Welspun Living Limited (514162) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Welspun Living's 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, Rohit. Good evening, everyone. On behalf of Elara Securities Private Limited, I would like to welcome you all to Q2 and H1 FY'24 Post-Results Conference Call of Welspun Living Limited. Today, we have with us the senior management of the company, including Mr. Dipali Goenka, Managing Director and CEO; Mr. Sanjay Gupta, CFO; and Mr. Salil Bawa, Group Investor Relations Head. I would now like to hand over the call to Mr. Salil Bawa for initial remarks post which we can start the Q&A session. Thank you, and over to you, Salil.

Thank you, Prerna. Good afternoon to all of you. On behalf of Welspun Living, erstwhile Welspun India Limited, I welcome all of you to the company's Q2 FY 2024 earnings call. Along with me, we have with us today, Mr. Dipali Goenka, Managing Director and CEO; and Mr. Sanjay Gupta, Chief Financial Officer. We hope you have had a chance to review the investor presentation that we filed with exchanges today. It is also available on our website. During the discussion, we may be making references to this presentation. Please do take a moment to review the safe harbor statement in our presentation. As usual, we'll start the forum with opening remarks by our leadership team and then we'll open the floor for your questions. Once the call gets over, should you have any further queries that remain unanswered post the earnings call, please feel free to reach out to us. With that, I would now like to hand over the floor to Ms. Dipali Goenka, Managing Director and CEO. Over to you, ma'am.

