Welspun Living Limited (514162) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '24 Post-Results Conference Call of Welspun Living, hosted Elara Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Prerna Jhunjhunwala from Elara Securities. Thank you, and over to you, ma'am.

Thank you, Michelle. Good evening, everyone. On behalf of Elara Securities, I would now like to welcome you all to Q3 and 9-month FY '24 Post-Results Conference Call of Welspun Living Limited. Today, we have with us the senior management of the company, including Ms. Dipali Goenka, Managing Director and CEO; Mr. Sanjay Gupta, Chief Financial Officer; 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 Limited, I welcome all of you to the company's Q3 and 9-month FY '24 earnings call. As mentioned, along with me today, we have our Managing Director and CEO, Ms. Dipali Goenka; and Mr. Sanjay Gupta, the Chief Financial Officer. We hope you have had a chance to review the investor presentation that we have filed with the exchanges today. It is also available on our website. During today's discussion, we may be making references to this presentation. Kindly 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 will 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 Mr. Dipali Goenka, Managing Director and CEO. Over to you.

Thank you, Salil. Good afternoon, everyone, and thank you for taking the time to join us today for our Q3 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. We are pleased to share that the growth in revenues that we witnessed in the last 2 quarters continued in quarter 3 as well, and we clocked the highest-ever quarterly revenues of INR 2,454 crores, growing by 29% year-on-year. The relatively better holiday season sales in U.S. have led to improved buying from major retailers. We continue to have sustained EBITDA achieving INR 382 crores, clocking 15.6% in Q3, growing at 67% Y-on-Y. Annualized ROCE has also improved substantially to 14.5% from 5.7% last year. India continues to be the leading supplier of terry towels and bedsheets to USA. And as per the OTEXA data, India strengthened its position and its market share in exports to U.S. for the April-November 2023 period, both in terry towels from 41% to 44%, and in bedsheets from 49% to 59%. In value terms, though the overall export to U.S. during this period saw a degrowth of 9% and 11% in terry towels and bedsheets. Welspun Living Limited, however, witnessed a growth of 14% and 30%, respectively, solidifying our leadership in U.S. exports further. In geopolitical front, due to the Red Sea issues, we are seeing increased blank sailing of ships leading to enhanced turnaround time and hardening of container costs for U.S. East Coast and Europe. We're keeping a close watch on this dynamic situation to ensure minimum disruption to the revenues and costs in Q4 and in the next financial year. Consequently, we continue to be cautiously optimistic of the operating performance for Q4, we've committed towards meeting our directed revenue growth of 12% for the year and 15% EBITDA and shall be toping this guidance by achieving revenue growth around 15% in FY 2024. I would like to shed some light on the shades and update for major business segments, starting with the export markets. U.S. GDP continue to strengthen in Q3 with a growth rate of 3.3%, much better than anticipated. Consumer inflation has fallen to 3.4% in December 2023 from a peak of 9.1% in June 2022, which was the highest inflation rate in U.S. since the early 1980s. Retail sales has also continued to show resilience in Q3, growing every month, witnessing a growth of 5.6% Y-on-Y in December '23. With a relatively good holiday season and consistent demand, we witnessed sustained inflow of orders during the quarter. Export revenues for Welspun saw a growth of 36% Y-on-Y. Despite global challenges, the Indian market remains resilient with an expected GDP growth rate of 7.3% and 5.6% inflation in Q3. However, the farm sector grew modestly at 1.2% and private spending close to 3.1%. This resulted in subdued retail sales remaining flat to slightly negative in Q3, especially in the discretionary categories due to inflation volatility, though the premium segments performed slightly better than expected during the festive season. Despite the challenging market scenario, Welspun's Domestic Consumer business achieved its highest quarterly results in the festive Q3 of INR 171 crores, up by 10% Y-on-Y and 20% Q-on-Q. Brand Welspun continues to strengthen its leadership position. And it's the most widely distributed home textile brand in the country with the presence in 600-plus towns and 17,006 plus outlets up by 1,495 in Q3, a reach not hitherto achieved by any home textile player in India. Brand recall for Spaces & Welspun has jumped substantially to 80% from 72% and 50% from 40%, respectively for our target audience, thereby leading in Premium and Mass Home Textile category. Brand Welspun like-to-like productivity growth has witnessed a healthy 7% Y-on-Y growth in Q3, contributing to an overall growth of 16% Y-on-Y. Brand Spaces has outgrown the category in the modern trade channel, emerging as a leading brand within the category and gaining market share. We have solidified our presence with 9 EBOs, FOFOs, added in Q3, leading to a total of 20 EBOs on a journey to 150-plus EBOs by 2025. The Home Textile Consumer business continued with its peak of positive EBITDA in Q3. We remain committed to continued investment in our brands for improving brand visibility and scalings as a focus to build profitable business growth in the Domestic Consumer business. Our emerging businesses of Domestic Consumer business, Global Brands, Advanced Textile and Flooring businesses grew 21% in Q3. Our licensed brands like Martha Stewart, Creative CO/Lab and Disney continued its core journey and grew 29% Y-on-Y. Licensed brands have given us an edge in U.S. and European markets by opening up newer avenues. In Flooring businesses, we have witnessed big ticket orders from U.S.A., U.K. and Middle East. We have improved prominence through repeat orders in soft flooring with increasing demand for printed wall-to-wall and carpet tiles in hospitality and commercial segments