Flair Writing Industries Limited (FLAIR) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Flair Lighting Industries Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. I now hand the conference over to Ms. Mamta Nehra from MUFG Intime. Thank you, and over to you, ma'am.

Thank you. Good afternoon, everyone. Welcome to the Flair Lighting Industries Limited Q1 FY '27 Earnings Conference Call. Today on the call, we have Mr. Vimalchand Rathod, the Managing Director; Mr. Mohit Rathod, the Whole-Time Director; Mr. Sumit Rathod, Whole-Time Director; and Mr. Alpesh Porwal, the Chief Financial Officer. A short disclaimer before we start this call. This call will contain some forward-looking statements, which may be based upon our beliefs, opinions and expectation of the company. As of today, these statements are not a guarantee of future performance and will involve unforeseen risks and uncertainties. With that, I would now like to hand over the conference call to Mr. Vimalchand Rathod, the Managing Director, for his opening remarks. Thank you, and over to you, sir.

Good afternoon, and welcome to everyone. Thank you for joining Q1 FY '27 earnings call. I hope everyone had the opportunity to go through our investor presentation and press release that has been uploaded on the exchange. We are pleased to present our Q1 FY '27 performance with 11% year-on-year revenue growth and a 23% (sic) [ 7.7% ] year-on-year increase in EBITDA. We are seeing increase in demand of our products in the domestic market with growth across key categories despite challenging arising from the prevailing geopolitical situation, which impacted our Q-on-Q gross profit margin and affected our certain market and supply chains. Our overall business remains in resilience and continue to deliver growth. Coming to our segment performance, our core Pen segment delivered 9% year-on-year growth with demand remaining positive during the back-to-school season. Our Creative Products and Steel Bottles and Houseware business also recorded double-digit growth. Together, those categories now contributes approximately 31% of our overall revenue, reflecting the growth -- the progress we are making towards diversifying our product portfolio. Flair Cyrosil Industries Private Limited subsidiary of Flair. Currently operates three stainless steel bottle manufacturing lines. The order for the fourth next-generation manufacturing line has recently been placed and its commissioning is expected by Q4 '27. The new line is expected to increase our manufacturing capacity by approximately 35%, enabling us to cater the growing demand -- domestic and international demand. Looking ahead, our focus remains on maintaining our leadership in writing instruments whilst increasing our market share in our Creative Products and Steel Bottles and Houseware business. At the same time, we are continuing to improve capacity utilization, better throughput in our distribution network and drive product capacity utilization, better throughput, innovative and strength of our presence in our own brands and international markets. I now hand over the call to Mr. Alpesh Porwal, our CFO, to discuss in detail about our Q1 FY '27 financial performance.

