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

Ladies and gentlemen, good day, and welcome to the S.P. Apparels Q2 FY '24 Earnings Conference Call hosted by Elara Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Prerna Jhunjhunwala from Elara Securities Private Limited. Thank you, and over to you, ma'am.

Thank you, Lizan. Good afternoon, everyone. On behalf of Elara Securities Private Limited, I would like to welcome you all to Q2 FY '24 Post Result Conference Call and Business Update Call of S.P. Apparel Limited. Today, we have with us the senior management of the company, including Mr. P. Sundararajan, Chairman and Managing Director; Ms. S. Shantha, Joint Managing Director; Mr. S. Chenduran, Joint Managing Director; Mrs. S. Latha, Executive Director; Mrs. P.V. Jeeva, Chief Executive Officer; and Mr. V. Balaji, Chief Financial Officer of the company. Without taking much time, I would now like to hand over the call to the management for opening remarks. Thank you, and over to you, sir.

Thank you, Prerna. Good afternoon to everyone here. I extend my warmest greetings to everyone joining us on this con call to review our Q2 and H1 FY '24 results. Wish you all happy Dhanteras and Diwali to everyone on this call. Before we proceed, I would like to share some insight about the industry and business highlights. After which, Mr. V. Balaji will provide an overview of the financial performance. To begin with, I will take you through the industry overview, followed by our division-wise performance. The recent analysis by Wazir Advisors predicts that the Indian textile and apparel market will achieve a compound annual growth rate of 10%, reaching a market size of USD 350 billion by 2030. Concurrently, the global apparel market is projected to experience an approximate 8% CAGR, expanding to $2.37 trillion by 2030. These growth projections underscores a significant potential in our industry. Moreover, the Indian garment export demand may see an upswing due to various macroeconomic developments. For instance, Bangladesh is considering a wage hike of approximately 35% to 40%. Now we are demanding, as per yesterday's news, about 55% of the workers due to high inflation, the potentially creating an opportunity to apparel players in India. This presents a significant opportunity for us to capture a larger share of the global market. Additionally, ongoing discussions about free trade agreements and China Plus One strategy are expected to play a pivotal role in shaping the dynamics of the apparel industry. We can observe a decline in India's exports primarily due to reduced demand from international retailers, who were driven to big stock excess inventory. Furthermore, the demand in the U.K. and European markets were affected by decreased purchasing power, mainly due to rising interest rates and other inflationary factors. These external factors did create headwinds for our business, but despite the challenges posed, our performance during the second quarter of FY '24 remained relatively stable. One positive aspect worth noting is that, the current -- we currently have a backlog of orders that extends until February 2024. This indicates the trust our customers have in our products and the robust demand that centralizes our business. We anticipate improved demand in the second half of the year as economic conditions are expected to stabilize. With regards to the company's division-wise performances. Spinning division, during the quarter, our Spinning segment witnessed a recovery compared to same period last year. The margins of spinning segments have stabilized largely on account of decrease in cotton prices. We had breakeven in this segment and believe to continue this trend in coming quarters. We are confident that the strength of improved performance will persist in the coming quarters as well. With regards to garmenting division, our garmenting division experienced a relatively stable performance during the quarter. The decrease in the per unit price realization of garments has an impact on the segment's overall revenue. However, we are diversifying by entering the manufacturing of ladies and menswear where the unit prices are better. It is expected to enhance the realization in the future. As of now, our order book stands at INR 410 crores, representing year-on-year growth of around 20%. We have orders booked until February '24. In Q2 FY '24, our quarterly revenue amounted to INR 246.1 crores compared to INR 277.40 crores in Q2 FY '23. We exported a total of 15.4 million pieces during the quarter. The adjusted EBITDA for our garment segment in Q2 FY '24, reached INR 48.43 crores, with EBITDA margin standing at 19.7%. Our utilization level has improved, ranging from 72% in Q2 FY '23 to 76% in Q2 '24, primarily due to increased workforce and introduction of nigh shifts. We have also initiated two-shift operations in a few factories during the quarter and plan to extend this to two more factories by December. Our goal is to have around 6 to 7 factories operating on a two-shift basis by March 2024. Initially, we are in the preparatory phase of the construction of our new factory at Sivakasi, which is expected to be operational by August '24. Furthermore, I would like to highlight that the duty drawback on shipments has increased from 0.5% -- between 0.5% to 0.7% on shipments starting from November 1, 2024 -- '23, sorry. Regarding our Sri Lanka subsidiary, we are making satisfactory progress and are engaged in discussions with various customers with the positive outlook for the future. With regards to our SPUK division. Regarding our business in the U.K., SPUK, we recently undertook a change by relocating our office from Leicester to London. This strategic move resulted in a 6 to 8 months of transitional period for the business, which has now settled down. The quarterly revenue for SPUK amounted to GBP 1.4 million in contrast to GBP 2.1 million in the corresponding period last year. We are optimistic about our ability to onboard three additional tickets by 2024 and anticipate strong performance from this division in the next and coming years to come. With regards to the retail division, in Q2 FY '24, S.P. Retail Ventures reported revenue of INR 27.69 crores and an EBITDA loss of INR 1.19 crores for this quarter. Although the Crocodile brand continues to be profitable, the recent introduction of new brands, along with the associated fixed overheads has had an impact on our profit margin. Our retail division is currently undergoing a consolidation phase, particularly as we focus on stabilizing new licenses and the brands. The overall outlook, we'll see a progressing landscape driven by key macroeconomic factors such as China Plus One strategy, omission of duty and taxes on export products, that is RODP, EP incentives and the production related to incentive scheme are set to stimulate the demand. Moreover, recent developments in Bangladesh such as expected increase in labor cost and workers unrest impacting the industry have led many retailers to shift their focus away from Bangladesh and India is one of the way of entering into SPA. And this combined with other factors will position India as a strong contender among garment-exporting nations. Within SPAL, enhanced operating leverage will make a significant contribution to the company's revenue. We anticipate achieving utilization rate of approximately 90% by March 2024, coupled with EBITDA margin of around 18% for the entire year. For our SPUK division, our primary focus is on securing a substantial order from a major European client which has a potential to substantially boost the division's growth. We have strong confidence in the SPUK division performance, and we are also keeping a keen eye on our retail operations as they will be critical in our strategy for come the coming years. We are confident that these favorable macroeconomic trends along with our commitment for improved operational efficiency will serve as the foundation for the company's future growth and profitability. Thank you and over to Balaji, our CFO.

