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

Ladies and gentlemen, good day, and welcome to S.P. Apparels Limited Q3 FY '21 Earnings Conference Call hosted by Systematix Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ankit Gor from Systematix Institutional Equities. Thank you, and over to you, sir.

Thank you, Neerav. Good evening, everyone. On behalf of Systematix, I welcome everyone on the call to discuss 3Q FY '21 earnings of S.P. Apparels Limited. From the management side, we are joined by Mr. P. Sundararajan, who is the Chairman and Managing Director; Mrs. S. Latha, Executive Director; Mr. S. Chenduran, who is a Non-Executive Director; Mrs. P. V. Jeeva, who is the Chief Executive Officer; and Mr. V. Balaji, who is the Chief Financial Officer. Without taking much time, I would like to hand over the call to Mr. Sundararajan for opening remarks post which we can have floor open for question and answer. Thank you, and over to you, sir.

Thank you. Thank you, Ankit. Good afternoon, everyone, and a very warm welcome to all of you present on the call to discuss our financial results for Q3 and 9 months FY '21. At the outset, I hope all of you are -- all of you and your loved ones are healthy and safe. In spite of second lockdown in Europe and U.K., during the month of October 2020, we were able to deliver good revenue during this quarter, mainly due to the product segment which we cater to. All our divisions have performed well during this quarter despite the lockdown globally, which shows the inherent strength of the company. The sustainability of the business will take us to a new high. Garment divisions witnessed healthy traction in Q3 FY '21, as the shipments to customers increased in spite of the lockdown. Our customers are witnessing consistency in demand, especially for their online retailing business. Retailers consolidation of supply base is still happening and that's one of the reasons that will support our growth going forward as we continue to remain one of their preferred suppliers. Our current order book stands at INR 215 crores. Our Garment division revenue for the quarter stood at INR 176 crores, an increase of 20.9% year-on-year, which grew at 20.9%. Our EBITDA margin improved from 17.4% to 21.6% this quarter, which improved by 420 bps. As mentioned in the previous call, we have consolidated small rented factories with bigger ones in order to reduce the rent, workmen transportation costs and other operating overheads. This also contributed to our EBITDA margin for the Garment division to improve to 21.6% for the quarter. In addition, we have efficiently worked on the consumption, wastage control and control on personnel costs, which contributed to margin improvement. We are confident that the EBITDA margins will sustain at this level going forward. Our current focus is mainly in increasing the appreciation levels by aggressive sourcing and training of workmen. Gradually, we will implement 2 shifts in some of our sewing factories in quarters to come. This will allow us to increase the capacity without investing further CapEx. This also will improve our revenue metrics and EBITDA margin going forward. We are receiving inquiries from new customers, and we are in the verge of getting orders placed. Moreover, we are working to add few more customers from U.S. and Europe, which will increase our customer base in the future. Unfortunately due to third lockdown, there is a delay in order placing by customers of late, even though we continue to get new orders placed to some extent. The retailers have indicated that they'll resume their normal buying from mid of March '21 onwards. With regard to the spinning, after the expansion project is completed, units have started contributing reasonably to the margins of the Garment division. Yarn prices have started moving up, while the cotton prices have stabilized, and this is also contributing the margin improvement to the Garment division. Processing division. The biological treatment plant project is completed and is up and running. This has improved the efficiency of the plant, and now our capacity has increased by another 3 tons a day. This is also contributing to the margin of the Garment division. S.P. Apparels U.K. division. SPUK revenue stood at INR 21.3 crores and EBITDA margin stood at 7.2% compared to 13.5% of revenue year-on-year. Our current order book for the SPUK is at GBP 3.69 million. With regard to the Retail division, as the economic conditions gradually improve, post the lifting of the lockdown, our Retail segment saw a decent uptick in Q3 FY'21. Revenue for the Retail division stood at INR 14.9 crores compared to INR 22.2 crores in Q3 FY '20. We are expecting Retail division to do further better in coming years and as there is gradual pickup in the consumer buying pattern. The revenue of Retail will be gradually growing quarter-on-quarter in a sustainable manner. Serious efforts in cutting the overheads is giving some margin improvement, and we'll be able to access the situation once the complete customer sentiments are back. Overall, our efforts to recalibrate the system by moving towards a leaner org structure and rationalization of employee costs and other operating overheads. Cost reduction incentives helped us to improve the adjusted EBITDA margins quarter on quarter. We hope that the efforts will yield us margin sustainability going forward. Our liquidity position continues to remain stable and comfortable. We have cleared all the interest and debt installment obligations that were due until today. We are increasing our customer base strategically and confident of comfortable growth going forward, whilst our strategy towards operational efficiency is on, and we look forward for a good future in the years to come. Thank you. Now I will request CFO to give an overview of the financials.

