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

Good evening, ladies and gentlemen. I'm Pavitra, moderator for the conference call. Welcome to S.P. Apparel's 4Q FY '20 Post Results Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note this conference is recorded. I would now like to hand over the floor to Ms. Prerna Jhunjhunwala from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, ma'am.

Thank you, Pavitra. Good afternoon, everyone. On behalf of B&K Securities, I would like to welcome you all to 4Q FY '20 and full year FY '20 post results conference call of S.P. Apparels Limited. From the company, we have with us the senior management, including Mr. P. Sundararajan, Chairman and Managing Director of the company; Mrs. S. Latha, Executive Director; Mr. S. Chenduran, Director Operations; Mrs. P. Jeeva, CEO of the Garment Division; and Mr. V. Balaji, CFO. I would now like to hand over the call to Mr. P. Sundararajan for the initial comments. Thank you, and over to you, sir.

Thank you. Good evening, everyone. Thanks to one and all, for participating in the call. The last few months have been tough, not only [indiscernible] it has been a huge challenge to the -- whole humanity. Weathering this crisis has been a challenge, and we are proud to inform you all that we have been able to ride over these crisis successfully without any major financial impact until today. I'd like to talk about the COVID-19 impact. Regards to the garments division, customers' impact despite the uncertainties, lockdown and supply chain disruption, the company did not witness any significant order cancellation from the garment division export customers. This is the testimony of company's strength, the niche product that is babies and kids wear. Shipments are kept on hold by our international customers due to lockdown imposed in their respective countries. This led to revenue loss of INR 250 million in Q4 FY '20. We are witnessing significant recovery in the order inflow from the customers since May, 2020. Customers are placing new orders based upon the season and number of stores they have opened. Few customers have postponed the orders, while others have placed the orders with the lesser quantities. No significant loss of revenue due to order cancelations. Whichever order that was canceled during the month of April '20, customers for those orders have either now reinstated those orders or have accepted to pay liability depending upon their order status. And our current order book status is at INR 210 crores. Regarding operational impact. All the factories and corporate office were closed from 25th of March, 2020 as per directives from the government authorities. With the permission of the local authorities, the company has resumed its plant operations from 11th of May, 2020 onwards over different dates for different factories. As of today, all the factories are operating at around 60% capacity due to social distancing now imposed by the government authorities. Company supported all the migrant employees for their stays and food in the hostel premises while ensuring all the safety and social distancing norms. Small portion of migrant workforce moved back to their hometowns during May and June, 2020. We are expecting the migrant employees to return back in another 5 to 6 weeks' time. Impact on forward contract and cancellation. Currency impact. Indian currency depreciated significantly in Q4 FY '20 compared to last year. This impacted our hedging position and resulted into restatement loss of about INR 40 million for the Q4 FY '20. Foreign currency appreciation and the loss of revenue due to pandemic is expected to impact the hedges and may see impact in Q1 and Q2 FY '21 also. Reduction in operating expenses. The company has announced reduction of working days to the extent of 30% to all staff and our employees, including the senior management till September 2020. Small rented factories are in the process of consolidation with big factories, which will reduce the operating overhead going forward considerably. Company has consolidated on workman transportation, and this will reduce the transportation cost by 30%. Our strategy going forward, a robust comprehensive business continuity plan as a response to disruption due to COVID-19, with focus on customer engagement, continuous cost reduction, calibrated expansion plans, business strategy realignment, employee productivity and efficient utilization of IT-enabled systems. Focus on liquidity management, capital preservation and operating leverage. The next one is priority for FY '21. Focus on calibrated growth and operating leverage, maintain adequate capital and liquidity, continued reduction in operating expenses, improve margin profile by change in product mix, improving production efficiency, reduction in overheads and the efficient raw material consumption, efficient use of technology and IT-enabled systems to increase the productivity and efficiency. Now I would like to mention about retail division. All stores, large garments stores and [LDOs] closed during lockdown period effective from 21st March, 2020. But certain malls were closed much earlier and stores in malls were closed from the 10th of March, 2020. As of today, certain stores, which are stand-alone in nature and are in the green zones, were opened effective from 18th of May, 2020 onwards. Currently until the lockdown is completely lifted, we may not be in a position to open up all the stores. Next page, S.P. Apparels UK business. Even SPUK's revenue was impacted during the month of March, 2020. Orders worth GBP 700,000 were not delivered due to lockdown. Now SPUK has started delivering goods to its customers and will be back to normal growth of revenues from Q2 onwards. Based on the company, our net debt to net worth as on March, 2020 is 0.27. We have serviced all our deals with the bank, including the term loan installments as of today our working capital utilization is below 70%. Working capital position. We are only using less than 70% of our limits with the bank of working capital facilities available. Further on our garments data, we have received a request from one of the customers for extension of payable days to 150 days on the shipments made up to 30th June. We do not find any other impact on our working capital. Now let's review the performance of each division for this quarter. Financial performance of garment division. Garment division, adjusted revenues stood at INR 145 crores, which de-grew by 21.6% on a year-on-year basis. And adjusted EBITDA stood at 12.7% for this quarter. The margins comparing year-on-year decreased by 340 bps. Major reasons being for reduction in margins are due to government's recent decision to roll back incentives given to garments exporters under the MEIS, which impacted our margin by 4%, which is around INR 22 crores. Second, due to loss of revenue by INR 25 crores due to the impact of pandemic situation. Third one, due to the appreciation of foreign currency against the Indian rupee, which impacted our hedges. With regards to capacity, our current capacity is 5,540 machines and we are currently utilizing 68%. Due to the consolidation of small rental factories, we are expecting the utilization to be better going forward. Regarding retail division, just to update that our plans to hive up the retail division did not get shareholders' approval during the month of March, 2020. Since then, retail division and these operations have been kept on hold due to the pandemic. For the time being, retail division continues to be a part of S.P. Apparels Limited and will progress well after the lockdown is over. Retail financial performance. Total revenue for this quarter stood at INR 12.7 crores as against the sale of INR 20.7 crore year-on-year. This decrease is mainly due to the COVID crisis. EBITDA was -- EBITDA was at 3.9% -- minus 3.9% as against minus 9% last year. With our SPUK business, financial performance is revenue of SPUK for quarter ended was at GBP 1.26 million as against last year performance, GBP 0.96 million in revenue. Even though SPUK grew by 31.5%, orders worth GBP 0.7 million were not executed due to the pandemic crisis. SPUK margins were at 3.5% as against a negative margin of 1.6% year-on-year. General outlook. Current order book position and restoration of the business for S.P. Apparels garment division is clear evidence that we are in the niche segment of babies and kids. In fact, most of our customers' online business and the supermarket businesses have grown by 50% to 100% under this segment we cater. The customers' spending pattern is priority to spend on the products, which we cater. On the current crisis, the company has been able to ride through this process only because of the strong fundamentals. There are opportunities opening due to China situation, which we are yet to make use of. I thank all the investors for having confidence in the company and supporting the company even during the crisis, like Brexit, demonetization and current COVID-19. We are progressing to better future, and we expect your continuous support. Thank you.

