Arvind Limited (500101) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Arvind Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions ] Please note that this conference is being recorded. I now hand the conference over to Mr. Satya Prakash Mishra. Thank you, and over to you, sir.

Good morning, everyone. A very warm welcome to Arvind Limited Earnings Call for the quarter ended June 2026. The financial results and investor presentation have been uploaded to our website, and I hope you have had enough time and opportunity to review them. Before we begin, let me introduce the leadership team. Joining me today, Mr. Punit Lalbhai, the Vice Chairman; Mr. Jayesh Shah, Whole-Time Director and Group CFO; Mr. Nigam Shah, Executive Director and CFO of Arvind Limited; Mr. Gurpreet Singh Bhatia, CEO and President of Advanced Materials Business; Mr. Karan Ojha, CEO of Wovens business. The first quarter of the year was an action packed one for the company. We began FY '27 with encouraging momentum supported by a robust demand across our key businesses. During the quarter, the business environment was influenced by evolving geoeconomic development, realignment of global trade flows and elevated input costs across several raw material categories in our businesses. Notwithstanding these external headwinds, demand across all our core businesses remained very healthy, reflecting strong customer partnerships and sustained market engagement. Coming to the operational performance during the quarter. The quarter witnessed healthy volume momentum across our core textile businesses, supported by robust demand conditions, higher vertical integration and higher investment in product innovation. Denim fabric volume reached 17.5 million meters, the highest level in 16 quarters, registering a growth of 34%. Woven fabric volume stood at 31.2 million meters, up 7% despite the seasonally weaker quarter, while garmenting volume crossed 11 million pieces for the first time, recording a growth of 13%, supported by a healthy demand and higher verticalization. On the strategic front, we have strengthened our global footprint by establishing a physical presence in the U.K. through a design gallery marketing office in London, supported by a dedicated on-ground representative to enable deeper and more consistent customer engagement throughout the year. We have also partnered with a garmenting manufacturing unit in Bangladesh and Egypt to diversify our manufacturing base and enhance supply chain resilience. Together, these initiatives will deepen customer proximity, broaden our global capabilities and further strengthen our international presence. Advanced Materials business also delivered a strong quarter with India business reporting a robust growth of 40%, supported by a broad-based growth across key segments. The Human Protective Gear segment benefited from normalization in defense procurement activity in India and easing up of tariff-related pressure in U.S. to help increase demand from that geography, resulting in a strong growth during the quarter. The Composite business continued its positive momentum, supported by increased demand from renewable energy and mobility and mass transport applications. The mobility segment, in particular, witnessed a strong traction driven by new customer additions. The Industrial segment experienced relatively lower growth during the quarter due to a higher capacity utilization. Higher capacity utilization is on account of some of our incoming CapEx program has not come online yet. This is expected to go better in coming quarters. The underlying demand environment though remains very healthy, and we continue to see encouraging opportunities across the segment. Overall, the Advanced Materials business maintained a healthy growth trajectory, supported by operating leverage and improved business mix and broad-based demand across key markets. Now coming to the financial performance for the quarter. Consolidated revenue stood at INR 2,501 crores with EBITDA of INR 258 crores, representing a growth of 25% and 39%, respectively. Excluding the contribution from Dalco-GFT, revenue and EBITDA stood at INR 2,344 crores and INR 234 crores, respectively, reflecting a very healthy growth of 17% and 26%. EBITDA margin during this quarter improved by 104 basis points to reach 10.3%, supported by operating leverage and improved business mix and continued execution discipline. At the segment level, the Textile division reported a revenue of INR 1,735 crores with a growth of 13% with an EBITDA of INR 139 crores. The Garmenting division reported a revenue of INR 497 crores, supported by 13% volume growth and revenue growth was moderated by a higher contribution from value segment products during the quarter. The Advanced Materials business reported its highest ever quarterly revenue and EBITDA of INR 650 crores and INR 97 crores, respectively, maintaining an EBITDA margin of 15%. The India business delivered revenue of INR 493 crores and EBITDA of INR 74 crores, reflecting robust growth across key segments. With respect to Dalco-GFT, the business contributed revenue of INR 157 crores and EBITDA of INR 24 crores during the quarter, representing approximately 1.8 months of operation post acquisition. EBITDA margin stood at 15.1% impacted by elevated raw material costs during the period. Full quarter Dalco-GFT, delivered a revenue of INR 244 crores and EBITDA of INR 40 crores, translating into an EBITDA margin of 16.3%. Profit after tax for the company stood at INR 80 crores, registering growth of 47% during the year. In terms of capital allocation and balance sheet, we continue to maintain a disciplined and prudent approach over the past several years. The company has materially strengthened its balance sheet through focused capital allocation, a rationalized debt profile and efficient capital structure and consistent free cash flow generation. During the quarter, we have invested roughly about INR 98 crores across various growth-oriented capital's expenditure programs, in line with our long-term strategic priorities and future growth plans. Very happy to inform you all that we have successfully completed our maiden QIP of INR 500 crores, which witnessed strong investor interest and was oversubscribed multiple times. The issue saw participation from several marquee institutional investors, further strengthening company's shareholder base and reflecting confidence in our long-term strategy and value creation potential. The proceeds from the QIP are being primarily utilized towards debt reduction and balance sheet strengthening, which will further enhance financial flexibility and support future growth initiatives. Looking ahead, the implementation of U.K. FTA and the gradual improvement in domestic demand are expected to create incremental growth opportunities for the textile sector. Demand remains resilient across both textile as well as Advanced Materials supported by healthy order book and sustained customer engagement despite the prevailing uncertainties in the operating environment. Within Advanced Materials, the Defense and allied segment continue to gain traction, and we maintain focus on expanding our presence in high-value customer programs and differentiated applications. At the same time, elevated raw material costs and supply side challenges continue to exert pressure on profitability. We are actively pursuing mitigation initiatives, including strategic sourcing and customer-led pricing intervention to maintain margin resilience. To conclude, we are pleased with a strong start to FY '27, marked by broad-based growth across our businesses, continued momentum in Advanced Materials and successful acquisition of Dalco-GFT, which further strengthens our technical textile platform. While the operating environment remains very dynamic, our diversified portfolio, strong customer relationships and disciplined execution positions us well to capitalize on growth opportunities and create long-term value for stakeholders. I'll now hand over the call to Mr. Punit Lalbhai, to give his opening remarks.