Thank you, MD sir. A warm welcome to everyone. Let me take you through our financial performance for Q1 FY '27. Revenue from operations stood at INR 319.2 crores, registering a 10.6% year-on-year growth. Gross profit stood at INR 158.6 crores, up 10% year-on-year, with gross margin at 50%, broadly in line with historical levels with a modest 31 basis point year-on-year decline, which is driven by geopolitical uncertainties and an elevated cost environment across the industry. We have also taken proactive measures to protect margins, including rationalizing schemes and discounts and implementing selective price increases across all our three segments of businesses: Writing Instrument, Creatives, and Steel Bottle and Houseware business. EBITDA stood at INR 53.3 crores, growing 7.7% year-on-year, while EBITDA margin stood at 16.7%, a 46 bps decline year-on-year. The moderation in margins reflects elevated and volatile raw material costs driven by geopolitical uncertainties. As capacity utilization improves and newer businesses gain scale, the company expects operating leverage benefits to support margin expansion and remains confident of progressively moving towards its EBITDA margin target of 17.5% to 18%. PAT stood at INR 29.1 crores, increasing 0.5% year-on-year with PAT margin at 9.1%. The relatively slower PAT growth was primarily due to lower other income and increased raw material costs during the quarter. Despite the prevailing geopolitical uncertainty and the challenges arising from West Asia situation, we remain confident in the underlying demand environment and reiterate our FY '27 revenue growth guidance of 15%. The above comparison is on Y-o-Y basis. And if you see Q-on-Q performance, the revenue shows a decline of 1.1% with gross profit margin declining by 151 bps and EBITDA declined by 116 bps and PAT margin declining by 220 bps. All these were primarily due to geopolitical situation in West Asia with sharp increase in raw material prices. We took prudent steps to mitigate and minimize impact through targeted price increases across key Steel Bottle and Houseware categories, rationalized trade schemes and discounts and intensified its focus on premiumization and product mix enhancement. Coming to our segment performance. Our core Pen business grew 9% year-on-year, reaching INR 220 crores compared to INR 202 crores in the previous year. The segment continues to be a consistent growth driver, supported by healthy demand in the domestic market and ongoing product innovation. Importantly, growth during the quarter was largely volume driven. We launched 18 new pens across different price segments, further expanding our product offering and catering to a wider range of consumer needs. The Creative segment witnessed a growth of 23% Y-o-Y to INR 80 crores as compared to INR 65 crores in Q1 FY '26. However, growth could have been higher, but the impact of sharp increases in raw material costs amid geopolitical uncertainties in certain categories, where we consciously prioritize a balance between volume-led growth and protection of margins. This growth was supported by the existing portfolio as well as new product launches. During the quarter, we introduced 10 new products in the Creative range. Going forward, we will continue to expand the portfolio through new product development while progressively building our in-house manufacturing capabilities. We will maintain prudent balance of volume-led growth and margin protection to achieve our previous guidance. Our Steel Bottles and Houseware business grew by 54.3% year-on-year to INR 19 crores compared to INR 13 crores in Q1 FY '26. The segment continues to see increasing traction as we expand our presence in these newer categories. It currently contributes around 6% of our overall revenue, and our focus will be on broadening the product portfolio and expanding distribution. Over time, we expect the revenue mix to progressively shift towards Creative Products, and Steel Bottles and Houseware with these businesses contributing a larger share of our overall portfolio. During the quarter, we introduced 32 new products across categories, further expanding our portfolio -- product portfolio. For FY '27, we have a pipeline of launches across Pens, Creative Products, and Steel Bottles and Houseware. We will continue to deepen our pencil portfolio, introduce higher-value formats in Pens and expand our Steel Bottles and Houseware portfolio across channels. To support the growth of our Steel Bottle and Houseware business, Flair Cyrosil Industries Limited has placed an order for a fourth state-of-the-art next-generation manufacturing line for stainless steel bottles. The new line is expected to be commissioned by Q4 FY '27 and increase our manufacturing capacity by approximately 30 to 35 percentage. Creative products, and Steel Bottles and Houseware remain key growth engines for us. Together, these businesses contributed approximately 31% of the company's total revenue in FY '26 and both continue to witness strong momentum. With the planned capacity expansion in Steel Bottles and continued scaling up of the Creative Product business, we expect the combined contribution to increase to approximately 35% to 38% of overall company revenue in FY '27. Coming to our domestic and export performance. Domestic sales grew 13% Y-o-Y to INR 277 crores compared to INR 245 crores in Q1 FY '26, reflecting continued demand for our brands in the domestic market. Exports stood at INR 43 crores and remained broadly flat year-on-year, primarily due to disruptions in the West Asia, resulting in longer transit times and higher freight costs during the quarter. While the near-term environment in West Asian region remains challenging, we have started focusing on increasing sales in other geographies and expanding our brand presence across international markets. In the current quarter, we have started seeing a positive growth in the export in various markets. Exports will continue to be an important area of focus and growth for the company. During Q1, the company incurred a total capital expenditure of INR 43.42 crores, of which INR 33.25 crores was capitalized towards the factory building in Valsad facility. This investment is aligned with our long-term strategy of strengthening manufacturing infrastructure. This also includes a CapEx of INR 38.7 lakhs recorded at Surat facility comprising investments and molds. We are a zero debt company and all the internal accruals are for future expansion and for the shareholders. Overall, we remain focused on building a stronger and more diversified Flair. We continue to drive premiumization across our product portfolio, strengthen our integrated manufacturing capabilities, expand our distribution and market presence and improve our working capital efficiency. We are confident in delivering consistent growth and creating long-term value for our stakeholders. Thank you, everyone. I would now like to hand over to the moderator to open the floor for questions.

[Operator Instructions] The first question is from the line of Sneha from Nuvama.

Congratulations on good margins sustenance here. The first question is related to margins itself. We have seen your gross margins falling just about 150 bps Q-o-Q and remaining actually flattish Y-o-Y. While you said on the opening remarks that you reduced schemes and discounts there, is that a sustainable level of margins? I understand polymer prices are moving too swiftly. But can we actually look at these kind of gross margins continuing over the next 2 to 3 quarters?

