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

Good morning, everybody. On behalf of Systematix, I welcome you all on the S.P. Apparel's 1Q FY '22 Earnings Call. I thank the management team of S.P. Apparel for giving us this opportunity to host them. From the management side, we have Chairman and Managing Director, Mr. P. Sundararajan; Executive Director, Ms. S. Latha; Director, Mr. S. Chenduran; CEO, Ms. P.V. Jeeva; and CFO, Mr. V. Balaji. Now I hand over the call to the Chairman, Mr. Sundararajan for the opening remarks. Over to you, sir.

Thank you. Good afternoon, everyone, and a very warm welcome to all of you present on the call to discuss our quarter 1 FY '22 performance. At the outset, I hope and wish that all of you and your loved ones are healthy and safe. During our performance call on FY '21, we have discussed in detail about the COVID second wave situation and its implications on the business. In fact, there is no big change in the business operational environment after the second wave. Factories are allowed to function with 50% capacity and buses, which commute between factory and employee places, are not allowed to [ place ] full capacity. Hope this position will improve in a couple of weeks' times and restore normalcy. Our major divisions have performed well during this quarter, which shows the inherent strength of the company. This sustainability and the experience gained during this period of the business will take us to a new high. Let's discuss segment wise performances. With regard to Garment division, the shipments to customers during this quarter increased year-on-year in spite of the lockdowns in the U.K. and some of the other countries. Our customers are witnessing consistency in demand, especially for their online retailing business. Retailers consolidation of supplier base is still happening and that is one of the reasons which will support our growth going forward, as we continue to remain as one of their most preferred suppliers. Our current order book stands at INR 335 crores. Our Garment division revenue for the quarter stood at INR 115.68 crores, an increase of 136% year-on-year due to low base, which was impacted the COVID. Our EBITDA margin improved from 12.7% to 26.1% this quarter. EBITDA margins are better due to recognition of RoSCTL announced by the government of India. We have recognized RoSCTL value of INR 8.5 crores during this quarter, out of which INR 4.5 crores is pertaining to Q4 of FY '21. Our Garment division EBITDA margins without the previous quarter RoSCTL would be at 22%, which is also very healthy. As mentioned in the previous call, we have consolidated factories to reduce the rent, workmen transportation costs and other operating overlays. We are confident that EBITDA margin would be between 18% to 20% in the coming future quarters. Our strategy in increasing the utilization levels by addressing sourcing and training of workmen is yielding better results. Once the second lockdown lifted completely, our strategy of bringing more migrant employees will gradually start yielding better results. As I have already discussed in the last call, we have a strong customer base and all our infrastructure is in place to engage increased volume. We are also equally working on the strategy to increase skilled-based employees, and I'm confident of better growth in the coming years. Let's talk about the spinning. Spinning is fully being utilized and is yielding good volumes adding to the Garment division's margin. Currently, we are in the process of expanding our Spinning division by another 3,600 spindles. And now due to the pandemic, the project is delayed by another 3 months. Once the project is completed, we will be at 27,000 spindles. Processing division. The Processing division's utilization level has increased due to investments in projects over the last 2 years. This is also contributing a considerable margin Garment division. S.P. Apparels U.K. S.P. Apparels U.K again got disturbed due to the lockdown both in U.K. and India, but the unlocking is happening and we are seeing good recovery in order inflow. This division is looking very promising. We have 3 new customers now. SPUK revenue stood at INR 11.62 crores and compared to INR 8.61 crores of revenue year-on-year. Our current order book for SPUK is at GBP 7.1 million. Regarding Retail. Before analyzing the performance of Retail division, I would like to share an update on the Retail division. The Board has given consent to set up a wholly-owned subsidiary company for the purpose of retail operations. Rationale for -- of setting up a wholly-owned subsidiary company for retail operations is due to the following reasons: We are very optimistic about the Retail division and the future of retail industry. Hence, we would like to restrategize and restructure the current retail operations. We would like to unlock the value in the Retail division. And you are aware that we have already tried to hive-off Retail division on a growing concerns few quarters before, but that did not go through. As we have mentioned earlier, our Retail division is a single brand retail agency model, which has limitations to market access, customer demand and optimization of overage. Moving to the next level, we need to have a couple of more brands, either own as well as any licensee, which requires additional investment towards creating larger distribution channel, investment in brand awareness and working capital requirements. The company intends to expand the Retail division into a large network of stores and distributers and would require a focused business plan with investments and hiring of key management people. The Retail division has sufficient market opportunity and experience, but however, constrained by margins on existing business model. The single-brand strategy does not leverage the existing or future potential. Hence, it was proposed to move operations into a subsidiary company and appropriate investments be raised in the new entity for further expansion. Investments may be sought from external private equity investors and/or other options of raising equity. This strategy will improve the performance and the valuation of both the Garments and Retail company. The Board has constituted a committee to look into the process and needs in which operations will be shifted to that subsidiary company. Regarding our liquidity position, it continues to remain comfortable. We have cleared all the interest and debt installment obligations that were due until today. We have strategized on the Retail division and will work towards unlocking value for our Retail division as well as our stakeholders. In Garment division, we are working towards better utilization of capacities and increase in revenue by strategically having different verticals of business, which will gradually grow along with the business, and we are excited about the new verticals. Now I will request CFO to give an overview about the financials. Thank you.

