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

Ladies and gentlemen, good day, and welcome to the SP Apparels Limited Q2 FY '26 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Ms. Prerna Jhunjhunwala from Elara Securities. Thank you, and over to you, ma'am.

Thank you, Hoda. Good afternoon, everyone. On behalf of Elara Securities Private Limited, I would like to welcome you all to Q2 Post Results Conference 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. I would now like to hand over the call to the management for opening remarks. Thank you, and over to you, sir.

Good afternoon, everyone. I'm sorry for the delay in joining because I was in Sri Lanka. I am in Sri Lanka now. Okay. Overall performance, I'm delighted to report that all our divisions that is SPAL Garment Division, Young Brand Apparels, SPUK and Retail division have delivered strong performance in Q2 FY '26. Notably, retail and SP divisions have reported positive EBITDA during the quarter, marking a significant milestone in our turnaround strategy. Commenting on the broader environment, the Government of India's recent approval of the Export Promotion Mission, EPM with an outlay of approximately INR 25,000 crores over 6 years is a landmark initiative to strengthen India's export competitiveness. This mission will provide Indian access to credit, support compliance and help exporters penetrate new markets. Combined with the FTAs under negotiation and schemes like RoSCTL, RoDTEP, this creates a powerful tailwind for our industry. SP Apparels is well positioned to leverage these benefits through our integrated model and diversified customer base. Regarding Garment division, our Garment division continues to be the backbone of SP Apparels. In India, we maintained healthy capacity utilization at around 83%, supported by strong demand and new customer additions across Europe and the U.K. The export witnessed a growth of 24% year-on-year with export quantity of 18.9 million pieces in Q2 FY '26 compared to 15.3 million pieces in Q2 FY '25. During this quarter, we strengthened our Sri Lanka operations, increasing our capacity. This increase is aimed at accelerating capacity expansion and leveraging Sri Lanka's cost-effective manufacturing environment, duty-free access to Europe and the U.K. and abundant skilled labor. SPAIPL, S.P. Apparels International Private Limited in Sri Lanka Inc. in October 2023 is already operational and will play a pivotal role in our long-term strategy to diversify sourcing and mitigate tariff, workforce and political risk. We remain on track to scale-up to 2,000 machines by FY '27, positioning SPAL as a competitive global supplier. We are pleased to share that we added 3 to 4 new European customers this quarter, strengthening our presence in key markets. These relationships, combined with our Sri Lanka capacity and SPU design capabilities position us well for sustained growth. With regard to Young Brand Apparel. Young Brand Apparel has experienced a marginal revenue impact during Q2 FY '26 due to the prevailing U.S. tariff situation. However, this was offset by stronger margins, reflecting our focus on operational and raw material procurement efficiency. We have consciously deferred the Salem expansion until there is clarity on U.S. tariffs, but we remain fully prepared to resume once conditions stabilize. In parallel, we are actively exploring opportunities to onboard a couple of U.K. customers, which will help diversify our current U.S. heavy customer mix and mitigate the risk. With regard to the integrated operations, our spinning, dyeing, embroidery, and printing divisions continue to provide cost advantages and quality consistency. The Dye division is running at full capacity, and we are prepared to expand throughput from 23 tonnes per day to 30 tonnes per day if U.S. tariffs are reversed or European volume accelerates. With regard to SPUK division, SPUK has turned the corner this quarter as committed, reporting positive EBITDA after several challenges -- challenging years. Our design-led approach and sourcing flexibility between India and Sri Lanka have helped us onboard new U.K. customers. The India-U.K. SPA will further strengthen our position in this market. Regarding Retail division, our Retail division has delivered a significant milestone this quarter by reporting positive EBITDA for the first time in a very long period. This turnaround reflects the success of our strategic decisions and disciplined execution. The Crocodile brand continues to perform strongly, maintaining its position as one of the leading menswear brands with robust demand across the formats. At the same time, Angel & Rocket has gained strong traction, validating our decision to invest in premium kidswear and expand its footprint in India. Importantly, our earlier decision to exit the Head brand franchisee has helped us cut losses and sharpen our focus on profitable growth. This rationalization, combined with operational efficiencies and inventory optimization has strengthened the division's fundamentals. We are confident that this positive trend will continue to -- continue going forward, supported by brand momentum, cost discipline and a clear road map for sustainable growth. We are also looking out for some strategic financial partners who will join us in the growth of retail going forward. The overall outlook, we remain committed to achieving our INR 2,000 crores top line guidance for FY '27 on consolidated basis. Our SPUK division's turnaround, combined with the sourcing flexibility and design-led engagement positions us well to capture incremental volumes. The Retail division's positive EBITDA milestone driven by Crocodile's steady performance and Angel & Rockets' strong traction has further strength to our consolidated outlook. Additionally, readiness to resume the Salem expansion once tariff clarity emerges will support the growth. With the initiatives and favorable policies tailwinds like the export promotion mission, we remain confident of delivering on our one full year guidance while sustaining margins and creating long-term shareholder value. Thank you for your continued interest and support. Now I would like to hand over to Mr. Balaji for the financial highlights. Thank you.