So good morning, everyone. It's a pleasure to be here and interact with all of you. Satya has mentioned all the events that happened in quarter 1 in great detail. So I won't dwell on the same. But I'd like to say that this quarter from a qualitative lens was extremely challenging and action pack at the same time. And I think the team has done fantastically well to deliver the kind of volumes that we have delivered, both on the fabric side and the Advanced Materials side, we have historic high levels of production, which took some very, very strong execution to deliver. And only for that reason are we in such a great position because if you look at the war impact this time, it has been quite significant and almost INR 100 crores worth of inflation in input cost happened in a very short period of time. So about INR 100 crores in H1 would be the overall impact in just cotton and yarn. And on top of that, there would be impact of all the petrochemical-related chemical costs. And therefore, the -- it was essential to do a high volume to keep our absolute EBITDA were very close to our budgeted range. So I think the teams have done a fantastic job in ensuring this happens. Of course, we are extremely excited with Dalco-GFT becoming a part of the Advanced Materials business. And the more we learn about that business, the more we are excited about its future. And the more opportunities we see to sort of cross-pollinate and make the overall business a lot stronger with that U.S. base now within the business. So I think that's enough for the general commentary as of now. I'd like to open the floor for questions, and we can answer them to the best of our ability. Thank you.

[Operator Instructions] The first question comes from the line of Aradhana Jain with 360 ONE Capital.

