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Lux Industries Ltd
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Ladies and gentlemen, good day, and welcome to Lux Industries Limited Q1 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Saket Todi, Promoter and President of Marketing of Lux Industries Limited. Thank you, and over to you, sir.
Good evening, and a very warm welcome to everyone. Along with me, I have Mr. Udit Todi, Promoter and President, Strategy; our CFO, Mr. Ajay Patodia; and SGA, our Investor Relations Adviser. I hope you have received the results, press release and investor presentation by now. For those who have not, you can view them on our website. I hope everyone is safe, and my prayers of speedy recovery for the ones who are fighting this out. The outbreak of COVID-19 pandemic and subsequent lockdowns has impacted major economics and sectors global -- across the globe. The quarter gone by was quite challenging as the impact of pandemic and the lockdown on the innerwear industry was no different. Consumers across geographies were in no mood to spend much on clothes and other fashionable items, while our production and distribution activities also got impacted due to the nationwide lockdown. Despite this challenging environment, our overall performance and profitability for the first quarter has been quite strong. This proved strong resilience of our business model, which has helped us to continue our growth trajectory even in these challenging times. I'm happy to share that we have been able to deliver profitability matrices, which are well above the industry averages. Our revenue has seen a slight degrowth of 6% even though a plant was shut for almost 1.5 months due to the lockdown. Despite these, our EBITDA and PAT registered an absolute growth of 34% and 64%, respectively, due to improvement in operating efficiencies and cost reduction measures. We continue to endeavor healthy profitability ratio by focusing on better product mix and rational cost optimization. Now coming to our working capital. As committed, we have undertaken several measures to reduce our working capital requirements. Even after the impact of COVID-19, we have been able to reduce our working capital by almost INR 80 crores from March 20 to INR 413 crores as on 30th June, 2020. Our operating cash flow for the quarter stood at INR 132 crores as compared to INR 59 crores as on June 2019. With gradual lifting up of the lockdown restriction and economic activities progressing towards normalcy, we are seeing green shoots in the demand and expecting coming quarters to be much better and robust. Our strong distribution network with over 900-plus distributor and nationwide presence, mainly in the northern, eastern, western part of the country, has helped us continuously engage with our dealers and customers, which in turn has helped us to gauge the on-ground market sentiment. I am happy to share that we are receiving positive response and inquiries with each passing day. Now I hand over to Udit to provide you an insight of our future strategies.
Good evening, everyone. I hope everyone is safe. It has been more than 5 months now we all have been facing hiccups of the pandemic and the lockdown. The quarter gone by has been challenging for us, both in our personal and our professional aspects. While during the first 2 months of the quarter, exports were restricted globally due to COVID-19, we are seeing good pickup of volume in domestic market and expect overall demand to return to pre-COVID levels in the coming quarter. Also, exports have begun since June 2020, and we expect the sales to normalize in a few months. On the brand investment side, over the past few years, we have invested approximately INR 566 crores across our brands, as it has been a constant effort to maintain our branding and marketing expenses in the range of 7% to 8% of our annual turnover. However, considering this year to be one-off and full of challenges, we have decided to keep investment in brands at about 4% to 6% of our turnover. This debt will help us rationalize cost and also focus on operational efficiencies which, in turn, will help us generate better profitability as well as return matrices. Our technology and automation-led manufacturing has helped us to maintain high-quality standards and deliver consistently superior quality products to our customers. With our decades of experience in the sector, extensive know-how, well-established brands and our ability to gauge the market sentiment, we are confident in fulfilling the needs of our customers and offer them favorable price value proposition. Our merger of J.M. Hosiery and Ebell Fashions with Lux is on track and is on the last leg of its regulatory requirements. However, we saw some delay in time lines due to remote functionality of regulatory departments, which now seems to be regular. This merger will need single market strategy and single company brand image, leading to a stronger market presence and higher confidence level with all its stakeholders. We are committed to a long-term vision and goal to provide highest level of customer satisfaction and long-term value creation for our stakeholders. Now I hand over to Mr. Ajay Patodia to provide you an insight of our financials.