Thank you, Sneha. Let me just give you a background of the entire calculation and the margins which you are posing -- which I see. So Q4 FY '26 margins remain largely protected due to lower cost inventory procured earlier. However, the impact of elevated raw material costs started flowing through from Q1 FY '27, resulting in margin compression. To mitigate this impact, the company has already implemented targeted price increases across key steel waters and houseware categories, rationalized trade schemes and discounts and intensified its focus on premiumization and product mix enhancement. As a result, despite the inflationary environment due to geopolitical uncertainties, the sequential gross margin decline has been limited to 150 bps, which basically demonstrates the effectiveness of these corrective actions which we undertook during the quarter. EBITDA margin declined to 16.7% from 17.9% in Q4 FY '26 and 17.2% in Q1 FY '26, while gross margin softened to 49.7% from 51.2% and 50% in corresponding period last year. See, the raw material prices across key inputs have increased, Sneha, as we speak. You are aware of that, which creates significant near-term cost pressure. Management had previously also indicated a potential 100 to 200 bps impact on margins that was during the last quarter call. And the Q1 performance reflects approximately -- reflects about 1.5% impact due to these higher input costs. To answer your question, looking ahead, how do we see it is that as the geopolitical situation stabilizes, the management expects the cost pressures to gradually ease over the next three quarters as the full benefit of pricing intervention measures, including rationalization of schemes and discount shall flow through the P&L. And we expect to target an EBITDA margin of 17% to 18% for the year.

Understood. That was quite helpful, sir. The second question was more on your segmental revenues. And last quarter, we gave the guidance that Pens will actually -- we are looking at around 5% CAGR sort of growth, but this quarter, we actually saw 9%. On the other hand, Creatives, which we were very positive about a 50% guidance sort of a number, we were at 23%, while Steel Bottle was largely in line with our estimate and in fact, higher. Could you actually tell us what is happening in Pens and what went wrong in Creatives on the other hand?

Sneha, just to answer about the Creative, nothing went wrong as of in Creative. We witnessed a growth of 23% Y-o-Y, primarily impacted by the raw material prices in -- due to West Asia crisis. There were certain categories wherein we took a conscious decision of going for balancing of volume-led growth and protection of margins. This impacts were on categories such as Geometry Boxes, Pencils and certain subcategories within coloring portfolio. So it was a very conscious call that we took to protect the margins. Overall, if you look at the Pen category as a whole, we have seen a decent growth of 9% in Q1, which always we used to consider like whenever we had a call earlier, we would always say that it will be higher single digit. So it's mainly due to our strong brand pull for writing instruments of pens under Flair and Hauser brand in domestic market.

That was quite helpful, Mohit. Any change in guidance on the overall revenue number?

No, I think looking at Q1 and the way things are progressing in Q2, Q3, we are positive that we'll be sticking to our original guidance of 15% year-on-year.

Understood. And team, thirdly, great that you announced steel bottle business expansion here. Just wanted to understand a few numbers. What will be the key utilization currently that we are operating at, potential revenues from the current line? And when is the new line expected and what sort of offerings are we bringing in and potential revenue there?

See, currently, -- so if you look at Steel Bottles, currently, the capacity utilization is about 65% -- and going forward, as you know, historically also, whenever we cross 65%, 75%, we tend to invest in the new expansion. And given the positivity and the signs from our buyers, mainly in general trade and e-commerce and quick com, we have taken a call that to increase the capacity by 35%, where we will be investing in one more state-of-the-art automatic line of Steel Bottles, where we would be investing about INR 15 crores and the expected revenue generation would be around INR 30 crores to INR 35 crores because it all depends on the product mix, what we make on that line. And to answer one more question about the existing line revenue, the existing line, looking at the product mix, what we have been giving in the last 2, 3 quarters to our customers, it looks like we would be doing about INR 100-odd crores with the current capacity.

That was helpful. One last one, if at all, I can ask a bookkeeping question here. What would be the split of OEM business this quarter, both domestic as well as exports?

So when we talk about OEM business, overall OEM business witnessed a subdued demand during the period. As highlighted earlier, also, our domestic OEM business has been fully phased out with our legacy OEM relationship reduced to 0. When we talk about export OEM business, of course, because of the West Asia crisis, there was a demand issue and also because of the logistics issue. It impacted the demand and the consumer operations. So I would say, overall, if you look at the OEM business, it is hardly contributing to about 5% of our overall business. So it -- yes, it will be looked as a regular business. It's nothing to be -- we are not focusing on OEM. We are rather -- for last 2 years, we have been focusing on our own brand sales.

The next question is from the line of Aradhana Jain from 360 ONE Capital.

