Arvind Ltd

NSE:ARVIND

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the conference call for analysts and investors for post results and discussion for quarter 1 financial year 2022-'23 Arvind Limited. [Operator Instructions] Please note, that this conference is being recorded.

I now hand the conference over to Mr. Samir Agrawal. Thank you, and over to you, sir.

[Samir Agrawal, executive]

Thank you. Good afternoon to all of you, and thank you for participating in this call to discuss the First Quarter Results of Arvind Limited for the financial year FY '22, '23. Joining me today is Mr. Jayesh Shah, Executive Director and Group CFO; Mr. Swayam Saurabh, our CFO of Arvind Limited; and Mr. Kaushal Shah, the Head of Investor Relations.

The business environment in the recent months has been quite well timed with multiple sources at play. In our key export markets, inflation has emerged as a primary concern for the policymakers and all central bankers are busy with interventions, including interest rate increases. Consumers have also been feeling the pinch expenses clearly through, though government support and high asset prices has kept the consumer demand strong thus far. 2 quarters ago, our key U.S. customers were busy preponing their buying to preempt the potential shipping delays. This has led to an inventory buildup in the supply chain. Now this trend has been resolved and with the first signs of consumer demand softening visible, our export customers have started to partially postpone their purchases.

In U.K. and Europe as well, inflation is being a matter of serious concern with the prospects of Russia, Ukraine war driving for long is further adding to a weak consumer sentiment. In domestic market, demand has been strong, including through this ongoing EOSS season, and most players are expecting this to continue through upcoming festival season and are hoping of a good Diwali. Commodity prices peaked during this quarter and have finally started to come down. In case of cotton, the decline is quite pronounced. And as we speak, the normal deliveries are quoting at almost 35% sound to whatever the price 2 weeks back. Other raw materials and shipping costs have also started to come down. Anticipating price decline, some of our customers, especially in the trade segment have started to delay their ordering as far as possible. So on the whole, this market environment is quite interesting and complex is playing out.

Coming to the performance update, our first quarter result was best ever Q1 in terms of both revenues as well as net profit, since the demerger of Anup Engineering and Arvind Fashions. Q1 revenues were [ INR 2,352 ] crores, which was 64% higher than last year's Q1 and 7% higher on a sequential basis compared to Q4 last year. Excluding other income, EBITDA stood at INR 220 crores, which [indiscernible] income overall operating margin of 9.4%. Profit after tax was reported at INR 106 crores, excluding the excluding the [ thread mill ] operations.

Our Internet business is classified under discontinued operations, subject to sale of Arvind Internet to Bigfoot Retail Solutions Private Limited for a consideration of INR 1,52.3 crores, effective 30th June 2022. This transaction is expected to close next month. Textile volumes, especially export markets were robust during this quarter, Denim sold 20 million meters of fabrics, which was in level as last year's Q1. Woven volumes rose from 23 million meters in Q1 of last year to 32 million meters in this quarter. Price realization in both these segments, denim woven fabrics increased by approximately 35% compared to last year's Q1. Garment volumes, excluding essentials stood at [indiscernible] million for the quarter. Overall, textile revenues were up 68% to INR 1,976 crores -- INR 1,976 crores.

AMD started this quarter on a strong note and its revenues were up 45% to reach INR 279 crores and an EBITDA of INR 32 crores. Demand for AMD products continues to be strong among our customers. However, input RM cost and expenses shipping kept the pressure on AMD margin, which stood at 11.5%. Overall, we expect Q2 to be marginally muted compared to Q1 given all the volatility in the business environment. And the rest of the year will depend on how the demand is impacted given the recessionary situation in global markets, and the commodity prices which are also quite verified.

