Welspun Living Limited (514162) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Welspun India Q1 FY '21 Earnings Conference Call hosted by Systematix Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Ankit Gor from Systematix Institutional Equities. Thank you, and over to you, sir.

Thank you, Janice. Good evening, everyone. On behalf of Systematix, I welcome one and all to the 1Q FY '21 earnings call of Welspun India. From the management side, we have Mr. Rajesh Mandawewala, Managing Director; Ms. Dipali Goenka, CEO and Joint Managing Director; Mr. Akhil Jindal, Group CFO and Head Strategy; and Mr. Sanjeev Sancheti, President, Finance and CFO. Now I would like to hand over the call to Ms. Dipali Goenka. Thank you, and over to you, ma'am.

A very warm welcome to all of you to our quarter 1 FY '21 investor call. I hope that you, your family and colleagues are well and safe and are taking the necessary precautions. I will cover the key business updates for the period and a continued focus on optimum capital allocation. Later Sanjeev will take you through the key financial highlights for the quarter. As we updated during the last earnings call, in June 2020, our plants were shut from last week of March to first half of April due to government-imposed lockdown on account of COVID. However, we could swiftly restart our operation with all the safety protocols in place. This was possible on account of a vertically integrated facilities where we have built an entire ecosystem comprising of vertically integrated plant covering spinning, weaving, processing and Cut & Sew, cotton warehouse, vendor ancillary park, workers colony, skill development center, et cetera. Proximity to port has also helped us to resume operations and get connected to the global supply chain. Although, we saw lower utilization of our capacities in April, it improved in May and further picked up in June. I'm happy to share that at present our plants are running close to full capacity. Many countries in Europe and U.S.A. have started easing down on the restrictions with majority of the stores back in operations. All the global big-box retailers selling essentials were operational during the last quarter and has seen continued upsurge. Hence, we have seen steady demand from these retailers, which has now come almost to preCOVID levels. Departmental stores were largely closed in March and April, but most of them have also resumed operations. As we speak today, big-box retailers with massive footprint have become a destination for all kind of shoppers, including those who hitherto have not been visiting such stores. Since our sales are skewed towards the retailers selling essentials, we are witnessing a sharp jump in inquiries and increased sales every passing month. So to say, our June 2020 month sales has come close to the level of June 2019 sales. Order book looks strong for quarter 2 FY '21 and projections for rest of the year look robust. Our newly launched Martha Stewart brand licensed products has seen great success in the U.S. market, both online and offline, despite COVID challenges. As stated during our last call, we have forayed into health and hygiene vertical in shortest possible time, with focus on health and hygiene-related products such as masks, coveralls, medical gowns, disposable bed linen, towel, disinfectant wipes, et cetera for frontline workers and consumers. This was possible by leveraging our vertically integrated woven and nonwoven capabilities. We also have a complete clean room setup for manufacturing these products and a fully equipped BIS accredited lab. We have launched reusable cloth mask with antimicrobial range and patented nano core masks with water repellent finish. We are amongst very few players to have BIS certification for 3-ply surgical masks. We are also making coveralls and medical gowns, both disposable, breathable and nonbreathable variants. We are the first company in India to be BIS certified for the coverall product. We will very soon be launching our antiviral range in exclusive partnership with HealthGuard, Australia. Our products are under certification for CE and U.S. FDA Class I. Listing is already done for supplying to global market. Opening up of exports will offer a promising opportunity, given that we have strong relationships with all the major global retailers and hospitality partners who are seeing high demand for these products. We see huge potential in the advanced textile business. Most of our customers wish to establish a secure supply chain with us. We have seen a big uptick in demand from downstream products like wet wipes, for which we play the role of private label manufacturing partner with addressing market size at $15 billion to $20 billion. Our current capacities are already fully utilized. Further, due to the changing consumer behavior towards health and hygiene, there's a high demand for PPE products as well as disposable solutions. Hence, the Board has approved today an investment of INR 495 crores for advanced textile vertical to be spread over 2 years. It is a planned CapEx for augmenting our hygiene, PPE products, nonwoven and bleached cotton capabilities. The proposed investment meets our hurdle rate threshold of 18% to 20% IRR. While the investments in augmentation of spunlace and wet wipes capacity will be INR 345 crores, we are also simultaneously building our cotton bleaching capacity at INR 150 crores, seeing an increased demand from fem care and baby care segment globally. This is a twin pronged strategy, then we'll exploit the domestic as well as global demand for cotton-based nonwoven fabric. Our products have met the stringent criteria of large MNC players and they are in discussion with us for a long-term offtake. These investments will give us a revenue of around INR 500 crores in the third year of operations at 75% capacity with operating margin better than core business margins. The above capacity enhancement would help us to strive the disposable solution range that are mass market to the niche across personal health and hygiene, baby care, personal care, feminine care and adult care segment. The headwinds caused by the spread of the pandemic has forced businesses across geographies to focus on e-commerce. Growth and penetration of e-commerce has accelerated, and we continue our enhanced focus on e-commerce businesses, both globally and the domestic markets. We are ramping up our e-commerce presence with our own brands, Christy and Spaces as well as omnichannel and marketplace. During the quarter, our domestic e-commerce business grew by 