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Lux Industries Ltd
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Ladies and gentlemen, good day, and welcome to the Lux Industries Limited Q4 and FY '20 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on date of this call. The statements are not 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, President, Marketing. Thank you, and over to you, sir.
Good morning, and a very warm welcome to everyone. I, along with me, have Pradip Todi; and our CFO, Mr. Ajay Patodia; and SGA, our Investor Relation advisers. I hope you have received our results and investor presentation by now. For those who have not, you can view them on our website.Before we proceed with the highlights for the year and the quarter gone by, I hope you and your dear ones are safe and healthy. The last few months have been tough for everyone, and I'm sure all of us, both in work and personal lives, have discovered a whole new way of living.These are challenging and uncertain times as India got struck by COVID-19 pandemic in mid-March 2020. Since then, the government across states started implementing stringent lockdown measures, which led to disruption and halting economic activities across industry and sectors. We've been growing at a healthy rate until the last few days of the quarter where we had to temporarily shut down our plants and business operation as per government's lockdown directives. This led to the loss of revenue and thus, in turn, impacted our bottom line.Despite this challenging situation, our performance has been noteworthy, and we have been able to maintain our margins, which are way better than the industry average. We have been able to resume our plant operation from May 2020 after taking all regulatory approvals and are returning to all regulate norms of social distancing, health and safety.Since lockdown restrictions have eased out in major cities and states of the country, we have seen good traction in sales and distribution. We are expecting a gradual demand uptick in the coming quarter, and we hope things are normalized to pre-COVID levels ASAP.The innerwear industry is filled with advancements, and we have already been at its forefront over the years. There has been a evident shift in the industry, and this situation has been no different. Our decades of experience in the industry, strong business model in place, team of experienced professional coupled with the state-of-art manufacturing facilities gives us the confidence and -- about adapting to these changing business environments and respond suitably to fulfill the needs of our customers.I'm happy to state that, during the quarter, the Board of Directors have recommended a final dividend of INR 2.5 per equity share or INR 2 each. This will take our total dividend paid for the year to INR 12.5 per equity share. Our dividend payout is in the line with our endeavor to maintain payout ratio of 25% of the annual stand-alone profit after tax for the company. Also, the group debt level as of March 2019 was around INR 185 crores, out of which we have been able to retire most of it in the current quarter due to the strong demand.With this, I will now ask Mr. Udit Todi, who is spearheading the strategy for the company to share his thoughts.
Hello. Good morning, and a very warm welcome to everyone. I hope everyone is keeling safe and my prayers to those who are fighting this out.Now coming to our quarterly and yearly performance as of 31st March 2020. We have delivered a better-than-expected fourth quarter considering several operational challenges amidst lockdown in the second half of March 2020.Our manufacturing, marketing, sales and distribution team continued business as usual until 22nd March, and we were going at a desirable pace until government directives to temporarily shut our business operations amidst lockdown.Despite these hurdles, we have been able to demonstrate better operating metrics, which are better than industry averages. This is an outcome of a continuous focus on brand-building activities, strong product portfolio and adoption of latest technology in our manufacturing processes.On the supply chain aspect, we have one of the largest distribution networks in this industry, having strong presence in north, east and western parts of the country. During these testing times, we have been in constant connect with our distributors, dealers and retailers, who have managed to provide us with valuable data points to sense the market pulse.As we are aware that lockdown restrictions have eased out in most parts of the country, we are witnessing good demand trajectory in the rural and semi-urban areas. This is mainly attributable to our widespread dealer network, strong brand equity and goodwill.Our industry is extremely fragmented with multiple small players with limited financial resources. We believe there is bound to be a consolidation in this current market situation, which will throw us both short-term and long-term opportunities. Given our financial stability and response strategy, we feel confident of emerging as a stronger player from this pandemic and grab the market share from the unorganized sector.Now on the working capital front. Our focus has been to constantly shorten our working capital cycle and thus, in turn, to improve our operating cash flows. For the year ended 31st March 2020, our working capital cycle has reduced since September 2019. Going forward, our aim is to reduce our working capital even further.Our proposed scheme to merge J.M. and Ebell Fashions Private Limited with Lux Industries is on a steady path, and we expect it to complete as soon as possible. We believe this merger will strengthen our position and will help us fulfill financial objectives, not only in terms of growth, but also in terms of strength and efficiency of our balance sheet. This will ultimately lead to long-term value creation for our stakeholders.Lastly, if not for COVID, we would have seen a revenue growth of 8% for the quarter with EBITDA impact growing by 6% and 22%, respectively. We have seen minimal impact on Q1 since we restarted operations in May. For the quarter, our revenues would be impacted between 5% to 12%. We have seen good traction in the domestic market in May and June. Our revenues would be slightly lowered only due to reduced exports since there are global restrictions on the same.With this, I would like to hand over to Ajay Ji to provide the financial highlights for the quarter and full year.