Thank you, Udit ji. Our revenue for the quarter stood at INR 247 crore as against INR 263 crore in Q1 FY '20. Revenue for the quarter has shown a slight degrowth of 6% considering our plant operations where it halt for a 1.5 months due to nationwide lockdown. Our EBITDA has seen an absolute growth of 34%, which stood at INR 47 crore as against INR 35 crore in quarter 1 FY '20. We have seen a significant improvement of 560 basis points in our EBITDA margin on account of prudent core specialization and improved operating efficiencies. Our EBITDA margin for the quarter stood at 19% as compared to 13.4% in quarter 1 FY '20. Profit after tax grew by stellar 64%, which stood at INR 31 crore as against INR 19 crore in quarter 1 FY '20. Our PAT margins have also improved significantly by 540 basis points, which stood at 12.5% as against 7.1% in quarter 1 FY '20. With this, we now open the floor for question and answers.
[Operator Instructions] The first question is from the line of Nihal Jham from Edelweiss.
Congratulations on the good performance. Three questions from my side. First, could you give the contribution of exports in this quarter and the same one in the last corresponding quarter?
So exports for this quarter stood at -- around at INR 15 crores as against INR 27 crores for the corresponding quarter last year.
That's helpful. The second one was on other expenses, which have obviously significantly reduced. So if you could just give a breakup of which has been the main cost component, assume it's advertised sales and marketing. But just if you could break up where have we managed to reduce cost? And how sustainable is this going forward?
So as you have correctly mentioned, the main reduction in the other expenditure account is mainly due to advertisement expenses. So as we mentioned in our speech, we generally earmark about 7% to 8% of our top line for ad spends, which, for the current year, we are keeping at about 4% to 5%. So that is one of the main reasons why you see the margins to be improving. And so -- I mean, current situation being a COVID situation, it's a one-off kind of a thing. Going forward, we believe that we'll -- in the next coming few quarters, we'll continue to see improved EBITDA margins on account of reduced ad spend. And going forward for the next, say, next financial year and the next to next financial year, we'll be, again, starting to invest in our brands, and we'll ultimately see the effect in the top line.
So last question from my side. Lux, obviously, has the highest reach in the country. So if you could just give a sense of current consumer trend in the innerwear space, both in terms of recovery for rural as well as for the cities and even in -- are you seeing a trend of your economy range seeing more traction than the premium range? What are the insights that you've seen over the last couple of months as the recovery is happening?
Like in the last couple of months, the economy range is definitely seeing more traction. And the main demand is coming from the rural market, which is still continuing. Urban market is still weaker. But the rural market demand, we expect the strong demand to continue and move towards the winter wear segment.
Any initial trends on how -- on winter wear demand from a distribution --from our distributors?
It is very strong.
[Operator Instructions] The next question is from the line of Sunil Jain from Nirmal Bang Securities.
Hello? Hello?
Yes. We can hear you.
We can hear you, yes.
Sorry. One or two questions. If I see your financials, there is some dip in the gross margin, if you take year-on-year and both quarter-on-quarter. Can you give me some reason? We were expecting like if the yarn prices are soft, then you should have gained on the gross margin.
This is mainly due to -- as I just said some time back, due to the mix change, the mass segment, the basic segment is moving much faster than the premium wear segment. So we had a drastic mix change in the last quarter, where the basic segment had a huge up-movement than that of the premium segment. So going forward, in the coming quarters, this should normalize back.
So we are seeing pickup in the premium segment now. Our composition is reverting back to its normal level?
Yes, yes. For the current quarter, to some extent, it will improve. And in the next quarter, it should improve further.
Okay. And second question is related to one of our associate companies, which we are merging, Ebell. Can you -- because there, the decline is very sharp, so how is the trend now? Is there a pickup we are seeing or that will make compared to the overall company?