Good afternoon, everybody. Thank you, sir. I'll just sum up the financials of the company and the divisions, which is already present in the presentation, which has been uploaded. Consolidated revenues stood at INR 212 crores as against INR 181 crores last year's Q3, which is at a growth of 17.2 percentage year-on-year. Consolidated revenue for 9 months stood at INR 459 crores as against INR 661 crores, which was a decline of 30.5 percentage year-on-year. EBITDA for the quarter stood at INR 38.9 crores as against INR 28.1 crores year-on-year which is a growth of 38.4 percentage. EBITDA margins improved from 15.5 percentage to 18.3 percentage year-on-year. EBITDA stood at INR 79.2 crores for 9 months as against is INR 92.1 crores of EBITDA year-on-year, a decline of 13.9 percentage in EBITDA. Even when our absolute EBITDA declined year-on-year, our 9-month EBITDA margins improved from 13.9 percentage to 17.3 percentage year-on-year for 9 months. Our PBT stood at INR 26.6 crores for the quarter against the PBT of INR 35 crores -- INR 5.35 crores year-on-year, which is a 397% growth year-on-year. Our PBT margins improved from 3 percentage to 12.5 percentage year-on-year for this quarter. Our PBT stood at INR 93.96 crores -- sorry, INR 43.96 crores for 9 months ended as against INR 39.25 crores year-on-year, which is an improvement of 12 percentage. Our PBT margins improved from (sic) [ to ] 9.6 percentage to (sic) [ from ] 5.9 percentage year-on-year for 9 months. Our PAT margin improved from 1 percentage to 9.3 percentage for this quarter year-on-year. Our PAT margins improved from 6.7 percentage to 7.1 percentage year-on-year for 9 months. Let us look at the division-wise performance. Garment division. Revenue increased from INR 145 crores to INR 176 crores year-on-year for this quarter, which is a growth of 20.9 percentage. 9 months revenue stood at INR 373 crores as against revenue of INR 557 crores year-on-year for the Garment division. EBITDA margin for the quarter stood at 21.6 percentage as against 17.4 percentage year-on-year without exceptional item, which is an improvement of 420 bps. EBITDA margin for 9 months stood at 20.5 percentage as against 15.6 percentage year-on-year, which is a growth of 490 bps improvement. On the Retail duration, revenue stood at INR 14.9 crores for this quarter as against INR 22 crores of revenue year-on-year, which is a decline of 32.3 percentage. Revenues stood at INR 31 crores for 9 months ended as against a revenue of INR 64 crores year-on-year, which declined by 51.9 percentage. EBITDA margins were negative for Retail division at 4.2 percentage as against 10.6 percentage EBITDA year-on-year for this quarter. EBITDA margins for 9 months were negative 2 percentage as against a positive EBITDA of 6 percentage year-on-year. SPUK revenues stood at INR 2.19 million for this quarter, which is flat year-on-year. EBITDA margins for SPUK stood at 7.2 percentage as against 3.4 percentage year-on-year, which was an increase of 380 bps. Revenue stood at INR 5.69 million for 9 months as against INR 5.7 million year-on-year, which is also a flat number. EBITDA margin stood at 6.3 percentage for 9 months for SPUK as against the 3.8 percentage of EBITDA margins year-on-year, which improved by 250 bps. As Chairman indicated that our liquidity is stable, our debt position on a stand-alone basis for -- as on 31st December, my gross debt is INR 170 crores, my debt is -- net debt is INR 128 crores as on December 31, 2020. My working capital inventory stood at INR 232 crores as against INR 243 crores as on September '20. Receivables stood at INR 95 crores as against INR 131 crores as of September '20. Payable stood at INR 75 crores for December '20 as against INR 90 crores as on September '20. So there is a significant reduction in the working capital and my debt. And other -- all other informations are available in the presentation, and let us take the questions straightaway. Thank you.