Thank you, Salil. Good afternoon, everyone, and thank you for taking the time to join us today for our Q2 FY'24 analyst call. I would like to share some perspectives on the operating highlights of our performance during the quarter under review after which, Sanjay would share some highlights from our financial metrics. Firstly, as informed, last quarter, the process for change of our name Welspun Living Limited is now complete. The move resonates with our intent to transform from a pure B2B to also a B2C-oriented company. The new brand identity, Welspun Living not only reflects the current business verticals, but opportunity to grow in related areas as a complete home solution provider. We are pleased to share that we have seen our revenues jump to an ever quarterly highest of INR 2,542 crores, growing by 19% Y-on-Y and 15% Q-on-Q. The upcoming holiday season in U.S. has led to increased buying from all major retailers. Consequently, we witnessed higher capacity utilization on the back of season rollouts at 80% to 90% for our terry towels, bedsheets and rug units. We have also achieved highest EBITDA of INR 391 crores in the last 8 quarters, clocking 15.4% in Q2, growing 158% Y-on-Y and 15% Q-on-Q. Annualized ROCE has improved substantially to 14.6% from 5.7% last year. As for the OTEXA data, India has gained back its market share in exports to U.S. for the Jan to August 2023 period from both in TT from 40% to 45% and bedsheets from 51% to 58%. We are keeping a close work on all the 3 Cs, cotton, coal, container, as we know post COVID commodities have remained dynamic. We have strengthened our internal governance to ensure that we are minimizing impact due to any untoward price volatility, both in short term and medium term. We continue to be cautiously optimistic on the operating performance for the remaining part of FY'24. Though the global slowdown estimates and worries still persists, we are committed towards meeting our directed revenue growth of 10% to 12% for the year and 15% EBITDA. I would like to shed some light on the updates for major business segments starting with the exports markets. Globally, the growth has moderated to 2.6% in Q3 and 3.3% in 2022. U.S.A. is, however, a market showing resilience with GDP in Q3 is expected to expand at 4% despite banking crisis and rate hikes. U.S. retail sales show resilience in Q3, it grew 3.8% Y-on-Y in September '23, 0.7% M-o-M in September '23. Inflation, though has affected consumer purchasing power to some extent, inflation is at 3.7% as compared to 3% last quarter. For the upcoming holiday season in U.S., we have witnessed increase in flow of orders during the quarter. Export revenues of Welspun saw a growth of 22% year-on-year with innovation products growing at 67% Y-on-Y. Our deeper customer connect across major international retailers is reflected in the increased share of shelves as compared to pre-pandemic levels, both in bed and bath categories. The global economic scenario is expected to be volatile. With the recent Israel-Palestine conflict, it has added to the overall complexity, though our direct impact is minimal, but that it may potentially affect global economic sentiment, which is something we are keeping a close watch on. Closer home, the Indian market has been resilient during the recent global turmoil with expected GDP growth of 6.5% and inflation at 5%. However, recently, there has been volatility in inflation owing to huge price hikes and different essentials leading to a dampening of retail sentiments. In Q2, as in Q1, at retail level, we have witnessed relatively lower footfalls and offtakes within the consumer, general merchandise and apparel space. In this time of inflation volatility, the consumer is prioritizing essentials rather than discretionary products despite the transient challenges in the market. Welspun's domestic consumer business sales remained flat for Q2. Band Welspun continues to spend in its leadership position and is mostly widely distributed home textile brand in the country with presence in 600-plus towns and 15,511 outlets, up by 2,246 in Q2, a reach not hitherto achieved by any home textile player in India. Brand Spaces has outgrown the category in modern trade channel, emerging as a leading brand within the category and gaining market share. Despite the continuing investment in marketing and relatively weaker retail market sentiments, the Home Textiles Consumer business continues with a streak of positive EBITDA in Q2. We remain committed to continued investments in our brands for improving brand visibility and salience, which shall be prominent in the upcoming festive season. With the consumer sentiments improving, we expect B2C segment posting a good growth during the coming months. We remain committed towards our focus to build profitable business growth in the domestic consumer business. Our emerging businesses of the domestic consumer business, global brands, advanced textile, flooring businesses grew 28% in Q2 Y-on-Y and 15% Q-on-Q. Our global brands include licensed brands like Martha Stewart, Creative CO/Lab and Disney and own brand Christy continued its upward trajectory and grew 27% Y-on-Y. Licensed brands have given us an edge in U.S. and European markets by opening up new avenues and total brand shares, Our sales has jumped up to 17% as compared to 12% in 2021. In Flooring business, we have witnessed big ticket orders for soft flooring in U.K. with a bulk order inflow coming in from U.S.A. In hard flooring in Q2, we have witnessed good order flow from U.S. and Middle East markets and have made inroads into African markets. Overall, our flooring plant reached a capacity utilization of 63% during the quarter with record revenues of INR 243 crores, growing by 52% Y-on-Y. EBITDA also continues to grow, reaching 8.3% in Q2 on the back of increased revenues and better operating leverage. As shared in the last quarter as well, we are witnessing a push towards the China Plus One strategy in major global markets and with a focus on complete traceability of the supply chain. In order to capitalize on the market opportunities, we are working on indigenization of a complete value chain. On domestic markets front, in flooring, we continue to see growth in commercial and institutional segments. We have executed one of the largest wall-to-wall order in India for Bharat Mandapam, which hosted the recently concluded G20 Summit. Residential segment continues to pick up traction in all our key markets. The Advanced Textiles business witnessed a 15% growth Y-on-Y and Q2 FY'24. We have expanded into newer territories and customers despite large scale offloading by Chinese and Turkish competition. Welspun's spunlace is now also approved for innovative medical applications, which has opened newer avenues. On the ESG front, we are glad to inform that the solar power JV with CleanMax has started operations in Vapi. The 30-megawatt solar plant at Anjar is also nearing completion and shall be operational soon. We are also taking steps to further our agenda of our renewable energy goals by 2030 through JVs to set up more solar and hybrid power plants. ESG is embedded in every aspect of operations at Welspun, keeping us ahead of our peers globally in sustainable practices. With this, I would now like to hand over to Sanjay, who will take you through the financial highlights. Thank you.