Thank you, sir. Good afternoon, everybody. I'll just run you through the financial performance of the company. On a stand-alone basis for the Q2 FY '26, adjusted total revenue stood at INR 305 crores, which is at the growth of 18.4% year-on-year. Adjusted EBITDA margin stood at 17.8% with a growth of 23.6% year-on-year. And PAT for the current quarter stood at INR 27.3 crores and the reported robust growth of 51.4% year-on-year with a PAT Margin of 9%, on a stand-alone basis for the first half, we have done an adjusted total revenue of INR 593 crores and an adjusted EBITDA of INR 98 crores with a margin of 16.5% and a PAT of INR 47.2 crores with a growth of 15.7% year-on-year and the PAT margin at 8%. On a consolidated basis, our total revenue for the quarter stood at INR 427 crores, which is a growth of 9.2% year-on-year and our EBITDA stood at INR 63.7 crores at an EBITDA margin of 14.9% reporting a growth of 28.1% year-on-year. And the PAT stood at INR 34.7 crores, a strong growth of 58.4%, year-on-year. For H1 FY '26, our total revenue stood at INR 830.8 crores, which is at the growth of 30.5% year-on-year and an EBITDA of INR 116 crores with a margin of 14%, a strong growth of 41% year-on-year. PAT stood at INR 95 crores with a growth of INR 38.5 crores -- on a segment-wise performance in Garment Division, including Young Brand Apparel, our Q2 FY '26 adjusted revenue stood at INR 389 crores, a growth of 10.2% year-on-year with an adjusted EBITDA margin of INR 16.6 crores at a growth of 16.7% year-on-year. Our SPUK Q2 FY '26 revenue stood at INR 18 crores with a positive EBITDA of INR 1.1 crores at against a loss of last year. Our retail division Q2 FY '26 stood at INR 21.7 crores and a positive EBITDA of INR 50 lakhs against a loss of INR 80 lakhs Q2 FY '25. Further in the retail division, Crocodile Brand revenue stood at INR 16 crores and Angel & Rocket revenue stood at INR 5 crores, respectively. On the current debt position, our gross debt on a standalone basis stood at INR 263 crores and net debt stood at INR 229 crores. We have currently supported our Sri Lankan operation with an ECB of $6 million. On a consolidated basis, our net debt is INR 303 crores. The presentation has got detailed information about the balance sheet, cash flow and division-wise performance. Hope you have all gone through the presentation. And now let us take up the question-and-answer session.

Thank you. [Operator Instructions] The first question is from the line of Raman from Sequent Investments.

Sir, I have several questions. One, I just want to understand that the new Sivakasi facility, we were expected to introducing around 400 machines by H2 FY '25. So what's the plan with respect to that? Are we planning to introduce like add 400 machines?

Jeeva, you can answer this, please.