Congratulations on the good set of numbers. First, I wanted to understand on the textile side. The textile revenue grew 21%, but we saw margins declining to around 7.5%. Could you help us understand the margin bridge, why there was a decline in the margins and quantify how much was due to the higher raw material costs versus the product mix or, say, other factors? And more importantly, how should we think about the textile margin over the next 2 to 3 quarters as the raw material pass-through catches up? That's my first question.

So I think the first thing to understand is Q1 is always a lower margin quarter. So compared to Q4, the margin will always look. So last year, we were at an 8.4% EBITDA margin. This year, it's an 8% EBITDA margin across the textile vertical. And it could have been close to double digits, but the -- but for the sort of raw material escalations that happened within a short period of time. You see, our order books fill up 3, 4 months in advance of the business. And the pricing gets fixed. It is then very difficult to sort of change that, and we wouldn't want to let market share go down, especially when we are on the growth trajectory. So we traded growth for margin, you could say. And I think this is a temporary phenomenon as the year progresses, we have passed on and are in the process of passing on some of the price escalations. That said, of course, it is an uncertain environment, and there is still -- the world is still not conflict-free. And till that happens, absolute certainty on the future is very difficult to predict. But all else being equal, as we progress towards the future, we should be able to improve these margins as the market catches up to the raw material escalation, the price -- our product prices catch up to the escalation. -- and things normalize. So I would say we are about 1, 1.5 percent off because of the overall war impact, and there's nothing more than that. The order book is extremely healthy. The demand scenario is holding up quite well. The teams have executed excellently. So I wouldn't read too much negativity into the set of textile margins that you see reported in this quarter.

And sir, in the garmenting side, our margins have been in the high single digits, and we are aspiring to move towards low double digits. By when can we expect that margins to move towards the low double-digit number?

I think that will still be a journey of, say, 18 to 24 months because we are constantly adding capacity at the same time. So while the older plants are scaling nicely and some of the plants are already at double-digit margins, whereas there are more plants moving from low single digit to high single digits. There will be plants that are coming in that will be at negative margins also. So because we are expanding rapidly, the margins will take, say, 18 to 24 months to cross into double digits.

Understood. My second question is on the denim side. Your denim volumes have significantly increased this quarter. How much of this reflects an improvement in the underlying industry demand versus how much could be because of, say, the market share gains or verticalization that we are doing? And can we expect this current run rate to sustain over the next couple of quarters? And where exactly is our capacity utilization in Denims?

So in Denim, we are also sort of creating some new capacity through an asset-light model where we are tying up with sort of nonfunctional assets that are available in the market and running them ourselves. So in fact, demand we see robust going forward. I think the current trajectory looks quite positive. And at least till the end of the year, we don't see any pressure on volumes. So the opportunity is to utilize, so our asset base is already at 100% and we are also working on increasing our sort of leased assets where we will take over management of a few assets and run them as if they are our own own assets. So currently, not much of that has happened. But in the future, we are also exploring those options as well. So it's a good demand cycle, and we are trying our best to take advantage of it. And so far, we are proving to be reasonably successful.

Understood. Just last question from my side. On the AMB India business, 2 things that catch my eye was one was your human protection growth and the second was composite growth. If you could just help us understand what led to that kind of growth, while I understand that there was some defense orders that normalized and easing of U.S. tariff pressures also helped us to get to that 39% kind of growth that we've delivered in human protection. But if you could help us understand how is the order book pipeline looking like? And what sort of growth should we expect for the rest of the year? And similarly for composites also, how much of the 76% growth came in because of the 4Q shipment spillover that happened? And how much is a sustainable rate that we can expect in the composite side as well? Yes, that's it.