[Operator Instructions] The first question is from the line of Prerna Jhunjhunwala from B&K Securities.

Congratulations, sir, on good set of numbers. I wanted to understand where are you getting more traction from, U.S. or Europe, U.K. region? And how are the trends in both the categories with respect to demand and customer behavior?

As you know most of our customers are actively trading on online except the largest customer, Primark. So they do not have any online businesses. So the rest of the customers have online businesses. And all online business, especially for the babies and kids are -- on trading is doing well. However, the unexpected third lockdown has shattered everybody. So due to the severe lockdown, so there has been little bit of disturbances, both in U.S. as well as here. And now that things are picking up, the customers are not canceling any orders. Of course, they have deferred some of the shipments for few weeks. But they have promised that they will start placing further orders from the -- from mid-March downwards. So we don't see any difficulty in getting the inflow of the orders.

Okay. So do you think the fourth quarter might be a little softer than third quarter because of this deferment?

Yes. Fourth quarter could be in line with third quarter, but Q1 can have some disturbances.

We are still trying it. Although Q1, there may be disturbances because for the Q1 deliveries, they should have placed the orders by now. So it's not as much as what's expected. But we are trying to bring forward some of the orders booked for July onwards. So we'll see to that somehow we will try to maintain the similar numbers of Q3 and Q4 for Q1. But we expect a little bit of drop in Q1 top line.

Okay. And sir, what is the reason for the impressive growth in SPUK business? It's grown quite with strong numbers.

So like -- if we look at year-on-year, the SPUK business is flat in terms of revenue. And also for 9 months, SPUK's business is flat. Your question on growth on SPUK, you're comparing it with the previous year's or all years?

Yes, previous year, previous year.

So like SPUK now has started working for the customer, Dunnes, and they are now encouraging to other segments also. So previously Dunnes, these were doing only similar, now they have started doing for other segments also. So that's why there is an increase in the revenue there in SPUK.

Sir, what other categories are you doing in SPUK apart from children?

Yes, men's and ladies.

Men's and ladies. But that will all be knitwear or it will be a mix of everything?

Mix of everything.

Mixed.

Okay, okay. And sir, any challenges with respect to labor availability now? Or has it come back to normal?

So as explained previously, we have...

So with regard to the labor availability, you know the things are normal already because there are no big differences because all -- even the migrant workers have come back. Everything is normal now. So we are currently -- we are back to normal with workforce.

Okay. Okay. And my last question is on geographical mix. Could you help us with the geographical mix between U.S., U.K., Europe?

So like 12% is U.S., 53 percentage is U.K. and rest is Europe.

The next question is from the line of Kirthi Jain from Sundaram Mutual Fund.

Sir, my question is with regard to the recent customer acquisition. Any retail sector of new customer addition in the recent quarters?

The new customers addition in this quarter?

Yes, sir.

I mean as we earlier mentioned, we have been talking about these new customers for the past 3 -- 2 quarters. And as we mentioned before, those businesses have started and it's all running. And there are a few more customers, and we are having dialogues with them. Hopefully, the business will start from -- say, order placing will be from Q2 -- Q?

Q2.

Yes, we'll expect the business in Q2 of 2022, the new customers. We expect about 3 customers addition.

Okay. So how significant may be the contribution, sir, in FY '22 from these customers, sir, in terms of INR 20 crore, 3 relatively put together -- all the 3 put together?

See, in terms of customer addition and the contribution, those are all new customers. So they don't give volume business starts -- to start with. So it will gradually build up going forward. So once these customers are there, all the customers, which are in pipeline are volume customers, so we can expect good business traction to start once they are comfortable with the process and our...