Yes. Actually, it was running up to 100, 150 until 2 months back, but due to this U.S. situation, we have reduced the capacity to minimum of 30, 40 at the moment. Until we expect the U.S. situation to revise, there will be a less running of machines. But we are trying for some European customers. We have offered some -- this factory for another 2, 3 customers. We are expecting that to be through in February, March. By April, we'll be running as usual, maybe from April onwards slowly from 100 to another 6 months up to 400, we'll be filling the capacity.

So basically, 2 months back, you were running at 100, 150 machines and now you're running at 30, 35 machines.

Exactly, yes. Yes, purely because of U.S. situation. But once we are trying for new customers, they are showing interest on this factory. We have already offered this factory to another European customer. So we are expecting new customers in from April.

It's not 235. It has come down to 35. That's what we said.

And this facility is only for Young Brand?

Capacity, you are asking about capacity?

No, no, no. I'm asking about Sivakasi facility is only for manufacturing of Young Brand Apparel.

It is for Garment Division. Yes.

And sir, we were expecting INR 100 crores from Sri Lankan operations in the first year of operation. Now that almost half year is almost done. So are you planning -- what's the current revenue you expect from Sri Lankan operations? And are you planning to add some capacity given that you want to diversify from Indian-based manufacturing to Sri Lanka, which has comparatively lower tariff rate?

Yes. Actually, from Sri Lanka, we have so far INR 16 crores to INR 17 crores in Q1 and Q2. And all this for Q1 and Q3, we were running only 1 factory. And Q3, we have added 2 more factories. So from Q3 and Q4, we are expecting about INR 25 crores to INR 30 crores -- so if we combine all together, it will be around INR 50 crores for this year.

From next 2 years...

Yes, next year '26, '27, we'll be running full capacity and definitely, we can expect 100 plus.

And with the -- how is the integration with respect to Young Brand coming? I just want to understand for the half year, what was the revenue from the Young Brand Apparel and margins profile? And are there any plans to improve the margin of this business from current single digit to double digits?

I think the presentation which is uploaded in the exchanges has got a complete details about Young Brand financials separately. Currently a few from Young Brand is around INR 84 crores, and we have an EBITDA margin close to around 14.9%.

And sir, my final question is with respect to the capacity utilization in India. It's above 83%. Are you planning to add some more machines for further growth? Or will you take up the call in FY '20's -- later part of FY '26?

Currently, our utilization is 83%. I think Q3, we will have a capacity utilization lower purely because of the tariff issue. We are planning capacity by March end, we should have at least 6,000 machines capacity. That was our initial plan because of the tariff issues, we have slowed down on the capacity expansion. So if there is a reversal in terms of the tariff, then we will quickly improve our capacity.

The next question is from the line of Bharat Gulati from Dalal & Broacha.

So I just had a couple of questions. First one is regarding our mix is -- I mean, you've guided for our mix changing going forward. So what kind of margins should we expect for the coming years to come?

On the Garment Division, I guess, on a consolidated basis between Young Brand and the export division, we should expect an EBITDA margin of 15%.

So on a consol level, at a group level, we could be maintaining about margins that we've done in this quarter of about 15% to 16% going forward. Would that be right to assume?

That should be the guidance which we have to work with, yes.

And sir, just on our capacity. So by the end of FY '26, could you quantify how many number of pieces will we be capable to export, not utilization, but just the pieces that we'll be able to export?

Pieces.

Yes. So the number of pieces...

[indiscernible].

So I'm just trying to understand how many pieces will we be able to export on an annualized basis in FY '27?

In terms of our full capacity, we should be going close to 100 million pieces.

And at what utilization we will maintain at 83%, 85% utilization for '27 as well?

This will be for 90% to 93% appreciation, it will be 100 million.

So 100 million capability with 93% utilization. Would that be the right understanding?

Yes. That's correct...

And just can you quantify the amount of CapEx that we would do in H2 in order to get this capacity fulfilled?

H2, we are not looking at major capacity expansion because of the tariff issues. Whatever happens would be on the maintenance CapEx only.

And we'll still be able to achieve 100 million mark next year?

Sorry?

