S.P. Apparels Limited (SPAL) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to S.P. Apparel Apparels Limited Q1 FY '27 Earnings Conference Call hosted by Elara Securities India Private Limited. [Operator Instructions] I now hand the conference over to Ms. Prerna Jhunjhunwala from Elara Securities India Private Limited. Thank you, and over to you.

Thank you, Nesia. Good afternoon, everyone. On behalf of Elara Securities Private Limited, I would like to welcome you all on Q1 FY '27 Post-results Conference Call and Business Update of S.P. Apparel Limited. Today, we have with us the senior management of the company, including Mr. P. Sundararajan, Chairman and Managing Director; Mrs. S. Latha, Executive Director; Mrs. S. Shanta, Joint Managing Director; Mr. S. Chenduran, Joint Managing Director; Mrs. P.V. Jeeva, Chief Executive Officer; and Mr. V. Balaji, Chief Financial Officer. I would now like to hand over the call to the management for opening remarks. Thank you, and over to you, sir. Thank you.

Good afternoon, everyone, and thank you for joining us for the Q1 FY '27 Earnings Conference Call of S.P. Apparel Limited. I'm pleased to inform our shareholders debt the Board has approved a dividend of INR 3 per share for the year and has also proposed a stock split of the company's equity share from a face value of 1% to INR 2 per share, subject to the necessary approval. We believe these initiatives reflect our commitment to enhancing shareholder value and broadening investor participation in the company. As global apparel sourcing landscape continues to undergo a spectrum shift, international brands and retailers are increasingly diversifying the sourcing base as part of the China Pason and Ghanaians. We are seeing encouraging signs of this transition, with customers actively evaluating Indian Silence as reliable sourcing destinations for long-term procurement requirements. Another important positive for our business is the India U.K. free trade agreement. While the agreement has only recently become effective customer engagement from the U.K. market has already improved. We are seeing stronger discussions and better visibility for future order volumes. We believe this development will strengthen India's competitiveness and create additional opportunities for export oriented manufacturing like S.P. Apparels. We have added 3 more new U.K. brands in service customer base. We are also awaiting for the India resale agreement to be signed off by end of financial year, which will bring more business into India very run on in the future. Coming to performance Q1 FY '27 was broadly stable from a consolidated revenue perspective, while profitability improved meaningfully. The first quarter was relatively soft from a top line perspective, is tariff impact late last quarter and certain spillover orders consistent schedules. However, the quarter clearly demonstrates the resilience of our operating model with the better margins with stronger profitability and improved quality of earnings. As we had communicated earlier, FY '27 is expected to be a year well, growth will be weighted towards the second half. Based on current customer discussions, our order visibility expected capacity ramp-up and planned initiation levels, we remain confident of achieving our previously stated consolidating revenue game, crores. for FY '27. The first cut is expected to remain moderate, but we expect a stronger revenue trajectory in the second half supported that improve customer order inflow U.K. FDA-related traction, normalization of shipment schedule and better operating intensity across our key business verticals. Coming to the business segments. I will begin with our government division, which remains the primary growth driver for the company. The quarter was moderate from a revenue perspective but profitability remains strong. And we saw better operating efficiencies, improved product mix and the healthy yarn spreads, which supported margin expansion. The stand-alone adjusted EBITDA margin improved to 17.5%, indicating better operating discipline despite softer revenue. We are also witnessing increasing customer interest across multiple geographies. Over the last few quarters, we have broadened our customer base and today operate with a more diversified customer portfolio of over 15 customers as a group. This reduces concentration risk and the improved visibility for growth. Our focus remains on converting this customer engagement into orders, while continuing to maintain strong execution, quality and delivery standards. Sri Lanka continues to be an important strategic time for the company. Over the past 2 years, we have worked extensively to integrate operations, strengthen systems and improve execution across the platform. We are now priming to see the benefits of these efforts. Operational metrics relating to delivery performance, productivity and quality continue to improve, and we expect the facility to operate at levels comparable to our Indian operations over the coming quarters. The developed country manufacturing platform between India and Sri Lanka gives our customers greater sourcing flexibility. It also strengthens our ability to participate in the ongoing China Plus One and Bangladesh Plus One sourcing ships. We believe the decision to establish a meaningful manufacturing presence in Sri Lanka has been one of the most strategically important decisions undertaken by the company from a long-term growth perspective. With regard to Young Brand Apparel, although revenue was lower year-on-year due to after effect of new static issue, the business delivered better profitability with adjusted EBITDA growing year-on-year and sequentially. This reflects better efficiency, better cost management and improved operating performance. We continue to make progress in scaling and brand apparel production has commenced at the [ Salada ] facility, which commercially, while commercially production from outward facility is expected to begin in the coming months. By October, we expect all planned units of brand sells to be in commercial production. This will provide us with additional growth capacity and strengthen our position in the intimate segment. We are also looking to add one more product to the production portfolio lines that is broad products which will create a new growth story for Young Brand Apparel. moving to SPUK, our U.K. business delivered revenue of INR 33.3 crores in Q1 FY '27, registering strong growth of 125.2% year-on-year. This reflects the increasing scale of the business and improved customer traction in the U.K. market. We will be adding 3 more new brands in the customer base in U.K. business. for the quarter was negative at INR 1.4 crores, primarily due to small assets and the shift of timing of certain shipments which moved into the subsequent period. The underlying customer momentum remains healthy and really SPUKs well positioned to benefit from the India U.K. FCA and the source flexibility out fined by our India and Sri Lanka manufacturing base. As customer conversations continue to improve in the U.K. market, SPUK remains an important growth platform for the company. Our focus will be on scaling volumes, improving shipment execution and moving the business towards sustainable profitability. Finally, coming to the retail division, SP Retail Ventures reported revenue of INR 18.83 crores in Q1 FY '27. I reflecting a growth of 26.7% year-on-year. EBITDA stood at INR 0.4 crores during the quarter, indicating continued improvement in the operating performance of the business. The retail business has made steady progress over the last few quarters with EBITDA breakeven and losses reducing meaningfully and the business now moving towards sustainable profitability. Our focus remains on improving store productivity, maintaining disciplined inventory management and very profitable growth across channels. Asian and broader India continues to perform well and remains a key pillar of our retail category. The bank has built a strong accesses among consumers through differentiated product offerings and premium positioning in the title segment. Our priority remains to maintain EBITDA breakeven on a sustainable basis by following a disciplined approach towards capital allocation on the expenses. Another important area of focus for us remains capital efficiency. Alongside our capacity expansion initiatives, we continue to optimize our sourcing and manufacturing model. Our objective is to support growth while maintaining disciplined capital allocation and improving the return metrics over the medium term. With the improving demand visibility, additional capacities coming on stream, a stronger order outlook for the second half, we remain confident about achieving our growth objectives for and delivering long-term value to all stakeholders. With that, I will now request our CFO, Mr. V. Balaji, to take you through the detailed financial highlights for Q1 FY '27. Thank you.

