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

Good evening, ladies and gentlemen. I am Pavitra, moderator for the conference call. Welcome to S.P. Apparels Limited 1Q FY '21 Post Results Conference Call hosted by Batlivala & Karani Securities Private Limited. [Operator Instructions] Please note this conference is recorded. I would now like to hand over the floor to Ms. Prerna Jhunjhunwala. Thank you, and over to you, ma'am.

Thank you, Pavitra. Good evening, everyone. On behalf of B&K Securities, I would like to welcome you all to 1Q FY '21 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; Mrs. P. Jeeva, CEO, Garment Division; and Mr. V. Balaji, CFO of the company. 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. Thanks to one and all for participating in the call. COVID-19 has disrupted all the countries, industries, economies and the people across all parts of life. Weathering this disruption has been challenge, and we have successfully faced these challenges. Q1 has been a quarter with disruptions due to COVID-19, generally, and now we will review Q1 FY '21 performance of each division separately. Regarding Garment division, with respect to customers, our customers have been able to grow better after the impact of COVID lockdown. This is purely due to our niche segment. They have also started consolidating their supply base further, and we are one among the preferred factories during -- in the consolidation. After the COVID lockdown release, all customers are projecting 20% to 30% increase in the future orders, which is mainly due to diversion of orders from China and consolidation of supply base. We have already added 1 new customer from U.K., and 2 customers are in the pipeline, who are from U.S., which will be done during this quarter, Q2. Customers' order book has been regularized for an uninterrupted revenue post lockdown, and our current order book status is at INR 224.45 crore, delivery spread up to January 2021. With regard to operations, 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 norms imposed by the government authorities. Small portion of migrant workforce moved back to their hometown during May and June 2020. We are witnessing the migrants to return back, and we are expecting more migrants to return once the transportation is regularized back to the work. We are planning aggressively to maximizing the workforce, to optimize the capacity utilization. Now our new factories have been approved by customers for commercial production. With regard to forward contracts and cancelation and the currency impact, revenue fell by 75% during this quarter due to pandemic and all contracts taken during this time needs to be canceled or needs to be shifted to foreign currency loan. Hence, we foresee an impact of foreign currency movement during our Q2 also. Reduction in operating expenses, as we mentioned during the last results con call, the company has announced reduction of working days to the extent of 30% to all staff and above employees, including the senior management until September 20th -- September 2020. Small rented factories have been consolidated with big factories, which will reduce the operating overheads and will improve the supply chain management. Company has consolidated on workmen transportation, and this will reduce the transportation costs by 30%. Our strategy, going forward, a robust comprehensive business continuity plan as a response to disruption due to COVID-19, its focus on customer engagement, continuous cost reduction, calibrated expansion plan, business strategy realignment, employee productivity and efficient utilization of IT-enabled systems. Although our aggressive plans for continuous growth year-on-year, considerably effective from Q1 FY '21. Unfortunately, it is getting pushed by 2 quarters due to this pandemic. However, our plans are ready, and you will see consistent and considerable growth every year in revenues as well as margins from Q3 FY '21 onwards. Q1 FY '21 financial performance of Garment division. Garment division adjusted revenue stood at INR 49 crores, which de-grew by 74.4% year-on-year basis. And adjusted EBITDA stood at 15.6% for this quarter. The margins compared year-on-year increased by 260 bps. Major reasons for reduction in revenue are due to the current COVID-19 issue. First 45 days of the year was the complete closure of operations. This was the major reason for drop in the revenue. Garment division capacities. Our current capacity is 5,100 sewing machines, and we are currently utilizing 3,000 sewing machines, which is at 60% level. We have consolidated small rented factories, and we are expecting the utilization to be better going forward. During the Q3 FY '20, we had utilization level of 3,100 machines, and it improved during the month of February, where we reached around 3,400. During the quarter 4 FY '20, our working days were only 60 days. We are expecting this utilization to move more than 4,000 levels by end of March '21. In our last con call, the installed capacity was informed as 5,500 instead of 5,100, which may be taken note of. Q1 FY '21 Retail division financial performance. The total revenue for this quarter stood at INR 2.15 crores as against sale of INR 20.7 crores year-on-year. This decrease is mainly due to the COVID crisis. EBITDA loss was at INR 70 lakhs, which is minus 32.7% as against 0.6% year-on-year. Q1 FY '21 SPUK. The financial performances, revenue of SPUK for quarter ended was at GBP 0.95 million as against last year performance of GBP 1.46 million revenue. SPUK de-grew by 31.6% mainly due to the pandemic crisis. SPUK margins were negative mainly due to the currency fluctuations. The overall outlook. We are witnessing significant traction in the order book, and we have aggressive plans to bring more customers from U.S., and we are also planning for an increase in capacity utilization going forward. Under the current crisis, the company has been able to ride through this process only because of the strong fundamentals. These are opportunities opening due to anti-China sentiments, which we are already having some queries. I would like to close this speech, and thank you for listening. And over to CFO.

