Arvind Limited (500101) Earnings Call Transcript

Good day, ladies and gentlemen, and a very warm welcome to the conference call for analysts and investors for post results discussion for Quarter 3 Financial Year 2020/'21 of Arvind Limited. [Operator Instructions] I now hand the conference over to Mr. Samir Agrawal. Thank you, and over to you, sir.

Thank you. Good afternoon to all of you, and thank you for participating in this call to discuss the third quarter financial results of Arvind Limited. Joining me today is Mr. Jayesh Shah, Executive Director and our Group CFO. Overall, the momentum in the third quarter continued along the theme of volume recovery we have shared in our last 2 quarterly discussions as well. Sequential volume growth continued in our core textile businesses. Unlike the last quarter, this time around it's driven more by the domestic demand. With volumes coming back, EBITDA margins have also returned to pre-COVID levels. In terms of specific Q3 results, the overall revenue stood at INR 1,514 crores, INR 1,514 crores, which was 81% of the INR 1,869 crores in the Q3 of FY 2020. On a sequential basis, this was higher by about 16% over the Q2 of this year's revenues of INR 1,305 crores. EBITDA for the quarter stood at INR 124 (sic) [ 176 ] crores, translating into an EBITDA margin of 10.7% compared to 9.9% in the same period last year. In the Textile segment, Q3 volumes stood at 88% of previous year volumes for denim and 77% for Woven. Especially Denim volumes in exports have crossed the previous year levels. Export volumes for Wovens have been impacted by extended lockdown and work from home trends in our key market and stood at 62% of the last year volumes. Domestic market has recovered to 74% for Denim and 81% of Wovens in terms of fabric volumes. Domestic brands and retailers who had sharply cut down on buying have returned to placing regular orders as demand has certainly reemerged post-Diwali. Garmenting volumes in Q3 increased to 89% of last year's volumes. Across the board, athleisure, casual wear, essentials and loungewear have been seeing strong market traction both in domestic and export markets. Textile margins in this quarter came under pressure from rising input costs in several categories. You will all be aware of the sharply rising cotton prices. Besides, other input costs including dyes, chemicals, energy, packing and transportation have also gone up materially. We have responded to all this in a very proactive manner through a combination of price increases, tight cost containment and continuing working capital discipline, which we have shared earlier as well. As a result, EBITDA margin in Textile stood at 12.7% compared to 12.4% in Q3 of FY 2020. Our Advanced Materials business continues to be robust and delivered Q3 revenues of INR 188 crores, which was marginally higher than INR 185 crores in the same period last year. EBITDA margins in AMD stood at 14.6%. We continue to see strong demand for our AMD products. During this quarter, our net borrowings reduced by INR 200 crores approximately, from INR 2,279 crores at the end of previous quarter to INR 2,082 crores. As a reference, we have started the financial year at a net borrowing level of INR 2,371 crores as of March 31, 2020. And this has increased to INR 2,702 crores as of June 30. And like I said, we saw a reduction to INR 2,082 crores as of 31 December. We expect to further reduce our borrowing by about INR 100 crores in this forthcoming fourth quarter. Looking ahead, we expect the domestic demand to continue improving. Traction in our export markets will depend on how the second and later waves of pandemic play out. We also expect the input cost pressures to continue at least for some time. Overall, we expect a sequential revenue growth of 12% in Q4 over Q3 levels. EBITDA margins in Textiles will be around 12% and Advanced Materials will be around 14%. So that concludes the opening remarks. And I now invite you to ask any questions that you may have. Thank you.

[Operator Instructions] First question is from the line of Maulik Patel from Equirus Securities.

A couple of questions. One, if you can highlight how do you deal with this input price inflation, which is there in chemicals and also in yarn? Are there -- from a category perspective, how is this happening in Denim and also in garmenting?

Sure. So the input we currently are seeing now global phenomenon across the board from folks among us [ where ] all suppliers of textiles have increased the prices and so have we, across the board. And we have been able to mitigate the cost size to our margin pressure through price increases as well as cost controls that we have spoken about in the past. So you saw even in Q3, our margins were better than Q2 and very similar to what they were a year ago. And despite the fact that we are at about similar to the percent of other [ volume enablers ]. I think the pressure on imports is likely to remain for some time, as my colleague just said. And we have been able to very successfully negotiate with almost all the key buyers of Others to raise the prices. And I think we will be continuing to increase prices even in Q4.

Okay. And second on Woven price. So Woven has seen, recently, a slower recovery compared to the 2 other categories, Denim and Garment. And now in opening remarks, Samir mentioned that brands have started placing the order. Can you see a faster recovery in the Woven in the coming 2 quarters?