Still be able to achieve the 100 million pieces capability next year without any major CapEx?

Yes, yes, yes.

And sir, just is it possible to mention what is our ROCE for our SP U.K. business?

ROCE currently it is around 4%, 5 percentage currently.

Any plans to increase that in the coming quarters?

Definitely, the increase in revenue will boost up the margins, which will have a positive impact on the ROCE.

So sir, would it be possible that we could see a little bit of a margin expansion come in, in '27 from current levels?

On a consolidated basis, you are asking?

Yes, consolidated basis, sir.

See, on a consolidated basis, we have huge various missions functioning. So we are guiding for a 15% EBITDA margin on a consolidated.

The next question is from the line of Rehan from Coheron Capital Advisors.

First of all, congratulations on a great set of numbers. It's been really good execution from the management. I just had a couple of questions on the capacity front. In Q1, we added about 700 machines in India and between India and Sri Lanka. So how much have we added for quarter 2?

See quarter 2, because of the tariff issues, we have slowed down on the addition. And also we have the machines which are put up in the new plant, we have reduced the utilization also, purely because orders are not coming through because from the U.S. customers. So we have slowed down on the capacity utilization in new factories purely because of that. So...

No, let me explain, Balaji. See, as of now, we have an installed capacity of close to 6,000 machines in India and about 1,000 machines in Sri Lanka. By end of March, it will be 6,000 plus, so will be 8,000, will be under S.P. Apparels Limited, SPAL, Garment Division and 1,300 machines will be in Young Brand Apparel. In case the tariff -- U.S. tariff is revised by next financial year, there will be an additional 300 machines in Young Brand. So all put together, next financial year it is going to be 9,600 to 10,000 machines will be running next year by now.

So that math is clear that you had cleared on the first quarter of this year as well. My question was in this quarter, considering that we are on a ramp and speed of execution, I wanted to understand other than Sivakasi. Sivakasi has about 400 to 450 in Phase 1, so the 6,000 includes that. That's correct, right? So in this quarter, how much have we added? Because last quarter, we added 700 roughly, including 600-odd...

We have not added anything. We have not added anything.

So as of now, our capacity is almost 6,000 machines, including Sivakasi's 400. That's correct?

Yes. We have no plan of adding any capacities in India.

Second question is for the YBAPL considering that tariffs have -- the additional punitive tariff has come in last week of August. So the hampering of your Q2 numbers will not take that dent. So in Q3, as of now, how has been the adjustment for the tariff in terms of profitability? Because in Q1, we were told that it is split across the value chain, but considering now that 25% has become an additional 25%, is the business still viable? Or how is the profitability now for the business? If you can share some light?

So I think when you mentioned in Q1, we announced or we informed that there will be a bit of profit reduction in terms of the tariff issues. I think even at that point of time, we already knew it was an additional 25%. So it was considering the 50%. So whatever we've seen in Q2, I think the numbers for Q3 will be on the same lines. It won't have a huge impact on the bottom line. And as we said, it has been passed on to the raw material suppliers in the booking. So it is across even to the customers. So there won't be a lot of impact even in Q3.

Not even on revenue terms, you would still be around INR 70 crores, INR 80 crores of revenue?

Definitely not on the revenue terms, but if you're asking on the margins, possibly maybe 1%, 1.5%. But revenue terms, there's no impact on Q3.

And if I can just squeeze in a last question. The subsidiaries have finally turned positive considering the rampant focus you guys have been on trying to turn it positive. Do we gauge that this is sustainable going forward? Because I remember a couple of years back also, this had turned, but then we saw a different cycle again. So do we gauge that this is going to be a sustainable form?

Yes. Especially on the retail front, it will be sustainable, again, because last 3, 3.5 years, even post COVID, there's been repeated corrections. There's been changes back and forth. There had been impact because of the head brand and other things. But now that it's all behind us, there won't be any negative impact for the business. So it is definitely sustainable. Obviously, quarter-to-quarter, depending on the pattern of the business, the quarters might be different. But overall, if we look at the financial year, it will definitely be better than earlier financial years on the top line and the bottom line.