Good afternoon, everybody. Warm greetings to you all, and happy Diwali.

Sorry to interrupt. Sir, your audio is sounding very low.

Is it audible now?

Sir slightly. It's sounding very distant.

So I will just brief you about the financial performance of the company. Consolidated revenue for the quarter stood at INR 287 crores as against INR 242 crores quarter-on-quarter with a growth of 18 percentage. Consolidated adjusted revenue of INR 530 crores for the first half versus INR 567 crores year-on-year. Adjusted EBITDA stood at INR 45 crores for the quarter versus INR 35 crores quarter-on-quarter. And adjusted EBITDA stood at INR 80 crores for the first half versus INR 80 crores year-on-year. PAT for the quarter stood at INR 29 crores for the current quarter versus INR 15 crores quarter-on-quarter. PAT first half stood at INR 44 crores for the current quarter, first half, versus INR 48 crores year-on-year. EPS stood at INR 11.4 crores for the quarter versus INR 5.97 crores quarter-on-quarter. I'll brief you about the garment division's performance. Adjusted revenues stood at INR 246 crores for the current quarter versus INR 212 crores quarter-on-quarter. Adjusted revenue stood at INR 458 crores for the first half versus INR 500 crores year-on-year. Adjusted EBITDA stood at INR 48 crores for the current quarter versus INR 40 crores quarter-on-quarter. Adjusted EBITDA stood at INR 88 crores for the first half versus INR 82 crores year-on-year. PAT stood at INR 33 crores for the current quarter versus INR 22 crores quarter-on-quarter. PAT at INR 55 crores for the first half versus INR 52 crores year-on-year. On the retail performance, revenue stood at INR 28 crores versus INR I6 crores year-on-year and EBITDA stood at INR 1.1 crores at against a loss of INR 70 lakhs year-on-year basis. SPUK revenue stood at GBP 1.4 million versus GBP 2.1 million, which has come down for the current quarter. After making a positive EBITDA of GBP 100,000, we have made a loss of GBP 90,000 for the current quarter. On the debt position, I would say that we have a gross debt of INR 168 crores as on a standalone basis and on a net debt, we have INR 90 crores on a standalone basis. Our inventory level at INR 247 crores on a standalone basis, receivables at INR 91 crores on a standalone basis, payable at INR 62 crores on a standalone basis. Our working capital cycle has increased due to the receivables from retailers, majorly due to increase in interest cost in U.K., where we are not disposing the invoices with our customers in U.K. Other information are available in the presentation and we can do the question and answer portion.