Thank you, sir. Good afternoon to everyone. Thank you for joining the call of Q1 FY '27. I will now take you through the key financial highlights of first quarter FY '27. Consolidated performance. On a consolidated basis, revenue from operations for the first quarter stood at INR 401 crores as compared to INR 403 crores year-on-year. Revenue was broadly stable year-on-year, primarily expecting the timing and certain orders and shipments scheduled during the quarter. Consolidated EBITDA for the first quarter Q1 FY '27 stood at INR 61.83 crores compared to INR 52.93 crores in Q1 FY '26, reflecting a growth of 15.6 percentage year-on-year. EBITDA margin improved 15.8% compared to 13.1% H2 on FY '26, supported by better operating efficiency and improved performance. Profit after tax for Q1 FY '21 stood at INR 24.7 crores compared to INR 2.66 crores Q1 FY '26, a growth of 20.4 percentage year-on-year. Earnings per share has stood at INR 9.9 for the current quarter has released a number of INR 8.2 Q1 FY '26. On a stand-alone basis, adjusted revenue for our operations for the first quarter stood at INR 263 crores as compared to an adjusted revenue growth of INR 287 crores in for Q1 FY '26. Adjusted EBITDA for Q1 stood at INR 46 crores compared to INR 43 crores for quarter 1. This growth stood at 6.7% year-on-year. Adjusted EBITDA margins improved to 17.5% compared to 15.2% Q1 FY '26. Stand-alone profit after tax stood at INR 26.4 crores compared to INR 19.89 crores in Q1 FY '26, reflecting a strong growth of 3.4 percentage year-on-year. Earnings per share stood at INR 10.5 per share for the current quarter compared to INR 7.9 in Q1 FY '26. Segmental performance. Looking at the segmental performance, our garment division, including the non apparel, reported an adjusted operational revenue of INR 37 crores and the first quarter with an adjusted EBITDA of INR 59.23 crores, and the EBITDA margin stood at 17.6% in entrant appliable alone reported a revenue of INR 7.72 crores for the current quarter and the adjusted EBITDA stood at INR 20.65 crores with an adjusted EBITDA margin of 17.1%. Profit after tax was INR 6 crores. Export sales [indiscernible] stood at 5 million pieces during this quarter. SPUK reported a revenue of INR 33.3 crores for the current quarter of FY '27, representing a growth of 125.2 percentage year-on-year. EBITDA for the current quarter was a negative INR 1.04 crores. SP Retail Venture posted a revenue of INR 18.83 crores for the current quarter, representing a growth of 26.7 percentage year-on-year, in addition reported an EBITDA post of 1 lakh during the current quarter. Export sales quantity of S.P. Apparel stood at 15.7 million pieces for this quarter, while export sales quantity for entrance still at 5 million pieces. With respect to the liquidity on the balance sheet, the company continues to maintain a disciplined approach towards liquidity, working capital and GAAP allocation. On a stand-alone basis, cost debt stood at INR 258 crores. Cash and cash influence stood at INR 26.62 crores, and net debt stood at INR 211 crores. for the current quarter as on June 2026. Our focus remains on supporting growth while maintaining financial support, improving our operating cash generation and optimizing capital employed across the business. This covers the most -- covers the key highlights of the financials risk. And information which is available in the presentation uploaded in the exchanges, and now the floor can be open for questions. Thank you.