Congratulations again on a good set of numbers.

The next question is from the line of Ashwin Reddy from Samatva Investments.

First question is on the retail business. Can you explain a bit more in detail as to what is driving the profitability of the retail business? -- meaning is it Indian market or is it the turn on Crocodile in distribution or what exactly is driving it? And into this, the second part is in the presentation, you mentioned about raising money from the capital markets. So is it a little young in terms of scale to go through the IPO route? Or what exactly do you have in mind when you said capital markets...

So first -- the first question on the improvements. Clearly, the additional -- the other brand that we had head was bleeding in a way because we had to clear inventory and because of the end of the license term, which was last December, and there was a minimum guarantee royalty and all that. So that was, I think, contributing to around 30%, 35%, 1/3 of the bottom line. The second part of it was Angel & Rocket brands we launched in India in 2020, just before COVID. And the next 2 seasons, the stocks that we bought, we launched in large-format stores, we were supposed to expand, but then there was impact of COVID for those partners, and they then buy a lot of stock even on sale of return. So that 2 seasons affected Angel & Rocket for almost 2.5 to 3 years, again, because of inventory, unsold inventory, liquidation, clearance, even returns in some cases. But all those corrections have completely been cleared over the last 2 years, effectively 7, 8 quarters, we've been doing it, and that is also now out of the way. And on Crocodile business, it was making EBITDA profit even last year, but now it started doing more. Primarily, again, Angel & Rocket and Crocodile, our D2C numbers have grown up significantly. It's more than 200% growth on D2C. So roughly, we were doing around INR 1 crores per month. Last year, we are doing close to INR 1.5 crores to INR 2 crores. I mean we're solely at INR 2 crores now. Also, the nonperforming or underperforming stores or channels have been slowly, we've exited from that. The other part of Crocodile is that the wholesale business has contributed to the bottom line because it doesn't have any fixed overheads and it is purely a B2B business and our receivables are healthy. Our inventory is also very healthy at the moment. So all of these have contributed to the positive bottom line.

And in terms of the -- I mean what is the trajectory you have for these 2 brands in the next, say, 2, 3, 4 years? What they kind of broadly?

I mean that in a way answers your second question about it being still very small. So the plan is for Crocodile to grow organically. Again, as it's a licensed brand, it's a more wholesale-driven brand. It will grow organically on its own. We are doing around annually INR 75 crores for Crocodile. We want to scale that up to INR 100 crores and INR 125 crores, INR 150 crores. That's the plan in the next 3 to 5 years to be able to touch INR 200 crores organically. So it doesn't need additional money or equity or even loan to be able to do that. It comes in its own cycle with maintaining inventory and cash flows. But Angel & Rocket is where we see a bigger potential as it's a D2C brand. Currently, we are around INR 50 lakhs to INR 1 crore per month kind of a revenue, but the potential for the brand to do INR 4 crores to INR 5 crores per month is definitely there. But we have to be investing on digital marketing. We also need to expand our stores because we are moving into omnichannel retail. So our stores will be able to fulfill orders which we get online and vice versa. So whatever money we're looking to raise will be for Angel & Rocket's growth, primarily driven by D2C, which is the website and the stores, physical stores.

And the second question is on the comment that you just made that the capacities in India would not be expanded going ahead. So I'm just trying to tie in this with the U.S. and with the U.K. FTA linked what would come in from next year, I believe. So how do you see the impact of the U.K. FTA on your business? Do you see this as a meaningful contribution? Or how do you think about this in the next 3, 4, 5 years in terms of impact on your revenues, U.K. FTA happening?

Can you repeat the question again, sorry?

Basically, I'm trying to understand the comment just made that the capacities in India would not be expanded. I'm trying to tie this comment with the impact of U.K. India FTA. I assume that you'll be expanding the capacity in India to cater to the increased demand from the U.K., but [indiscernible] you understand.