Thank you, sir. Good afternoon, everybody. Let me just run through you the financial of Q1 performance of the company. We have made a revenue of INR 131 crores as against INR 59 crores of revenue year-on-year, which is an increase of 120 percentage. Our adjusted EBITDA margin stood at INR 27.83 crores as against INR 5.28 crores year-on-year, which is an increase from 8.8 percentage to 21.1 percentage, which is 427 percentage increase. Our PBT stood at INR 16.82 crores, which is a 12.8 percentage as against a negative PBT of INR 5.82 crores year-on-year. Our PAT margin stood at INR 11.56 crores as against negative PAT of INR 5.82 crores last year. PAT is at 8.8 percentage. On the division-wise performance, Garment division revenue stood at INR 115 crores versus 49 point -- sorry, INR 49.06 crores year-on-year. Our Garment division's EBITDA stood at 26.1 percentage as against 12.7 percentage year-on-year. Our Retail division revenue stood at INR 4.54 crores versus INR 2.15 crores year-on-year. Our EBITDA margins for Retail division stood at negative 53.8 percentage as against 32.7 percentage negative year-on-year. U.K. margins -- U.K. revenue stood at INR 11.62 crores as against INR 8.61 crores year-on-year. And an EBITDA margin, which is a breakeven 0.3 percentage for the current quarter as against EBITDA negative of 2.6 percentage year-on-year. Our gross debt stood at INR 157 crores, and our net debt is at INR 132 crores. Currently, our inventory is at INR 281 crores as against INR 241 crores of March. This inventory, which has increased is mainly because of cascading of the orders where we were not able to dispatch orders due to the lockdown. Our receivables are at INR 77 crores as against INR 94 crores year-end. And our other assets are at INR 43 crores as against INR 34 crores of year-end. Our trade payables are at INR 78 crores as against INR 73 crores of year-end. Rest of the information is available in the presentation, and we can get into the question-and-answer straight away. Thank you.

[Operator Instructions] The first question is from the line of Ashwin Reddy from Samatva Investments.

So I wanted to get some more clarity on the retail part of the business. So one, is there any specific strategy to focus on the kids wear or is it like a general thing is what you're looking at in retail? That's the first question. And second, given that through S.P. Retail brands, you already have -- I believe have the ownership of head and engineer market in India. So how does that tie in with what you have on the private side of the business?

Can you repeat your first question?

First thing was, say, within retail, would you -- so what is -- if you could give more specifics on the strategy with respect to -- is it focused on kids wear or is it like a general retail or your own brands or is it, again, franchise or some brands or some clarity would be helpful as to what are your plans on retail?