Thank you, Udit Ji. Our company reported a strong quarter and year ended 31st March 2020. Our revenue for quarter 4 FY '20 stood at INR 288.2 crores versus INR 391.2 crore, registering a [ negative ] growth of 26%. This was on account of loss of revenue due to plant shutdowns. Our EBITDA stood at INR 47.7 crore as compared to INR 64.6 crore in quarter 4 FY '19. We have been able to maintain our EBITDA margin at 16.5% as compared to quarter 4 FY '19.Our PAT for the quarter stood at INR 29.8 crore versus INR 36.8 crore in quarter 4 FY '19. PAT margin for the quarter ended at 10.3%, showing an improvement of 90 basis points compared to 9.4% in the same period last year.Coming to quarterly performance of J.M. Hosiery & Co. Limited revenue of INR 80 crore whilst Ebell revenue stood at INR 61 crore.Now coming to our yearly performance. Our revenue stood at INR 1,209.9 crores vis-à-vis INR 1,260.1 crore. Revenue remained placed on account of some impact of plant shutdown due to COVID.Our sales and marketing expenses stood at INR 89 crores, which is approximately 7.36% of our revenue. We have invested INR 566 crore in our brand across the 8-year ending FY '20.EBITDA for FY '20 stood at INR 190 crores as compared to INR 187 crore in FY '19, registering a growth of 2% year-on-year basis. The EBITDA margin has seen an improvement of 33 basis points, which stood at 15.7% versus 15.4% in FY '19.PAT for FY '20 stood at INR 122.5 crore as compared to INR 98.8 crore in FY '19, recording a growth of 24% year-on-year basis. The PAT margin stood at 10.1%, a stellar improvement of 200 basis points as compared to 8.1% in FY '19.Coming to the yearly performance of J.M. Hosiery & Co., it closed a revenue of INR 309 crore while Ebell Fashions revenue stood at INR 271 crore, thus making the group turnover around INR 1,790 crore and the group EBITDA level around INR 270 crores. For FY '20, our return of capital employed stood at 27.8%, whereas return on equity stood at 24.7%. Net debt-to-equity ratio for the year stood at 0.3.With this, we will now open the floor for question and answer.
[Operator Instructions] The first question is from the line of [ Lakshmi Narayan ] from ICICI Mutual Fund.
In terms of export, what has been [indiscernible]
Mr. [ Narayan ] your voice is not audible. Please use the handset.
Is it better now?
Yes, that's better.
Yes. I just want to know what is the mix of exports and domestic for the full year. How was it last year, FY '20 and FY '19?
The export is around INR 135 crore, which is the same as 2019. And domestic remains at around INR 1,075 crores.
And what has been our distribution expansion this year for how many -- what kind of equipment we have actually expanded?
The net distribution expansion has been the same. The distributor numbers has been the same as on FY '19. There has been new distributors who have added, plus some of the distributors are retired also.
Got it. And what should be [indiscernible]
Sorry to interrupt you. Please repeat your question. Your audio is not clear.
What is the total area reach you have via these [ distributors ], what is the mix across the regions, if you can give some idea?
We are not exactly present in the EBOs. Our channel of distribution is a wholesale channel of distribution, so in turn sent to the MBOs. And finally...
Sorry, sir. I was thinking about MBOs. That's my bad. So I was thinking the MBOs.