So talking about Ebell Fashion, the mainly -- it's dealing with womenswear. And overall, if you look at the industry and the economy, womenswear, as a segment, overall has taken a big hit because women are not stepping out and purchasing products. It is only -- I mean the situation as it stands as of now is that it's mostly men's products, which are selling and that too more of rurals -- more on the rural side than the urban side. So that has been the trend overall for the first quarter. But going forward, like in the current quarter, we have seen a much improvement compared to Q1, but we believe that it should still take some more time for it to come back to pre-COVID levels.
Okay. And last question is about the current month. Are we seeing the month-on-month -- year-on-year growth in first 45 days? Or how is the trend?
So I believe, right now, we were mostly discussing about quarter 1 results. And -- so it will not be -- we cannot give you a very exact quantitative outlook when it comes to Q2. But, yes, just to give you an idea that, overall, we believe that when it comes to men's segment and Lux, overall, as an entity, the demand side has been pretty much good -- it has been pretty well. I mean you can see the results in Q1 as well. We've been able to achieve about 90%, 95% of our quarter 1 sales year-on-year. And we believe that quarter 2 should be something similar, if not better.
Last question is, can you spell out how much is the debt at the end of the June quarter?
Debt at the end of the June quarter, it's -- just give us a few moments.
It's at INR 52 crores. The same, we have a term deposit of around INR 55 crores against it.
So net debt 0?
So net debt we have…
Net debt is negative.
[Operator Instructions] The next question is from the line of Giriraj Daga from KM Visaria Family Trust.
What is the volume in quarter 1 versus last year?
Sorry to interrupt. Giriraj sir, your voice is not quite audible.
Hello? Is it audible now?
Yes, you can go ahead.
Yes. What is the volume in absolute number we'd done in quarter 1 versus last year?
So talking about volume, the volume has been pretty much flattish. And -- so last quarter -- I mean last quarter 1 FY '20, we had done volumes of about 4.7 million and even in the current quarter, the volume is about 4.7 million.
Okay. And the next question is related to…
It's 47 million.
47 million. Okay.
Yes.
Next question is related to export. So last con call, you mentioned that export might be -- will be simply lower than last year. So how is the trend you are looking now? You said that June we are seeing good pick up. Would we be able to match last year number? Would we able to grow from last year number? Any thoughts there?
Last year number, it's too difficult to predict as on now seeing this COVID situation in different countries. But quarter 2 numbers, we are expecting to have a growth as compared to Q2 to Q2 basis.
Okay. Q2 to Q2, expect growth in export market?
Yes.
Okay. Similarly, like on the working capital, would you be able to give me the inventory debtors and creditors separate? You gave the combined number, but would you be able to give me separate numbers for that?
The inventory as on June '19 was at INR 306 crores and June '20 inventory is at INR 277 crores. Receivables as on June '19 was INR 271 crores, and on June '20, it was INR 258 crores. The payables on the other hand on June '19 was INR 156 crores, and on June '20, it is INR 129 crores.
Okay. My next question is related to the cost reduction. You mentioned A&P was a large number there. Would you be able to give an absolute number how much was the A&P in quarter 1 and how much we did in this quarter 1?
We have saved approximately around INR 10 crores to INR 12 crores from advertisement.
Okay. But when we look at the numbers from INR 48 crores to INR 20 crores, we are looking at it almost INR 28 crore reduction in other expense. So would you give any other head, which we had resulted in such a sharp cost reduction?
We also had a reduction in the administrative expenses. The senior level management, everyone, has taken a salary cut for the month of April as well as May. There was a major reduction there as well.
That must be reflected in the employee expense, right?
Right. That's correct.
So I'm talking about other expenses, which is down from INR 48 crore to INR 20 crore. So your employee is down INR 11.5 crore to INR 8.8 crore, which is understood. But your INR 48.5 crore of other expense is down to INR 20 crore.
So the absolute number of advertisement in quarter 1 -- I just got the numbers right now, was at INR 33 crores, June '19 and June '20 was at INR 10 crores. So there is a saving of INR 23 crores out here.
Okay. Okay. So large part was that A&P savings?
Yes. And as well as there was a INR 2 crore saving from miscellaneous expenditure, which mainly includes rented places as well as administration cost.