This is Gurpreet. So the way to look at it is last year, our quarter 1 amidst all the tariff uncertainty was the softest quarter in the last 5 quarters. If you normalize that softness, we are in the ballpark 25%, 30% kind of a growth. Coming to your specific question on the accelerated higher growth on human protection and composites. Last year, for 6 months, we had very high softness because of the external environment on defense in India, which started to normalize in quarter 3 onwards. We started investing efforts to broad base our customer base in defense and paramilitary during that period last year, and we are seeing that benefit accruing to us as commercial and business benefit in this quarter. So our customer base across all defense services and paramilitary services has expanded, and we are on that path. Some of the investments we made on defense to upgrade our portfolio to superior products are also going to see commercial realization in the coming quarters. Third area on defense as a focus area is global defense. We started to look at that business quite seriously, and that would be another development over the next 12, 18 months. Composites, again, had a very soft last year quarter 1. Due to the uncertainty in Middle East because Middle East is one of our focus markets for infrastructure development. We had delayed execution of some quarter 4 orders. I would say that number is about 10% of the revenue for the quarter, which got implemented in quarter 1. We still have some pending orders to execute, which we are hoping to execute in quarter 2. Overall, normalized, I would say on revenue, high teens to 20%, thereabouts for the full year is what we will look like. However, on margins, EBITDA margins, we will deliver a growth higher than the 18%, 20% on revenue because of all the operational efficiency programs that we've implemented over the last 3, 4 quarters.

So in summary, I would say that the growth rate is a result of hard work. I think it is sort of very high in quarter 1 because the comparative quarter last year was lower than normal. And I think the way we should think about this performance is that things are going in the right direction. And we are on track to achieving that 18% to 20% medium-term sort of growth target that we've been constantly guiding towards. So we can say that our efforts are paying dividend in that direction.

Understood. Just one last bookkeeping question, if I may. Your net debt has increased this quarter to around INR 2,100 crores following the acquisition. After applying the INR 500 crores of QIP proceeds towards your -- a part of it towards your debt reduction, where should we expect the net debt to settle for the full year? Yes, if you could just highlight on that?

So it will settle exactly INR 500 crores below where it is today. But the way to think about it is that the INR 450-odd crores that we've taken in the U.S. will get serviced by the U.S. entity. And so the India business will come very close to the debt levels before the Dalco acquisition. So this INR 500 crores essentially cancel out the additional debt that we've taken on the India entity to finance the acquisition. So broadly, our debt levels are back to historic levels and Dalco has a healthy cash flow generation in the U.S., which will be able to more than service its debt and its higher growth ambitions and CapEx for that purpose. So I would say we are very comfortable on that, especially after the fundraise.

The next question comes from the line of Soham Samanta with Motilal Oswal Financial Services.

Just wanted to check our target because we are expecting 15% growth in FY '27, obviously, this quarter, we do that. So I just wanted to check on a full year number, how we are looking at the garmenting growth for FY '27?

We should come close to that. If not 15%, it will be in the high -- I mean, close to that. It should be close to that. See, the first quarter was a quarter that was heavily indexed towards the knits product. So though we did a high number of pieces, the ASP was small and denim, which is our highest ASP product, a lot of those dispatches sort of shifted to Q2. So it is -- I think rather than looking quarter-to-quarter, we should sort of look at the yearly journey. So you're asking the right question, and we should be close to the number that where we want to be on current visibility. So I wouldn't read too much into this quarter itself.

One follow-up in this garmenting so when you are talking with 7.5% margin this quarter, so assuming the raw material is where is it right now, so if we take the raw material right now and if we take next 3 quarters, so is it fair to assume that high single digit or maybe low double-digit margin will exit by Q4?

I think it will take 1 more year to get into double digits or at least 1.5 years from today to get into. So middle of next year is where you should start looking for that double-digit in Garments. Our focus more is to ensure that our growth where it needs to hit our execution is on point, customers are happy and our new factories are coming on stream at the speed at which they need to. So I think that's the heavy lifting that needs to be done in garmenting. And I'm happy to report that the trend line is positive. We are doing better than last year in terms of margin as well, slightly, but it is better than last year. And our plans are going according to how we have budgeted internally.