Performance. It will take 1 year.

Performance. So it may take a year for us to settle down with the new customers and start picking up in terms of contribution as a percentage.

Okay. Sir, any initial guidance would you like to give for FY '22, sir? How it is shaping up, given the visibility and everything? And given the opening of this -- for next year, any guidance would you like to give, sir, like what can we target to achieve?

See, we see '21/'22 to be definitely a better year, especially after this COVID. We hope we are all geared up for a good performance, better performance in all these quarters. As we -- not only that, we have planned -- as we mentioned in the last quarter that we have planned for a capacity increase, but not increasing, what we call, the CapEx. So which means, as I mentioned, during the speech that you know we have increased the number of workforce, but using the same existing factories -- some of the existing factories, gradually converting into 2 shifts. So which means naturally there will be an increase of this capacity by at least about another more 20% or so. So with additional sale -- it will fetch additional sale. So we hope next year is going to be far, far better.

But giving you guidance in terms of percentage or in terms of value could be tough because the impact of COVID is still there in the system. Q3 -- as we started saying that Q1, there is a booking or a deferment in terms of bookings by 3 to 4 weeks. So we still feel that '21/'22 should be the -- to be the best year if we consider S.P. performance previously.

So we will target to cross INR 825 crores, sir, like what -- the INR 825 crores was our best ever.

So that's what. We cannot give you a number as such. But in terms of export, we can say anywhere between 15 to 20 percentage of revenue growth year-on-year or 10 percentage when you compare FY '19 where we have done well. So if you look at FY '19, from FY '19 -- see, FY '20 was a disturbed year. FY '21 is also a disturbed year. So when you compare revenue growth on exports alone, there could be a significant improvement of 10 percentage to 15 percentage revenue growth from FY '19 for FY '22. That could be some guideline, which you can look at.

Sure, sir. Sir, my next question is like given that the growth pace and -- there would be a very good cash flow generation. At least, say, currently, we have a INR 20 crore kind of profit and INR 8 crore depreciation. If I annualize it, we will generate more than INR 100 crore cash flow next year assuming the same run rate continues. Sir, what will be the application for the cash flows, which will be generated?

So in terms of capital allocation, we are very clear that our capital allocation should be done in a reasonable way. For the time being, I guess, capital allocation into the projects or the expansion will not happen because we are very clear in terms of what needs to be in terms of projects. So it will be appropriately taken -- the action will be taken appropriately at the appropriate time. Otherwise, we...

We will plan...

We put more efforts on capital allocation. So that's answer for your question.

Okay. Sir, currently, we are fully captive on yarn or we have open exposure? Sir, we have to buy from market, sir? What is our mix now currently at the increased utilization?

Certain products like spindles, we have to buy outside, which we don't have any in-house capacity. So it's like if I utilize -- if I'm consuming 80% of my yarn what I produce, I may be buying 20% from outside, just to keep the other products also get in stores.

Okay. So will you look to expand the yarn, sir?

For the time being, I guess the expansion which we have already done in terms of the building infrastructure is already available for 27,000 spindles, that we could add another 3 frames, which will be another 3,600 spindles next year.

Okay. Okay. So sir, like what is our maintenance CapEx plus hostel CapEx plus this 3,600 spindles CapEx, which we may plan up you next year? What will be the CapEx, sir, these 3 CapEx may come in next year?

So we have spoken about INR 15 crores to INR 20 crores of investment into the hostel facilities last call itself, which could come up based on the requirement wherever it's essential. So it's purely that we wanted to have a mix between the migrants and the locals. So that is the requirement for hostel facility, which can be -- which a project allocation of INR 15 crores to INR 20 crores could be possible.

Okay. Maintenance CapEx, sir? What is our yearly maintenance CapEx?

Maintenance CapEx will be higher, anywhere between INR 3 crores to INR 6 crores, depending on the customer requirement and all.

The next question is from the line of Bharat Sheth from Quest Investment Advisors.

Sir, I mean this -- on this garment side, we said that we have order book of around INR 215 crores. So that -- what could be, I mean, approximately delivery time line? I mean, is it in Q4? Or it will be divided between Q4 and Q1?