The next question is from the line of Tanvi Shetty from Axis Securities.
I understand that most of your revenue comes from the Central and Eastern states, but I wanted to know what is the demand situation like in other parts of the country like Western -- in Maharashtra, Gujarat and also South?
So the demand position overall has been all across India. I think it will not be correct to say that it was a biased sort of a demand coming in. The demand has been scattered all across, and we were seeing good demand coming in from, in fact, North, West, Central, East. All the areas were -- the demand was pretty much well distributed. And giving you a -- compared to the rural and the urban make, we felt that the rural was performing better than the urban.
Okay. Okay. Sir, now in Q2, like I understand you can't reveal much of the Q2 numbers. But on a qualitative basis, I wanted to understand that with the sporadic lockdowns in Bihar -- sorry, U.P. and floods in Bihar, do you expect Q2 to be better than Q1?
So we believe that with the easing of the lockdown, Q2 should definitely be better than Q1. And even if you look at seasonality of the sales, I mean, Q2 as a quarter is always bigger than Q1 quarter. Even if you look at last year figures, Q2 is always bigger than Q1. And -- plus, with the easing of the lockdowns going ahead, we believe that Q2 number should definitely be better than Q1.
The next question is from the line of Sachin Kasera from Svan Investment Managers.
My question is regarding this cash flow that we have shown a significant improvement. My sense is that a large part of that is driven by the reduction in working capital. So from what I can understand is that because our production facilities were closed for almost 1.5 to 2 months, a part of it is that we produced less and we obviously liquidated the inventory. So is this reduction in working capital because of lower inventory? Is it now a sustainable thing or it's a one-off and it will normalize by the end of Q2?
So see, the reduction in working capital obviously has been handsome for quarter 1, mainly because of change in terms of trade because given the COVID pandemic situation, the credit period which was letted out was much lesser than in a normal circumstances. And it was the same, even going ahead into the channel, the wholesalers were almost selling on a cash basis and so were the retailers. So the credit period across the channel had gone down considerably, obviously, because owing to the COVID pandemic situation. So that was one of the main reasons why you see better cash flows coming in for the first quarter. But we believe that going forward, it should normalize to some extent as the lockdowns will be relaxed and credit period should, to some extent, normalize to pre-COVID levels.
So pre-COVID, what was the type of credit we were giving? How much did go it down? And…
Yes. Just to give you -- even -- so credit, again, will start flowing in once the COVID situation is normalized. But as we have been stressing over the last few con calls, you can see that over the past few quarters, the company has always made it a considerable effort to reduce their working capital. And we have been able to do that. Even despite of the COVID situation, we have been able to achieve reduction in working capital. And if you look at over the past few quarters, when the COVID situation wasn't there, the company was able to reduce its working capital requirement.
That is, I think, very visible and very well appreciated. My question is that how much of this reduction in number of days that we have seen in the last 3, 4 months is sustainable? And how much will it normalize? So if you could just tell us what was the credit that used to be pre-COVID? And what do you think will be a new sustainable number once things normalize in another month or 2?
So we believe that going forward, in the long term, the company is looking at achieving about 125, 130 days of working capital level.
And what was it pre-COVID?
So pre-COVID, we were at about 140, 145.
Okay. So around 10 to 15 days of savings you think is a sustainable number?
Yes.
Secondly, this -- you mentioned that the volumes have more or less been flat. And while obviously, demand has seen some impact. So how much of this is basically that filling of the channel inventory? Now is it that both the wholesalers and retailers also have been able to liquidate and the overall channel inventory has more or less remained the same?
So in fact, you have put up a very good question and -- so in fact -- the fact what it remains is, in fact, very opposite. So what happened was during the situation, all the partners in the channel were more and more concerned about liquidating what stock they had. So everywhere across the channel, the level of inventory has gone down. And even despite that, the volume has remained flattish. So we believe that in the coming quarters, even if we are looking at replenishing the channel inventory, the volume should increase on that front. So right now, if I'm talking about in the first quarter, in the first 3 months, it was not that the channel inventory was going up. In fact, it was the contrary, the channel inventory was going down. Everyone -- no one was willing to take any kind of a risk of stock on their shoulders. So everyone was liquidating whatever stock they were having.
