Welspun Living Limited (514162) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Welspun India Limited, 3Q FY '20 Earnings Conference Call hosted by Equirus Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vikas Jain from Equirus Securities. Thank you, and over to you, sir.

Thank you, Tanvi. Good evening, everyone. On behalf of Equirus Securities, I would like to welcome all of you to the Q3 FY '20 earnings conference call for Welspun India Limited. From the company, we have with us the key senior management, including Mr. Rajesh Mandawewala , Managing Director; Ms. Dipali Goenka, CEO; and Joint MD; Mr. Altaf Jiwani, Director of Finance and CFO; and Mr. Akhil Jindal, Group CFO and Head Strategy. I would now like to hand over the call to the management for their opening comments, post which we'll open the floor for the Q&A. Thank you, and over to you, sir.

Thank you, Vikas. Good evening, ladies and gentlemen. Welcome to Q3 FY '20 investor call for Welspun India. Before we get into financials, I would request Dipali to give an overview about the market outlook, our business and some of the key initiatives, which we have implemented in Q3. So over to you, Dipali.

Thank you, Altaf. Good evening, ladies and gentlemen. I just wanted to give you a perspective. Today, if I look at the core business, we are a 23% EBITDA without the MEIS and the crutches of incentives, so our business looks good. Volume growth, if we look at it, as Welspun, we maintain the guidance that we committed. And I'll just give you a perspective about where our volume growth will be. Our emerging businesses will be at 30%, which they are continuing to be. And going forward, they'll contribute around 4% to the top line. At core businesses, we must share that innovation, brand and sustainability are the enablers. Hygro has grown at 15% year-to-date and going forward, Hygro and Wel-Trak will be growing at double digits as well. A milestone of 15 years of Hygro, I must share we have achieved around $1 billion of sales at retail on Hygro in these 15 years. Second, the key enabler is brands. We have just recently licensed Martha, which actually was present at Macy's. And if you know, Martha Stewart, she is a renowned personality in United States of America, with 3 million followers. And this actually will also find our doors opening into tier 2 retailers where Welspun wasn't present, like TJ Maxx, Ross and the other tier 2 discounters also. If I look at sustainability as another enabler, we were recognized by ET- Futurescape as one of the leaders in sustainability. And we were the only textile company, which was ranked in the top 100s with the other FMCG and CPGs. In the volume growth, bedding and rugs and carpets will be contributing to the other set of growth, rugs and carpets being around 20%. Hospitality, again, will be growing at double-digit going forward as well, and we are opening global doors in hospitality. And as you're all aware of, e-commerce is something that has been disrupting the retail landscape. E-commerce will become a reality, omni-channel will be also the way forward. We have hired an expert who comes in -- who has handled a portfolio of around $200 million of e-commerce business. And this will be the way forward for Welspun going forward. We have a digital brand called Welhome, that will continue to grow in pure play as well as omni-channel. Our non U.S. business, despite the disruptions with Brexit and the others, is growing and will continue to grow. We are looking at nontraditional channels here, like loyalty programs that have been also an important contributor to that. Thank you.