Thank you, Dipali, and greetings, everyone. I will give a brief overview of financial numbers for quarter 2 financial year '24 before we open for question and answer. During quarter 2 of financial year '24, we reported highest-ever quarterly revenues of INR 2,542 crores, up 19% year-on-year and 15% quarter-on-quarter. For H1 of financial year '24, revenue is at INR 4,754 crores, which is up 16% year-on-year. EBITDA margin for quarter 2 stood at INR 391 crores, that is 15.4%, highest in last 8 quarters and is up by 158% year-on-year, that is 829 basis points and 15% up quarter-on-quarter. For H1 financial year '24, EBITDA is at INR 733 crores, 15.4%. It's up by 125% year-on-year, which is 751 basis points. Cotton being the major input cost, has become relatively stable, albeit at a new higher level. The consistent profitability reflects the work that the company has done across all operating areas, be it cost specialization, value engineering, developing new innovative products or winning new marquee programs from customers. Profit after tax after minority interest for the quarter is at INR 197 crores vis-à-vis INR 9 crore year-on-year and INR 162 crores last quarter, increased by more than 22x year-on-year. For H1, PAT is at INR 357 crores versus INR 31 crores of H1 financial year '23, up by almost 12x. Consequently, our consolidated EPS for quarter 2 stood at INR 2.04 per share as compared to INR 0.08 per share in quarter 2 of financial year '23 and INR 1.66 per share in quarter 1. For H1 of '24, EPS is INR 3.70 as compared to INR 0.31 of H1 in the previous year. On the ForEx front, our average exchange realization for the U.S. dollar during quarter 2 was 83.35 compared to 80.79 in the corresponding quarter last year. At the end of quarter 2 of financial year '24, our net debt stood at INR 1,573 crores, INR 425 crores lower than INR 1,998 crores a year ago, and INR 242 crores lower than INR 1,815 crores in quarter 1. It is slightly up by INR 40 crores from 31st March due to slightly elevated working capital requirement. In first half of financial year '24, we have spent INR 168 crores towards CapEx, majorly towards the setup of 30-megawatt solar power plant at our Anjar facility. We have a stated objective to be 100% renewable energy by the year 2030. In this direction, we are pleased to share that the Board of Directors in their meeting held today has approved after due evaluation of various proposals presented an investment of INR 56.4 crores in a special purpose vehicle for supply of 47-megawatt of renewable energy around the clock RE-RTC basis for Anjar operations, which will make the company's Anjar unit about 80% renewable energy by 2026 and would be a significant step towards our journey to reach 100% RE by 2030. The company will hold about 27% equity share capital of SPV, which will set up 150-megawatt of solar plus wind plant to supply the said RE-RTC. This arrangement is at the most competitive rates to the company and is also appropriate from a capital allocation point of view. Coming to segmental results. Quarter 2 core business, Home Textiles revenues stood at INR 2,352 crores versus INR 2,011 crores in quarter 2 of '23, up by 17% year-on-year and 15% quarter-on-quarter. For first half of '24, revenue for core business was at INR 4,390 crores, up by 14% year-on-year. Quarter 2 EBITDA of Home Textiles stood at INR 359 crores at 15.3% as compared to 6.3% year-on-year and same as quarter-on-quarter. For H1 EBITDA for Home Textiles stood at INR 672 crores at 15.3%, up by 756 basis points year-on-year. During quarter 2 of financial year '24, revenue from Flooring business was INR 243 crores, up by 52% year-on-year and 8% quarter-on-quarter. EBITDA is at INR 20 crores, that is 8.3%, which is the highest ever quarterly EBITDA for flooring as compared to 2.6% last year. For first half, Flooring revenue was INR 468 crores, which is also up 42%, and EBITDA is at INR 38 crores, which is also at 8.2%, which is up 628 basis points year-on-year. With this, I will leave the floor open for question and answer. Thank you.

[Operator Instructions] The first question is from the line of Bhavin Chheda from Enam Holdings.

Congrats on record results, mainly on the top line front and very good performance on the flooring front. A few questions. If I see the capacity utilization, it has been increasing dramatically for last 2 quarters. And in the September quarter, bath linen has crossed 90, rugs and carpets 98 and bed linen was 81. So considering the current buoyancy in the U.S. market, should we expect second half to be at a similar level? What's the outlook?

So the outlook -- thank you, Bhavin,, for the question. And the outlook, we will say that we are cautiously optimistic, and we are committed to the growth of 10% to 12% on the topline and 15% EBITDA. And the capacity utilization will be the same. However, we are -- we might look at some kind of debottlenecking of a capacity. So that is something we would be exploring as we go forward.

How much time this would take, debottleneck -- so debottlenecking, you are mainly looking on the bath linen side, right?

So we would be exploring it looking at the demand, but we will explore. And there could be an opportunity for little investments that could be explored and that could be on the cards, but we are just exploring that, but looking at the prudence on ROC and IRR.

Second, on the flooring side and you mentioned in the opening remarks, there were some orders, I think mostly from U.S. or U.K., you mentioned. So were these one-off type of orders or we are going to continue going forward, and we'll see the sales momentum going up as well as margin sustaining? So the question was, these were not short-term orders, right, only in the quarter, the same run rate would continue going forward?