And that is -- when you say channel, it is also including the end retailer?
I'm sorry?
When you say channel, it is including the end retailer, the final point of sale?
When I say channel, I mean, company, wholesaler, retailer.
Okay. So does it then mean that -- because see my sense is that market will definitely gone down. So at the retail level, or at the point of sale, the market share has gone up significantly because while your volumes are flat, my sense is that the market would have definitely seen some correction, right, in terms of overall demand?
So see, the basic fundamental of this entire analysis is that although we weren't quite categorized as an essential commodity, but in practical -- in all practical uses, it was an essential commodity. During this lockdown, I'm -- all the consumers, those who are target audience, have been consuming our products. So as soon as the lockdown was opened up and people started to go out, when they were stepping out to buy food and grocery and everything, people were also ending up buying their basic essentials. And that is one of the main reasons why consumption was never -- in our particular products, consumption was never stopped. Even during the lockdown, people were consuming our products. So even if you're looking at the retail level, we do not believe that there will be much of an inventory pressure at that point.
No. My question was that at the retail level, do you think have you gained market share? Or is it that market is more or less remained same and that is why we are more or less the same?
No. So we definitely believe, overall, the market has been good for the entire industry. There is no doubt about that. And when we talk about our particular market share, we believe that -- because being a big organized player in -- within our own industry, the overall organized share during this lockdown period has increased vis-à-vis the unorganized sector. So on that account, we definitely have gained market share.
Sure. My last question is regarding the merger of the 2 group entities. So you mentioned in the presentation that because of this COVID, some of the hearings have got delayed. So can you give us any sense on when do you see now this final hearing happening and by when we can see the consolidated numbers?
So see, our application is pending before the NCLT. And right now, as the situation stands that -- I mean the court is not functioning as regular as it used to during the pre-COVID levels. So that is why the waiting line or the waiting queue, so as to say, has quietly -- the waiting time for a case to get heard has increased quite a lot. So from the company and the management side, all the regulatory -- so we have taken all steps and we have already filed the application. Now it entirely depends as to when the NCLT takes up the case for hearing and gives us a green signal.
And that is the only approval which is pending?
So that's -- we are pending at that. We've already filed application.
The next question is from the line of Manish Sonthalia from Motilal Oswal Financial Services.
Sir, would it be possible for you to share us the gross margins on each of these segments, menswear, womenswear, athleisure? And I also wanted some color that during this pandemic, what is the level of disruption in the unorganized space? Obviously, the organized space like yourselves and others would have gained market share. But if you could shed some color on how this disruption has impacted the unorganized guys.
So with this pandemic coming in, see, it's become much more difficult for the unorganized guys definitely because we being an organized player, we pulled across all our resources and we tried to make sure that we could produce as much as possible and then also sell as much as possible. When you're talking about the production process, it's quite a lengthy long process. So for any unorganized player, even if he gets stuck at one point, the entire product does not get manufactured. And even right now, after the lockdown getting eased up, we can still feel a lot of hiccups and a lot of hurdles at different points of production processes, but being a big player, we somehow manage one way or the other. But for an unorganized player, we believe that it would be quite, quite difficult under the current circumstances to function, as they would, in the pre-COVID situation. So yes, there has been significant disruption when it comes to the unorganized sector. And talking about your margin level, we do not have it handy right now. So you can obviously reach out to our IR people and they can get back to us and we'll get back to you as soon as we have the figures with us.
And just the gross margin numbers on the menswear, womenswear and athleisure segment?
So womenswear for us is basically Ebell Fashions Private Limited. So the figures were already -- the balance sheet -- you can obviously look at the figures, which we have achieved in the last few years, so gross margins levels will be quite visible over there. And when it comes to menswear, menswear is primarily Lux, which hovers somewhere around 30%, 35%.
And athleisure segment, like Lyra and all that stuff?