Thank you, Dipali. Q3, we have actually PAT -- we have seen a PAT growth of 55%. So there has been a significant improvement in the margins. Our core business while we have done a revenue of INR 1,700 crores, which is about 2.5% increase over -- year-on-year. We -- our core business EBITDA margin is 23%. And as Dipali mentioned without -- we have not recognized the MEIS of 4%, which was withdrawn by the government with retrospective effect from 7th March 2019. So in Q3, we did not recognize that and Q1, Q2, we have taken impact on the exceptional item. So without the -- and we don't have any incentives now in our business model. So this actually demonstrate the robustness of the business model where without the crutches of the incentives, we are able to demonstrate an EBITDA margin of 23%. After considering the Welspun Flooring, we have EBITDA margin of 19.6%. We have a core business net debt, which is about INR 2,286 crores, so compared to INR 2,741 crores in -- on March 31, 2019. So we have actually reduced the net debt for core business by about INR 455 crores. If we consider the Welspun Flooring debt of INR 619 crores, we are at INR 2,905 crores of net debt position as of 30th -- 31st December, which is lower than the March figure. We have -- in the EBITDA margin, of course, we have certain tailwinds which we had. But before I get into that, I would like to tell you that in Flooring we have actually up -- we have considered the entire cost, which is upfront. So our entire cost is front-loaded and the benefit is going to come in the subsequent quarters. For example, the entire samples and trial run which we have done, we have actually valued the entire inventory at the realizable cost. So we have not valued at cost. So that is the entire cost, which has come in Q3 for flooring. The entire distribution model, which we have built in, so we have about 50 distributors now pan-India. We have about 450 dealers. So all the costs which we have incurred in the -- in creating this kind of reach pan-India also has been absorbed front-loaded in Q3. The entire activity of brand building for flooring as well has been captured in this Q3 numbers. So what you see there is entire cost, which has been uploaded, which has been front-loaded in Q3 numbers. And based on -- the current run rate for flooring, which is about single digit, that's -- it's about INR 7 crores per month. We expect this will become into double digits. So we are seeing a ramp-up of sales, which is happening. So March exit should be about between INR 15 crores to INR 20 crores of revenue run rate for flooring business. The continuous focus on the emerging business because most of these emerging businesses are actually our B2C. So we are actually -- the entire business, the organization is getting focused more on B2C. We have been either to -- more on a B2B business and we have also engaged one of our major consultants who is helping us in creating the entire marketing strategy, the distribution strategy, the brand positioning for the flooring business. All the emerging businesses and retail also, we are actually -- the association of Mr. Amitabh Bachchan for the Welspun brand has catapulted Welspun brand into the top 2 -- in the second rank in the entire home textile brands, which is in the mass segment. So this is within -- in less than a year, we have actually reached that status and we are through -- we are actually in a status -- a situation where a brand, our legacy brand, which is more than 100 year-old and we are at #2 position, which is less than 1 year old. The innovation portfolio continues to keep growing, while we don't give the numbers quarterly, but when we give the annual numbers we'll show -- we'll actually give you the numbers for the full year. It has grown substantially higher and our strategy to create that differentiation using innovation, particularly for Hygro brand that continues to play well and we're seeing the kind of growth rate, while the underlying market is growing at 2%, 2.5% in the U.S., the HygroCotton products are growing at 15% in the same market. So growth strategy, which is a 3-pronged strategy to look at new products, new channels and new markets that we'll share while we answer some of the questions, we'll share some of the initiatives which we have taken on this 3-pronged strategy. So as far as the top line is concerned, it is a 2.5% growth, which has happened. It has a 5.7% impact is -- of the exchange. We have INR 72.96 per dollar for Q3, we had a INR 69 per dollar in the last year Q3. There is a de-growth of about 4% in volume terms, which is there. But we have seen a growth of both flooring -- the emerging businesses have contributed almost about 2%, 2.5% of growth in the top line. In terms of our finance costs and depreciation, which has gone up year-on-year. It is flooring finance cost, which is about INR 4.5 crores and depreciation of about INR 12 crores, which has added to this depreciation. But as I told you, all these costs are actually front-loaded from here on. On the flooring business, you will see a substantial shift as the sales ramp-up happens. In terms of -- we have started now from last quarter disclosing the segments both for flooring and core textiles separately. And you'll see there -- that we have about 23% of EBITDA margin on the core business. In terms of exceptional items, INR 51 crores, which is there. We have, as government had withdrawn the MEIS benefit with retrospective effect while, as an industry, we are looking at various legal options, and we will pursue those options, which are there. But as a conservative policy, we have gone ahead and actually written off this whatever we had accrued from 7th March till 30th September, and that is about INR 97 crores. And the other -- the other item, which is there is about the class action suit, so we have actually settled it and it is completely over. Everything is behind us. Now this will pave the way for us to reach out to the customer. And that is about INR 43 crore of write-back, which we have taken, the provision which we made last year. So that's another item, which is there in the exceptional items. So after considering the exceptional item, we are at, profit after tax of INR 73 crores, vis-à-vis INR 47 crores of PAT in the last -- same quarter last year. So that's about 55% jump in the EPS and the revenue. So in terms of CapEx, we continue to calibrate our CapEx based on the cash flows available. So we are -- right now, while the total CapEx for flooring is about INR 830 crores as of 31st December. And we will remain within our guidance of INR 600 crores of CapEx for the current financial year. So in this quarter, we have actually seen the overall margin after considering the Welspun Flooring business. We are at 19.6% EBITDA margin, which is within our guidance for the full year, which is 19% to 21%. And with this, I would hand over the call to RRM, to give his -- to share his views about the performance in the market.