Should we open up for questions? Hello?

Yes.

[Operator Instructions] The first question is from the line of Aman from Carnelian Capital.

Congrats on the good set of margins you have delivered on the garment. It is very encouraging to see the Q-on-Q improvement. So just wanted to understand what had led to this improvement in margins...

Sorry to interrupt Mr. Aman. There's a lot of disturbance from your line.

Is it better?

Much better. Please proceed.

Sir, my question was on the garment margins, like it is very encouraging to see the Q-on-Q improvement in garment margins, but what has led to this improvement? Because when I see financials of some of the peers, they have not reported any improvement in margins, but we have improved our garment margins a lot. So if you can talk about that a bit.

See, Aman, you are talking about the improvements in the garment division, which includes the spinning also. For the current year, I think our spinning plant is being utilized fully and we are not having any issues from the spinning where the cotton spreads were beyond -- is better this year. So that's why our margins have also improved. Moreover, the pressure on the yarn is not there. The yarn prices are corrected comparing last year. So we are maintaining the EBITDA margins, whatever we plan to iterate it.

Right. So sir, can we expect similar kind of margins to continue for the next few quarters also like given how the yarn prices have basically moderated right now?

Yes, we always give you the guidelines of always between 18 to 20, which we are able to so far maintain, except for one quarter I think. Otherwise, on an average, annually, we are able to maintain 18 to 20. That's the guideline we are giving because sometimes the policy might change, sometimes the raw materials may go up or go down or the recession in the retail international market and exchange rate, there are so many variables. So in spite all these variable things, we are able to maintain 18 to 19. Sometimes there are some advantages, sometimes there are disadvantages. So we are able to balance both.

Understood, sir. The second question was on the order book, like how much order book we would have right now? And also the realization for fees for that order book, if you can give?

Order book, I guess it is explained in the opening remarks, the order book is INR 410 crores. On the realization for fees on the order book should be close to [ INR 130 to INR 133 ].

Okay. Got it, sir. But this wasn't on Sri Lankan subsidiary, right? We've been talking about this expansion on the Sri Lanka side. So if we can share any more updates like discussions with clients. Have we located the factories we might want to tie up with for contract manufacturing? So any update on that side, sir?

I think in your opening remarks, he has specified that there is good amount of discussions that have happened with these retailers. And we are waiting for the retailers to start giving clearances in terms of factories. Those factories needs to be audited and needs to be completed. So that will take six months times.

Yes, 3 customers have shown interest. It's a matter of -- we have to undergo the procedure, so the first thing is costing exercises and some sample development, sample making for quality testing, and then they'll go for the complaint audit of the factor and only then they'll start placing the orders. So in principle, 3 customers have agreed for this Sri Lanka operation. So it's a matter of time, say, next another about 2 to 3 months' time, probably by March, April, shipments will start.

The next question was on the retail side. So like we have seen some improvement in the EBITDA margins this time, right? So would it be possible to share the EBITDA profits we are making in Crocodile business and the losses we are taking from the new brands? Like that would give a very good idea to us that how the transition is basically happening in the newer brands, if that is possible, sir?

Yes. Maybe going forward, we will include a slide on retail, giving you a breakup on the contribution, sales and EBITDA contribution brand wise.

Yes. And sir, last question was on the operations, like we were trying to get into focus garment also, right, by looking for some factory near Bangalore or Chennai. So like how are we progressing on that side? And like any update if they can share on that, sir?

For the [ O1 ], it is still under negotiation, and we are looking for acquisition for the [ O11 ]. We had some alternate plans also which should be -- we will be able to give a firm information in the month of April '24.

Understood, sir. And this will be mainly for the...

