is -- how do you see that going forward?

Yes. See, that is considering 1,300 in the existing setup and adding another about 300-odd machines as a new setup. So with the current scenario, because of this US tariff issue, we have to wait and move forward. If the tariff has not come down from 50%, then probably we will be putting this project on hold until the picture is clear, the expansion project. But in the same time, anyway, we are going to entertain some of -- 1 or 2 more European customers into Young Brand as a -- in order to mitigate the geographic risk.

The next question is from the line of Rehan from Coheron Wealth.

Can you hear me?

Yes, yes.

Congrats on a great set of numbers. Sir, I think the management is doing extremely well, integrating YBAPL, so I would first like to congratulate you on that. My first question is primarily on your Garmenting business. If I dissect the numbers, I just wanted to ask whether my understanding of INR 289 crores for purely the garmenting business, excluding YBAPL. On a Y-o-Y basis, it's about 30%, 35% kind of growth, which is very good. I just wanted to understand where has that come from? Because you mentioned that we've added about 600 to 700 machines on the call, so -- in the quarter. So can you help me understand the same a little better?

Yes. In fact, if you look at the year-on-year in terms of -- production also has gone up, so we have added a new capacity in current quarter, quantities have moved up. And for the current quarter, there is a significant increase in the garment production also.

Yes, see -- excuse me, yes. See, Q1 '25 and Q1 '26, there are 2 reasons. One is Q1 '25, there was difficulty in the booking, which we mentioned that -- and the second one is less machines. It was -- so now we have increased to 700 machines now. So that is how the topline has come up.

Sir, these machines are in Sri Lanka or in India? The...

No, India. India.

Only India, yes, because Sri Lanka is still not reflected in these numbers strongly.

Right. So Sri Lanka has not contributed, this -- all this 700 machines in India at the moment?

Yes. And that is the reason why there is a -- capacity utilization, there is a small challenge because we have ordered new machines.

Yes, that is completely fine. That, I think, Balaji sir was very clear on. You mentioned that we are adding about 650 to -- 650 machines in Sri Lanka in this half. Is that -- my understanding correct? And by the end of the year, you're looking at 2,000 machines. So just wanted to understand when can we see those numbers come on stream? Because this has been in the pipeline for almost 3 quarters now.

No, no, no. No, no. Sri Lanka has been in pipeline for 2 quarters. So you will find the quantities coming up from Sri Lanka from second quarter onwards. Maybe small quantities in second quarter and fully from third quarter onwards because, see, we have to get the clearance from the customer also for production. So it may take 2, 3. Even though it is all customer approved factories, for producing their orders in that factory, we have to get clearance from the customers. So Q3 will be the right quarter where you'll find Sri Lanka completely having enough production.

Okay. And if I may, one last question. Considering -- I mean, I understand the management is very clear on the fact that you're all trying to diversify YBAPL to European entities or deepen the ties because you'll have outstanding relations there. But let's assume that you have your current business, which is about almost INR 80 crores, INR 90 crores of YBAPL, how are you seeing the tariffs? Like what kind of margin impact are you seeing on that business? Because we're still hit with the 25% tariff over the last 1.5 months, so we would just like to understand what -- because I'm sure the customers that you're dealing with will also have -- will ask you to take some of the hit as well. So can you explain or quantify that amount?

See -- Chendur, are you there? No. See, in terms of margin, I guess, every addition in terms of...

Balaji, can you hear me?

Yes, sir, we can hear you.

Yes, yes.

This is Chenduran from the management team. So to your question on Young Brand, yes, there have been conversations with the customers. They have definitely not considered the additional penalty, which we all expect that to not stand beyond the end of this month. So let's hope so. But for the other 25%, there has been tariff increase with the other countries as well, roughly an average of 20% for the competing countries. So though it is a disadvantage for India, we -- there is an impact of, say, 3% on the first quarter with Young Brands. And going forward, we expect that to be shared between the suppliers, so the raw material suppliers who the customers have nominated, but customers are also planning to increase their retail prices because it is the same for all the retailers. And definitely, there is a part of it that we are expected to share as well. We don't have specific numbers on how much we will be expected to share. But let's say, roughly 1/4 would be what they're expecting us to share.