29% year-on-year, with just 45 days of activity, while our global e-commerce business grew by 100% year-on-year. Spaces has also become one of the top online brands on Myntra in home category. During the quarter, our own website, spaces.com, doubled its sales year-on-year and christy.com witnessed record-breaking sales. In FY '21, we are targeting 100% growth in our domestic e-commerce business and around 150% growth in our international business from e-commerce. Our own brands like Spaces, Welspun, Christy and licensed brand Martha, along with our innovation capabilities, will act as key growth catalyst for this channel. Domestic business has revived from June 2020 as most states are easing down restrictions and trade activity has started to pick up. Our domestic retail business clocked INR 250 crores in revenue in FY '20. The revenue in the current quarter has been sluggish due to the lockdown impact. However, we plan to mitigate the shortfall through a new vertical, health and hygiene. Spaces continue to be consistently the #1 brand in SIS format in bed and bath category, our second most popular brand in premium category. The distribution network for the Spaces brand has increased significantly and products are currently available in 350 towns at 2005 outlets. We continue to see a grand opportunity in Welspun as a mass brand. It is the second most popular brand in mass market category and is currently present in 46 cities, 3,014 outlets and 52 distributors. The company continues to invest significantly in building its brand and the current profit of the company is after the investment in building brands and channels of distribution. The company has spent around INR 100 crores in the last financial year towards its brand building efforts. Significant travel costs across the globe with restrictions hit the hospitality segment. It may take a little while before we start seeing traction as most countries have now lifted enforced hotel closure. We are seeing demand picking up. In case of flooring solution, the exports business is looking promising. The total size of addressable export market is more than $20 billion. Currently, 80% of hard flooring market, which is equivalent to $3 billion is serviced by China, and customers are looking at derisking dependence on Chinese vendors. In case of hard flooring, we are seeing faster product and facility approval by large U.S.-based importers. We have entered into a long-term strategic arrangement with one of the largest U.S. distributor for hard flooring. This has enabled us to secure 50% of our current capacity of hard flooring. As external situation keeps improving, we expect every passing quarter to be better than the previous month. In FY '21, we expect at least 50% of the flooring revenue to come from export business. As we see better visibility in the business in a calibrated way, we'll inject rest of the balance CapEx. In flooring solutions, we would be the only brand in the market offering safety and convenience, a 1-day installation, COVID safety and installation to the consumers. Considering the present scenario, this would be the key consumer consideration from health and hygiene perspective. In addition for the commercial flooring, we are also the only brand in the market offering made in India product with comparatively better service and lower lead time due to our nationwide footprint. We have around 475 outlets, including 100 plazas pan-India. In the back half of the year, we will increase the network to around 900 touch points. On capital allocation, we would also like to discuss our capital allocation strategy. It has been our endeavor to allocate capital efficiency -- efficiently in order to enhance stakeholder value. Hence, over the last few years, our net debt has reduced even though we have added capacities in various businesses, including our investment in the flooring business. Our total net debt reduced to INR 2,653 crores in June 2020 as against INR 2,962 crores in March 2020, a reduction of INR 309 crores, while net debt of our textile business reduced by INR 348 crores to INR 1,976 crores. Our strategy on capital allocation is to calibrate our CapEx based on the cash flow available and keep it around the total depreciation charge, maintain a steady dividend distribution of at least 25% of stand-alone profits, continue to invest in our brands across geographies and channels and continue focus on reduction of net debt. We have already reduced net debt in our core business by INR 1,000 crores over the last 2 years and would continue to allocate cash flows towards net debt reduction. Today, any capital we are allocating is after a comprehensive discussion and exercise, which is supervised by the Board. Any capital invested is with view to grow with a significantly higher margin than the current average margin. I would like to reemphasize that we have been able to withstand all the past and present challenges because of the investments we have done in innovation, digitization, brand, talent and sustainability, which may not be visible directly in the top line in the short run, but will help create a sustainable organization with stable growth and strong margins. I would like to announce few leadership appointments recently in various parts of the businesses. We have strengthened our leadership team at flooring to deliver on growing business aspirations. Mahesh Shah will not be leading the Indian business. He'll be responsible for designing and implementing growth strategy and align the domestic business vision. Mahesh is known to have turned around loss-making company by redefining strategy and has in past built a great retail franchise. Nemisha Ghia has joined us as Head of Domestic retail business. She has worked with reputed companies across e-commerce, FMCG and telecom industry. Her immense experience in sales and distribution and e-commerce will enable us to drive further growth. Rajendra Mehta has joined us as CHRO of WIL. He brings comprehensive years of 25 years of developing and executing strategic human resources across diverse industries. As you would all know, Altaf Jiwani has taken over major responsibilities within the group from July 2, 2020. Sanjeev Sancheti has taken over as the CFO of WIL from July 2, 2020. He is a senior professional with over 27 years of experience across diverse functions, including corporate finance, M&A and alternative strategy. We wish all of them a long and successful association with Welspun. Now I would like to hand over the call to Sanjeev to provide all the updates on Q1 financial numbers. Thank you.