A couple of questions. First, I wanted a little more understanding on Pens business. So one is we've seen a good growth, 9% growth this quarter. Wanted a little more understanding of how are you looking at this growth? What led to it? Was there any one-off sort of demand that we saw in this quarter? And can we expect this kind of growth to sustain over the next few quarters? Because like the previous participant also said, for the full year, we were expecting low to mid-single-digit kind of growth in Pens. But given we've already done 9% this quarter, can we expect the run rate to continue in the rest of the year as well? That's my first question.

Yes. So when we look at the overall Pens business, I think we have grown by 9% year-on-year. And it was mainly driven by the volume growth. So if you look at the overall volumes, we are increasing our market share in the domestic market as well as the export market. So going forward in Q2, Q3, Q4 also, we are hoping to continue with the same guidance of high single-digit growth in Pen division. And it was also led by the new product launches, what we have done in back-to-school season.

Okay. And any sense if you could give us as to what could be our market share today in Pens? And the reason I'm wanting to understand that is that recently, one of your competitors has also taken over Reynolds as a brand. So wanted to get your sense also on how you're looking at the competitive intensity to change your hence course? And what is our strategy going to be? Are we changing any strategy there with respect to Pens?

So to answer that, Rennolds was always there in the market earlier too. And as the leaders in writing instrument industry, we have a strong brand portfolio with Flair and Hauser. And we will continue with our high-growth strategy in this segment. So I don't see any impact at all due to this takeover.

And any sense on what would be our market share today in the Pens segment?

So currently, the market share as per the CRISIL report -- last CRISIL report, in writing instruments, we have a market share of 18%.

18%?

Yes.

Understood. And is it fair to assume that going forward also, the growth will be driven by our own brand rather than the OEM business for us?

Absolutely. Yes, it will be our own brand growth.

Understood. And what would be the mix of mass, mid-premium and premium? Any change in that mix for this quarter? You said it was volume-led, but still wanting to understand, was there any change in the mix or it's mostly 50-50 for us, 50% coming from mass and 50%?

No, I would say mass and mid has increased because, of course, because of the volumes, the mass and mid has increased.

Understood. And in the Pen segment...

Sorry to interrupt you ma'am. May we request you to join the question queue for a follow-up question. The next question is from the line of [indiscernible] Gupta from [ Preneta ] Asset Managers.

My first question is that the new unit that we are putting in Gujarat for Writing Instruments, Sir, how much is the total revenue potential for the maximum utilization? And my second question is on working capital. So sir, inventory, if you could just share some thoughts like how we are doing inventory-wise? Yes, that would be good.

So the new unit at Valsad which we are putting is basically it will suffice our growth projections for the next 1.5 years, which we have. So -- and it is not only for Writing Instrument, it is for Writing Instrument and Creative, both. We have -- historically, also we -- you would have seen that our CapEx to revenue ratio has been around 3x. And we have projected a calculation also says that it is going to be 3x this time also.

Sure. And on the working capital?

So I'll share with you some -- I would say, the working capital here. Working capital has, in fact, year-on-year, if you see, my working capital has gone down by 6 days, has improved. And so it has improved by 6 days year-on-year, if I would say, previous -- quarter 1 to quarter 1. It has broadly remained stable during the quarter -- this quarter compared to the previous quarter, that's Q4 FY '26, with inventory receivables and payables remaining largely in line with the previous quarter. So we got the advantage of keeping -- you would have seen in our numbers, we got the advantage of keeping higher raw material stocks, especially in the time of the uncertain geopolitical situation. But going forward, we expect to streamline inventory levels as the West Asia crisis stabilizes with an anticipated improvement of approximately 10 days in our entire working capital cycle levels. We should be doing this by the end of this year. And also on working capital, just to add to this, that the inventory -- heightened inventory levels, one major thing -- one thing which I said majorly because of the crisis where the uncertainty of supply of raw material and the pricing issues which we face. But we also have new product launches across Creative and Steel Bottles, which requires somewhat higher inventory, particularly as these categories are still establishing distribution relationships. This is expected to normalize as the business -- these businesses gain traction. Given our experience in the Pen business, inventory levels can be managed more effectively, while the newer categories will see a gradual optimization as demand visibility improves. So overall, we expect a continued gradual improvement in both inventory and receivable days, which will support a higher working capital -- healthier working capital cycle in FY '27.

The next question is from the line of Atul Mehra from Motilal Oswal.