So on retail, Ashwin, it's like -- currently, it's proposed to transfer our operation into a subsidiary company, raise equity there either through private equity or through other means of equity, and then try to consolidate on a couple of more brands. It could be either own brand or it could be on the licensee brand. Because the single brand retail, as Chairman was informing when discussing on the opening remark, the single brand retail is -- has got its limitations and it's not able to push more. So like -- since the retail industry is good, and we wanted to explore all the opportunities, currently now the strategy is to move the operations into the retail subsidiary company and then try to build the brand there, raise equity there and move forward. That is the strategy.

But we have a plan for one kids brand and sports brand, that is what we are going to look for and most probably it should be the way it is.

Sure. So sir, say, but right now -- so I believe S.P. Retail brands has both head and also [ ] right in India because I've just seen some interviews online. That's what I understand is there with S.P. Retail brands. So would they be moved into this company or will they operate separately? Because -- will that remains private and done separately?

See, it is -- the retail brand is company which was set up previously [ year ] under before when we wanted to hive-off. So I'm not sure or things could -- there could be a time where it could also be part of the subsidiary company.

[Operator Instructions] The next question is from the line of Giriraj Daga from K M Visaria Family Trust.

Yes. Can you hear me?

Yes, please. Go ahead.

Yes. So my first question is like you mentioned about the expansion in retail, and we will be looking to expand our footprint there. So what is the investment strategy have been finalized? So you will only be investing with the external money what we'll be getting? Or we'll be investing from our S.P. Apparels balance sheet also?

So in terms of strategy on investment into the retail, I guess, why at all we are looking at subsidiary and raise money there is because we are not investing more money into retail. And that is why the operations is getting transferred to a subsidiary company, and you allow the subsidiary company to raise its own capital and then consolidate into the operations and move forward. That is why we are moving the operations into a subsidiary company.

Understood. So just to make myself clear, like you'll be looking out for the fund-raising plan. And suppose -- I'm just playing devil's advocate here, suppose if you don't able to make any success out there, so will we just keep the plan on hold or will we then take a different call there?

No. See, the strategy is to raise funds there. And if you ask what happens if it is not being able to raise money there? We cannot answer that question at the present moment, but we are very confident that over a period of 3, 4 years' time we can also look at listing of separate retail as a separate company 3, 4 years down the lane that should be also a possibility.

Okay. Okay. My second question is on Garment division. So you mentioned 18 to -- you mentioned 18% to 20% of EBITDA margin guidance, right?

Correct. Correct.

Which is assuming then you revised RoSCTL rate, right?

Yes, yes. This is including the RoSCTL, which will be extended until March '24.

So like last time, we were talking about 18%, so I thought this time it will be minimum 20%, right? This is not the case?

See, when we last time spoke about EBITDA of 18 percentage either looking at RoDTEP, which would be our 2 percentage. So now RoDTEP is not being extended to the Garment division -- I mean garment industry, as such. So now you've seen the RoSCTL which has been given. So like -- there is an additional 2 percentage which is coming up, and that's why we are saying that EBITDA margins between 18% to 20% could be the -- so we have increased the spread.

Okay. No, I was taking the minimum 20%, rather than 18%, 20% price band, I was looking at a minimum 20% kind of a number.

We hope [indiscernible] but see, let us give a range of 18% to 20%. I mean, if you look at the historical thing, but for the lockdown period, we've been able to maintain it. And I think once we ramp up our top line, probably this may improve. You're not sure.

Okay. My, like, last question and a follow up on the same segment only. We did about like 9 million kind of number this quarter. So what is our full year guidance looking at the order book in our hand? And you mentioned about that there are some inventory also, and that's why our inventory number has gone up. So have you seen the traction that shipping in July, August so far? So the second quarter should probably be much better than the first quarter?