And sir, last question on AMB business. So expecting 18% to 20% kind of growth. So this is the India business, I'm assuming. So what is the Dalco number we're looking and overall margin, if I compare AMB plus Dalco, what are the margin we are looking in the range of 15% to 17% That is the number we're looking for FY '27?

Will land there, right? Dalco be slightly lower growth, especially this year since we will have our first order of business is to integrate the business, and we will have to start up the higher CapEx cycle. So we are taking those decisions now. So this year should be in that 9%, 10% growth. But next year, we are trying to push it into the teens with higher CapEx. So I think Dalco will start going towards that mid-teens level sometime next year because we are doing those CapEx now and it will take there is some lead time for that to come on stream.

And sir, combined margin for this AMB plus Dalco?

It will be similar, right? So I mean Dalco is in that 16%, 17%, which has come down slightly because of the petrochemical-linked raw material, similar problem as our textile business. So it should come back to that 16-plus percent as the our pricing to our customers catch up to the levels required. Right now, we had rapid raw material increase and already fixed pricing. So that normally takes a couple of quarters to catch up once the escalation is through and the new cycle of orders come in at the higher price.

The next question comes from the line of Surya Sunidhi Securities.

Yes. Congrats for the best ever numbers. So Punit bhai, just a couple of questions. One is as we discussed last time, there were some lines to be added in the Dalco side. So if you can give some status as to what sort of lines we are currently operating and what sort of CapEx lined up in the Dalco side this year and maybe [ by when ] we have the terminal period, we could be ending these lines, said the...

Sorry to interrupt, Surya, your voice is not audible. Are you using a hands-free device?

My question was, we discussed last year, last time that we are actually about to increase lines in the Dalco and if you can quantify the kind of CapEx we are actually going to implement on the Dalco side. And secondly, the utilization limit there at the and to what level -- because my understanding is with the current run rate, you'll be hitting around close to INR 900 crores of revenue there. So whether we will be increasing the traction to what will going forward, you just indicated that increasing the [indiscernible] line from below...

You're still not audible, Surya. I would request you to change your location. Management, were you able to get his question?

Let me answer it -- the question is that what is the capacity at Dalco and we were planning to increase that capacity and how that capacity increase is going to happen. We are functioning at high levels of capacity utilization. There might be some capacity that can come on stream through good work on efficiency improvement, which the team is doing. But there are 2 things that are happening. We have already invested in the upgradation of 2 of our 7 lines. So those CapEx should come on stream within the next 3 to 4 months. That will give us a little bit of capacity towards -- starting towards quarter 4. And then the bigger decision is firing line 8 and which is under evaluation right now, and we are positively viewing it, but that decision will be taken in the next month or 2. That will add significant capacity. So that will increase the capacity by almost 7%, 8% overall.

So what kind of peak revenue we can expect from FY '27 in?

'27 will be about between 100 million and 110 million we should land.

Okay. And regarding the debt repayment there, whether because we can pay within 3 years, 3 to 4 years as last time said, so are we had to [ refinance ] with Dalco there or [ repay it ].

We will repay the debt in 5 years. And there is enough cash flow to service interest, repaid debt in 5 years and do the CapEx that we want to. We don't want to sort of reduce our CapEx because that is very important for growth. So we will pay the term loan back in the term that it is required to pay back.

The next question comes from the line ofPrerna Jhunjhunwala from Elara Securities.

And congratulations on strong AMB performance. Sir, I had a question on this partnership model that you are pursuing in the garmenting business. How should we look at it in terms of capacity addition, balance sheet investment and revenue and margin opportunity that it would unfold for us?