At the start of the quarter, the RM prices were high [indiscernible] in higher valuation and temporary increase in the working capital required. We expect to correct most of this excess working capital during the quarter and continue our debt retail program as planned and communicate to you. We continued our trajectory of producing our long-term debt. And in this quarter, we have repaid INR 56 crores, taking the balance to INR 901 crores. Overall, net debt stood at INR 1,809 crore at the end of the quarter, which was INR 127 crores higher than the March ending quarter, and this was driven by working capital, as I explained.

So this concludes my opening remarks, and I now invite you to ask any questions that you may have. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Biplab Debbarma from Antique Stock Broking.

[Biplab Debbarma, analyst]

Sir, first question is regarding the real estate business. I mean, you have a gen agreement JV- JD kind of agreement with Arvind SmartSpaces. Just trying to understand, so is it like you get the share of the revenue and entire cost and everything responsibility of execution goes to Arvind SmartSpaces? Or do you get the entire cost and debt in your books and Arvind SmartSpaces just develop it and get a share of the revenue. So that is my first question.

[Unknown Executive]

Right. So this question was asked last quarter as well. Arvind Smart Spaces act as a developer for us. And the land is owned by us, which is basically developed, we get cash directly, which is -- the cost is getting booked as project expenses and later on once the project is completed, revenue will get recognized. Right now on the cost is what you see in the P&L.

[Biplab Debbarma, analyst]

Okay. So it is booked in your P&L? Cost.

[Unknown Executive]

Yes, that's the development cost.

[Biplab Debbarma, analyst]

Okay, okay, fine. Understood. My second question is on your net debt. It's a good thing that long-term net debt has gone down. But if you see for the last 7 competitive quarters, we have seen a consistent reduction in net debt. So this quarter, if I'm not mistaken, the net debt has increased a bit. So just trying to understand what led to this increase in the overall net debts?

[Unknown Executive]

Right, so net debt has increased by INR 127 crores this quarter. And this is primarily the value of inventories, which has gone up, as you know, input prices have continuously been going up. This, we expect to largely correct by the time we exit Q2.

[Biplab Debbarma, analyst]

Okay. Okay. So directionally, the net debt reduction would continue. Is that what you were saying, sir?

[Unknown Executive]

That's correct.

[Biplab Debbarma, analyst]

Okay. One final question, sir. Sir, both RM prices elevated level and you also mentioned about demand -- muted demand in the export market. Just trying to understand which is more concerning? I mean both are, but just from a point of view, what will bring you in a more relating -- like more better demand or the RM prices going down, sir.

[Unknown Executive]

So both are interrelated. Demand is, let's say, getting impacted because of discretionary nature of at least large part of April. RM prices coming down could make it more affordable to buy. But it depends on different segments. They are not really one-to-one, but RM price is going down and demand continuing to improve should help outlook for textile company like ours.

[Operator]

[Operator Instructions] The next question is from the line of Prerna Jhunjhunwala from Elara Capital.

[Prerna Jhunjhunwala, analyst]

I have 2 questions on the business side. You mentioned that the demand is muted in the near term. But just wanted to understand the relationship between RM and SG prices going forward, at least for the near term, whether the -- generally we say that fabric is -- it takes time for fabric sizes to correct. So are the customers really wanting the prices to reduce in line with cotton prices? How are they behaving actually in terms of product pricing, in terms of order bookings, whether they are ordering 50% of your general order book or 40%, or 80%? Just wanted to understand how is the customer behaving in both domestic and export markets to understand the underlying business scenario.

[Samir Agrawal, executive]

Yes, sure, Prerna. So let's talk about domestic and exports separately. As far as export markets are concerned, like we shared even a couple of quarters back, there was clearly a preponement of buying which was happening because large customers, especially in the U.S. they had seen significant shipping delays and some of them have even incurred airfreight charges, and they want to avoid that. And hence, in our Q3 and Q4 we saw a slightly preponed demand compared to the season which normally buying happen side. So that played out. And obviously, we are aware -- we've been aware that the inventory has been slightly higher than what we usually see in the pipeline.