as well as value-added products in hard flooring. On domestic market front, we continue to see growth in hospitality and residential segments in all our key markets. In order to capitalize on market opportunities, we are working on indigenization of a complete value chain. Overall, our flooring plant reached a capacity utilization of 60% during the quarter with highest ever quarterly revenues of INR 246 crores growing by 46% Y-on-Y. The Advanced Textile business witnessed a 39% growth Y-on-Y in Q3. We have increased the capacity utilization of our new Telangana facility to 65% during the quarter. We have seen the highest pace -- highest sales of spunlace during the quarter, while making inroads into the newer customers for needle punch. In wet wipes and sheet mask as well, we have developed new products for marquee customers. In line with our growth strategy and getting into near complementing businesses, we are glad to inform that the company's Board has approved capital expenditure to set up additional jacquard towel facility in a brownfield investment of INR 326 crores at the existing Anjar facility. It will increase our total towel capacity by 6,400 metric tons per annum to 96,400 metric tons per annum and would be operational by Q3 2024, 2025. This augmentation in the capacity will help in expanding our range to fashion and beach towels and at the same time, benefiting from China Plus One opportunity. A full capacity utilization, it will have a revenue of INR 400 crores per annum. The Board has also approved an investment of $12.5 million, INR 104 crores to set up a fully automated below manufacturing unit at Ohio, USA, with a capacity of 6.7 million pillows and the same would be operational by Q2 2024, 2025. This shall help us in expanding our product basket and tapping into onshore opportunities nearer to our customers. It will give us an additional revenue of $50 million, INR 415 crores at capacity utilization. As per our prudent capital allocation policy, all these investments would give us an average ROCE in excess of 20%. ESG is embedded in every aspect of operations at Welspun, keeping us ahead of our peers globally in sustainable practices. Welspun Living Limited becoming a member of United Nations body, UNGC, United Nations Global Compact, promoting environment and socially conscious business practices is a step towards confirming the same. We also released our annual sustainability report, highlighting our performance in our focus areas for ESG fully audited and assured by one of the big 4. We are glad to inform that the company has achieved the Best Managed Company Award 2023 from Deloitte, second year in a row. It's a testament to the strategic direction that the company has embarked upon for a sustained profitable growth and it reaffirms Welspun Living's continued focus on growth, innovation and business excellence with highest level of good governance 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'll give a brief overview of the financial numbers for quarter 3 '24 before we open for Q&A. During quarter 3, we reported revenues of INR 2,450 crores, up 28.9% year-on-year. And for 9 months of financial year '24, revenues at INR 7,200 crores, up by 19.7% year-on-year. EBITDA margin for quarter 3 stood at INR 382 crores, that is 15.6%, up by 67% year-on-year, that is by 356 basis points. For 9 months of financial year '24, EBITDA is at INR 1,115 crores, that is a 15.5% margin, up by 101.3% year-on-year, that is 626 basis points. The company has been able to maintain consistent profitability and it reflects the work that the company has done across all operating areas, be it higher orders leading to high capacity utilization or cost rationalization or value engineering. Profit after tax, after minority interest for the quarter, is at INR 177 crores vis-a-vis INR 42 crores year-on-year, increasing by more than 5x. For 9 months of financial year '24, PAT is INR 535 crores versus INR 73 crores last year, up by more than 7x. Consequently, our consolidated EPS for quarter 3 stood at INR 1.84 as compared to INR 0.43 last year. For 9 months, it is INR 5.54 as compared to INR 0.74 last year. On the ForEx front, our average exchange realization for the U.S. dollar during quarter 3 was INR 83.80 as compared to INR 79.80 in the corresponding quarter last year. At the end of quarter 3, net debt stood at INR 1,542 crores, which is INR 367 crores lower than INR 1,909 crores a year ago and lower by INR 30 crores from last quarter. Slightly inventory -- slight inventory buildup in quarter 3 would be rationalized by quarter 4 and would bring down the net debt further by quarter 4 end. Coming to segmental results. Quarter 3 core business Home Textile revenues stood INR 2,251 crores versus INR 1,758 crores in quarter 3 last year, up by 28.1% year-on-year. For 9 months financial year '24 revenue of core business stood at INR 6,641 crores, up by 18.2% year-on-year. Quarter 3 EBITDA Home Textile stood at INR 347 crores at 15.3% as compared to 11.7% last year. For 9 months, EBITDA Home Textile stood at INR 1,019 crores at 15.3%, up by 635 basis points year-on-year. During quarter 3 '24, revenues from Flooring business was INR 246 crores, up by 46%, and EBITDA was at INR 20 crores, which is 8.1% as compared to 1.8% last year. For 9 months, Flooring revenue is at INR 714 crores, up by 44%. EBITDA was INR 58 crores at a margin of 8.2%, up by 628 basis points. In 9 months financial year '24, we have spent INR 230 crores towards CapEx, mainly towards a setup of 30-megawatt solar power plant at our Anjar facility. As earlier mentioned by Dipali, the Board of Directors have in their meeting today approved CapEx investment totaling to about INR 430 crores to set up a new towel capacity of 6,400 metric tons per annum at Anjar, and to set up a pillow manufacturing facility with a capacity of 6.7 million at Ohio, U.S.A. The projects should be financed 75% through term loans and 25% through internal approvals. Most of this CapEx would be incurred in financial year '24-'25. In line with our capital allocation policy, both this investment would give us average ROCE of more than 20%. With this, I'll leave the floor open for question and answer. Thank you.