So the Lyra is basically womenswear. We do not have the athleisure gross margin levels currently now right now with us. We'll surely get back to you.
The next question is from the line of Ankit Pande, CFA, from Quant Mutual Fund.
I hope I'm audible. My question is regarding your channel mix. Could you just break it down into general trade, modern trade or indeed online and your exclusive channels. Also -- and then a follow-on from there. If you could talk about behavior of inventory stocking, destocking or maybe pricing action amongst the big dealers versus the not-so big dealers versus your own channel, if you could. If at all, this is appropriate in this time.
So basically, the channel mix is basically general trade. And online sales are definitely applied to the premium category on where there is a percentage of -- the percentage of online sales and modern trade is higher compared to Lux. Lux, being a very mass brand, is quite available in the market. So bulk of our sales generally comes from the general distribution -- general trade itself. And talking about channel levels of stocking and destocking, we've just spoken about it a few moments back. Under the -- for the first quarter, everyone was working on a -- so as to say, hand-to-mouth basis, where whatever products were getting manufactured were getting sold the same day and even the wholesalers were selling it the same day on a cash basis and so were the retailers. So the entire channel was working on a very hand-to-mouth basis. So there was no question of stocking up of goods arising. It was -- everyone, in fact, were having quite lower levels of stock than they usually would have. So the channel has dried up quite a lot in the first quarter, which we believe in the coming quarters, the -- even if we look at replenishing the channel stock, some sort of a volume growth will come on that account.
Okay. And secondly, if you could talk about any imports of any materials that you have, especially synthetic materials from Southeast Asia. If you do that, and if you could break that down as a percentage of cost?
So we -- generally, most of our materials are sourced locally. We are not dependent on imports. We only import machinery. We do not import any raw material.
Okay. Fine. And for the remainder of the year, what is the CapEx outlook? And how has it changed versus at the start of the financial year?
So going forward, for the current year, we're looking at incremental marginal CapEx, which is regular maintenance of machinery. We're not looking at any major big ticket CapEx going forward as of now.
Okay. What would the numbers be?
So that the number will be somewhere between about INR 10 crores to INR 15 crores.
The next question is from the line of Riddhima Chandak from Roha Asset Managers.
Am I audible?
Yes.
Yes. So basically, what is the contribution from the rural and urban?
The contribution of rural market is approximately 65%, whereas the urban is approximately 35%.
And going forward, if this percentage would be same or we are, sort of, increasing in the urban market?
That is very hard to decide. As seeing the COVID situation, we don't know where the urban markets would head to. But rural markets is definitely strong. And if there is a solution comes of COVID-19, then the urban markets would also boom in.
Okay. And what is the contribution from the economy versus premium as economy contributed more in the Q1 FY '21? So in general, what is the contribution in economy range versus premium range that is ONN and…
Economy range contributed to around 90%, whereas the premium range contributed to around 10%.
Okay. Okay. And are we tracking the sales or secondary sales or tertiary sales as primary is almost covered to 90% to 95%, as you stated earlier? So is there any clarification on that side?
There is no exact tracking of it, but with the experience and getting this feedback from the market, the tertiary sales is much more than the primary sales. As we rightly said, sometime back that the channel inventory is getting lessened by each passing day [indiscernible].
Okay. And as a subsidiary, that is Ebell and J.M. Hosiery, so out of total revenue, how much these 2 subsidiaries contributing? And from the longer-term perspective, say, 2 years, how this number -- what number…
On an average, both the entities combined contribute to around 50% of the sales of that of Lux.
Okay. And going forward…
Like on a long-term basis.
Yes. Okay. So this 50%, you are looking from the longer-term perspective, say, 2 to 3 years?
Yes.
And currently, how much it is?
Last year -- last financial year, it closed at around INR 600 crores. So currently, seeing just 1 quarter won't be wise because it will give you a very skewed numbers because one of the companies contains womenswear segment, which took a big hit in the quarter 1, but in the coming quarters, this will again revise back as soon as the lockdown opens up. But on a general level, 50% of the sale of Lux has contributed to J.M. and Ebell put together.