Yes. Can you come again with the question?
Okay. What is the retail for MBOs? I mean I made a mistake. I shouldn't have asked EBO.
Okay. The total retail for MBOs is approximately between 2.5 lakh to 2.75 lakh.
Okay. And what's the restriction across the -- your sales across the various regions, north, east, west and south.
So the eastern would be around 27%, the western would be around 19%, the central would be around 16% and the northern would be around 35%. And remaining is for South India.
The next question is from the line of Nihal Jham from Edelweiss.
Yes. My first question was just to specifically understand in Q4, when you say that there was a big growth of 26% is basically that you were not able to ship the orders to the wholesale channel and that is how you've calculated the impact? Is that the right way to look at it?
More or less, yes, that should be the right way to look at it. But because we always have a March scheme for our distributors, so we -- so that gives a calculation that there were orders which we like to ship as well as we had to receive a few orders from our distributors on the front so that they can close that scheme and achieve the targets.
Sure. The other question is that innerwear is mainly a nonessential category. And in Q1, for most part of the country, you had an impact on most of the shops were closed. And even for the -- some of the other categories that we've said, Q1 has been quite a washout. What is surprising is that how is it that only your sales have fallen 5%, 10%, which I think, as you've given the breakup, is only for the month of April. So again, is it that you're not centered to the distribution of the wholesale channel and you will wait for them to liquidate it in the coming months? How is that the impact is much lesser than what other players have experienced and despite the fact that even on essential category there was a complete lockdown for Q1?
So actually, what you are trying to say is that the kind of products which we are selling, which is basically men's innerwear category, even though the government does not classify it as essential, but in practical daily process, it is the most essential product, which all of us would use on a day-to-day basis. Although during the lockdown, I mean, during the first few days, we were not able to sell but the consumption of our products had not stopped even for a single day. There has not been a single day during which any of our consumers will not be using our products. So during this time, the consumption has been proper. And after the lockdown was announced on the 22nd of March, and we have been able to resume our operations from 29th of April, which is end April, beginning of May. So since the beginning of May, we have been starting to ship all our orders to our distributors and dealers.And coming to the second part of your question, which was that whether the dealers are stocking the products and not being able to liquidate them. So I would just like to give you a better understanding of the same. In fact, our dealers and distributors are billing and have quite done so. They are paying us upfront money for all the product which they are purchasing. Because in terms of sales, which they are also seeing. They are also seeing cash sales happening. So in fact, the credit in this system has gone out substantially. We have been taking upfront money from our distributors, and our distributors have been taking upfront money from our retailers. So whatever goods we have shipped has ultimately got liquidated even at the distributor and the retailer point. So the entire supply chain right now is kind of going on a hand-to-mouth basis. So the demand in the current quarter we are seeing is pretty, pretty good.Also, I would like to add to it that the product category which we deal in is not a cyclical purchase. Like our consumers who purchase our products, it is a necessity purchase for them. They don't have a habit of buying it once every year or once every 8 months or 10 months. They have a habit of buying when it is required for them or when the products are in such a bad shape that they need to require or buy a new product. So our product doesn't fall into the cyclical purchase category, but into a necessity purchase category. So there has been a continuous purchase and demand of our products to our consumers as they require it as they do not have any other choice or any tactic.
Absolutely. So Udit, if I just clarify better on that, would it be right to say out of the 2.5 lakh, 2.7 lakh MBO outlets, that we mentioned on this call, most of them are obviously not in the top 10 cities where there was limited lockdown and they continued through the quarter. Would that be the right way to think of it?
That would be absolutely right. Most of these retail counters would be outside -- although we have a lot of retail counters remain in the urban areas, but a bulk of it would be in the nonurban areas. And even during the lockdown, by different kind of means, all of them were more or less operational. Because under the rural side, even in the rural areas, the lockdown -- I think the impact of the lockdown was not felt so much.So our products have been able to do quite well. In fact, it is just an insight which we received during these lockdown days, that -- in the rural base, a lot of kirana stores are, in fact, have also started selling basic men's innerwear. So that, again, became a new sort of a counter during this lockdown. That is what the people came up. That was a different kind of a solution, which the retailers and the distributors have come up with. So all of these combined has helped us achieve good sales figure for quarter 1. Because right now, also, quarter 1 is underway, and we will not be able to give you any exact numbers of the same. But just to give you a guidance that the quarter 1 sales and demand both have been pretty good. And the entire channel and pipeline, right from the manufacturer down to the distributor and the retailer, has been on a hands-to-mouth basis, and the channel is quite empty right now.