[Operator Instructions] We'll take the first question from the line of Prerna Jhunjhunwala from Elara Securities.

Am I audible now?

Yes, you are.

Congratulations on a strong set of numbers. I just wanted to understand the demand scenario. How is it panning out in the U.S. for the next 2 quarters, whether Red Sea attacks are having an impact on the order inflow or you're trying to increase the orders -- prepone the orders for the company? So just wanted to understand how is -- how the customers behaving in the current geopolitical situation?

Thank you, Prerna, and very interesting question. So first of all, I must tell you I have always maintained and we have at Welspun always maintained that U.S.A. is a resilient economy. And today, even if you look at it, quarter 4 is at 3.3% as GDP growth. Inflation also remains about the same. Interest rates are steady at around 5.25%. So we're looking -- that the Fed -- you know the rates cuts are expected in 2024. So the markets in the holiday season have been up. It has been -- it grew by 3.8% Y-on-Y. And the retailers are pretty confident about the other markets as we go forward as well. However, the Red Sea definitely is an aberration. But I must say that there are opportunities and we are looking at the risk of mitigating the Red Sea. Retailers are looking at -- it might take the whole 2 to 3 weeks extra. So people are planning ahead or they are very -- they are looking at innovative ways for mitigating the turnaround times as well, Prerna. There are a lot of things that we are doing along with our customer partners as well. So over and all, I must tell you about Red Sea that it will be -- we'll be mitigating and make it minimal cost impact overall.