Okay. Okay. And for this year, this FY '21, so for the full year, how much revenue growth we are expecting? As we said that Q2 would be better than Q1, so overall, how much you're expecting growth in terms of revenue? And what sort of EBITDA margins would be there as -- in the current year, as you said, A&P spends will be lesser as compared to FY '20 levels? Yes.
Can you please repeat yourself?
Yes. So how much revenue growth we are expecting for the current year? And what EBITDA margin guidance you would give, as you said that it will improve during the -- in the next few quarters because, as you said, A&P spends will reduce -- will be lesser as compared to the FY '20 level.
Correct. Correct. So going ahead, we believe for the entire financial year, as of now -- as the COVID situation stands as of now, we believe that we should be able to achieve our last year sales. In fact, to some extent, we believe that we kind of should be -- we are estimating we should be able to achieve single-digit growth figures. It looks a little tough, but we believe that we should be able to do -- at least the last year figure, we should be able to match what we have done. And talking about EBITDA margins, as we mentioned that we have reduced our A&P spend, so we believe that about 400, 450 basis points increase in EBITDA margins should be seen for the current financial year.
The next question is from the line of Sandeep Abhange from Samco Securities.
Hello? Hello? Yes, can you hear me?
Yes.
Actually, I wanted to know what was the reason for increase in the other income part, like it was almost more than 400% increase. So can you like give me some breakup like what we -- I understand there must be -- rental income would be there, rental waivers. And what else could be there in that. I wanted to understand that.
Just give us a few moments. We'll just come back and answer you query, if that's fine. If you have any other questions, you can please ask.
Yes. So -- and one more question I had regarding the pent-up demand. So during the last quarter, many -- your competitors have also mentioned that there was a lot of pent-up demand during the quarter. So what are your comments on that? And what do you feel like whether it is going to sustain? Or how it's going to pan out in coming quarters?
So obviously, there has been some effect of pent-up demand is there because if you're in a complete lockdown situation for 1, 1.5 months, so some sort of a pent-up demand has to be there. So some -- so as you can see, Q1, we -- some amount of pent-up demand has obviously played in. But going forward, we believe that now supply should remain a challenge, quarter 2 and quarter 3 are the quarters where we witness winter wear sales a lot. So winter wear sales, for us, has been quite a big percentage of sales for us. Just to give you a flavor, last year, we did about INR 200 crores of winter wear sales. And bulk of the sales are accounted for in quarter 2 and quarter 3. So going forward, right now, as the situation stands, it's becoming tremendously increasingly difficult to produce winter wear products. So right now, we believe that with the onset of winter, the demand for the winter wear goods should be quite, quite strong because not many people are able to manufacture the winter wear products. We, having our own company, has its own setup for manufacturing winter wear products, therefore, we should be able to achieve the kind of production levels which we are looking at. But overall, at the industry level, the production of the winter wear segment should take a big hit. So we believe that right now, quarter 2 and quarter 3 should see good demand for the winter wear products coming in.
And to answer your first question for the other income, INR 1.3 crore gain was from the foreign currency fluctuation, which was there in the price of the U.S. dollar, and the remaining was from the interest received to the company on the INR 55 crore deposit, which has been made during the quarter.
The next question is from the line of Hiten Boricha from Sequent Investment.
Sir, I just want a small clarification. You mentioned EBITDA margin guidance, I missed on that side. Can you please repeat it?
So EBITDA. So we're looking at an increase of 400 to 450 basis points increase in EBITDA margins for the year FY '21, which is primarily on account of reduced A&P spend.
400 bps, right?
400, 450.
The next question is from the line of Sachin Kasera from Svan Investment Managers.
Yes, 2 questions. One was on this EBITDA margin. So you also mentioned that the A&P spend will normalize from next year. So over a 2-year period, how should we see? While, this year, there will be 400 to 450 basis point, is it that while A&P will go up because of the better premiumization and some of the other initiatives you will be able to sustain this next year? Or you think there could be a drop of 150 to 200 basis points in FY '22?