Good evening, everybody. I would like to give you financial performance of the -- of S.P. Apparels. Total revenue stood at INR 830 crores, as against INR 810 crores for the financial year 2019. Total revenue grew by 2.5 percentage for the whole year. Adjusted EBITDA stood at INR 110 crores as against INR 123 crores of financial year 2019, EBITDA fell by 10.9 percentage. EBITDA -- adjusted EBITDA margin stood at 13.3 percentage as against 15.3% last year. The main reason for the EBITDA margins falling is due to MEIS withdrawal. EBITDA margins stood at 5.3 percentage versus 13.5 percentage last year. The main reason being MEIS withdrawal, ForEx and the MTM losses and the foreign currency appreciation, which hit our PCFC restatement. PAT margins stood at 5.6% versus 9.1% year-on-year, mainly due to reasons discussed above. Financial performance of the company during the fourth quarter. Total revenue stood at INR 169 crores as against INR 214 crores year-on-year. Mainly disturbance due to the COVID impact. Adjusted EBITDA stood at INR 18 crores as against INR 27 crores year-on-year, mainly impacted due to MEIS withdrawal. PBT margin stood at 3.1 percentage versus 13.9 percentage, mainly due to MEIS loss of revenue and foreign -- ForEx currency loss in PCFC restatement. PAT stood at INR 2.8 crores as against INR 19 crores year-on-year. On the performance of garment divisions, total revenue stood at INR 702 crores versus INR 680 crores year-on-year. EBITDA of garment divisions stood at 15 percentage versus 17.6 percentage last year, which was largely impacted due to MEIS. Total revenue of garment division for the Q4 stood at INR 145 crores as against INR 185 crores of last year, mainly due to the losses, which we have discussed. EBITDA margins stood at 12.7 percentage versus 16 percentage during Q4 decreased mainly due to MEIS. On the retail performance, total revenues stood at INR 77 crores -- INR 77.6 crores versus INR 81.7 crores year-on-year, mainly last 20-day sales didn't happen. EBITDA of retail stood at 4.4 percentage versus 2.1 percentage year-on-year. Q4 revenue of retail division stood at INR 12.7 crores as against INR 20 crores year-on-year. Q4 EBITDA of retail division stood at 3.5 percentage. SPUK total revenue stood at INR 50 crores versus INR 48 crores year-on-year. EBITDA margin stood at 3.7 percentage for the current year. As CMD pointed out, on a stand-alone basis, our current debt is very under control. Our gross debt is INR 180 crores, and our net debt is INR 139 crores, for which only INR 30 crores are long-term in nature and rest is short term. Of the INR 180 crores, INR 36 crores pertains to right-of-use. We have serviced all our term debt and interest up to 30th June and we have currently no due outstanding. As CMD pointed out, our working capital limits are well less than 70% of the overall limits. On the working capital on a stand-alone basis, our inventory stood at INR 227 crores for the current year as against INR 247 crores last year. Inventory was -- has come down by INR 20 crores. Receivables stood at INR 94 crores as against INR 128 crores, considerable reduction in receivables also. Payables stood at INR 84 crores as against INR 109 crores last year. And the company has made an operating cash profit of INR 124 crores as against INR 78 crores, which is very healthy. Other things are available in the presentation. Now we will -- we can open up for question and answers.