Sorry, can you come back again?

For woven garments, will it be for the existing clients only or like are we looking to add new clients?

For existing clients only. And also -- see, if we acquire, we'll also take their customers as well. You get my point?

Yes, got it, sir.

[Operator Instructions] The next question is from the line of Rehan from Equitree Capital.

So first question would be on SPUK division. I mean any reason you see the decline year-on-year in operational revenue as well as EBITDA front? Any specific reason you guys feel the same?

Yes, same. As I have been mentioning in the past quarter as well, there has been a major strategic change we are doing, it's a -- location-wise, strategically, it's advantageous to move from Leicester to London. The SPUK office used to operate from Leicester where the customers were finding it difficult to visit there because the accessibility has been a problem. So we have shifted about a few months back to London, and now we are -- until then, we have not been able to book concrete businesses. And also the entire team, we are adding more new people as well as transferring some of the people from Leicester also. So now the strength has increased, and now our customers are very clear about what we are now doing, and they are very happy about the strategic location now, this is one point. And another point, our main customer, key customer of SPUK is there is a recession in them because of the European recession market due to lesser disposable income. So the retailers are sitting with huge stocks. That is -- so even the orders which are supposed to be released last month, this is not happening because they are waiting for the stocks to reduce, that is another reason. But going forward, having the same FY '24-'25 is going to be -- again, we will be back on track, and we are having -- we are budgeting a very attractive number and we're adding another 3 more new customers. So I'm very confident that's going to be the -- that business model will have a great future.

Second question will be on your yarn business. Could you tell us more about it and the performance this quarter?

Yarn business. So spinning division, see, last year, there was a huge loss due to increase in the cotton price and the realization of yarn price was very low. So it was not even -- the realization was not even to the level of cost of cotton. So there was a severe loss during the last quarter and gradually now the cotton prices have come down and the yarn price is stabilizing. So this quarter, we have been able to maintain the breakeven level. So that is the reason why yarn division, spinning division is not making losses now. But slowly, I think EBITDA is becoming double-digit EBITDA slowly. And I'm sure this will continue forever. So the good point is it will not pull down the profit of other divisions.

[Operator Instructions] The next question is from the line of Prerna Jhunjhunwala.

Am I audible now?

Yes.

Sir, I just wanted to understand the customers in the U.S. and how you are improving your revenue mix there?

Okay. See, as we have been always mentioning, getting the orders, getting the business, getting the customers, it's not a big challenge as much as getting the workforce. That has been the challenges for S.P. Apparels all this time. And as I mentioned last summer also, now we have been able to turn around the manpower challenges. And that is one of the reasons why we are even going for 2 shifts in some of the factories, which makes it a very clear message that we have been able to manage the mobilization of workforce. So in our business, in terms of S.P. Apparels businesses, the more the capacity, the more the business. Because for us, the customers are very strong for us and only the capacity has been a challenge, now we are going to increase. And I think year-on-year, the capacity will grow by 15%, 20% comfortably. So if that is the case -- so we have got one U.S. customer already, so we can increase our customers only when we have sufficient capacities.

So Sri Lanka facility, when is...

Sri Lanka will fetch additional business for the company because already the running factor in businesses but that has nothing to do with the American customers because it is a duty-free country to Europe and the U.K. So our customers are all from Europe and the U.K., and we have already spoken to them. So they are showing their interest for placing some orders to the U.K. factories. So that's going to be an additional business from our existing customers.

Okay. And the product mix will remain similar in Sri Lanka?

Definitely, the product mix will increase. We will be doing some of the women and adults garment out of Sri Lanka as well, and even undergarment.

Okay. And sir, what will be the contribution of men and ladies wear today in your revenue share?

Today, it's only negligible, 2%. It is only 2% now, and we will be there. Over a period of time -- over a period of years, we are planning for at least 10%.

Okay. Understood. And will there be any change in your debt profile given that you are expanding capacity and also looking at working capital requirements would increase going forward? Still do you expect the debt to remain around current levels? Or do you see a substantial increase?

We don't see any substantial increase in the debt profile. I think we are moving towards a debt-free company. Our long term debt is close to only around INR 4 crores, INR 5 crores as of today. On the working capital front, see -- the working capital, I guess, there could be some increase in the working capital requirements just because we are moving to the new factories, new capacities coming up. But that will be in line with the -- and we'll also the current approvals coming in. So I don't think there will be a big change in the debt profile.