Okay. There is no rush from the retailers is what we are trying to understand to, being -- because to mitigate this 2 week delay -- delivery delay.

So here, Prerna, I must tell you, we are working very closely with our customers. We already know that we have our supply chain analysts who work in the geographies there. So we are looking at our warehouses where we can stock in U.S.A. as well, so and those are the opportunities we're looking at in pockets. So definitely, it will be a very need-based, curated according to the retailers' demand. But I just want to again maintain that the minimum impact of Red Sea will be there. So I just want to just put that forward to you.

Okay. Understood. And ma'am, second question is on the domestic market. You mentioned that consumer discretionary demand has been weak. And we witnessed this across product categories and other retail business as well. So does it change your target for near term, mid-term, for growth in the domestic market?

So Prerna, now let me give you a perspective of retail. First of all, we are not going to change any of our targets because this is all kind of an interim blip. So the rural market has been very modestly grown at around 1.2% and our personal consumption is at around 3%. When you look at India's GDP, growth at around 7.3% that's coming with the kind of investments in energy sector, infrastructure, that has actually contributed to that, right? But if I look at the consumer indexes, they have been a little low. However, the premium products have continued to be stronger here. But I can just tell you that this is all a blip and everybody will be looking at how the elections pan out and we will definitely see an upside. This could be absolutely a blip here. And I can also maintain one thing here, Welspun's plan on the retail segment remains intact.

[Operator Instructions] The next question is from the line of Monish Ghodke from HDFC AMC.

So my first question is what would be our split between CIF and FOB contracts in Home Textiles?

So yes, FOB is around 80% of our top line, yes.

Okay. So there won't be much impact of this Red Sea disruption in our freight costs, right?

Absolutely, Monish. And that's what I'm maintaining. And the rest also there -- we are looking at minimum mitigation -- minimum impact on anything, so yes.

So the warehouses, which we have in the U.S., how does it work? Are those for -- are those maintained for CIF orders? Or those are also FOB orders?

No, they are maintained for the domestic orders and CIF, let me be very, very clear on that. So we have three warehouses and that helps to get our customers and service them better in any kind of aberrations as well.

Okay. So what would be the typical freight cost in CIF contracts?

So it went down to about $2,000, and it's currently -- in open market it's hovering at around $5,000. But because of our contracts, we are not paying that much. So about $2,000 to $3,000 per container.

Could you explain in percentage of sales terms?

It's about 1.5%.

Okay. And sir, this inventory of 90 days, which we have in general, what is the breakup between RM and finished goods?

We don't give out that information, but it would be -- I mean, any business, which has a breakup of RM and finished goods, we have the same breakup.

Okay. And sir, this utilization ratio, so our utilization for towel has improved, but the bedsheet utilization appears weak. So is there any reason as to why bedsheets is yet to pick up?

No, Monish, it is a reason for the market demand quarter-on-quarter. If I can say that this quarter -- this year, we'll end up as a 80% utilization for towels, 70% utilization for sheets and 60% for flooring. So this is what we are looking at Monish.

[Operator Instructions] The next question is from the line of Hemang from Anvil Research.

Yes, ma'am. Earlier we were targeting to have a very low amount of CapEx for next 1 or 2 years, and we want to become a debt free. So have we changed our stance or this investment in the one-off?

Yes, sure. Over to you, Sanjay.

Yes, Hemang. So no, our target for being debt free in 2 years' time remains intact. These are strategic investments, which will help us in meeting our medium-term objectives that we have outlined for us for financial year '26. And hence, these are building up our product range and portfolio, which will help us in getting there.