Sure. Just one last question from my side. Could you update on how the performance of ONN and one8 was for the entire of this year and if you have any targets for the next year?
So as far as ONN is concerned, for the year FY '20, we, in fact, seen a growth of about 5% vis-à-vis the company sales have remained flat, ONN as a sector has grown about 5%. And considering our middle and the economy segment, so the middle segment has done better than the economy segment. So overall, the product mix has changed for -- towards the betterment of EBITDA margins.
And one8?
one8, this -- one8, actually, the distribution of it had just started during the quarter 4 of FY '20. So it will be unwise to compare it to the quarter 4 of FY '19.
[Operator Instructions] The next question is from the line of V.P. Rajesh from Banyan Capital.
You have mentioned that your manufacturing capacity is about 2,000 lakhs of garments each year. So could you just share with us what has been the production in fiscal year '20 in terms of pieces?
Sir, please come back to the question once again.
I wanted to know the garments pieces that you have produced in fiscal year '20, given that you have mentioned your capacity is 2,000 lakhs.
This is actually the sale of our products and pieces, not actually the manufacturing in the year FY '20.
So you're saying 2,000 lakh garments pieces were sold in fiscal year '20. Is that right?
Yes.
Okay. And then my second question is that if you look at your price range, it varies from, let's say, INR 50 to INR 1,350 per piece. So what is the average selling price across all your products?
The average selling price ranges around INR 61 to INR 63 per piece.
Across all the pieces, right? That's INR 62 or so thereabouts, okay.And then lastly, in terms of these 2 subsidiaries that you are combining with the main company, what were the EBITDA margins for the first 9 months? Because we're in Q4, so I'm just curious what were the EBITDA margins for these 2 businesses for the first 9 months of the last financial year.
EBITDA margins for Ebell Fashions stood at around 18%, and EBITDA margin for J.M. stood at around 11%.
Okay. And why was J. M. Hosiery down so much in Q4 compared to Ebell?
This is an average of an annual number.
Right. So my last question was in terms of Q4 decline in J.M. Hosiery, it was 36%, right? Whereas Ebell was only down 10%. So what is the reason behind it? Is it that J.M. Hosiery is selling different kind of innerwear? Or there is something unusual there?
Exactly. So the product offerings between J.M. and Ebell Fashions are quite different. And so for Ebell garments, it was primarily womenswear, which is outerwear garments. And when it came to GenX, it was a mix of innerwear as well as outerwear, primarily men's.So owing to the different restraint showing plus a corresponding period for J.M. has witnessed very high sales figure in FY '19. So when we are comparing it to FY '19, therefore, the decline looks a little more sharp.
I see. And just one last question. What is your sales from, let's say, rural and semirural markets versus the urban markets?
See, actually, we have a wholesale selling invoice policy. So if our distributor is present in the urban market, it is not necessary for them to sell to the retailers in the urban area. So it is very difficult to assess that how many retailers are exactly there in the urban market and how many retailers are there in the rural market. But overall and on average, when we take out, it's an 80% to 20% ratio. 80% should be rural and 20% should be urban.
The next question is from the line of Sachin Kasera from Svan Investment.
Sir, just 1 question on working capital. You mentioned that you have reduced it quite a bit in the June quarter. Did you give any number?
For our...
June quarter, how much reduction you've been able to achieve in the working capital?
June quarter which year?
June quarter ongoing. This quarter, which has just ended -- ending today. You mentioned that the sales will [ be impacted ] by 5% to 12%, but you also mentioned that you have been able to reduce the working capital this quarter. So can you give us some sense how much has been the reduction?