Yes. The run rate will continue. In fact, we are going to be looking at kind of our capacities will be maintained as the same. And it is also on the back of the China Plus One strategy. I think we are seeing an opportunity there. The whole traceability and being the most modern plant in this part of the world actually gives us that advantage. And definitely, that is something owing to that, we will continue to see this kind of capacity utilization and orders. And this is not one-off. This will be consistent.

And the last one on the balance sheet side. There were some receivables outstanding from government on the incentive part and the other. How much has been received in the quarter? And as on the closing balance sheet date, how much receivables are pending now?

So we have been consistently getting, Bhavin, the incentives due from the government. And it is at the same level that we had in quarter 1 or quarter 4 of last year, so there has not been any increase.

[Operator Instructions] The next question is from the line of Tarang Agrawal from Old Bridge Asset Management.

A couple of questions from my side. One on the flooring and the second one on the domestic B2C textile business. So on the flooring business, your unit realization seemed to have fallen substantially. Is it -- I mean, what's driving this? Is it a conscious effort to gain market share, utilize the benefits of traditional operating leverage? So that's one. And the second one on the domestic B2C business. I'm not sure, but did I hear it correctly, is this business burning any cash on a quarterly basis? That's number one. And number two, how are you managing the supply chain to sell your MBOs?

So flooring business, no. So the UVR is a factor of many things. So we have hard flooring, soft flooring. And then within that also, there are various categories. So it is a mix change that may have been seen. There has been higher capacity utilization and higher sales. So of course, there has been a mix change. And that might have impacted it slightly, not to a large extent. So UVR is not an issue. On domestic B2C, as Dipali mentioned, we are into positive EBITDA. So we are not burning cash. We are investing in marketing consistently each quarter, about 9% to 10%, which we are continuing to do, but we are not burning cash there. On supply chain?

Yes, I'll take this up. So for the supply chain for the MBOs, we have a distribution network that we have across the country. And we have over 200 sales staff across the country that help the distributor to reach to the dealers. So that's the way we work with the MBO network. Along with that, we have a technology support as to reach out on the beat plan and the whole reach-out plan as well. So from Kashmir to Kanyakumari, from West to the East, we have a complete network plan, and it is all supported by technology here, Tarang.

Just, ma'am, if I may. You spoke about the distribution. What's the number of distributors right now, which are helping their MBOs?

We have around 125 distributors here, Tarang, right now, and they are growing stronger.

And just a follow-up on the flooring business, sir. Sir, you did mention that we haven't seen a realization yet, but if I look at the March '23 quarter, we were at about 1.5 million square meters, which gave us about INR 210 crores of revenue. And if I look at September '23, we are at about 2.8 million square meters, and the revenues moved up from INR 208 crores to INR 240 crores, so that was the source of my question. I understand mix changes and -- yes. please go ahead, sir.

Yes. So as I said, so mix has changed. So in March '23 quarter, the mix was different. And in this quarter, the mix is different in terms of hard and soft tiles. We can give more details offline too.

The next question is from the line of Biplab Debbarma from Antique Stockbroking.

Congratulations on the excellent performance, ma'am. My first question is on FDA. So how do you see the impact of U.K. FDA on home textiles, especially on Welspun India. And typically, what do you think it would -- from ratification of FDA to finally getting orders from U.K. Typically, how long will it take? And do you see this U.K. FDA extending to EU FDA? Yes, that's my first question.

Okay. And any other thing? You can continue and then I can answer.

No, no. Thank you, ma'am. This is my question on FDA, yes.

So FDA, I think U.K. FDA is a great opportunity. And as you know, U.K. contributes around 10% of the home textiles demand. And definitely, this opportunity is going to be good for us in terms of not only just towels but sheets. And I think that's going to be a kind of a clear upside. And when you talk about the orders kicking in, it is a matter of when it kicks in and the FDA is approved. We will see a matter of 6 months when this starts coming in.

And do you see EU FDA following through like here or this 2 would be 2 different ballgame altogether?

The EU I think is not something that we see right now, but I think U.K. is something that we are seeing. And that is something is definitely is kind of top on the cards. And also, it consumes the highest consumption after United states of America.

Ma'am, my second question is, in the beginning, you mentioned you maintained 11%, 12% growth guidance. Now if I see the number, operating revenue is already INR 4,693 crores. And if you assume, the second half would do as same as first half, then automatically the growth will be more than 15%, if my calculation is correct. So are you seeing a second half degrowth? Or if the second half is better than first half, then the growth should be -- operative revenue would be more than 15% -- am I missing something here?