So let me tell you, Hemang, we have one more thing here. Like this actually gives us an opportunity to improve our share of shelf with our fashion towels and our beach towels. And along with that, this gives us a better UBR. And also, the China Plus One is an opportunity here too. So let me just say that. With this, I must also share the prudence of ROCE has been maintained at 20% here. Now even whether that's for the pillow project that we have in America, that actually is closer to our customers' needs. And it is a very big demand after towels and it's a great opportunity that we see.

Yes, that's great. And ma'am on the flooring side, are we on track? Or -- so whatever the assumptions what we are having, we are delivering on that line? Or we are still sort of the -- whatever the -- in terms of assumptions for expectations of the business is?

We continue to grow here. You must have seen our growth of flooring of, say, over 40% here, highest growth that you've seen in this quarter. So definitely, Hemang, that is on track. And in fact, our EBITDA will be better from the next year onwards as we indigenize the supply chain and as we curate our businesses better and better going forward.

Okay. And flooring doesn't require any further CapEx for this...

General CapEx may be required of INR 50 crores to INR 100 crores for balancing equipments or maintenance, but no, nothing more than that.

And the last question, how much savings we will incur from solar power plant? What we had commenced in that 30 megawatt?

So 30-megawatt solar plant -- solar, generally comes at a price of about INR 4 to INR 4.05 per unit against current price of INR 8.5 for thermal plant. So about 50% savings.

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

So my first question is on margins -- good margins, decent set of margins. So if we assume the cotton price remains stable, like INR 55,000 kind of park and kind of price and assume that there is no escalation in freight cost, what kind of margin shall we see as capacity utilization goes up? I'm just trying to understand that can -- is there a headroom for margin to go upside from 15% to 20% in the next 2, 3 years?

So we would maintain -- try to maintain our margin rate that we are currently doing. I mean keeping into mind that quarter is remaining at the same level this year and next year. Other than that, we are not giving any guidance on a higher EBITDA or lower EBITDA. We'll try to maintain the EBITDA that we have currently.

And you know that the global dynamics are still geopolitical scenarios continue to be there. So we want to maintain the numbers that we're committing here, Biplab.

Okay. Okay. And the second question is in terms of -- because you have various subsegments in your business. You have advanced textile, domestic and export brand. So in terms of effectiveness, which kind of segments are you seeing -- witnessing significant growth? Or you are very -- you have a very optimistic outlook?

So here, I can just tell you one thing, Biplab. Here, Welspun is working on getting the share of shelves around the globe. So if I can talk about licensed brands like Martha, that -- the additional share of shelves, apart from towels and sheets get better into the discounters. We're not only doing towels and sheets, we're doing bedding -- utility bedding. We are doing flannel. And when we talk about Disney in U.K. and Europe, that gives us additional share of shelves with different retailers. So the opportunities are everywhere. For the domestic market, we already know that we are the highest distributed brand right now in the country. And we know that the consumption and the amount of housing opportunities that we are seeing in this country are immense. So definitely, that again becomes a very big deal. When we are seeing our brand Christy, which makes the Wimbledon towels, which again is becoming a very important B2C play at a brand in U.K. and also now growing globally as well. So I can say that all of it is made according to the needs -- of the market needs. Advanced Textile primarily is very commodity driven, but however, our brand is going to be launched in wet wipes in India as well and which will definitely be available for consumers as well.

So Biplab to continue it with further, I mean, our -- all these emerging businesses, their share of total revenue is going up steadily. So we have reached about 32%, 33%, and we are seeking to take them to 45% of our total revenue. So all these businesses will continue to grow in excess of 20% to 25% over the next 2 to 3 years.

Okay. Okay. And my final question is on the CapEx that you announced. One is the brownfield and one in Ohio. From when you commence this CapEx?

So Ohio will be commenced by quarter 2 and Anjar by quarter 3.

The next question is from the line of [ Sanika Khemani ] from Middleton Capital Advisors.

Am I audible?

Ma'am, a little bit low. Your audio is a little bit low.

Is it fine now?

Yes, ma'am.