The reduction has been drastic, but we won't be able to give you the numbers right now. That would be available by the end of this quarter.
Sure. But this reduction is a consequence to lower revenue or the reduction that we have achieved would you think would be sustainable?
The reduction is really due to the strong demand in the market because the channel is empty and the distributors are demanding the products, and they are ready to pay upfront.
Okay. So we have seen a reduction on both inventory as well as receivables?
Mainly receivables; inventory, to some extent but mainly, it's due to receivables.
Okay. Fine. And secondly, on this merger, now what are the time lines that we are looking on? And what are the permissions which are pending? You mentioned that you now hope to consume it soon. But just for an update, what are the pending permissions? And what do you think is the likely timing by when the permission should come in?
So our application for merger is already filed with the NCLT, and it is pending before NCLT. But as you know, under the current COVID situation, the courts are also not functioning in full strength and capacity. So everything is taking more than natural time in its due course. So we are already pushing them for giving us a hearing date. And it is up to the courts now to provide us with the data and take it forward. So that said and done, we still believe that by -- within this financial year or, say, within this calendar year, by November, December, we are pushing them and trying to get it done by December this year.
But now, other than NCLT, there's no other permission which is pending as far as regulatory authorities is concerned, right?
So we are pending before NCLT.
Okay. And you shared the EBITDA number for both J.M. Hosiery for FY '20. Can you also share the PAT number? That will be really helpful.
So both the companies are right now private limited and their accounts have not yet been audited. So we will not be able to share you the exact PAT figures, but the sales figures are more or less accurate as well as the EBITDA margin guidance is. The figures will be in line with the guidance. And I mean, right now, that's all that we can comment on the group companies.
Sure. But can you just share the EBITDA number for both FY '19 and '20 for J.M. and Ebell?
Yes, sure. We'll do that. We have that. For FY '20, the EBITDA level is around INR 70 crores of J.M. and Ebell. And for FY '19, the same would be at around INR 60 crores.
Okay. So INR 60 crores versus INR 70 crores EBITDA. And just one thing, do these companies have any debt on their balance sheet? Or they are more or less debt-free companies?
They are more or less debt-free, but they do, but they do have debt, as I mentioned, that the total consolidated debt is at around INR 185 crores.
Okay, okay. I missed that. Assuming to say, including Lux, J.M. and Ebell put together, INR 185 crores as of March?
Yes, that's correct.
But any number you have in mind for this year? Where would you like it to be like INR 120 crore, INR 100 crore? What is your internal target for this number for FY '21?
So going forward, in the current year, as we have already mentioned during the beginning of the speech, that -- so Ebell is more or less debt-free, Lux is almost debt-free and there is a certain limited amount of debt in J.M. So at the group level, if you see by -- within this current year, we'll be within -- we'll be less than about INR 100 crores -- within INR 100 crores.
Sure. And any idea on the CapEx number this year?
Right now, there are no plans of any CapEx. But if there will be any, we will be informing you as soon as some decision is taken at the Board level.
[Operator Instructions] The next question is from the line of Prerna Jhunjhunwala from B&K Securities.
Congratulations on this reduced receivable numbers. I would just like to understand whether these numbers are sustainable going forward the moment your markets become normalized and competition starts getting in again for you? There's enough inventory on the shelf. Right now, there's not enough inventory so we are able to reduce the receivables level. So that will be the right way to put it.
So our intent has always been to reduce our working capital days and requirement. And we've been able -- we've always been guiding that, and we've been able to achieve that in the last 4 quarters, at least. But right now, under the COVID situation, it is an unprecedented situation. None of us have gone through this before. So how exactly how the market plays out in the coming future is really hard to comment as of now. But yes, this intent is always there to reduce the working capital. And as of now, at least in the first quarter, we've seen the receivable -- we've seen very strong receivables right now, but how much of it will be sustainable going forward is, right now, little difficult to comment. We believe that, in the next quarter, in the next 3 months, the entire picture will become much more clear, and we'll be able to give you a firm guidance as to what we will be able to achieve for the full year.
No. I'm asking for 3 to 5 years position, like when the shelf space gets again filled and there is enough pipeline in the supply chain.