[Operator Instructions] We have first question from Riddhesh Gandhi from Discovery Capital.

Congratulations for handling the hard times reasonably, efficiently. I just had a couple of questions. So as of now, what kind of utilization compared to pre-COVID are we running as of right now? And do you have any explanations in terms of actually about when we should be able to get again to pre-COVID levels?

Currently, our utilization is 3,300 sewing machines as against 3,600 -- between 3,600 to 3,700 machines pre-COVID scenario. So that's about our utilization percentage, going forward.

Yes. Actually, our current utilization is about -- as AMD mentioned, it is about 60% to 70%. We were reaching 70%. And this month onwards, we are thinking of improving the capacity. But again, there is a lockdown announcement in our state. So we are trying to maintain the same 70% in this month of July. From August, September onwards, we'll improve to 75% and 80%. From October, we are expecting to reach a maximum of before-COVID situation.

And -- understood. But I just to understand, if we are -- if you -- just as a contradiction here, if we are saying we are 3,200 to 3,300 as opposed to the 3,600 of pre-COVID, that's close to 80%, 90%, right? Or am I not getting the numbers right?

See, pre-COVID, we did face some issues because of the orders [indiscernible] came out. So like if you look at January, we -- it was purely a holiday season. So that's why utilization was low. But I guess what CEO said is purely on the machine, total machine front.

Okay. So you're saying in terms of 70% based on the 100% capacity, but probably 80% to 90% of where we were at the pre-COVID. Is that right?

Yes, right.

Got it. And just to understand, with regards to -- it's not a question of I mean demand and orders. Is it just primarily a question of being able to ramp-up in the terms of rules and regulations, demand isn't a problem at all? Is that my understanding what you're saying?

Yes, exactly. See, we have enough orders to run the capacities as we normally used to utilize 80%. But because of this social distancing and transportation mobilization of people, we are able to maintain 60% to 70% of 80%.

Got it. How would you say pushing on that, just to understand that overall, you would expect some amount of slowdown in retail to even have happened to our customers, right? Like even in London and all of that, when we hear that your staff is slowly starting to open up but I mean, the retail is still slow. So how are we continuing to get that little demand? Is it because we are detaining certain amount of market share from other clients? Is it new clients who we've actually broken into?