Yes, definitely. The second quarter will be better than the first quarter in terms of quantity on the sales front. And looking at the guidance side, it's anywhere between 57 million to 58 million pieces could be the possible number.

Okay. Okay. Just last you mentioned inventory number up, can you just give me the number? I just -- it just slipped from the call.

INR 280 crores, an increase of INR 39 crores year on -- I mean against March.

The next question is from the line of [ Rajesh Kumar ] from [ Share Giant ].

Just explain about the order book with -- sorry, I missed that. If you can just repeat what is the kind of order book you have?

INR 335 crores for [indiscernible] divisions and the GBP 7.1 million for S.P. Apparels U.K. Limited.

Okay, sir. And sir, on the U.K. business, so I wanted to get some color like due to -- there has been not too much of moves, which is in one of your main markets, where like -- there has been -- due to COVID, locking, unlocking situation is happening, so how do you see the trend is there? And what is your outlook, sir, out there?

You're talking about U.K.?

Yes, sir.

So see, in the opening remarks, we have already said that the unlocking is happening in U.K., and we are seeing good traction in the orders, in fact. The order inflow is very good. In fact, we are restricting ourselves in taking a couple of orders because of the availability of factory capacity. So the order inflow is very good. And the unlocking is happening and the retailers are doing well.

Okay. Okay. And sir, like, that's very heartening to hear that, sir. Sir, any kind of like a risk in the sense like due to this COVID issues any kind of like write-offs or something which can come up?

So in terms of write-off I just -- we don't have any write-off as such today. The customers whom we deal with in the Garment division is very sound customers, and we are getting -- in fact, if you look at our receivables, it has come down by INR 20 crores from INR 99 crores to INR 73 crores. It has come down considerably. It's mainly because they are paying us a little earlier now because they wanted to support all the suppliers and the customers are paying us earlier, a week earlier.

So there is no issue with regard to any payment, default or something like that.

That's really great to hear, sir. Sir, I also wanted to know if you can answer on the CapEx requirements, which you will see for a further expansion in the going ahead, sir?

So in terms of the expansion, I think last call we have updated that we are investing INR 15 crores in spindling capacity expansion. And anything in terms of investment into the Garment division will be only to support our hostel facilities, which could be anywhere between INR 10 crores to INR 12 crores.

So what is the kind of debt numbers you have? And what is the outlook going ahead of the debt business?

Look, today, in fact, net debt is at INR 130 crores of debt. The outlook -- like we wanted to be a 0-debt company in over 2 years' time.

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

Sir, firstly, on the retail part, I wanted to get some more clarity. So what have been the key learning, say, from the Crocodile brand so far? And say, when you have a multibrand approach, so what are the 2, 3 points that you believe would change for you, which would help, say -- which should help us have a different set of outcomes?

Sorry, I...

Can you speak a little louder, please?

Yes. So basically, I'm trying to say, what has been the key learnings from the Crocodile brand that we had so far? And when you have a multibrand approach, I'm trying to understand what are the key things that will change? Or what are the key things that you're banking on?

See, in terms of the learning, I -- the key learnings will be to increase the square feet, the presence needs to be increased so that the revenue can increase considerably. And what we have worked on is on the centralized warehousing system where we are constantly reviewing the inventory and the other inventory-related -- because inventory is something which could pile up in the retail because of the cut sizes and so on. So we have strategized or we have got an experience in terms of how to strategize on the inventory pile up and how to liquidate it. And on the multi-brand, I feel that you have to have a couple of options like I have developed Crocodile as a casual and a formal wear brand so far. And going forward, if there could be a brand which can be used -- I mean, it can be an athlete brand or a sportswear brand, which could complement each other in terms of the store, presence and same sales store growth can also come up because I'm having multi-brands in the same store. So this could be a combination which could increase our same sales per store so that the revenues can increase, unit price can increase per person.

Okay. Okay. So basically, you are saying the existing network of Crocodile stores will also be used and become like a multi-brand outlets or not clear, just to...