No, no. I actually will still maintain the growth target that we're talking about 10% to 12% and the EBITDA of 15%. Let's be looking at the kind of overall global scenarios here. And you don't know with the kind of the Israel-Palestine conflicts and the other conflicts that are happening, what comes on staring at our face. But amidst all this kind of scenario that we are, we are going to maintain what we have committed, that is 10% to 12% top line and 15% EBITDA.

Okay. Okay. Okay. And the third thing is, ma'am, if it doesn't have direct impact from Middle East war, and if FDA comes through, your capacity utilization is elevated level. And if we maintain the same kind of growth, say 14%, 15%, let's be optimistic and say 14%, 15%. Do you think we may have to put up incremental CapEx? Or what would be that key trigger when you will take that decision whether to increase CapEx? And if it is to increase CapEx, how do you increase CapEx, your own or you use some subsidiaries or associates CapEx? That was my second question.

So there's 3 things on this. I just -- so one is debottlenecking. Second is also optimizing our ancillary network that we have near our factories. Third is, as we see the growth kicking in and the utilization kicking in over 95%, we definitely see that we are exploring CapEx. But yes, that's something that we are very, very clear about, the prudence on IRR and the ROCE. And if there are opportunities because there are opportunities owing to the displacement of different countries across where India will hold a very good opportunity here. So definitely, that could be something on the cards. We are definitely exploring that. And we will look at the prudence of ROCE and IRR here.

The next question is from the line of Prathamesh Sawant from Axis Securities Limited.

So congratulations on a good set of numbers. So ma'am, my first question was with respect to the existing Australian FDA? Do we have any advantages from them? And are we pursuing anything happening over there?

Yes. Australia has been a very interesting market. There are 2 things that have worked for Australia and India: one is the FTA; the other is the relationship of Australia and China. So that actually has put India at an advantage. And for Welspun, of course, we have seen an opportunity here, not only in home textiles -- in the retail segment, but also in the hospitality segment and also in the flooring segment. So yes, there is something which we see as an upside there.

And do we have any demand traction or plant -- any leads over there working for us?

Yes, absolutely. We have our retail relationships that we have. We have a hospitality relationships and the flooring relationships also that are there. And Australia will be an advantage for -- and the FDA has been an opportunity for us and as well as India.

Secondly, ma'am, with the current flooring segment doing really well. So just wanted to understand on the granularity of the U.S. orders. Is it from like 2 or 3 big customers or it is more granular than that?

So it is a mix of all, actually. So the opportunities, first of all, the mix is hard flooring and soft flooring. And it is a mix of the distributors and now also the retail channel that we're talking about. And that is going to continue to evolve. And also owing to the whole China opportunity, we definitely see an upside here.

No, no. My question was with respect to the current significant ramp-up in the U.S. export revenue, especially in the flooring. So was it particular to 1 or 2 big players or was it more granular?

Yes, it is owing not just 1 or 2 play players, it is a mixed bag, and it is more granular here. It is not just 1 or 2 who are contributing to this. And also going forward, there'll be more newer customers adding to our kitty.

And are we focusing B2C over there for flooring?

No, not yet. The B2C will not be something. It will be purely B2B that we are going to be focusing. And actually, let's face it, flooring is basically primarily a B2B kind of a segment, yes.

And then lastly, 1 last question from my end. There's -- your outlook on the cotton prices, are we expecting any margins -- gross margins to remain stable over here?

So we are maintaining our margins that we've already spoken about. And cotton prices -- looking at where we are today, they are going to be around INR 61,000, INR 62,000, and that's what we are looking as an outlook at the moment.

Because there were talks meanwhile where the prices were climbing to INR 85,000, so we are not experiencing that, correct?

No, no, no. Not at all. Not right now. So definitely, the -- see, we are seeing the weather has been a little inclemental. There has been pink bollworms that we have seen. But it is also the supply and the demand. And we are looking at an outlook which is looking at around INR 61,000, INR 62,000.

Yes. Also, Prathamesh, we have cotton in stock with us for the next 4 months. We are keeping a close watch on the cotton prices. We have systems in place to take steps necessary to ensure that we are not caught on off-guard on this. So yes, no worries on that front as of now.

The next question is from the line of Iqbal Khan from Nuvama.