Now having said that, we are also seeing that going forward, the consumer sentiment itself is going to become a bit of unpredictable one because all the COVID support from the government has come down and then overall interest rate environment is going up, price going up is making it seem like consumer sentiment is likely to soften, right? We should put these 2 together. Quite obviously, from a demand for our products point of view there is a degree of uncertainty. So far we have not seen any major cancellations. Our businesses work on -- given the only long contracts and lead times. So we have seen some small postponements, but not any major cancellations, right?

Now if you track the results also the global company results declared until April or May have been reasonably strong. Now from this point onwards how things unfold is something we are also going to see and we'll update you as and when things will happen. But so far, like I said, it's a posture situation, but nothing itself that things have reversed for -- on our export market point of view.

In terms of domestic market, it has been really good. I mean, the whole domestic markets have done quite well right through the end of the season sale in July. And those participants believe that we should continue to see a good holiday season for our festival season coming up as well. So on the whole, I would say that there is a possibility of things being a bit muted. But from what we see, there is nothing which kind of concerns us too much.

[Prerna Jhunjhunwala, analyst]

So sir, can you assume that does the sluggishness in the export market should more or less be compensated by the domestic market because we have -- we had in the past increased our share of export market volumes in the last 1, 1.5 years. So will that rebalance in the near term is how we should look at?

[Samir Agrawal, executive]

Yes, sure. So from quarter-to-quarter, it does kind of change our export domestic mix and it will be fair to say that in the coming days we'll see stronger uptake in the domestic customers and that possibility is there for sure.

[Unknown Executive]

If I can add to that. So obviously the risk which we see on export, the goal will be to try to compensate and goal will be via domestic. But it's also the fact that it's a little bit uncertain to what extent that the further deferment of orders could happen, how fast the inventories would liquidate -- hence, sort of a conservative view on the fact that quarter 2 likely to be muted. It's a little bit uncertain out there.

[Prerna Jhunjhunwala, analyst]

I completely understand on that, and this is really helpful, sir. Just wanted to know current utilization, is it higher, lower than the numbers reported?

[Unknown Executive]

Current utilization of what?

[Prerna Jhunjhunwala, analyst]

Of capacity across [indiscernible] in denim, woven and garmenting.

[Unknown Executive]

So you would have seen already in woven as well as garmenting, we are quite close to the total operating capacity we have. But in denim, we are not fully using capacity because the cotton impact, as you know, as a percentage, highest is in denim fabric. And as cotton price has started to subside, we would see improvement in denim capacity utilization.

[Prerna Jhunjhunwala, analyst]

That was quite helpful. I have a few bookkeeping questions, I can return back to question queue.

[Operator]

[Operator Instructions] The next question is from the line of Biplab Debbarma from Antique Stockbroking.

[Biplab Debbarma, analyst]

Sir, just on the cotton, you mentioned that the cotton prices have been now trading at almost 35% discount to the fixed prices, which is heartening. So -- and I think the cotton output in the next cotton season hopefully would be better. Just trying to understand in terms of availability of the cotton, how is the situation? I mean, we have been hearing that many of these companies are not buying cotton, not building an inventory. Can you give us some idea if people are not buying some, if you are not buying, if you have small cases of shutdowns, then how this price level -- I mean 85,000 elevated level, how they are trading? I mean, what is the availability situation? Just trying to understand what's happening in cotton.

[Samir Agrawal, executive]

Yes, so just to be very precise when I put the word 35%, it's for the November delivery. So it's a forward-looking price. So I'm not saying currently the cotton trading at 35% less, right? That's one small position there. But to answer your question more broadly, see what's happening is if you see the global sort of supply side situation, that's also a little bit more nuance and complex. So like if you take American quarter, which is on the big sources, that excess drop has been spoiled by situation than [indiscernible] there, right? So that's one part of supply is impacted there.