Thank you, Dipali. Good evening, ladies and gentlemen. Many thanks for joining Q1 Welspun India con call. I will give a brief overview of the financial numbers for the quarter before we open for Q&A. As mentioned by Dipali, our plants were shut for last week of March to first week of April -- first half of April during the government-imposed lockdown on account of COVID. Due to this, we saw lower utilization of our capacities in April, but it improved in May and further picked up in June. This impacted the revenue and EBITDA of the current quarter which are down by 30% and 36%, respectively, from the corresponding quarter of the previous year. However, at present our plants are running close to full capacities. We're extremely happy to share that in spite of one of the most difficult times in the history of the company, due to lockdown, we have been able to achieve an EBITDA of INR 238 crores and operating margins of 19.6% in the current quarter. Our total income was down -- total income during the quarter stood at INR 1,216 crores versus INR 1,736 crores in Q1 FY '20. While the volume fell by about 37% due to lockdown, the average realization increased by about 10%, aided by better mix and stronger U.S. dollar. Home textile revenue stood at INR 1,185 crores versus INR 1,718 crores and flooring revenue stood at INR 25 crores versus INR 10 crores in Q1 FY '20. Emerging businesses, which includes flooring, retail and advanced textile, contributed about 10% to the top line. Despite macroeconomic challenges, we have reported EBITDA margin of 19.6% in this quarter versus 21.4% in the previous quarter of the same year -- of the corresponding period. And the core business EBITDA margin stood at 22.1%, steady Y-o-Y. Profit after tax stood at INR 49 crores versus INR 150 crores in Q1 FY '20. TTM EPS stood at INR 4.05 versus INR 2.32 in the same period last year. We would like to reemphasize that we are fully integrated and hence are in a much better position to manage supply chain-related risk, which have been acknowledged by all stakeholders. This has enabled us to very quickly restart and come close to preCOVID levels in June 2020. We have used this opportunity to look deep into our costs and have been able to rationalize costs and improve efficiency across functions and supply chain, which will help us significantly going forward. The borrowing level has come down substantially. Net debt excluding flooring debt is down by INR 348 crores while overall net debt for the company is down INR 309 crores and stood at INR 2,653 crores. While we calibrate our CapEx based on cash flow and return threshold, we estimate our CapEx for the current financial year to be around the year's depreciation of around INR 500 crores. On the ForEx front, we have been continuously following the Board's group policy to sell 50%, 60% of our receivables on rolling 12-month basis. The impact of the current spot will reflect in our revenue with a lag effect that is from the end of this financial year. We continue to hedge 50% of our future receivables currently. Average exchange realization for this quarter was 72.7% versus 71% in the corresponding quarter last year. Over the next 3 to 5 years, India has a great opportunity to capitalize on the present anti-China sentiment across the globe. Large global businesses are expected to recalibrate their supply chain strategies, and this may bring in great opportunities for companies like Welspun who have deep relationship with some of the largest retailers in the world. In the midst of the pandemic surrounded uncertainties, it may not be prudent to give guidance for FY '21. While we are well equipped to navigate through these challenging times and continue to pursue our long-term goal of sustainable growth and delevering our balance sheet, we would like to assess each quarter as we progress till the time the global normalcy returns. With this, I will leave the floor open for Q&A. Thank you.