So 1/4 of the tariffs, right?

1/4 of the tariffs, 1/4 of the incremental tariffs.

Okay. No, I just wanted to understand because considering you're all still trying to diversify, but that will take some time. So that would just help analysts understand -- like to understand what kind of impact the tariffs can have because this business is scaling pretty well, so that's why.

Yes.

And one bookkeeping question. Balaji, sir, can you help me with the EBITDA of Spinning for the quarter?

Which EBITDA?

EBITDA of Spinning for the quarter?

For Spinning?

Yes, Spinning division.

Spinning, roughly around INR 4.5 crores, INR 5 crores for the current quarter.

[Operator Instructions] The next is from the line of Ashwin from Samatva Investments.

So could you talk a bit more about the gross margin compression in the stand-alone business?

On the stand-alone business, it's purely the margins, which have come down. I mean, it's purely because of the increased wages. So the Tamil Nadu government has increased the wages as on 31st -- 12th of March. So there is an increase in the minimum wages. So there is a compression in the margins of the standalone.

No. Actually, what I'm asking about is -- so what I'm asking about is the gross margin, sir, not at the EBITDA level?

Gross margin...

Sir, gross margin came down from 70.7% to 64.8%. What is the raw material component? Or what is the mix change component in this?

See, it's purely on the product mix. It's purely on the product mix. That's the only thing which will have some impact on the gross margin.

So is it more of the men's and women's wear, which is a lower-margin business versus the children's wear? Or what -- could you talk a bit more about this? And what should we expect going forward from here? Is this the new baseline? Or how should we think about this in the times ahead?

See, in terms of gross margin, it's purely based on the amount of products that is completed in that quarter. For example, if we are doing more of the body suits and basic model, the material costs will always be on the higher side.

See, it's like this, we are in the capacity growth mode, so naturally, when the new capacity has come, there could be a kind of a reduction in the efficiency. So that also will pull down the gross margin. And in order to sell -- and in order to get the customers approved, we need to bring in some of the customers who can quickly approve these factories in order for us to get the approval from a regular customer. So we have to now take some orders at a very low margins in order to get start the -- kick start the factories running so that in 3 to 6 months' time, our existing customers will come for the audit. So that's the general practice of our customers. They want the history of 6 months' record for any new factory for approval. So we need to take some -- yes, some local orders or some stock orders. All these things put together in addition to other things. These are the reasons for the drop in gross margin, but the guideline, this is not going to be that slowly, it will gradually improve.

The next question is from the line of Chirag Shah from White Pine Investment Management.

Sir, first, a very basic question, a clarification, if you can just give a revenue mix today on consolidated basis between U.S., U.K., Europe and maybe Asia?

In terms of revenue mix for -- on a stand-alone basis, we have around 10% on U.S.

No, sir, on a consolidated basis, it would be better. Sir, on a consolidated basis, it would be -- on a consolidated basis.

On a consolidated basis, maybe U.S., we are around 35 percentage, including Young Brand, and rest will be U.S. and Europe. We don't do anything for Asia.

Yes, U.K. and Europe.

U.K. and Europe, sorry.

So 65% U.K. and Europe and 35% in consolidated basis is U.S.

Okay. And so you indicated that on the U.S. side, we are 5% differential duty, right, versus the 25%. There's a 5% differential duty. And that you are looking at that, you believe will be absorbed by the chain; some by you, some by raw material guys and some by customer itself.

Correct. So it is like customer -- the retailer takes 1/4, then the customer takes 1/4, the producer takes 1/4, the supply chain management takes 1/4. So it's been split between all the 4.

So the broad understanding has been achieved, good. And when do you think -- so in the last quarter that's gone by, is there anything of this that was -- that is unabsorbed in our P&L, which we have borne and which is yet to be passed on or accounted for? Or it has already been accounted for?