[Operator Instructions] The first question is from the line of [ Varun ] from Equity Capital.

Sir, a couple of questions. Firstly, if you could help us understand why the capacity utilization was lower this was the 14% drop in capacity year-on-year and which led to the overall revenue growth also. And secondly, I also wanted to know how much was the vital airspace cost during this quarter? And why were these shipments happening? And will this continue to Q2 also?

So one question on onto capacity incantation. Capacity utilization comparing last year, we have added additional 1,000 visions for this sorry, 7 million expectations for the current financial year. And utilization levels have come down only because of the order out because of care issue during the month of March, April and May. So that is why there is a decrease in the capacity utilization. On question number 2, on the right, the cost of cycles was around GBP 50,000 in SPUK. That was on cost in the [indiscernible] in SPUK. And what was your third question?

Will this continue in Q2, are you seeing any further delays in shipments? .

No. We are not looking for any lower with respect to shipments.

Yes. So delaying shipments or because of container because of the order .

No, it is because of the customer request. .

[Operator Instructions] The next question is from the line of Prerna Jhunjhunwala from Elara Securities India Private Limited.

Congratulations on strong margin improvement. I have 2 questions on garmenting business. You mentioned that you've added 3 customers in this quarter, would it be possible for you to share your name and which geography they are from?

No. That we are not in a position to until the cash shipment goes there will not be a question to share it. But 2 from U.K., 1 from EU. So is a U.K. mainly because of the FDA because those retailers [indiscernible] plan to take the benefits out of -- take the SPA benefit out of India. So they were in a 1 flat and is locked on the capacities and then all the cost things and now they are going to play the orders. And also in SPUK also, we have -- we have already added -- I mean, we are in the process of adding 3 more strong customers because of SPA and there was product development design support because never ways that the brands are looking for additional service like product development design and the proximity to their offices. So that is additional advantage. So their SPUK is in a position to take some other 3 more customers. So which means they are doing all big customers, we are very strong now. I can mention one about the may remark in expenses.

Oh, okay. So U.K. is going to source from action center. So how big can we believe that this SPUK business can meet in the next 2, 3 years' time?

Yes. Our guidance is we are planning up to in the next 3 years of time, I think we are planning further 13 million plus.

Okay. Okay. And at that level....

We are aiming for GBP 50 million.

Okay. GBP 50 million. And at that level, we will be profitable? And what kind of margins can be...

I think this quarter, but as the deferred shipment. This would have been EBITDA positive. But I think now the EBITDA is sustainable. There is that's for sure. And since it's a tailing model that as the soft-brand grows, which is an months only. So definitely, there is a good opportunity for improvement in the market.

Understood. Second question is on Sri Lanka. What kind of traction we are seeing now? What is the capacity utilization there? And what kind of revenues we are doing? And how has been our experience in terms of operation management and what kind of margins we are doing there?

The capacity since we acquired all the factories are already fully running factory. So the capacity is fully run except 1 factory when it is 85% to 90% renin. But it is almost all in to the maximum capacity, these factories are running. And we are continuously selling the base orders from India with the raw mat aiding and their shipments per ounce is perfect on time everything. So only the initial the initial operating loss is something. So that will be over a period of time will be back on track. I think by end of March, those factories will be able to manage themselves. I think our software system is already implemented completely with regard to accounts and finance and then for the operation. And this payment, everything is controlled from India only.

Okay. Okay. And who is managing -- you are only managing the facilities or they are...

There is one country manager, there is one country manager and one CFO there.

Okay. Understood. And what will be the revenue by the end of March from Sri Lanka?

Up there between INR 150 crores to INR 200 crores of revenue, which will fit in the books of S.P. Apparels only.