Looking at the long-term period, as we've always mentioned, that we -- overall, this is one of the most important objectives of the company to reduce its working capital, and we've already been able to do that in the last year. In FY '20, the working capital compared to FY '19 on account of receivable and everything has been in a much better shape. And going forward, and going forward in the next 3 to 5 years, we will be able to reduce it further.
Okay. Sir, my next question is on competitive intensity. Do you see a shift from unorganized to organized segments happening because they will be facing supply chain issues much more than us?
Exactly. I think the impact of COVID with regards to the unorganized to organized shift will be much, much more stronger compared to a demonetization or a GST implementation. The COVID is a much stronger consolidation factor compared to the previous 2 incidents. Because right now, under the current circumstances, production is actually quite a big challenge for the unorganized players. We, being a much-organized player and having a much older presence than the rest of the players, we've been able to ramp up our production to almost pre-COVID levels right now.But that is not the same for the entire industry, the entire industry, even right now is struggling with production issues. So thankfully, our company has been in a better shape. But overall, the industry position with regards to supply is not a very happy picture. So we believe that, going forward, this should lead to a better market share being captured from the unorganized sector. In fact, coming -- going forward, we are looking at -- everyone is starting to prepare for the winter season. And not many people -- not many manufacturers will be able to achieve even pre-COVID -- sorry, last season winter figures. But we, as a company, are aiming at an increased level of production compared to last year's winter, anticipating that going forward not -- we'll be able to, again, capture good market share from the unorganized player. So we are quite upbeat about the shift from the unorganized to the organized sector.And as far as the winter products is also concerned, last season, the entire winter product at the channel level also got sold. So the channel right now is also quite empty. Plus, not many people will be able to supply this time. So all these factors combine because we believe that, going forward, the winter season also should look good this season. And once also, as we are seeing that the production from monsoons has been quite great, India hasn't seen such a good monsoon for many years right now. So with all the money flowing into the rural sector, the demand from the rural side in the summer as well as continuing into the winter season should be pretty strong.
Okay. So that's quite helpful. Sir, can you throw some light on innerwear versus outerwear sales also because you do quite a lot of outerwear? So what would be your percentage on outerwear? And how has been the demand in the outerwear versus innerwear for you?
Right now, our outerwear percentage in comparison to innerwear is very minimalistic. So it won't be wise to say growth in outerwear because the percentage growth can be a big number, but the absolute number will not have a big effect on the overall sales of the group company.
Okay, okay. Because there's -- you've seen good demand from -- for casual wear because everyone is working from home. So that segment as per channels is showing good traction. So I thought maybe the...
No doubt there's a good demand for casual wear, but what we have seen that there's a better demand for innerwear. And the products which we supply, as I said before as well, that our product is a necessity product because it's not a cyclical purchase for a consumer.
Okay, okay. That's helpful. Sir, my last question would be on the sales loss in the month -- in 4Q. It's almost INR 120-crores-odd loss that you were seeing in the month of March. And that, too, in a period of last 15 days, even if you assume that there were logistical disruptions in the -- starting from 15th of March also. That's quite a huge number considering the -- is it a normal practice? Or was there something exceptional in this quarter?
It's quite a normal track to see. What happens is, during the year ending, there are a lot of year ending targets which the distributors are given. So during the last 2 to 3 weeks of March, a good bulk amount of sale happens because of closing their incentives and target schemes. So that is the period when they really stock up. So that is the exact period when we lost the sales because of the implementation of lockdown. And so I think a lot of sales, even the sales which are locked during the end of March, a lot of it has also spilled over to quarter 1 this year. So therefore, we are seeing quarter 1 to be good.
So sir, did you increase -- did you carry forward the incentive scheme because of the inability of people to...
We have not done that. We have not done that.
The next question is from the line of Sunil Jain from Nirmal Bang Securities.
Congratulations on good numbers. Sir, my question relates to other expenses, which are comparatively down in this quarter, fourth quarter. Any specific reason for that? Is there a reduction in ad spend? Or what would be the reason?