So my question is on the revenue guidance. So basically, sir, if you have to meet our 15% guidance, we have to do 18% growth for the rest of the year. So in the current environment, what gives us the confidence of 18% growth for the rest of the year, if you can maybe break it up in business or segment-wise, what will drive the growth? And are you already seeing acceleration in top line growth now that say half the quarter has already passed by?

Yes. So overall, if you look at the numbers and going forward in the next 3 quarters, we would like to stick to our guidance, looking at the kind of demand what we are generating in domestic market as well as export market from our customers. So based on that, we would like to stick to our guidance. As far as category-wise is concerned, as we had always mentioned that it's going to be high single digit in Writing Instruments for us, the growth. Creative and Steel Bottles will, of course, higher number digits, like about almost 40%. So I think we would like to stick to the guidance.

Got it. And sir, other than maybe the near-term guidance, maybe if you were to think about it from a 3-year perspective, would we be confident of similar 15% plus top line, bottom line over the next 3 years as well, given the growth plans and expansion plans?

Right, Atul. So all the projections which we are sharing with you, this is for the current year, but 3 years, 15% CAGR is easily achievable. I would not like to kind of give you a higher number at this point of time, but we are sure about it and confident about the plans which we have in place.

Got it. One final question, Alpesh, is on operating leverage you spoke about in the opening comments. So given obviously the current environment where cost pressures on the raw material side are on the higher side, if you can highlight a little bit more like what is the potential for operating leverage, which can unlock some of the margin loss from gross margin? If you can maybe specify.

Yes. So currently, if I -- like I shared, we have taken a few measures here mitigating measures to kind of counter the increase in the raw material prices. And the way there are certain products in 1 or 2 of these segments where we have also taken a conscious decision to kind of market them in a different way to maintain a balance between margins and that. So a combination of volume-led growth and targeted price increases what we have -- what has worked in our favor. So Q3, Q4 are always better, Atul, if you were to see Q1 and Q2. Now Q1, obviously, just MA or whatever is influenced a little by the ongoing crisis in the raw material price increase. and exports have been affected. But as we move forward, based on the measures which we have already taken in terms of reducing discounts, rationalizing discounts and schemes and also increase in prices, the combination of this should not be an issue for achieving the projected numbers.

The next question is from the line of Nilesh Doshi from Prospero Tree AMC.

Congratulations for encouraging result in the light of the sharp increase in raw material price, sir. Congratulations. Sir, my question is regarding the Creative segment. Sir, Creative segment is our one of the fastest-growing segment. And you have given the guidance of 15% on an overall revenue basis. And -- but our presentation indicates that we have a 75% production capacity now. So is the company thinking to expand the capacity for the creative segment in the near future?

Yes, yes. So as we mentioned earlier also, Nilesh sir, that we are expanding our production base for Creative. And whatever infrastructure we build on new buildings for the factories, it is always fungible where we will make Pens as well as stationery -- Creative division.

Will that capacity cater to the future demand also because the Creative is the fastest growing, and we are something -- anticipate that there will be a much more growth than the Pen segment. So our capacity must be ready for the future demand also. Is it like that?

Yes, yes. For future demand, everything is planned accordingly to meet the future demand.

So when that capacity will be ready, sir?

By end of next quarter is when we have the entire capacity in place. The building has been capitalized so far. It is built, but the machineries and mold, et cetera, are yet to kind of be installed. So by end of this quarter is where we see it should start commissioning. And Nilesh, you would realize that once we kind of -- it's not a switch on, switch off. So we will -- over the next 2 quarters is where we'll see the capacity being -- the optimum utilization of the capacity there where we start. And just to add to this, this new Valsad plant where we plan to kind of manufactured pens, writing instruments as well as creative products. Simultaneously, our facility at Surat has also begun its operation in -- 100% operations in the new property or new factory, which we kind of capitalized in the previous year. So these put together should be -- shall be, in fact, sufficient to kind of power our growth.

Okay. And sir, my next question is to the earlier participant, you have mentioned that the Reynold was already in the market, so not too much worry to us. But now it is owned by some strong competitor. So we must be ready with our strategy to maintain and increase our market share. So you mentioned that 18% market share in the Pen segment. And now the Reynold is acquired by the DOMS. So are we ready or what is our future plan to maintain our growth because Pen is already a single-digit growth trajectory. So we should not lose the market share and maintain at least our growth trajectory.

Yes, yes. So Nilesh sir, if you see in Q1 as well, we have seen a growth of 9%. So when I talk about domestic market alone, we have seen a growth of almost -- in terms of revenue, it's almost about 13%.

Please continue.