So just to fill in. So A, there is the China tariff thing, so it is helping both our flooring business as well as the rugs business that we have. And so while the tariffs have not just impacted towels and sheets, but our carpet tiles, wall to wall carpets that we will make in the flooring business as well as the bath rugs that we do are likely to benefit, and they are -- the rug business is already seeing, let's say some momentum, where we are seeing a 20%, 25%, kind of growth in that area. Also, the cotton prices are significantly dropped and which is one reason why, the textile business margins are at 23% in this quarter despite the MEIS benefit getting taken away. So the cotton prices have helped. So the point we keep making is that our business is incentive and raw material price-agnostic. So our business will be around the 20% EBITDA mark and give or take is whatever cost pressures, incentive, this up and down, this eventually get passed on. And the business has a tendency to generate that 18% to 22% kind of margin that we do. Also, a lot of work has been done on the Spaces and Welspun brand, as Altaf mentioned. So it has grown at a phenomenal 32%, 33% in the current year. And this -- we are building good momentum. So there are -- the distribution has grown significantly, and it is continuing to grow significantly. So we believe that both Welspun as well as the Spaces brands will acquire maturity and continue to grow very, very significantly. And the current year, between the 2 brands, we are likely to be between INR 270 crores or INR 275 crores...

INR 235 crores.

Or thereabouts, and our goal will be to cross, let’s say INR 350 crores or maybe even more in the year -- in the coming year. And I think our association with our brand ambassador, Amitabh Bachchan is helping our home textile business and as we speak, as we have already -- we've signed up and shot the ad films for the flooring business with Mr. Bachchan, which will go live sometime before June. And so hopefully that will also provide an impetus to the flooring business. So I'll also take a couple of minutes to discuss what is happening on the flooring business. So as Altaf said, until the end of Jan, that's most of our time and efforts were actually built -- invested and the money got invested in building the collections. So hundreds of SKUs have been developed in all the 4 product categories that we represent. And for the various markets, now we cater to the export market, we cater to the hospitality business, both international and domestic, which we are building up a network in India for the residential market. And then there is the commercial market where our carpet tiles will also go. So simultaneously, the product development and collections that are getting developed. So by and large, let’s say this end of January, middle of February, with our first round of collections will get done. And it is already getting distributed, as the designs and patterns are getting ready through our distribution channel. So the product and the value proposition of flooring in a day has been well received in the marketplace. The product is well received. So hopefully, in the coming year, we are likely to see better traction with the distribution network that we are building. So the whole go-to-market strategy, also the building of the network, BCG is assisting us just the last several months, and they will continue to do so over the next year as well. So as we are laying a very solid foundation. So as Altaf said, we have 50 distributors now, we are represented almost in the entire country, state-by-state, with all the major cities. We have about 400 points of distribution. Our goal is to get to about 1,500 points by the end of FY '21, and some of them are the shop-in-shops. So we have about 70-odd shop-in-shops now. We'll -- as we transition this year, we'll be crossing 100 shop-in-shops. And our goal is to get to, let's say, 300 end of FY '21. So we are building a network, there are some very serious discussions happening on the export side with some very, very large -- with importers and distributors, also some very large OEM players. Again we are at sampling stage with them and so this quarter, I think, things will settle down. And this hopefully will translate into businesses for the year that's coming. So this progress is getting made in all areas. And we are looking to end the year and with the March exit rate should be anywhere between INR 15 crores and INR 20 crores for the flooring business by itself. And as the distribution and the dealer network crosses 650, 700 maybe thereabout, that's when we'll go for an all India marketing launch with our brand ambassador Amitabh Bachchan and so that impact -- this hopefully should help this kickstart the product in the domestic market. And we are doing -- we've done about 8,10 installations on carpet tiles in the domestic market with some esteemed clients and the inquiry list now continues to grow. So like -- it's a typical process that the architects and AiDs getting the smaller projects with us to test us out. So whatever has come our way we have executed them beautifully. And so this, hopefully, over the next 3, 4 months, because as we gain the confidence of our channel partners and also the AiD community. So this business on the carpet tile should also start happening. And we are also building a global distribution network or aligning with importers, distributors, OEMs. So that the capacity that we have, we are able to find a market for our products. So I think these are a few things that I thought we would add. And the other thing, I think which, in fact, in our Board meeting got extensively discussed today was the e-com strategy. So Dipali and her team are furiously working on, let's say, this -- the e-com business, particularly in America. And so the guy that -- so we've actually hired an excellent leader there, and he's now settled down -- he's a few months into the system. So he comes from that background, he has built $150 million of the e-com business from scratch there. So there are things that we need to correct, both in terms of strategy as well as execution. So I think, as a company, we are focusing attention on the e-com part of the business, now that is growth. So it's already about 15% of the American market, and it's likely to grow further. So we need to participate in that growth and so we are building the right framework and the right talent pool. And this -- so this is the business planning time and hopefully, by the second half of March, I think our blueprint will be ready both for the textile business as well as the flooring business, along with the Advanced Textile business and both the brands, Spaces and Welspun. So all in all, so we feel satisfied. And particularly -- in a time when the retail customers, some of them are growing, some are not. So in that environment, we feel pretty satisfied with what we have done both with our textile business, and some of our emerging businesses as well. And hopefully are looking towards this positive growth in the times to come. So all in all, the emerging businesses in the company, which is Advanced Textiles, Flooring and Spaces and Welspun brands should definitely grow past 50% in the next year because the flooring business is off a very small base. So it will grow significantly, we hope to grow our brands by whatever 30%, 35% that we've continued to grow the last several years. And the Advanced Textile business should also show us modest growth, so between the 3 of them put together in excess of 50% growth there. Now, these form already 10% of our top line now. So this 5% or 6% growth at the company level should come from the emerging businesses. And this, hopefully, the textile business should contribute an equal amount. So we want to retain our guidance on a double-digit growth for going forward. And 20% EBITDA margin plus/minus 2%, so that's where our business is currently, and we are hoping to continue that performance going forward. So with that, I'll be happy to -- all of us will be happy to take questions.