Good evening, everybody. I would like to update you on the performance of the company in terms of numbers. We have achieved INR 59 crores of revenue on a stand-alone basis -- sorry, on a consolidated basis as against a revenue of INR 225 crores year-on-year. And our EBITDA stood at INR 6 crores, 70 lakhs as against EBITDA of INR 25 crores year-on-year, which is a drop by 73.8 percentage. This is mainly due to the pandemic crisis where the revenue could not come first 2 months. Our PBT stood at INR 5.8 crores negative as against INR 10.9 crores year-on-year. Our Garment division revenue stood at INR 49 crores as against INR 191 crores year-on-year, which fell by 74.4 percentage. Our SPUK revenues stood at INR 8.61 crores as against INR 12.58 crores of last year, which is a decrease in INR 31.6 crores -- 31.6 percentage. Our Retail division revenue stood at INR 2.15 crores as against INR 20 crores of revenue last year, mainly due to the closure of all stores during this pandemic time. And our Garment Export division's EBITDA margin improved by 260 points -- basic (sic) [ basis ] points during this quarter, even though our absolute value came down. SPUK had a negative EBITDA margin due to currency fluctuations. And our current debt as on June 30 is, gross debt is INR 184 crores, and the cash is INR 15 crores. And net debt is INR 169 crores. We have a stock of INR 234 crores from the book, a receivable of INR 89 crores and a payable of INR 80 crores as on 30 June 2020. Rest of the data is available in the presentation. And we can go into the question-and-answer section.

[Operator Instructions] We have the first question from Resham Jain from DSP Mutual Funds.

Good management on the cost side during this difficult quarter. And so my question is on this overall upbeat commentary on the demand side. You have also mentioned the same in your presentation in terms of order book. So last year, what we have seen is the second half, the revenue run rate itself was lower pre-COVID as well. So now going into, let's say, in the next 2, 3 quarters, let's say, quarter 4, by which we can see some normalization, what kind of run rate one should estimate? Obviously, I understand scenario is still uncertain. But just based on your judgment, what do you see the revenue run rate moving by the quarter 4 of this year?

It should be, definitely, when compared to last year Q4, it will be definitely above that -- above the Q4 '20 and we expect staying at par with the Q4 '19.

Sorry, sir, I couldn't hear the last statement.

Resham, see, today, we are looking at a capacity utilization of 60%, which is 3,000 machines. So by -- in the initial remarks, Mr. Sundararajan spoke about reaching 4,000 sewing machines by March. So that itself will improve the effectiveness by 20 percentage. So the resulting will be the sales revenue.

Okay. And at 4,000, what kind of revenue run rate you can reach on a quarterly basis?

On a quarterly basis, at 4,000 sewing machines, it should be close to INR 200 crores of revenue from exports alone.

Okay. That's encouraging. And sir, my second question is on the SPUK business. Typically, what we have seen is that it's, purely, in a way, a trading business. And we haven't seen any material or major -- like the run rate has been quite stable since last couple of years in this business. So how do you want to take this business going forward? Do you see any synergy or any benefit coming from this business overall, other than, obviously, it has been profitable, but last 2, 3 quarters, in the trading business itself, we have seen some minor impact?