The Chinese cotton continues to be outlawed to be used by any of the Western buyers. So that part also is impacted. Indian cotton output is kind of yet to be kind of sliding so you will know only by September end or October, which way the rains will play and how much of a good harvest we see this season. So on the whole, all the sources of supply which impact our availability and prices are still in a way uncertain, and hence it's very difficult to say which way things will go. Yes, from a demand point of view, we do believe that the pressure which was there may not be as is. So we expect some softening. But at the same time, given all the supply side companies are talking about, we don't expect the market to crash down completely. So the market price we believe will hold and of course [indiscernible]

[Biplab Debbarma, analyst]

Okay. Okay. And sir, final question on the water business. I mean, what is happening in that water business? Are you getting orders? And are we going to see as we get it in the next 1 quarter or so you would see some profitability or breakeven kind of thing in the water business?

[Unknown Executive]

So water business is going as planned and we have never given specific numbers around performance. We have basically talked about the other segment not being a drive on overall EBITDA, and water business is progressing as planned and it is profitable.

[Operator]

[Operator Instructions] the next question is from the line of [ Ritesh Gandhi ] from [ Discovery Capital ].

[Unknown Analyst]

Just have a couple of questions. I mean just to understand this implication of cotton price and the spinning spread being extremely low right now given the differential in Indian price and international price, is that expected to impact us in terms of actually on the tenant side? Or I mean how should we be thinking about this?

[Unknown Executive]

So if cotton prices start to come down, assuming demand remains constant, cotton prices starting to come down and spinning margins start to get thinner, this will help our costs in denim as well as in woven. So that's a...

[Unknown Analyst]

So is spinning spreads are lower, it helps us, is it? Or it hurts us?

[Unknown Executive]

Yes, because we don't have 100% in-house spinning capacity. Spinning spreads when they were higher, we were paying those charges.

[Unknown Analyst]

Got it. So how much of our capacity do we use internally for spinning as opposed to purchasing outside yarn?

[Unknown Executive]

At textile level, it will be about half ours.

[Unknown Analyst]

But then I'm just assuming that when overall spread in spinning are higher, it would also be helping the other half where we have our own spinning, right? Because effectively other people who actually aren't integrated wouldn't be able to pass it on.

[Unknown Executive]

That's correct. In-house is on cost, but the other half on which you would pay what market would pay. So if this margin starts to get thinner, this should help.

[Unknown Analyst]

Got it. So effectively, so right now if you see some what we understand is that, I mean, spinning spreads are extremely low. So would that sort of imply that this is slightly higher than our normalized rate of profitability?

[Unknown Executive]

So of course, I mean, I answered it already. When spinning spreads are low, by design this would aid, but there are just too many variables to determine ultimate profitability or cotton costs, consumer pricing, customer pricing and demand.

[Unknown Analyst]

Got it. And so on the -- okay, and this -- so and on the garmenting side of things what I understand is that, obviously, people look at the current big cost of fabric and materials, RM, etc., and your pricing is a little -- more or less it's dynamic. I mean, in denim also, is it the cost plus effectively where your buyers look at? Or is it looked at bit differently.

[Unknown Executive]

No, not really see. We don't sell -- we don't do any customer contracts on a cost-plus basis. We either spend in fabrics on sort of given variety on a per meter basis, or we can fully make cloth. And that output is based on a permit output pricing, it's got no direct linkage to a cotton price.

[Samir Agrawal, executive]

I mean, it is linked to cotton, but there are other variables in play, the design, the R&D, which goes into it, relationship of the customer. There is no cotton price linked clause if you are asking that?

[Unknown Analyst]

Got it. And the other question was on select garmenting side, how are you guys seeing overall the demand? Because obviously, on one hand, we are hearing stories about excess inventory at a retailers end, on the other side we're hearing that India is gaining share as a percentage. So how should we be looking at -- I mean, our order book, our discussion, our ability to pass on increases in prices, etc., to our customers.

[Unknown Executive]

No, good that you asked. So garmenting in quarter 1 we have done well. And also, we have spoken about it, garment and AMD leading to growth is also accretive from an EBITDA perspective. Garmenting had done well, so have on AMD, and this should continue also going into future quarters.