Yes. So looking at other expenses, which have been done, our advertisement has been more or less flattish compared to the corresponding period in the previous year. It's been roughly similar, accepting a small amount of decrease itself. But a big number which was featuring in FY '19, March was a ForEx loss, ForEx currency translation. It has not happened in this year. And so we'll do one thing. There is the entire list of other expenses, which have been -- which have happened for both the period. You can just -- we will be able to share the details with you over mail maybe so that you can analyze the different headings for yourself. You can analyze them for yourself, you'll get a much clear picture as to what is happening within the company.
Fine. Sir, 1 question related to Q1 results, where you expect that sales has bounced back in May and June. But we are seeing a lot of cost is being lowered, if it is yarn cost and all. Are these need to be passed on? Or is there any possibility that we can retain that?
Right. I think you brought up a really nice question [indiscernible] mentioned in the interview today in the morning. So the cotton, the yarn prices are really down in the current quarter. And since, but the demand has been pretty strong, and there are a lot of logistical challenges itself, so we've been able to retain the benefit of the yarn prices within the pricing itself. So the reduced prices have not been passed on. That has been -- the benefit of it has been absorbed by the company. And also, the advertisement expenses for Q1, Q2 should be on the lower side because we are trying to cut down costs of advertisement in the first 2 quarters. So overall, if you look at FY '21, the advertisement percentages should be coming down. This is coming down.
Just one more question on [indiscernible] side. We are seeing the labor issues. So how -- now the things are getting resolved also, so what is the status now? At what level your productions are running right now? And are you expecting [indiscernible]?
So in our industry, the bulk of -- the most labor-intensive part is stitching of garments. And stitching of garments is one area which we are getting done on a job working basis. And all these job workers, which are more than 500 in number are in and around our manufacturing facility itself. So these has been helping us in 2 ways. Number one is, during the lockdown, we were spared off the labor costs because of them being on a job working basis. So that has helped the company reduce its cost. And b, because of them being to the vicinity of that manufacturing plant, we have been able to resume our -- the supply of -- the supplier books have been able to come back to pre-COVID levels because most of them were in and around Bengal itself. They were not migrant labor. So supply challenges, we were able to overcome because of -- owing to both these factors.
So the production level at current point of time is at normal level?
Yes. So the current production is almost at par with pre-COVID level.
Okay. Great. And sir, last question, related to export. You said that the export got some impact in Q4. So how is the situation? And what's the outlook for the export for the year?
For the year, the outlook of export doesn't look that great because we have been exporting to more than 40 countries, and each country has a different policy for the COVID-19 situation. So it's very difficult to find out that what exactly will be our export and how much we're growing the export because if the situation of India improves and to the country where we are exporting the situation of that country doesn't improve, so still the export doesn't takes place.
And sir, margins in exports are similar to India? Or they are different?
Better than India.
The next question is from the line of Devanshu Bansal from Emkay Global Financial Services.
And congrats on achieving...
Sir, please increase the volume of your phone.
Yes. Is it audible now?
Yes, sir. It's audible.
Congrats on achieving encouraging sales trends in challenging times. So you indicated about some pass-through sales from Q4 to Q1, so -- of about INR 150 crores. So will we be able to achieve the entire INR 150 crores of that in Q1?
No. Actually, there has been a sale loss of around INR 135 crores, and that is due to the target incentives, which we had with the distributors, and the same target incentive hasn't been carried forward for the current year. So there has been no pass on from the previous year's orders to the current year. It's a freshly new order. And this -- these new orders and supplies are being taking place mainly due to the strong demand in the rural market and the channel being empty.
Perfect. And are there any attractive trade schemes for wholesale channel, which could have helped these paid in Q1 for FY '21, I'm talking.
Look, currently, we don't need any attractive sales scheme because whatever has been -- is being produced on a day-to-day basis is getting supplied to our distributors. So we are working on a hand-to-mouth basis.
The next question is from the line of Aviral Jain from SG India.
Yes. My only question was, what's the ballpark contribution of the share of unorganized sales in the industry? And we can talk about FY '19, FY '20 numbers. And because what I understand is we have -- the unorganized player [indiscernible].