Yes, see, this is -- basically the business model is a great business model, which means we -- as I mentioned to you, this is taking care of the customers, who want the full-service like designs and sourcing, quality control, compliances, which they will not be able to manage. So this is the kind of service we do. And this office has got a set of factories under them. So business model is very good, and the customers are extremely happy. The existing customers' business is growing year-on-year. What we have not done is that we have not increased the customer base because we wanted this to -- because it's a brand new business. So it needed about a few years to stabilize and to go to the next level. So in the meantime, last year, we had a little bit of disturbances and now the COVID has come. So post lockdown, now we have added 2 more customers for this SPUK business. And we expect that our budget, the business budget, closing FY '21, is much more than what we used to be before. And our plans are reach -- by FY '22 to cross GBP 10 million, that's our plan. And I'm sure we will be able to do it because we have increased the customer base. And we don't see -- so far, we have not faced any difficulty with regard to the operations or payments or anything.

Understood, right. And sir, my last question is on the overall operations side in terms of -- you mentioned about a lot of cost reduction programs, which you have initiated. Should we see some of those benefits flowing through in the next few quarters? Or this is just like a temporary thing? And what can be the impact on the margins because of this?

So like in terms of the cost reduction, which we have done, [ that you're seeing ], like, because we are only utilizing the capacity to an extent of 60%. So since there is a reduction in utilization levels, we have requested all the staff and above people to reduce -- I mean, cut their number of working days. So that is where the 30% is. And from October onwards, when we had to come up again, let's say, 80 percentage or 85 percentage of utilization, this has to come up. But in terms of what it's going to get contributed on the margins, we feel that the margin of 18 percentage what we have guided for should we looked at, including, the cost reduction.

[Operator Instructions] We have next question from the line of Deepesh Agarwal from UTI.

Congratulations for managing tough time well. Sir, in your opening remarks, you mentioned that you have actually got 2 new customer, one from the U.K. on the Garment division side. Can you throw some insight how large this customer could become and by when you expect a meaningful volume for this customer to start coming in?

So this customer is basically characters' licensed importers, I would say. So because normally, the licensed manufacturer or importer, they will be mostly importers only because they cannot have the manufacturing. Nor we can handle the customers directly because it needs a lot of input with regard to Disneys or other brands or other licensee's characters. So they do all the designs, and they work closely with the licensors. And then they hold the stock and deliver to the brands as and when immediately required. Say, for example, if some movies are released, say, in Disney character, any movie is coming up, so immediately, they will have the stock ready and deliver it within 2 to 3 days' time. That's the kind of a business model. So what advantage we are going to get from them is that even during the recession time, we will be able to produce and keep the stocks because we are the stockist and deliver locally. So this is a big advantage. And normally, for the licensee products, the margins are much better than the regular one. And their volumes are also big because they are dealing with all big retailers in the U.K. And also, they have connections with the U.S. at a later stage, so that will also give us an opening to the U.S. markets for the characters business.

Okay. And the other customer is from U.S.?

Yes. You asked about U.K. Then U.S., already the work is going, and all the costing exercise are done. And they are happy and they have now -- the design inputs are being given to them. The price negotiations are going on. Hopefully, from Q1 2022, we'll be able to start the business with them. Two customers are there. I mean they are again retail brands.

Okay. For both of them, we expect from Q1 of FY '22 the dispatch to start, right?

Yes. The U.S. customers.

And U.K. one?

Already started. The shipment is -- sales is going next week.

Okay. Okay. And sir, in terms of Retail division, any decision now, what is the road map for Retail division?

So Deepesh, we are looking at the strategy. We can discuss the strategies only when the LFS are all opened up and see how we consolidate on the retail part and work on it. So currently, only stores like stand-alone stores are opened up. And we may be in a position to give you a complete strategy going forward, only when the entire lockdown is released, and the malls and the LFS are all opened up.