[Operator Instructions] We take the first question from the line of Bhavin Shah (sic) [ Chheda ] from Enam Holding.

Yes. Congratulations on excellent set of numbers all across in the difficult times. And press release also mentioned a strong outlook. So it is good to see that company returning to normal very fast. Just a few questions since there are many new things in the press release. So first thing, I think you mentioned the advanced textile CapEx of INR 495 crores over 2 years and revenue potential of close to INR 500 crores in year 3. I think, we are already growing this advanced textile business by close to 30%. So should we assume this as an incremental of INR 500 crores business over and above the normal growth rate?

So Bhavin, this is Rajesh. Hope you're well. So Bhavin, our current capacities by and large in most of the products that we do are now getting utilized close to full. So this year, the growth will come from the existing capacity. But from next year onwards, we have to rely on the expanded capacity of -- for which the CapEx is currently getting planned and executed. And the CapEx is going to get executed over a 2-year period and should be good to deliver this INR 500 crores of top line and at 75%. So if the utilization is more than 75%, the top line is likely to be better than that as well. So that's the way we are currently planning.

Okay. So if I summarize just this current INR 300 crores business can grow at best to INR 450-odd crores as you need CapEx. So including this CapEx in third, fourth year, we reach INR 1,000 crores odd, right?

That will be our endeavor, Bhavin.

Next thing, on the health and hygiene segment, which is the new segment, and you mentioned few things on it. So is this the -- just the domestic potential? Or are you looking at both domestic and export market? And in that segment, how much CapEx are you putting? And what kind of revenue numbers you are looking at? Or what kind of market opportunity and what Welspun is targeting because this is very large segment, so I'm sure you would be focusing on few segments only. So what is our target here since this is a new thing, which has just come up. You had some products, but which were very small, but now this opportunity is growing. So you can give some guidance there, what numbers or what kind of business potential you're looking over next 3 years?

So let me -- I'll take this question as well. So Bhavin, we have the base ready for, let's say, this foray into the health and hygiene thing because we are -- as Dipali mentioned, we are vertically integrated both across woven and nonwoven fabric supply base. And also, let's say this in terms of finishes that need to get this applied, particularly for -- on the health side of the business. So as we -- right now, we are set up for about 5 or 6 products, which is coveralls, medical gowns, surgical masks, N95 masks, medical gowns and also our existing products, which, let's say this, we are adding the antimicrobial, antiviral features to our product portfolio. So there's not much -- there's not significant CapEx that is going behind this. It is about pivoting this a little bit of our existing capacities into developing products for the health and hygiene segment. Now to your question on whether this is a domestic play or an international play. It is both. So this -- we're clearly set up in both the markets, both domestic, where this -- as Dipali mentioned, so we already have a distribution network. And over and above that we are engaging with several potential partners for a strategic alliance. But I think we are very well positioned for the global markets as well. And we need to set ourselves up. So we are currently under certification, you can't export these products without certifications, both within the European and American markets. So we are undergoing that process. But we believe there is a huge amount of potential on the international side as well. Now we -- it's early days. It's too early for us to quantify the opportunity. So this -- so you will -- we will walk before we run. As I said, we have not put in too much of capital expenditure into creating this facility. And there's nothing in terms of CapEx, large CapEx that we are incurring, which cannot be put to alternate use. So we have been in the health and hygiene space. We have been making wet wipes and disinfectant wipes and all those things. So there's nothing -- there's no significant CapEx that, as I said, that is getting incurred. And we will have to walk and test both the domestic and international markets as they open up for us. But the early signs are good, and this -- over the next few months, we might be in a better position to quantify. So right now, it's very early days, but the signs are encouraging.

Yes. And just my last question on the flooring part of the business, and then I'll enter the queue. So flooring, good 2-year strategic tie up with a U.S. player for 50% of hard flooring capacity. So any guidance here since we have already reduced the EBITDA loss of flooring from INR 60 crores to INR 27-odd crores. So since the press release mentioned the 50% of the capacity is booked, I assume that's close to INR 200 crores to INR 250 crores business potential. And if yes, then how does that ramp up? Because I believe hard flooring and soft flooring was 50%-50% of the capacity. And if 50% of your hard flooring is booked, so that number would be close to the $30 million, $40 million worth of business? So when does that start? And how does that ramp up and what's the breakeven point there?