Actually, this is up to 4 months, that is from April to July.

Okay. April to July?

Yes. You mean order -- that is from March to July, sorry.

From now.

From February to July.

Okay. Yes. So I was a bit confused. I mean there is a talk is going on this container and logistic challenges. So how we are placed in that aspect? Are we facing -- or do we have to incur some extra costs during this Q3?

See, our scope of work is only up to the -- handing over it to the forwarder. It's up to customer and the forwarder to decide on the container. Because we are FOB, we are not concerned about the container. But what happens is that there could be some moving issue because the container doesn't move or the ship doesn't move, then the resolution of sales also differs. That's the only thing. We don't spend money on these containers.

Okay. Okay. And Mr. Sundararajan, you stated, I mean, that this current EBITDA margin will continue. So in 9 months, Q3, we have done at 21.6%, whereas in 9 months 20.5% for Garment export. So where -- are we confident of maintaining between 20% to 22% kind of a margin range next year?

See, this is all -- we have been always not committing to you, but we give you some directions, some ideas that we are able to maintain. We have been telling you from 18% to 20%. So, so far, we have been able to maintain that EBITDA margin. So which means we have seen all the bad times, right from demonetization, GST paying and Brexit, now again this COVID. So all these times, we have been -- overall, we have been able to manage -- maintain 18% to 20%. So we don't anticipate anything in the future also. So I don't think there will be any problem in maintaining this one, 18% to 20%.

Okay. Great. And how about SPUK, which is -- approximately, say, this quarter is 7.2% and 9 months is 6.3%. So what is, I mean, sustainable margin that we look forward for SPUK?

So for SPUK, we should be anywhere between 5 percentage to 6 percentage. Because of the currency movements, there are some -- when you convert that, so there is a better EBITDA margin. So you have to consider 5 percentage to 6 percentage of EBITDA for SPUK. That's the sustainable percentage.

Sir, you stated that approximately 15% kind of a growth in garment export can be happened. So what about the growth in SPUK? Because this year, 9 months, SPUK has done a very good job. 9 months is not done. But of course, Q3 is very good. So how do we see sustainable, I mean, growth in SPUK?

See, SPUK is all in all comfortable than this S.P. India, see, because there, we are free to source for many factories and we are free to book for many customers like. So based on the company's reputation that business runs. So with our own existing customers, with small orders, we are able to manage. So we -- but for this COVID thing, definitely, we would have -- we would have definitely crossed about INR 8 million. Definitely, we would have crossed INR 8 million, but for this COVID. So the growth should not be a problem as far as SPUK is concerned. It can go even faster than what it is so far.

Okay. Great. Great. Sir and on Retail, I mean, when do we really, I mean, look in? I mean of course, we have been able working on bringing down cost and everything. So how do we see Retail business, I mean, for next year?

Sir, in terms of growing Retail, we need to invest more into the inventory. How do you expand Retail growth is by opening up more stores present in more areas, that's how you can grow Retail. Considering that there is a huge amount of, I mean, capital employed into the Retail division, now the Board has decided not to invest more money into Retail division. So our -- now our aim will be to sustain with the capital employed whatever is available today and increase or maintain the revenue without making much cash losses. So that will be the strategy on the Retail front.

And since now this MEIS benefit is getting over, so how much really -- how do we see that going to have an impact on our company? Because currently, how much MEIS benefit are we -- or RoDA, whatever scheme name is there, we are getting, and how do we see that going ahead?

So currently, we have close to 6.2 percentage of duty drawback and RoSCTL up to December. From January onwards, it's called RoSCTL, will be replaced by RoDTEP, which the percentage is yet to be announced. But I guess to make India competitive like with the Bangladesh, Sri Lanka, Vietnam, duty benefit should be extended to the Retail -- I mean to the manufacturers of the garments, so that we are competitive with the rest of the world. So government will definitely have to support the industry with this benefit because anything getting exported from Bangladesh is duty free into Europe and U.S. So to compete ourself, we should get this benefit.