No, no, it is -- our customers, we are only talking about our existing customers, not about any new customers. Preferably our customers are -- the majority of the customers are supermarket customers who open all the stores all the time. And where again, the clothing is a part of a supermarket sale, where, again, these babies and kids are always in demand. And moreover, all the customers are really strong in the online businesses. And again, Primark has salaries -- opened most of the stores in all the countries all over the world, and their business is immediately as shot up as it used to be before. So we don't see any drop in order book in the coming future.

Got it. And then effectively, just to understand, is the exchange rate, obviously, we've had a large -- I mean, actually a depreciation of the rupee so in terms of -- is that being adjusted in our pricing? Or are we able to keep some of the currency gains which we have?

To some extent, we build this in the cost thing because customers are also aware of these things. So definitely, there is a lot of pressure on the order book pricing because of this COVID situation. But this is helping us in meeting out their targets today. So it's not going to give us any extra margins, but we are able to meet their target and the [indiscernible] targets.

Riddhesh, we have ForEx coverages or hedges during the month of April and May. So this hedges just used to be pushed over to subsequent months when we use it. So maybe first 2 quarters, we may not be in a position to use the gain advantage, which we have.

We avail now.

Understood. And with regards to, obviously, we have lost actually MEIS also. And so the incentive has reduced a bit also. Have we been able to adjust that in our pricing also up to an extent?

Yes. As we mentioned, even the last call that we are trying to make it up to maintain the same 17%, 18% EBITDA despite the loss of MEIS, 4%. So we are confident we would be able to do it.

Got it. Got it. Got it. So effectively, here, what we are seeing is actually net-net of the MEIS loss plus the currency, plus the pricing, taking into account everything, we should be able to maintain 17% to 18% EBITDA margins and that would be at how much capacity utilization?

Capacity utilization, 85%.

So -- and as of now, we are at about 70%. So you are saying as we...

Yes. See, we are looking for the first quarter and the second quarter, you may not look at the EBITDA margins of 18 percentage because you're [indiscernible] at 60%, 65% to 70% based on the area. So maybe from Q3 onwards, we should be in a position to reach this 18% EBITDA margin, if there is no more further disturbance.

Got it. Got it. So even with regards to like H1, it's not like we are in a state where we are like losing money. And so effectively, we'll still be slightly profitable, but by Q3, Q4, we expect to be a normalized and also have an ability to utilize our enhanced CapEx, which we have done and executed. Is that sort of....

Yes, pretty much correct.

And the order book from your other global clients, like say, Carter's and all of that, which we're working on, all of those like new accounts are also actually panning out?

So in terms of order book, yes, we have bookings from Carter also. We cannot give you a customer-wise booking, but to have bookings from Carter's also.

Right. But overall, because of how we are placed in the specialized area, which we are in, we don't see the demand of profit margins being an issue. It's just a supply constraint, which we are hoping after the lockdown is eased, maybe after maybe month or 2, we can move up from 70% to 85% or 90% or whatever.

Yes.

All right. Got it. And just my last question is on your retail front. Obviously, retail is hit. Have we been able to reduce our -- actually overall fixed -- actually kind of costs so that we're at least -- at least it has a little bleed as actually possible?

Yes. See, in terms of retail -- the retail, the stores are closed. So all stores from March onwards, we have spoken to the landlords where we are not passing on the rents during the close down period. And also with the months where we are -- where we are closed, we are not paying any rent. We are negotiating with them. There are certain people who are asking for 30 percentage, 35 percentage. But we are still negotiating. We are not paying anybody now. And in terms of the personnel cost, we have reduced so many -- the front end is completely reduced. Only the back end -- and even at the back-end level, we are working with 30% -- number of days are reduced so that the cost is not much on the -- sitting on the books.

Even member of staff, in retaliation, has been drastically reduced.

We have next question from Chirag Shah from Valuequest.

Sir, I just wanted to know what would be the impact of this Vietnam have entered into FDA agreement with you? So now how Indian garment manufacturer would be impacted with this?