So it will require some investment, but it will require only a fraction of what it would require for a whole plant because we will be taking -- we will be making only strategic investments to improve the functioning of those plants. Right now, it is quite early days. So you can say that it is an exciting opportunity, but I think it will take maybe up. This year, we will sort of go conservative to ensure that we are able to execute before we try and sort of scale it up to a very large level. It is important to establish it well. And I think the important thing is that our first efforts have been quite successful. So I'm optimistic about this becoming a model that we will use. And sometimes we may also strategically invest something in these factories, but it would be a fraction of the overall balance sheet impact that a new plant would have. This is -- this gives us capacity from multiple regions of the world, which is globally optimized. Each country has its strength and we would like to leverage that, plus our customers appreciate that we don't have all our eggs in one basket. So this ticks many boxes. However, the important thing is to do it right so that we don't make mistakes and all the benefits that we think we will get through this actually accrue and are not spoiled by execution-related failures. So we are going in a conservative yet optimistic way on this model. And I think as we go forward, more and more clarity will emerge on exactly how much of this will be, but it can easily, in my mind, be 20% of the overall business in the medium term. I don't want to give a fixed time line by when it will reach that. But that's the kind of scale we are thinking overall, maybe 30% if we are very successful. So that's how you should think about it. And I'll keep giving an update on how we are doing here.

I actually, I was not looking at what kind of scale we'll be achieving through this model. I just wanted to understand how should we look at it against the investment that you're doing in your own capacity. So what kind of return ratios you can make? And what kind of margin should we look at it because it will not be similar to what you make in your own factories because it is shared.

Factories, but there are -- it is coming at marginal fixed cost, right? So there is a much smaller fixed cost associated. So the return metrics will be very high on this sort of model because capital employed is very low. So return on capital employed will be high. Maybe margin will be 2, 3 percentage points lower because 2 people's margins have to be accounted for. But it gives the customer derisking and it gives us the advantages of a new geography. And as I mentioned, each geography has its own strength and own product signature, which we can also benefit from. So overall return metrics, it will actually improve from a return on capital employed perspective. EBITDA margin will be slightly lower. And it can be in that high single-digit type level if all goes well.

Okay. The second question on denim. You are already at 17.5 million meters and eventually you are running at almost full utilization. So is it ideal to assume that you are running at -- your capacity has improved to 17 million meters currently from 16 million earlier, or is...

Doing some debottlenecking type CapEx that will help us do that. Karan, do you want to give a perspective on the overall market and demand scenario and where do you see denim orders being now and in the medium term?

Sure. Thank you for that, Punit bhai. And let me talk a little bit about the Denim business first. As we all see, the Denim business is at its all-time high in last so many quarters. The main reason for that is, first of all, geographical expansion that we have done, verticalization that has played in into the denim space that has been extremely important. Third is we're going into multiple geographies through differential routes, giving customers the country of origin that they want. So we are going more closer to the customers. That gives them flexibility that gives us flexibility of offering different kind of products from different geographies. Third is we are able to capitalize on the scale of the region. Fourth is that we have started to open up design hubs globally, which connects us better to the customer and in real time, we are able to service the customers and close our development process, which is extremely important. So these design hubs coming up in multiple geographies. We are strengthening our design hub in the U.S. We have added in U.K. We are also looking at 1 or 2 locations in the Europe, looking at the EU FTA coming in place. So a couple -- you put all of these together, your verticalization happening, your product development is happening. We have gotten Japanese consultants and designers on board. So the product has become a little premium with our designs coming in, verticalization strengthening, I think all of this gives us very positive momentum for the next couple of quarters, I would say, in the year, we have very good visibility on our Denim business. Likewise, on the Wovens business also, this has been -- this is typically a lower quarter, quarter 1. But if you see, we have clocked the highest ever numbers in quarter 1, which are typically seen in H2. So the volume has been extremely good. We have been taken a little bit on the lower side because of the sudden spike in raw materials. But that also is pretty much the strategy in place, how we'll be back to our numbers in the medium term, but it will take some long-term time to get back to where we were. But yes, we see a very strong order pipeline. So that gives us sufficient enough confidence.

This is helpful. Just a follow-up on this. I wanted to understand what is the role of Bangladesh over here because Bangladesh is also facing issues with respect to power and other issues. Is that also helping our Denim business procurement as their capacity run below normal utilization levels? And how -- what is our export share to Bangladesh currently?