[Unknown Analyst]

Got it. So -- and the reason we aren't seeing any impact kind of on overall demand is because of us gaining the share?

[Unknown Executive]

No, no. Future quarters, demand does make things uncertain. Garmenting as a business for us has underperformed, but have last 3 quarters stepping up quite significantly. And I was just making a point that garmenting has done well in quarter 1, in line with what we have guided and should expect it to continue that trajectory subject to demand holding work. One more thing to add on what...

[Operator]

Sorry to interrupt. Mr. Gandhi, may we request that you return to the question queue. There are participants waiting for their turn.

[Unknown Analyst]

Sure.

[Operator]

The next question is from the line of Chinmay Kabra from Emkay Global.

[Unknown]

Am I audible?

[Samir Agrawal, executive]

Yes.

[Unknown]

Sir, I just had one -- a couple of questions. The first was that we have witnessed preponed and postponed line that you said in the orders. So by when do we expect the orders to arrive at the normal flow? Like any estimated duration or estimated time?

[Samir Agrawal, executive]

I think the core inventory correction cycle should kind of play out in the next quarter or so. And we should be kind of task that by the next quarter or in second. And then after that, obviously, things will depend on the market level demand and supply and this whole inventory correction slowly will be over.

[Unknown]

Got it. And I just had one more question. I'm not sure if this was asked previously, but I just wanted to know if whether you're passing any of the benefit of lower rates, the current lower rates which are falling, are we passing on the benefits to the customers for this?

[Samir Agrawal, executive]

So not like that, not yet. Obviously, over time, that is the cost structure changes, this is the competitive market. So the pricing will reflect that in the medium term. But if there's no direct increase, like I said, our price contracts are not linked to input prices directly.

[Operator]

The next question is from the line of [ Nirmal Jha ] from [ Ceracic [indiscernible] Management ].

[Unknown Analyst]

I just wanted to understand, what's the exposure for domestic market in banyan woven on the fabric side?

[Samir Agrawal, executive]

What do you mean by exposure?

[Unknown Analyst]

Means, how big is the domestic market for you in terms of supply vis-a-vis exports?

[Samir Agrawal, executive]

The domestic market is about 30% of total -- sorry, about 35% of the denim and woven combined.

[Unknown Analyst]

Right. So when you expect some sort of a buoyancy in domestic market to compensate for the slowdown in exports, you mean the entire thing can be taken care by the buoyancy in the domestic market? Or you think there will still be -- there will be some?

[Samir Agrawal, executive]

No, we don't know. So, I mean, we do not know how bad export can get. Right now there are 2 situations. One is inventory which some of our customers are sitting on and others could be how demand would deteriorate. It's a very evolving situation. We do see that domestic has been very positive so far. We'll have to just wait and see how next 2 months evolve. And of course, our goal will be to respond. But it's difficult to put a number to it, it's what would be the level of impact and if it can be entirely absorbed by domestic market.

[Unknown Analyst]

Right. But in that case for your government business, you would have already started receiving the orders to be supplied for the Christmas and the December quarter, right? So if you can just give us how does it look like the order book for garments?

[Samir Agrawal, executive]

No, correct. But at any point in time we have a forward order book across our businesses. And at this moment, the order book is a little weaker than a normal quarter. Hence we expect the future months to be a bit muted.

[Unknown Analyst]

Right. So can you quantify or give some range on a Y-o-Y basis, how short it is?

[Samir Agrawal, executive]

No. At this point, we will not be able to quantify because very dynamic. It changes every alternate day.

[Operator]

Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Samir Agrawal for his closing comments.

[Samir Agrawal, executive]

Sure. Thank you, everybody, for joining us today. We will meet in one more quarter. Bye now. Thank you.

[Operator]

Thank you. Ladies and gentlemen, on behalf of Arvind Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.