The next question is from the line of Hemang Kotadia from Anvil.

Right now, our utilizing...

Sorry to interrupt Mr. Kotadia. Sir, can you speak a bit louder?

Am I audible?

Yes, sir, please proceed.

Yes. So right now, the factory is running at 76% utilization for the second quarter, and we are targeting 90% by fourth quarter, right?

At the end of March.

Sorry?

At the end of March '24, yes.

Okay. Okay. So the effective capacity of the company is what, 19 million pieces per quarter?

We don't -- we have 5,000 machines as of today. And today, currently -- I mean, not about Q2, current utilization level has gone up and we are at 82%, 83% as of today. So that's about -- we will definitely reach 90% by March.

Roughly in first quarter, 19 million pieces.

Sorry?

First quarter, roughly 19 million pieces.

19, 1-9, right?

Yes, 1.95 crores.

Okay. Okay. Out of that, by March, we will be able to reach 90% on the month of March, right? Okay. And sir, on the spinning side, so how is the cotton yarn situation right now? And the improvement in margin in the current quarter, mainly because of the improvement in the cotton yarn scenario vis-à-vis last quarter, that is first quarter? Or still there is some benefit we will have to kick in for the coming quarters on the yarn side?

In terms of the cotton versus yarn spreads, I think comparing year-on-year, the spreads have come up. Definitely, they are better now. But if you look at quarter-on-quarter also, the margins have improved in terms of the spread between cotton and yarn. But these both cotton and yarn are market-driven, we cannot have control over it. We cannot just give you how it can improve over next 2, 3 quarters. But definitely, we feel that going forward, that should not pull down the overall margins.

Yes, we expect the EBITDA to be double digit.

Okay, right. And sir, what will be the CapEx for the current year and next year?

Current year, we are looking at around -- we have already invested close to around INR 30 crores, INR 40 crores into the hostel facilities, which we have already planned, maybe another INR 10 crores towards the end of the year. So we are moving aggressively as CMD was talking about, the 90% utilization and the second shift in the 6, 7 factories. We may have to invest more into the hostel facilities. That maybe next financial year, we will look at it.

Okay. so this financial year would be INR 50 crores for the full year and next probably...

Yes, it could be INR 50 crores for the year, yes.

Okay. Okay. Okay. And with INR 50 crores, we can easily increase our capacity by 10% to 15% every year if we want to?

Yes. Correct.

Okay. And sir, how is the situation on getting the employment because I think we are kind of industry that requires a lot of female employees. So how you do -- how you get the first of the employees and how you train and how much time it will take to train them and get on board basically?

The workman?

Employee?

The workman?

How to train them, right?

How much time it will take to train the employees and get on board?

See, mostly, we get the employees from the preliminary trained institutions across India, and we give them about 2 weeks of intensive training, and then we will place them on the job and it will take about 30 days for them to reach a reasonable efficiency. So which means that they'll be fit for production with a reasonable efficiency, say, after 2 months of the recruitment or the work.

Okay. And availability is not an issue, right?

Yes, that's not, so far not.

The next question is from the line of Sheetal Keswani from Shriram Mutual Fund.

Sir, I just wanted to understand how are we planning to expand the SPUK business? And what type of growth can this business see in 2 years?

We have done all the shifting, everything from Leicester to London. So now it's all up and running now, it's not an issue. But unfortunately, because of the recession in the U.K. and the European countries, so there has been a little bit delay in getting the orders. But all said and done, we have already spoken to all the existing one customer and another 3 customers. The order booking starts from end of November, first week of December for the next season, which means in '24. So we strongly believe FY '24 will be a best year for SPUK. That means for the new numbers because we are going to have 4 new customers, the big retailers of U.K. and Europe. And we are very confident in all spaces...

Okay. Okay. So sir, then we expect '25 and '26 to be stronger than '24 in that case?

Yes. '24, '25 will be back on track and '25, '26 will be much stronger.

Much stronger. Okay. Okay. Sir, I just wanted to understand your outlook on the garment business for the next one to two years?