Yes, yes. See, it is -- so in Crocodile, it's a single brand. if you need to grow, then you have to only grow the menswear only as a growth, and then you need to pile up a lot of stocks and a lot of liquidation, lots of unsold things. So these are the lessons, which means there is a limitation of growth of one single brand. But in order to grow better rate, so we need to have more than one brand so that we will have minimum stocks in all the brands and different segments. One is menswear, one may be kids wear, one may be sports and athleisure brands. So you have a mix of all. So the same amount of inventory can be split across the 3 brands. So which -- where the cash liquidity will be better, liquidation will be much better. So this is the learning and this is the strategy.

Okay. All right. This is helpful. And second question, sir, is on the SPUK front. Say, -- given that in the SPUK division, so you're doing not just kids wear, but as you mentioned womenswear as well, right? So how do you see this business in the next 1, 2 years? So how do you see the scale-up happening in this business for SPUK?

Yes. This is a good question, again. So here, if you look at the -- considering the -- this COVID situation, the retail brands, they are restricting themselves from traveling to various sourcing countries to manage their supply chain or replacing, et cetera. So which means -- so they need somebody who can serve them locally from -- in the U.K. or in other countries like. So this -- our SPUK office is now very much advantageous to them. See, because they don't have to travel all the way to look for new factories or placing orders or [ cancels ] or quality control or compliances, et cetera. Since this SPUK is giving all full service to those retail customers, so -- which means this model is working out -- picking up much better than what it used to be because people prefer someone can support them locally, the retailers prefer. So we are getting more and more new customers added. We have been having 2 customers already there. Now we have added another 3 more customers. So there are about 5 customers, and there is no limitation of capacity because we can source from any factories, any countries as long as they are fully complied with. So this is a wonderful business model, which needs to take off much -- to a new height in the next 2 to 3 years' time.

Got it. Got it. Got it. That sounds interesting. So again, a follow-up on this. So the -- what you do right now is only the sourcing part? Or do you also design and do more value-added stuff for the brand?

See, it's a completely a different setup which starts from creative designing, product development and this sourcing and supply, quality control. This is a full service, full service.

[Operator Instructions] The next question is from the line of Nilesh Doshi from Green Lantern Capital.

Yes. Sir, taking forward from the previous question and your answer, so just in the new model from SPUK, you will restrict the children wear only, right? Is that correct?

In the Garment division?

Yes. SPUK model where...

So SPUK model is for all. It is not restricted only to kids wear, it is doing menswear and ladieswear also. Not only the [indiscernible] products, even the wovens.

Even the wovens. And you would try to outsource these products from the manufacturers possibly from India? Is that correct?

India, but we are not restricted only to India. We can source from Bangladesh or Sri Lanka, from anyone else.

Okay. But in that case, we don't have that kind of expertise or any capabilities to source from Bangladesh or other countries. Because typically, our model has been, we were the manufacturer for last many years. So how do you feel comfortable and confident to do this outsourcing, provide with the same quality control and...

No, you have to understand it's completely different independent business entity, where in our U.K. office, they have expertise who used to work for the retailers, who used to work retailers as designers, for sourcing or quality control. Say, we even -- their office in [ India/Italy ] also have recruited somebody from the various buying offices who used to source from various countries. So there is a very strong completely different kind of outlook people are there. There's nothing to do with the manufacturing outlook. So that's the kind of a team we have in U.K. and India.

Okay. And what is your, I mean, feel that in next 2 to 3 years, how big this opportunity can be?

It's -- in the next 2, 3 years, it will definitely -- we expect to double it, for sure, minimum.

Okay. And you were also, in the last call, talking about repeating a similar model expansion in U.S. and in other countries. So...

Yes. We are not ruling it out. It will take some time. Once this COVID thing settles down, we will think of those also.

Yes. But then for that, you will again have another office in U.S. and Europe or everything will be done through S.P?

Too early. So we are still not conceptualized it. So we are yet to think about it, but there are ways and means for it.