Good. Look, so as you are all aware, this is a startup. And this -- I'll start with counter asking you a question. If you can -- you know there is a pandemic situation. So anything that we say has to be in light of the circumstances. And if all things are normal, the numbers that you mentioned are, let's say, achievable. But we are in a pandemic situation, Bhavin, and things -- this will -- as things clear out, we will be in a better position to turn the table and guide on the numbers, but for the current year, we will need to be cautious. But the signs are good. We feel much better about the business on the international side. And while the domestic business will take a little more time to take off, but the international side of the business is looking very promising. And on the domestic side also, see what in a current situation like this, it is -- we will get it in and install floors into the homes of the people, and we are capable of getting out in a day or 2. So very clearly, this -- nobody would want these people hanging around your house for 15, 20, 30 days to change your floor and so on and so forth. So as things clear out as the pandemic situation clears out, we believe, that this we have -- our conviction, our value proposition, both in the domestic market as well as this rebalancing of the supply chain in the international markets will actually play in our favor.

We take the next question from the line of Nihal Shah (sic) [ Jham ] from Edelweiss.

Sir, my first question, just to understand how the quarter went? Because I understand April was something that you would have completely seen the impact of lockdown and hardly revenues would have been recognized. So looking at the revenues you've done for the quarter, is it that we were at close to 100% utilization in both May and June?

So I'll take this question. So April, we actually started commencing when the whole -- the government opened up the lockdown for manufacturing post the 21st of April. So April actually was absolutely at practically 10% of our capacity. And May and June, we started seeing kind of around 70% to 80% of our capacities working. And the advantage that we had, and I will reinstate again, is our complete ancillary park, our workers colonies around and a complete vertically integrated operations. That helped us. And for us, through the pandemic, I think I must just also share that the health of our people was prime. So taking care of them in the terms of giving them whatever that needed to be done for immunity, to get everything done, so that they could be safe and secure, and they could feel safe and secure has been the whole objective. So May and June saw the capacity working at 75% to 80%. And now as we see the second quarter coming in, we have now started taking up to 85% to 90%.

Sure. Dipali, would it be right to say that, as you mentioned, I think 3, 4 weeks back even on the Q4 call that most of the Q1 order has been probably driven by the big-box retailers selling essentials and department stores were more or less absent for the entire quarter?

Yes. It's basically primarily the big-box retailers. And it started with U.S.A., but then Europe and U.K. also opened up. And generally, the trend has been towards the grocery and those kind of retail outlets that have seen the complete impetus of demand. But as the departmental stores and discounters also opening up in America, people have started, again, stacking up the inventory that they had lost on for the last quarter.

That's helpful. And just last thing on this is that, do the domestic sales of the branded business, excluding Hygro have any significant contribution this quarter or they contracted as much as the overall revenues?

So you know that the pandemic in India and the major lockdown happened in this quarter. And India started opening up, in fact, very, very recently. And so there has been a very minor contribution to retail around -- I mean I would say, 2% to 3% into what we are seeing. But I think you'll see the upsurge coming in the next quarter because that's the time India is opening up, festivals are coming up. So I think the momentum looks positive.

That's helpful. The second question was on flooring. In Q4, you mentioned that the Board was looking at reassessing the flooring business about how to maximize shareholder potential. I just wanted to check has there been any incremental update since then about that can -- you can share on that?

Of course. Of course. We also mentioned this in that Board meeting that there will be a committee of this independent directors appointed to look into various possibilities. So -- which we have done, so they are working on it. And we also mentioned it will be August before they come up with their recommendation. So the work is happening. And the next -- upcoming -- the next Board meeting, we might have something as the recommendations from the independent directors come.

That's helpful. Just last question from my side. Rajeshji, if I were to look at the current advanced textile top line, I think it will be around INR 300 crores if I am right. I just wanted to understand, what is the category that the current revenues is targeted at?

So it's all health and hygiene. So the products, by and large, also about 90% of the revenues come from the health and hygiene, some from raw materials, some from finished products. But it's by and large directed to health and hygiene, baby care and this fem care and so -- which has been the heart of our business. There is another part of our business, which is filtration and related products. So there, let's say, this -- so there's potential for us to grow in terms of utilization, but the health and hygiene business is throttling pretty well right now. And yes, the revenues are around the INR 300 crore mark that you mentioned.

Yes. As you mentioned that you could potentially hit a capacity bottleneck next year considering the rate at which it's growing. So would there be a need to possibly expand that line of the business? Or that call you're going to take at a later time?

Which is what the CapEx is all about. So...

But this is for -- you would say a different line of business, right? This is more into PPE and more into health?