Yes. So if you saw -- Woven historically as well, as you possibly would know, has been a more domestic-focused business as compared to Denim. And it was the domestic market, which are -- and particularly the top brands that buy from us, the big brand houses that buy from us, were actually selling older inventory and not buying new inventory. But all the brands have -- all the brand houses are gotten out of the old inventory and they have because of an extremely good [ festive ] period in quarter 3. So all of them have started placing orders. And that you saw in terms of a sharp recovery in Woven fabrics for domestic market. We believe that, that trend will continue, and we will see even much higher utilization. Also, you saw that the prices of our Woven fabrics because the top brands the fabric, type of fabric they buy is not expensive compared to what the retailers buy. And as a result, the prices also are at a lower levels because the average product mix was different. That has also started shooting up again. So both on top line or the utilization as well as our margins, Woven is coming back to normalcy.

Okay. And one segment which has been relatively stronger on the AMD side, what kind of outlook do you have on AMD in -- from not only next year but a year or 2, what kind of growth do you see?

I think maybe Samir can take that. Samir, do you want to take? And then maybe I can add.

Yes. So Maulik, on AMD, it is a business which we have kind of in last 2 years, from et cetera, was made mature from a bunch of start-up ideas, which have been assembled over a long period of time in a concrete sort of portfolio, which is now relying on fairly definitive set up fee accounts across the different product categories, and hence repeat business. So where we are wanting to take this business is to keep pushing on a relatively robust double-digit growth over the next 2, 3 years. And really build upon the foundation which we already have made. So we expect this to grow at a fairly good pace over the next 2, 3 years in the solid base we have built.

Okay. And with growth in top line, will margin also expand? We've been deferring close to around a 12% kind of or 14% to 15% as number over the last 3, 4 quarters, definitely higher than the last year numbers. But I mean, what could be the trajectory on the margin side?

Yes. So it already is a fairly good margin and then it will expand, let's say, another percentage point a year, say, roughly speaking for a couple of years at least. So yes, there is some more headroom in the margin expansion, which we see as the scale-up goes beyond today.

And if you allow me the last question. Over the last 2, 3 quarters, management has been delivering on the debt side. And whatever you have mentioned probably Q1 or Q2 have been there in the Q3. But now you've been on a raw material inflation. And also, there will be in the cotton season where there is tremendous turbulence by the quarters during the March, February to year. Where do you see that at the end of the financial year?

So as we have guided in our note as well and my colleague spoke, so we are looking at a further rate reduction in Q4 and we do not -- we do not have any significant capital expenditure program for the next, at least 1 year. So we should be looking at debt reduction going forward as well.

So what kind of a debt number we are seeing it right now? I mean in terms of the debt CapEx for the next year?

Very minimal, I would not put a number because we haven't prepared the business there, but it will not be -- it will be closer to maybe INR 100 crores, not more than that.

The next question is from the line of Prerna Jhunjhunwala from B&K Securities.

Congratulations on a good set of numbers. Just wanted to understand our debt reduction. Apart from EBITDA and cash back that you generated, what has helped us to reduce a substantial amount of debt in the last 2 quarters?

I think the cost, as you said, that one is the profits that we made. And since we don't have a CapEx program. But I think more importantly, the think [ the resulting operative down ] that we have been able to improve. I think it's almost doubled over last 1.5 years from closer to 3%, 3.5% to 5%, 5.5% now. And I think the earnings that we have is [ from very ] aggressive call of managing working capital in a very different manner. And let even some sales go but not let the working capital go up. So that's one of the key reasons why you see a very sharp reduction in the debt, though our earnings have not been as high as the debt reduction so far.

Sir, could you just elaborate on the working capital target days that you would be looking at or how much improvement we can see further on working capital?

So we would see -- I think our response to these 2 things now. I think we have reached definitely high level of working capital [ bound ] there is still some room to grow. But there would be now the run rate at which we are growing. For example, if you looked at -- { so let me talk to Jen. Jen, can you please stop talking while I am speaking? ] So I think if you saw our guidance, we have spoken about close to 12% growth over this quarter sales, which will mean that it will be up closer to INR 1,700 plus crores, which would mean that we are running at a run rate of close to INR 7,000 crore top line as compared to what we have done this time. So for -- assuming everything remains the [ stability ]. So I'm not forecasting for the future, but I'm just giving you an example. So this is that, I think there would be a need for increasing working capital in terms of absolute amount but our terms may help us to [ not ] increase in absolute amount our working capital. So we should be able to keep the earnings available to us for us to reduce the debt.

Okay. So if I understand correctly, the absolute value may go up, but the number of days, you'll still remain very tight.

Yes. Tighter than what we have right now.

Okay. Sir, my second question is on your Denim demand. What we have seen growing from the [ fabric ] industry at the trader level is that the Denim demand has improved substantially. So could you please highlight if there is an [ equity deal ] coming in the demand supply scenario for Denim? And are you looking at a better profitability and better demand scenario panning up and the level with which this industry is going to over the last 2, 3 years, is now coming to an end and what are the factors impacting -- helping it, if at all that is happening?