Okay. Yes. Okay. Understood. Understood, sir. And you mentioned about 1 new product line to be added in Young Brands. Could you give some color on what kind of -- is it in the intimate category only or...

It is apparel, lady's bra. It is a lingerie product, which is completely different product line, but we are going to put the site explain the schedule.

Yes. Can you hear me? So Young Brand, being in intimate wear, we do a lot of underwear, which is the bottom for the existing customers. And it's a value add in terms of doing the long products. And all the customers have been encouraging and pushing this brand for a while to do those value-add permits. The current year, we are in the process of partly acquiring and investing into mainly to be able to manufacture those products. So it's purely molded value-add in rows. .

Understood. What is the kind of investment you are doing? And initially, what kind of revenues are you looking at from this investment?

So in terms of revenue, it's a little too soon to talk about that. So we have orders which can fulfill 200 missions for capacity at the moment. but the investment will only start from September, October. So by the time it comes to a full-fledged production in terms of generating revenue, it will be next month. In terms of investment, we already have the building within the entity. So it will only be acquiring machineries from an existing setup from an existing factory who are leaders years in these products. acquisition in terms of the machinery and the team partly. Investment, I think it shouldn't be more than INR 10 crores kind of investment that's the maximum.

[Operator Instructions] The next question is from the line of [ Srihar ] from [indiscernible] Wealth.

I had just a couple of questions on the business and how it's shaping up. considering now that the tariffs have also rolled back and we're getting some benefit on the same -- you had mentioned it was a 90 to 120-day lag. So do we see Q2 onwards margins to come a little better than what they are at the moment? Or how will it be for Q2, Q3 going forward?

See, with respect to margins, we have already guided for a consolidated like Young Brands division that is between end-brand and S.P. Apparels put together, we will be anywhere above 15% for the whole year. Even including Sri Lanka business, we should be 15% EBITDA margins. And with respect to Q2 performance, we feel that Q2 will be better than Q1 on the top line.

And there was a hindrance that considering tariffs are uncertain and the geopolitical reasons, we had slowed down the CapEx across Salem and other entities in India. Are we back on track to complete Salem and India for the machinery for the base business?

Chenduran?

Yes. So yes, we are back on track on that one. We've restarted the work on the projects on the unbrand side since April. So -- and salonfexibility has started since last month. It's doing the trial production, but at some point in the next 3 months, post-Diwali, it should be running to the full capacity of what we planned for the Phase 1.

With regards to Young Brand Apparel, they have alternatives, which, as we said, it is a to be commence very soon. But with regards to the SA division, yes, this -- we have a lot in started to state factory and slowly retail calculation, then we have a plan to increase to another or to the mice over a period of next 2 years' time. And with regard to sales at the moment, we have faced that the silent period for everything to settle down for another 1 year. But however, in the main site in Silane advantages, we can go for job work with the customer who acts without any investments and without any risk for the operations. So that is one more opportunity where I think. So probably next year within 1 year time, we will be able to increase another about 500 to 600 extra machines as a job. So this will add additional sales in the top line.

Understood. So the 750 machines that Balaji sir mentioned in the beginning was split across India and Srilanka? Or was it only India?

No, it's only India..

Okay. And what's the current machines in Sri Lanka at the moment? .

Current machinery in Sri Lanka is around 1,650 expectations. .

Out of 30 is used there, expos. .

INR 1,300 crore. And at the moment for the quarter, how much was contributed from Sri Lanka.

In terms of missions or top line. Top line, we have a revenue of INR 25 crores on the top line from Sri Lanka.

Okay. And for this year, is it fair to estimate that you had mentioned that INR 2,000 crore guidance for FY '27. In Q1, we've done about INR 400-odd crores of revenue. So that takes the trajectory on an average of 500 plus for the next 3 quarters consecutively around 530, 550 range. I mean, I know it's not linear, but I'm just saying that that's how it optically looks on the numbers. Do we -- are we confident of achieving that number? Or would you like to give us a little bit more clarity on the same, please?

No, on a consolidated basis, we have given a guidance of INR 2,000 crores and what we have achieved for the first quarter is INR 200 crores. But we still feel that second half will be the time where we will achieve better results, what we lost in first quarter, we will be able to achieve in the second half. That is what we are to. And we still feel that we be in a position to complete our guidance. By end of March '27, we will have an outline of INR 2,000 crores. That is what we still believe.

That's very encouraging. And if I can just ask 1 last question, what would be the EBITDA from the yarn division for the quarter?

Yarn division for the current quarter, it was around 70 hours for the first 2 quarters.

Sorry, sir, I couldn't hear you? INR 7 crores?

INR 7.8 crores. .

Okay. So you have not mentioned the order book of each of the businesses in the opening at could you give the order book? .