Sundararajan, you -- in your opening remark, you said that since Primark is only our customer, which is not online. So because of lockdown, it may be getting impacted. So how much Primark is currently contributing our top line in this Q3?

30% -- 20% to 30%, it ranges.

So which is one of the largest customers that we have. So if I mean this lockdown continue the way, in particularly, it is in U.K., so how -- what could be the impact on our business? How do we really plan to, I mean, derisk the kind of weightage we have on the Primark?

So sir, on the Primark front, Primark previously was contributing close to 30, 35 percentage previously. Now because of the lockdown, they have come to 20 percentage. So on the mitigation factor, I think, previously, Chairman had spoken about, bringing in 2, 3 new customers so that we mitigate the risk of concentration of customers, which we have been doing for the past 2, 3 years. But unfortunately, after bringing in new customers, we could not start -- I mean increase our contribution in terms of new customers because we went into COVID issue. Then again because of COVID, they also went into lockdown. So like H&M, they slowed their buying. So I think '21/'22, as Chairman was talking about, should be the year where you will find all the delisting in terms of customer concentration will happen.

See, in place of Primark, as we have already started getting the orders from new customers, as we mentioned in the previous quarters, there are -- 2 new customers have already come in and trial orders have already started and we have shipped them. So we are in line for placing the next round of orders, so which will definitely compensate the little bit of loss of Primark.

I mean, sir, and you said that from this new customer, we expect order, I mean, to start from Q2 and 3 customers are there. So if you can give, I mean, the geography presence of these 3 customers with whom we are expecting the order in Q2?

See, there are 2 things. In the last 2 quarters, we mentioned that there are -- we are already talking to 2 new customers with the business already started. So those businesses will start coming from -- Q1 onwards they will start placing. And other 2 or 3 more customers, we have just started the dialogue. So we'll start getting the business from Q3 onwards. So that will support us for the next financial year, say, '21 -- sorry, '22/'23. So here already we have 2 new customers started placing orders.

So these 2 new are -- I mean which geography? If you can, sir, give these 5 customers geographic presence?

Yes, they are all from Europe, these 2.

And the remaining 3?

Sir, sorry to interrupt you. May I request you to come back in the question queue. [Operator Instructions] The next question is from the line of Nirmal Shah from Seraphic Management.

Sir, just a follow-up to the previous question. I wanted your perspective on the incentive vision? Like, some of the companies in the home textile, they are talking about the incentives would be lower than what they were getting before. And even in budget allocation, the incentive, the RoDTEP scheme allocation has been pretty low. So do you see that as a risk in terms of incentives, it might be lower than what you were getting before?

So for home textiles, I think the concept of incentive percentage is completely different from what the garments is making. Like, they had an incentive scheme where they were getting close to around 11 percentage, I guess, I'm not sure. But I think this 6%, 6.2 percentage of incentive, which has been extended to the Garment division -- garment industry should be extended by at least 1 or 2 years so that the industry and the competitiveness of the industry is withheld.

Okay. So sir, but my question was looking at the way government financials are, even the incentives are lower than what we were getting before. Do you have any levers to recoup that because the same was done when the MEIS was withdrawn retrospectively, no one expected that. So just as a time lag, how much time lag does it take for you in case if the incentive turns out to be lower than what you are expecting? How many quarters do you typically take to recover your margins from the customers? That was mainly a time lag question what I had?

So I think in the MEIS what, you know, the 4% was withdrawn, so we definitely -- yes, we -- it was a big shake to the industry, and we have been able to revive now, although there is some -- immediately after that, this COVID situation came out. So we were -- definitely, we did not expect them, but we were prepared for it and we have revived now. I mean we are able to maintain the same even after withdrawal of this MEIS thing. So even if there is any untoward thing happens, we -- definitely, I don't think that will happen. If at all happens, then even it cannot happen in a big thing, maybe a small percentage. So we are working to be prepared for in case if the situation goes worse, then we are prepared for that also. There could be a, say -- for 2 quarters, there will be a disturbance, then we will revive by Q3.

The next question is from the line of Vikas Jain from Equirus Securities.