So Denim as a business, I don't know -- moderator, can you please mute everyone, please?

Yes, sure. Prerna, when you are not speaking please mute your line, we are getting some disturbance from your line actually.

Yes. Thank you. So as far as Denim industry is concerned, there are a few factors which are helping Denim business for India. One critical thing is that, of course, there is a [ minimal ] factor from some of the customers who are buying exclusively or significantly from China, have been buying from region other than China. And that more is -- more gradual, but visible and real. Number two, in India, there has been some bigger players for whatever reasons have actually exited out or reduced their capacities. So there is a capacity reduction of 10% to 15% that we can see. Number three, with the casualization, work from home, like our Denims have really taken a significant increase. As a result, you are right, there has been a strong Denim demand, not only from India, from the so-called international markets. And because there has been some mix up of supply side -- supply chains, there is -- I think most Denim companies have done, we have also, as you said, that we have been able to pass on the cost push to now even in Denim. So in the domestic market, despite the fact that Denim has [ really been not is because ] category. Go ahead.

Yes. Yes. So which means that this is gaining, the demand supply under equilibrium and we can see higher profit coming in from Denim business going forward?

I would not make a general statement like that. But as of today, Denim is in a relatively stable situation, yes.

Okay. Okay. And sir, my third question would be on Garments. Are you seeing that kind of improvement in Garments as well? the demand from China Plus One kind of a...

In fact for India, the reason why Indian businesses will not grow as much as it would grow, is because Indian garment capacity is reasonably low as compared to many other nations like Vietnam and Bangladesh. So the advantage that India could get is, to some extent, restricted because of the garmenting capacity not being available. However, for Arvind and some of the other garment players in India, I think the orders are coming in, whatever one could take and the garment capacities as a result are getting [ filled ] faster than the public capacities.

Okay. So sir, would you be going ahead with capacity expansion in Garments?

Right now, we have capacity to sell for the next financial year. We are not looking at further investing into any capacity creation for 1 year.

The next question is from the line of from Saurabh Patwa from HDFC Mutual Fund.

Most of my questions were already answered by the previous 2 participants, but I still -- I have 1 question, if you like. Sir, any thoughts on -- I think in the past, we have spoken about the noncore asset monetization which would help us to reduce debt. Any --

Yes. So Saurabh, thanks for coming over and asking the question. We have begun a sale of a large parcel of land, which is supposed to bring in closer to about INR 300 crore to INR 350 crores over next 2 to 3 years, that we have entered into an agreement [ but not with pru ] to get that piece in a joint development. The good news is that more than 50% of the land under the development has been converted into an actual sale and cash flows have started. So over next couple of years, we expect around INR 200 crores to INR 300 crores to come in, which will entirely go to further reduce the debt.

Okay. Great, sir. Great. And just one question in addition to what the previous participant asked. When you mentioned about the Denim -- -- improvement in the Denim market, see in fact, historically, before FY '18/'19, Arvind used to be very stable, at around close to 100 million meters every year. And it started dropping since FY '19 quarter-on-quarter. So I think we made the low in Q1 FY '21. Since then, your rates are improving. So how long you believe if you take maybe like 2 years, 3 years, and your position may end up somehow [ hard or ] whatever?

So no, we are at a good 85%, 87% for now. We're not too far away from 100% and when we say capacity of utilization, we are comparing it with around 95 million to 98 million meters of Denim. So we are not too far away from that. And I think over next year or so, we should be able to sell at the full capacity and making [ dress ] because COVID is still around, not in India and in Europe and in America. So subject to that, if the normal life are to be there, I don't think we are too far away from utilizing.

The next question is from the line of Resham Jain from DSP Mutual Fund.

Yes. So just a couple of questions. One is on Garment. Currently, I think we will land this year roughly around INR 1,200 crores to INR 1,300 crores kind of number in garmenting. What kind of headroom do we have because we said that...

I think we are left with a good 50 million capacity ratio to utilize compared to current year, because current year, the first half was not good. Of course, we are running right now at a rate of almost as you rightly said, closer to INR 1,400 crore run rate, INR 1,400 crore, INR 1,500 crore. So from there to -- we don't -- if we were to use all our capacities, we would be closer to INR 2,000-plus crores.

Okay. And when do we -- when you think that we can do that quarterly INR 500 crores kind of garmenting run rate or so?

So we are currently not making long projections, Resham, because world is still uncertain. For example, there were certain delays postponement as we speak even in Q3 from Europe because of the lockdowns that you saw. So it's difficult to make that projection. But I would consider it sometime in the next financial year, you should see that run rate coming, whether it is Q2 or Q3, I don't know. Just because of the COVID is not [ far in, in India ].