We have the first question from the line of Vijay Sarda from Crescita Investment Management.

Congratulations on good set of numbers. So just wanted to understand 2 things. One is on the overall outlook on the textile, given the fact now there is a problem going on in China, which may be temporary in nature. But overall, the growth, what we have seen in the home textile, which was, at one point of time, 2 years back was around double-digit now have gone down to single digit. So how is the outlook over there in textile business? Secondly, coming to the flooring with the kind of investment that we have made now of INR 800-crore-odd. What kind of revenue potential over the next 3 to 5 years, we can see in this business?

So let me start with the back half of your question and Dipali will take the textile part. So on the Flooring side, so about INR 800 crores and -- slightly in excess of INR 800 crores have been invested, just to refresh, the project is about INR 1,130 crores, INR 1,140 crores. So the rest of the money will be spent over the next 8 to 12 months. And there's no need for us to buy equipment that we don't currently need, so we have staggered our investment there. So we will end the project investing about INR 1,100 odd crores in the floorings business. And as we have discussed this in the past, so give or take a couple of hundred crores beyond that should take us to a revenue of -- in excess of INR 2,000 crores over a 5-year horizon. So as we ramp up and as we utilize all these capacities, our guess is that there's another INR 200 crores. So INR 1,100 crores plus a couple of hundred so INR 1,300 crores, INR 1,350 crores of investment. So the balance INR 200 crores, we don't need to invest now for -- or, let's say, for that matter, another couple of years. So that kind of investment should give us a INR 2,500 crore kind of revenue. So those kinds of capacities have been build up. And as I said, this, we are aggressively looking to find a house for selling and marketing that capacity. And so like any new business, it is going to take us some time, but we are seeing good symptoms. So I think that we have made our presence felt in the marketplace both in the domestic as well as international markets. And still leading companies, leading distributors, dealers in India, leading importers, distributors, leading OEMs are engaged with us. So they have seen what we have built, they've seen very quickly that in a 4-month this time that we have put a collection together and from a technology standpoint, we are second to none. So there's respect in the marketplace for what the company has done. So -- but to answer your question, this should be good to deliver INR 2,500 crore kind of sale over a 5-year period.

Sir, just one more. In terms of this, how the -- like the mix will be in terms of domestic and export because currently, what we have ramped up is a domestic presence of distribution. So simultaneously, we have done for the international as well in terms of the establishment -- distribution?