If you recollect what Mr. Chendur, JMD, spoke about, he has spoken about that. We have taken a 2.5%, 3% hit in the first quarter.

Yes. I missed that point. That's why I was wondering the 2.5%, 3% rate. Okay. It's almost 50% U.S. bound, you are assuming it will be 1/4. Great. This is helpful.

Yes.

Okay. Sir, second question is the U.K. -- on U.K. side -- is somebody speaking? I'm not able to hear that gentleman.

Sorry, can you come again on the question?

No, no. I thought somebody was speaking, and his voice was very low, so I was just clarifying. Okay. Sir, second question is U.K. FTA benefit. So how should we look at it? And when do you expect it to flow actually?

By end of March, see, because now our Indian parliament has passed the bill, but waiting for the U.K. parliament to pass it. So they expect between 3 months to 6 months' time. So once it is passed in the U.K. Parliament, then this will be effective, hopefully from April 2026.

Would it be fair to assume already you have started discussing the negotiations with customers so when that happens, you can start producing on ASAP basis?

No, I don't think we can be premature in terms of discussions. It can happen only after the bill has been passed.

Okay. So after the bill is passed, it will take another 6 months to finalize and then accordingly it will flow.

Yes. Yes.

Okay. And last question was on the retail business. So if I go back to 2 quarters, we were looking -- we had given a hard stop with respect to the losses that the business is making or deciding to discontinue the business. So -- and Chenduran was very clear at that point of time how he is looking at either of the scenario. So any thought process on that? Because we are now very close to that initial target.

Yes. Can you hear me?

Yes.

Yes. So yes, I agree. So we -- I clearly said that we give a hard stop with 8 quarters, which was almost 1.5 years back. So even Q4 last financial year, we had projected that Q1 would be quite poor in terms of -- it wouldn't be as much as what we expected, where it's a profitable situation. But whatever has been corrected in terms of the inventory, receivables, if we get into those details, it's come down considerably. So irrespective of all of that, it's well sustained. The finance costs have gone higher at the EBITDA level. We are definitely breaking even. All the earlier issues with the Head Brand, the royalties and the clearing the old stock, that's all been cleared by Q4. So there was some impact to Q1, but it's all done now. And the other fact is that we are still having conversations with raising equity. People have shown interest to -- into retail. So that's the other plan. And to be honest with you, we are internally having the conversations. We raised money. We don't make any operational losses, and then, slowly the retail business comes back on its own self-sustained. And maybe one more quarter, Q3, we will either do this, we'll break even consistently, Q2 and Q3, or we will still be able to take that call by the end of Q4.

And just a follow-up on this. Is there a commitment from your side to Crocodile brand for how long bare minimum you need to carry the brand or the franchise, and that is one of the reasons?

No.

So there is nothing?

No. There is nothing there.

Okay. There's no such restriction like that. No such...

No, no. There's nothing like that. Yes.

The next question is from the line of Aabhash Poddar from Aionios Alpha Investment Management.

I hope I'm audible. So in Q1, we've done a 35% growth on the stand-alone side. I'm assuming there would be some employee productivity benefits also that you would have achieved given that in the previous quarters we said that there is a labor challenge and you have hired new workers. So just wanted to understand, given this benefit that's come in Q1, do you think the stand-alone business would surpass the growth that you had earlier expected? I'm asking ex of land bank. So earlier the target was, say, around INR 1,600 to consolidate the entry level. Do you say...

Sorry to interrupt, your line is breaking.

Am I audible now?

Yes, sir.

Yes. So I just wanted to understand...

Your voice is very -- please be slow when you talk.

Slow in expression, please, speed.

Okay. Okay. Yes. So I just wanted to understand [Technical Difficulty].

No, Aabhash sir, we're not able to hear you properly. Your line is cracking.

I will take it offline. Okay.

The next question is from the line of Chirag Shah from White Pine Investment.