So see, right now, talking about FY '21, we spoke about 400, 450 basis point increase in EBITDA margins, primarily in account of A&P. But again, talking about FY '22, FY '23, A&P spends should tend to go back to normal. But again, the product mix will change. The company will be launching newer products. And whatever investments are being made in branding exercises in the year FY '22 will result in higher sales coming in the next 2, 3 years. So generally, when you start advertising a product and when you start investing in branding, the results generally come with a lagged effect. So that is the main reason, we believe, that going forward our investments in brand should again tend to go back to somewhere close to normal. But again, the entire 400 basis point increase in EBITDA will not get erased because, obviously, the product mix is changing and the company is being able to realize the better margins.
Is it fair to assume that the management and the company will put all the effort to try and sustain as much as this 400, 450 going forward also?
Definitely, definitely. The company will put in all the effort to maximize its EBITDA margins going forward.
My second question was a follow-up regarding this distribution and the market share gain for organized. So as you mentioned that one of the key reasons why the organized industry gained the market share was that the organized -- especially larger players like you, were able to manage the supply chain production far better than the unorganized guys. So over the next 2, 3, 4 months, once things -- unlocking has started, things normalize and the supply from the unorganized guys comes back, so you think the market share gains that have come by, will again go back to pre-COVID levels? Or you think part of the market share gain that the organized industry has got in this COVID era will be sustained?
We just spoke about it a few minutes back, quarter 2 and quarter 3, bulk of the sales are coming in from the winter wear products. And winter wear production has been a very, very big challenge for the current financial year because of the COVID situation. So we believe that in the current 2 quarters, it will become even more difficult for the unorganized players to manufacture winter wear products.
So my question was actually not even 2 quarters. My question, my question -- sorry, my question was more once things normalize on the supply from the organized, maybe it is 2 quarters or 3 quarters. Once they come back in the market, some point of time they will. At that point of time, you think this share will remain or you will have to give back the share gain that you have got?
So that is something which we believe that, obviously, whatever market share we are gaining, some of it will obviously remain with the company because whenever a customer starts wearing a more branded product, not all of them go back to wearing an unbranded -- non-branded product. So some sort of customer stickiness is also there. So even in your entire channel of distribution -- so the level of confidence in the distributors, wholesalers have over an organized player is much more. And once they start working with an organized player, they generally do not go back to the -- everyone in their life wants to upgrade when it comes to using or consuming a product or selling a product. So some sort of stickiness will obviously be there. So we do not believe that whatever market share gains are getting made will not get lost.
Sure. And just one lastly, is there a debt also on the balance sheet of those 2 companies have been merged or they also debt-free, like Lux?
So if you look at both the entities combined, they are debt-free.
In that scenario, now that we are more or less debt-free and focused on generating free cash flows, is there any internal strategy as to next 2, 3 years, what is going to be the capital allocation policy? Are you going to look in terms of doing some acquisitions to use this cash? Or will it be more in terms of paying out to shareholders in terms of buyback? Or any thoughts on there?
So we already have our dividend policy in place, whereby we try and achieve -- we try and give a 25% payout ratio. So that is what we are looking at maintaining that even for the current year, that whatever free cash flow -- whatever profits are getting generated, about 25% of it will be used to paying back as dividends to our shareholders. And right now, until now, we've been using all our cash to reduce our debt, which right now has almost come to a net debt-free kind of a situation. Going ahead, obviously, we are scouting for opportunities where to invest the money and what else the company can be doing in order to increase their margins. The capital will obviously get deployed in the manner in which your return on capital stands at a fair value.
Due to time constraints, that was the last question. I would now like to hand the conference over to the management for closing comments.
I take this opportunity to thank everyone for joining on the call. I hope we have been able to address all your queries. For any further information, kindly get in touch with us, or SGA, our Investor Relation Adviser. Thank you, once again.
Thank you. On behalf of Lux Industries Limited, that concludes today's conference call. Thank you for joining us, and you may now disconnect your lines.