But one good news is that Reliance has taken over Future Group. So Future Group is one of our big business partners, where in the last few months, we got stuck, the movement of stocks and the payments got stuck. So now since the Reliance has taken over, we've got a formal message from Future Group, Kishore Biyani, as well as from Reliance that all the supplies will continue. The payments will be released. So there will not be any disturbance in the ongoing businesses. So we are now -- we are feeling we are in safer hands.

Okay, okay. What would be the fixed cost run rate of the Retail division?

So fixed cost, see, if you look at a fixed cost on a full complete running basis, we may be close to INR 1 crore, INR 1.25 crores a month. But what happens is that when the stores are all closed, we don't pay them rents because the stores are not allowed to go open up. So now you cannot look at the fixed cost. And moreover, we have requested all our employees to work from home, and they have all taken haircuts wherever it is possible.

The expenses are 50% cut now.

The expenses are like every employee is taking a 50% haircut.

Okay, sir. Okay. And lastly, we don't plan to add more capacities this year on the Garment side. We are now 5,100 machines, and we wouldn't be adding new machines this year, right?

It's like this, there will not be any new projects for the next 2 years. And we have -- we will maximize the capacity within the existing setup by increasing the utilization. So probably, we will reach up to 80%, 85% of the existing capacity over a period of, say, 1 year. By -- next year, by now, we should be able to go close to 5,000 machines.

So at 5,100 machine, you expect to utilize 5,000 machines next year, which would actually be 90...

Close to say 4,800 by end of March '22. We will be able to reach up to that. Then we will be thinking of expanding by new projects.

Deepesh, we are also looking at exploring the opportunity of getting into a second shift, maybe in 1 or 2 factories, where there is opportunities.

We have next question from Divya Jain from ICICI Mutual Fund.

Sir, my question is more regarding there was -- when you are saying that there is increased demand from the customers, so is this because of the field and the child, the category in which we serve or because of the fabric? I just wanted to understand what are the incremental orders, which you are getting from this customer.

As I mentioned to you that we are expecting another, about 20% to 30%, increase from the existing level of the whole year business, so we are expecting 20% to 30% from the existing customer.

No. Sir, I am just trying to understand, which category? Is this in the child wear itself? Or it's more of because of specific fabric or so what category of...

No, no, no. Same -- similar thing. Same kind of products, but the business was coming for, number one, they need -- the selling is -- so the trading is very good. So they want -- they increased the number of pieces per order. Volumes per order, they want to increase. And also due to consolidation, we are getting others businesses to us in the same category, same segment, not different fabrics or not different, say, men's or ladies. Only within this, in the same products.

Okay. And sir, if you could just help on the, previously, we had discussed that we are getting into the pajamas and the basic commodity, sort of, those nature of apparels also. So how are we progressing on that front?

Can you say it again?

Sir, you had indicated previously that we are getting into a different line of business like the basic pajamas, which, I think, KVR or few people do. So any progress on that front? Or it's still the child wear?

Yes, yes. That is also the -- yes, you can go ahead.

Yes. Actually, we started doing that pajama also. That is also going at a good volume. Comparatively, when compared to last year, the basic pajama and other basic product volume has picked up now. So as per -- based on your question, we are increasing in PJ -- pajama volume.

Also.

Okay, okay. And which other categories is possible along the pajamas. So is that the T-shirts are also possible along?

Yes. The T-shirts and the essentials, that is, body stores, sleep stores and the fashion T-shirts and pajamas. These are the categories and accessories like bib, booties, hats, all these. So across all -- across the board, the volume is increasing.

And sir, your guidance for 4,800 machines, or sewing machines, takes care of these orders also, right? I mean it's a blended one for all of them.

Yes, right. Yes for...

Divya, I'd like to reiterate that it was the -- it is not a guidance, but it is our...

Our plan.

Our plan to go to 4,800 machines by end of February '22. That is what we said -- sorry, March '22.

March '22.

Next, we have a question from [ Zaki Nasser from Nasser Investments ].