Sorry, I think there was -- that was kind of a miscommunication that the capacity will not be expanded in India. What was meant was the focus currently on Sri Lanka to make sure that we achieve a sizable scale there, but definitely looking forward to India, U.K. FTA, capacity in India will also be increased over the next 1 year to 2 years.

But what is the [indiscernible] discussions I mean any more color on the initial discussion/commentary from your clients in the U.K., which areas or which segments do you see a large demand? I understand the proportion of men's and women's could probably increase versus children, but anything else you can add on the current would be helpful.

The next question is from the line of Shubhankar Gupta from Equitree Capital.

So first question is on the other income bit. So bookkeeping question. Other income went up substantially in this quarter. So can you just explain what led to this increment?

Balaji sir got disconnected. I will reconnect. Meanwhile, can you answer?

Can you repeat the question again, please?

So the question is on the other income. So other income went up substantially in the books for Q2. Just wanted to understand what led to this increment?

Yes. Generally, there is a standard other income of about 6% to 7% in terms of RoSCTL license sale of [indiscernible] incentive and also some kind of waste to sales and some -- these are the things. So generally, it expects to be -- and the exchange rate benefits of we always work on 1.5% to 2%. So all put together about 8% normally is the other income percentage on the top line.

Okay, sir. Got it. Okay. And sir, I just want to understand, so I'm a bit confused as to what sort of machine CapEx are we seeing till FY '27. So I think you guided around 9,000 to 10,000 machines by FY '27, right? So just wanted to understand how are we seeing that in the -- not in the short term, of course, U.S. tariffs are there, and we don't have clarity as to how they will come out finally. So how are you seeing this like the machine addition for the -- let's say, by FY '27? And what CapEx will that involve?

Yes. As CFO, Balaji said before, for the next financial year, we -- at the moment, we don't have any CapEx plan because -- now we are waiting for the maturity stage because we have invested in 2 factories, Sivakasi and one more, Trichy Factory and then Young Brand Apparel is one and Sri Lanka 2,000 machines. So we have invested enough in this. So now we are in FY '27, we are going to wait for the maturity level and stabilize everything, the operations and everything. Then say '28, we may increase another about, say, 15% to 20% addition about 1,000 to 2,000 machines. Probably FY '28, we may go up to 12,000 machines.

So FY post clarity and maturing only, we'll be seeing an increment of machines. And sir, I just want to understand what has led -- so I think the previous question also got some understanding. But just want to understand what led to the PAT positivity for both retail and SPUK. Like what are the top 2 trigger items, which led to profitability for both the segments this quarter?

Yes. With regard to SPUK thing, see, as we told many times about the last about 3 years to 4 years' time, we were relocating the office from Leicester to London and completely because the head of our U.K. operation repaired, so we had to look for a new set of team while shifting to London. We had changed the entire staff and the head of the business, everything. And because of that, it has taken about 2 to 3 years' time. And we were just trying to restructure the whole thing. And now we have been in a stage to get the confidence from all the customers of the U.K. brands. And now everything is all set now, it is only to take off now. So which means we have about 5, 6 customers in the U.K. for SPUK business and everything is in the growth mode. So everyone is increasing year-on-year by 20% to 30%. So that's in the safe mode. And we are not going to increase our overhead there. So automatically, the growth will be fantastic in the next -- our plan is in the next 3 to 5 years' time to go up to GBP 50 million. That's our plan. And the road map is ready for GBP 50 million. So that's clear. With regard to the retail, I think I will let Chenduran answer to that question.

So as I said for the earlier question, if you're asking the key highlights would be definitely there is an improvement on the gross margin. The revenue like-for-like compared to last year, Q2 has remained almost flat, but the improvement has come from gross margins. So that's increased by around 7%, which has contributed for the positive bottom line. That's one. Two is on the expenses have also come down. As I said again, some of the nonperforming stores, even the part of the sales team, some of the fixed expenses have also come down. So these are the 2 main factors. One is improvement in gross margin and two is on overheads.

And what was the magnitude of this reduction in overheads, like some rough estimate? -- in terms of...

Okay. In terms of percentage, it would be around 6% to 7% on the overheads has come down.