Yes. So see, this mix is likely to change year-on-year, but all in all, if you ask me a 5-year view, we have built the business on a 50-50 kind of a portfolio. So we are looking at an excess of INR 1,000 crores of revenue from the domestic market over the next 3 to 5 years. And an equal amount coming from exports as well. So we are looking at a 50-50 mix in each -- in both these markets. So look, I'll get Dipali to talk about your textile side of the question, but I want to start that -- look with what is happening in China. So we want to -- we don't want to build our business on the corpses of the people there. So pardon us, but -- so we don't -- we are not seeing this as an opportunity and we don't want to see this as an opportunity. But yes, the tariff part is helping the flooring business and the rugs business. And Dipali will take you through some of the key initiatives that we are taking on that side. And also that, so look, it's already close to $1 billion business. We have a 25% market share of towels in America, we have close to 15%, 16% in sheets. So the business is already -- we've developed a very strong market share and so just to continue growing the business at the rate at which it has grown over the last year [ is a bit ] challenging. And which is why I see this as the right time, the company took the initiative of this investing its cash flows into the flooring business. Now we are investing money into the Spaces and Welspun brands, for home textiles. And by the way, we are looking at a INR 1,000 crore plus business in India for the home textile business as well. So we were aware that the growth is going to slow down and if the business cannot continue to grow at that rates forever. So this, we have taken all the decisions at the right time, at the appropriate time. And all within, let's say, the cash flow that the business is generating. So -- and having said that, look, we are still very positive, our business is going to grow, just between 5% and 10%. So don't get us wrong, so our endeavor is going to be to grow our business, or the core business also this 10%. But -- so it is challenging, we acknowledge that, a realistic number would be anything between 5% and 10% and Dipali you might want to quickly share some key initiatives that you are taking?

Yes. So absolutely rightly, I mean, we'll be closer to the higher single-digit. But looking at our growth channels with the e-commerce and hospitality and hospitality will be growing at a double-digit going forward. Innovation will become a kind of a vehicle of growth as well. Hygro will be growing at 15%. And also -- and Martha, the brand that we've licensed actually, it's making us find doors in the tier 2 retailers, which -- where Welspun wasn't present in. So that is a great opportunity and also an opportunity towards rugs and bedding, will be very, very important for us. And as RRM pointed out that China tariffs have laid an opportunity for Welspun in the category for rugs and carpets, definitely so. So yes, our business definitely looks robust as we go forward. And our initiatives that we've taken this year will definitely see a growth for us in a strong -- in single digit as well. And positively, also, our class action has also come to a closure. So definitely, that's also a very positive sign.

Ma'am one more question in terms of just continuation this, export part of textiles, we were doing good in U.S. any which way we have a robust presence. How about the Europe and other rest of the world, where we started with our strategy to penetrate deeper? So how is that happening and is that a good market to watch out for incremental growth?

Yes, absolutely. In fact, I would say, while with the kind of conversation on Brexit and the challenges in the European economy, we have continued to grow. We've in fact grown at 8% in Europe itself. And this is actually because of the kind of different initiatives, which are nontraditional channels that we took. So loyalty program is, again, a very important initiative. And a lot of -- a couple of other things, including promotions in this part of the world. So this will be an important part of our growth, U.K., Europe and Rest of the World.

The next question is from the line of Sumant Kumar from Motilal Oswal.

So my question is for the -- this quarter, 2.5% growth. Can you give me the breakup of volume realizing and currency breakup for that?

Yes. So Sumant, the exchange impact is about 5.7%. There's a volume degrowth of about 4.2%. And there is this Welspun Flooring has a favorable impact of about 1%.

Okay. So 4.2% volume de-growth?

Yes. So this -- but let me just qualify this, so don't read too much into this de-growth of the volume. So as we compare this quarter against a very large -- this couple of promotions that we have done in the last year. So these promotions will come in the coming quarter and the quarter after that. So this April to June quarter. So those promotions have been postponed. So this effectively, the business has not degrown. So it is just the shifting of a couple of large promotions that we did last year from a timing perspective. So a couple of large businesses just have shifted a quarter or 2. So perhaps that is the reason of the de-growth.

Can you give us for the -- breakup for the 9 months? The 5% growth we have shown?

So I'll -- offline, I can give you, Sumant later. I don't have the figures readily available right now.

Okay. Okay. And talking about the flooring solution -- sorry, when we talk about the overall guidance you have given that 10% double-digit growth and 20% margin, EBITDA margin. So what is the growth for the core business, that is including double-digit growth, including a flooring solution? Or you are talking about the core business?

If you look -- we are -- our ambition is to grow the core business also just between 5% and 10%. So we'll aspire for 10%, but realistically this we should fall anywhere between 5% and 10% so that's where that the core business is going to be. And the rest of the growth will actually come from the emerging businesses that we have.