Yes. Sir, Mr. Sundararajan mentioned you will be using 4,800 machines at the end of the last quarter of March '22. 4,800 machines would, maybe, turn out to be a turnover of around INR 260 crores to INR 270 crores, roughly. So that was...

So that was per quarter.

Per quarter, yes. So that was INR 255 crores is what we did in September '19. So do you think that the growth what the company was planning is mostly postponed by a year or so, sir? My next question, sir...

No, no. Mr. Nasser, the INR 240 crores, INR 247 crores of revenue, which was done in Q2 FY '20 is a consolidated number. And INR 250 crores is the Garment division turnover alone. So there is a differentiation. So see, like, INR 47 crores, if you look, at INR 20 crores of Retail revenue and INR 10 crores of the SPUK. So it is also a part of it. So what we are looking at is when we do a 4,800 sewing machines, INR 250 crores of exports alone can happen along with the duty drawback and the other incentives could be close to INR 270 crores. And if you can add up S.P. Retail division and SPUK, which could be the additional number.

Around INR 300 crores, that will mean?

Yes, close to INR 300 crores.

Sir, what are the incentives available from the Government of India now, sir, because of things like MEIS and all were scrapped. So have you got anything, which replaces those schemes? Or -- I mean, it's the pricing you have to adjust it in the pricing for now?

Currently, we have a duty drawback of 2.1 percentage and RoSCTL of 4.75 percentage. So that is what the existing is. From April onwards, the RoSCTL is not being released because government is looking at a new duty drawback structure and the RO, rebate on duties and taxes structure, which could be released by end of this month, which could be given retrospective from 1st of April onwards.

Okay. So there's some type of getting from retrospective effect.

Yes. Yes, correct.

And sir, you said that the net debt is INR 169 crores. So would it -- have you calculated this by adjusting the cash and cash equivalents also, sir? Because we had, I think INR 46 crores.

Our net debt is INR 169 crores, INR 15 crores is my cash availability, net is INR 168 crores. So if you look at the balance sheet, which is being released on 31st March, you will find 40 -- INR 35 crores of 116 adjustment because of duty obligation -- sorry, lease obligation, which is sitting part of my debt. So without my lease obligation, my net debt is INR 168 crores.

Okay, sir. And sir, looking forward, see, first quarter was like totally tough for everyone. Second quarter, things have slightly stabilized. So do you think the third and the fourth quarter could see a close to normal 85% kind of run rate for the company, sir?

Yes. That is what we are expecting. And hopefully, we are planning to do that.

We have next question from Vikas Jain from Equirus Securities.

Sir, my first question is about the -- we had a business -- seen a sharp gross margin expansion. Anything to read about into this? Or it is just because the revenues are down and -- so anything to interpret from that, sir?

You're talking about the gross margins?

Yes, sir.

See gross margins is now at 23 percentage. It's purely because the Retail contribution has come down.

Correct.

So like INR 20 crores, Retail has come down to INR 2 crores. Always Retail's COGS is supposed to be at 60%, 65%. On consolidation, you look at -- when you look at the -- on consolidating the Retail and the U.K., you look at a higher margin. The contribution from Retail is low. So that's why you are finding the percentage margin on a low basis.

And sir, you also mentioned about that we have consolidated a few factories by merging smaller ones into bigger ones. So what would be the total count of the factories as of now?

16 factories.

We have 16 factories. And because the consolidation...

Vikas, I would like to say that 16 sewing factories. We have other factory, like, the printing, embroidery, dyeing, spinning, all is different.

Correct. Correct. Sir, so what would be the savings -- a permanent savings kind of a number that you would like to give for the savings in terms of rentals for those factories?

See rentals, when you talk about rentals, it is going to get consolidated into my depreciation because all the factories, which are getting consolidated into my own factory. So what could give us improvement in the margin is going to improve our supply chain management and the effectiveness of the utilization of labor force will definitely improve the margins.

Yes. Roughly around INR 1 crore will be the yearly savings on the rentals.

And this you are talking about from a monthly run rate of, say, FY '20, right?

Yes, yes.

Correct.