Yes. See, the India stands to be the very -- the most preferred country globally because of China Plus reason and FTA has been anticipated. So the retailers are getting prepared for diverting the orders to India, anticipating FTA at any time. And Bangladesh is a tough task for the retailers to manage up to certain level. And the cost of the labor is going to go up by 50%, negotiations going on, on the labor costs. And even in Sri Lanka, is also like -- they are also -- for whatever reason, Sri Lanka has not been getting much businesses. So we stand to get here -- stand to be the most preferred vendors, India. So India in the next 3 years, we are very strong with regard to the inflow of order. And the workforce mobilization is also I think most of the companies have been able to manage those challenges. And the raw materials are under control, there is no issue about it. And all the other ancillary processes like dyeing or yarn or printing, I think all big factories are already ready. And again the compliance side also, all the customers are happy to work with India because of the transparency in our factories, compliances, et cetera. So there is a good opportunity for India in the next 3, 4 years.

Okay. Got it. So then since we are getting opportunity over and above Sri Lanka and Bangladesh, are we adding any new customers in the garment division?

Yes, of course, we are going to add one -- already we have resumed not the new customers, those customers whom we used to do the business. Because of the capacity issues, we had to request them to give us the break and now we have resumed them because our capacities have grown up. So one customer has come back. We have already started the business with them. And there are going to be 1 or 2, 3 new customers coming for SPUK business. And for S.P. Apparels garment division, we are planning one more new customer. And one of the existing customer, the American customer has shown interest. Last week we had a meeting with them. They are talking about a huge volume. They want to divert everything from other countries to India. So that's the customer. We have 1 or 2 customers for garment division and SPUK another 3 customers.

Okay. Sir, incrementally, could you just quantify then how much will that help us to grow the garment division?

It's still in the early stage. So I think overall 20% will be there.

Overall, 20% will be the incremental. Also, any geographical new customers are we adding or just that, the one part of the SPUK that you mentioned. Anything else? Are we getting orders from what the Sri Lanka and Bangladesh would have got? Since India has got the opportunity now, are we seeing from anywhere else?

The customer of whom he was talking about are the customers from U.S. So we will always prefer to mitigate the risk of concentration geographically. So we are looking at new customers. The new customers are from U.S.

[Operator Instructions] The next question is from the line of [ Akshay from JHP ].

Sir, what would be the capital employed in each of the segment?

The total capital employed would be close to around INR 800 crores. And if you look at segment-wise capital employed, the garment division could be close to around INR 600 crores and INR 100 crores with spinning and INR 70 crores with dyeing and the rest with the retail and the UK. So these are all rough numbers.

Okay. Yes, I got it. Sir, when do we plan to list the S.P. Retail Ventures because currently, it is loss-making. So in the annual report, you have mentioned that we will be able to raise capital and get listed as a company on its own.

See, ultimately, the objective for hiring of retail for a company is to raise capital in that company and list it separately. So maybe once we turn it around and start doing consistently of the margins, then we will bring in one private equity investor or strategic partner and then try to list it. May be [ JMD ] can add to this.

So yes, we are planning for 2 more financial years where we consistently make sure the performance is positive and then try to get listed by FY '26.

Okay. Okay. So on the children's garment side, who would be our competitors, so the big names like Shahi are also there in the children segment?

That's very difficult to talk about that because, see everyone is doing most of the products. So our customers more or less, what can I say, it's an open competition. But with all our customers, we are #1 in the department. That's all I can talk about. But the other's competition, I cannot comment on that.

Okay. Because as I see in presentation, there seems to be -- you have written that there is some entry barrier, which is associated when we go in the child segment. So just wanted to ask on that front, whether it's...

That is still true, that is still correct, that statement. So that is the reason why we are #1 with all our existing customers. We are the #1 vendor. But there are always certain products which we cannot do. So those things will be placed elsewhere also.

Thank you. Ladies and gentlemen, that is the last question. I now hand the conference over to the management for the closing comments.

Thank you. I'm sure we have been able to satisfy everyone's questions and if there is still anything to be clarified or not clear about the answer, you may please call any of us from the management side, and we'll be happy to share the information. And wish you all again Happy Diwali and thank you.

Thank you. Ladies and gentlemen, on behalf of Elara Securities Private Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.