Yes, this is one thing. Vietnam is a challenge. So they've gone into FDA. This was long-awaited one. But again, they are into the volume businesses. Vietnam is, again, like China, big volumes and more of the millions of units, orders and whereas India in the order size and the sizes are completely different from what Vietnam is doing. But still, as we always mentioned that India has got its own -- the chunk of in orders, which the customers would always split the orders to mitigate the risk. So, so far, we have not faced any challenges. And still, I would say that some of the Vietnam's orders are coming here also. So it is too early to comment anything on the Vietnam one, but we are waiting on the competition.

But do you still think that it will put margin pressure because now incremental 9% due to disadvantage will be there compared to Vietnam. So do you anticipate any pricing pressure with this?

This is like Bangladesh, like-for-like Bangladesh, Sri Lanka and Vietnam. All the 3 countries are like this only. So as we faced Bangladesh and Sri Lanka, we will face Vietnam also.

Got it, sir. Sir, secondly, on -- so now with MEIS withdrawal, what is the current incentive, which is taking in P&L? What is the total percentage of sales which we get as an incentive?

2.25 percentage.

2.25 percentage.

7.25 percentage.

7.25%. Got it. Earlier, it was 11.25%, right?

11.5%.

Got it. Sir, what is our hedging policy?

So when the order is confirmed, we hedge 60%. On shipment, we hedge 20%. The balance, 20% is kept open.

Okay. And currently, at what rate we would have hedged now?

For which currency, like pound, we are at INR 95...

I mean, whichever is the highest exposure you have today.

Pound is at INR 95 and dollar is at INR 74.50.

Okay. And sir, now with reducing cotton prices, how it will impact or benefit to us? We'll be sitting with some inventory also.

So in terms of cotton, it's like orders are taken based on current yarn rate. So cotton to yarn, we cannot exactly match but for orders, which we have already taken, we would have booked our cotton. But cotton, which was procured during the season time, yes, we should have -- we could have some small impact because of that.

With the cotton price reduction will definitely help a little bit in the margin of yarn. And -- but when it comes to garments, it's very little.

So we don't expect any inventory loss in coming quarters because of reduction in cotton prices?

Because the cotton what stock we have is already against the orders what we have. So I don't think there will be any impact on the margin hit.

Got it, sir. And sir, so currently, we are having almost around INR 230 crore inventory in our books. Out of that, how much would be towards finished goods?

Finished goods would be close to INR 708 crores on the garment.

And remaining would be?

See, it will be like certain portion will be at the yarn stage, certain portion will be at cotton stage. Certain portions will be at dyeing stage and rest will be WIP.

Okay. So INR 200-odd crore would be RM plus WIP, is that understanding...

No INR 230 crores, INR 227 crores, INR 40 crores is of retail, retail stores. So you have to remove that and look at it. So if you are removing that and looking at INR 187 crores of inventory. Of that, you will have cotton inventory of INR 40 crores. You have to also remove that and look at it. So INR 147 crores is the [indiscernible] inventory.

Got it. Got it. Got it. And sir, just lastly, you mentioned that you will be able to maintain your margins to previous level. This year was an abrasion because of MEIS. So this 4% reduction, which we have seen this year, how you will be able to recoup that? What are the line items where you see that these efficiencies will come?

The supply-item-wise...

Now this is nothing to our internal way of working. We will -- we have so many ways like wastage improvement in wastage management and increase further, we have to work closely with the efficiency improvement on the efficiency of production and the raw material procurement and just-in-time management. So lot of things are there. So in every touch point, if we say even -- say even about 0.5% or 0.25%, then easily, you should be able to manage 4%.

And utilizing your capacity at 85 percentage is what we said for 17% to 18 percentage. So once you start utilizing our capacity by 85 percentage, then I think 18% and above will be the EBITDA margins.

We have next question from Deepesh Agarwal from UTI Mutual Fund.

Yes. Hope everyone is safe out there. So my first question is, when you are saying 60% utilization, does that imply something like 4.5 million pieces per month? Is my understanding correct?

Deepesh, I think utilization and -- pieces cannot be -- cannot rationalize. What you can take is what we are working at 3,300 to 3,400 machines, depending on the machine factories. So you cannot just extrapolate it to number of pieces, that is not possible.