[indiscernible] through the unorganized sector we had to estimate there is no formal study which is conducted to give us an exact figure. But the idea, the sense of -- the sense which we're getting is in the mass market segment, the unorganized sector is roughly about 40% to 50% of the market.
The next question is from the line of Abhishek Rathi, India Ratings.
Yes. So my question was, again, on the demand side, where you have clearly mentioned that it's currently a hand-to-mouth situation. But given that we have been facing a very declining demand. We have seen that in Q3 and now in Q4. What would be -- what is your outlook for FY '21? Would it be 70%, 80% or 90% of a normal year?
So see, it will be difficult to comment as to what the entire guidance for FY '21 would look like. Right now, we are just 3 months into this current year. And as you see this current year has been acting quite funny for everyone, it is very difficult to predict as to what will happen 3 to 6 months down the line. Right now, what we are witnessing is what we have shared in Q1. But going forward, for the entire year, I think we should wait for another 2 to 3 months in the -- maybe in the next con call, we'll be able to have a much clearer picture as to what FY '21 would look like.Right now, well, Q1 FY '21 look fantastic, great. But for the entire FY '20, right now, it is difficult to commit on any guidance.
Okay. And on the ad and promotion expenses, since they will be in FY '21 which is an uncertainty, what would be the guidance for this year on the ad and promotion?
So ads and promotion, as we have said, will be brought down. So generally, on an average, we maintain about 7% to 8% of sales as advertisement expenditures, which under the current year will be brought down. What exactly would it be? It's tough because it's a very big call for the company. It's under -- it's a discussion at the Board level. It's a Board-level discussion. But yes, what -- to give you a ballpark sense, you're believing that it should be down by about 1 percentage or -- 1 percentage or 2.
Okay. And my last question would be on the export side. So we have been hearing in the market and the industry that there is a sourcing away from China everywhere slowing in the world. Do you see the impact actually coming in, in terms of inquiries or higher export orders from existing clients who are buying from China or other countries?
To the countries where we see in, exactly they are mainly in Africa and Middle East. So there, the undergarments has been finally bought in these countries through India itself. And China doesn't play a major role here, but in the highly organized developed countries like Europe and America, yes, China does play important role out there. But currently, we are not focusing or we are not present in those countries, but yes, we are receiving positive inquiries, but still it's yet to get converted.
The next question is from the line of Kedar from Composite PMS.
So my question is on the trajectory of the advertising spend from here with a medium-term perspective. So the general run rate of 8% of sales, which we've been sticking to for the past couple of years. So do you see that moving linearly as you start operating at a higher revenue base? Or how should we look at it going forward?
For the next 3 to 5 years, we believe that this 8% will be stagnant. But for the current year, due to the COVID situation, as we are uncertain about the next 3 to 4 months that how the market is going to take place due to COVID, so we have stopped advertisement. As well as another important reason for this is that whatever we are producing is get easily absorbed in the market due to the current high-demand situation.
So in that case, if you are working with a static target of, say, 8% of revenue, so going forward, in the sense, what sort of thought process or internal framework do we have ensure that the effectiveness of -- or the ROI of this is very high? Because, as you know, it's intangible and you can't directly measure whether what you're actually investing in terms of market development is that translating into the ground or not. So just curious to figure out in a sense 3 years to 5-year horizon, can we get to a situation where, let's say, your revenue base is actually 50% to the current level, but your advertising expense may, let's say, move from a level of INR 90 crores to INR 120 crores, which in turn can actually unlock a lot of value both for the people running the business as well as for the shareholders?
So see, what happens is every industry or every company to -- so as to say, has an optimal level of advertising spend as a percentage of revenue, which is achieved over a longer period of time in the long run. So when the company was started 10 to 15 years back, the advertising spends were much higher. And as and when the revenue base kept on growing, we -- ultimately, the percentage kept on dropping, and it came roughly -- we kind of believe that 7% to 8% was that optimal level, which we kind of maintain in the long term.Now talking about the ROI of the advertising spend, what happens is, when you stop spending on a brand, in the first 1 or 2, 3 years, you'll not be feeling any impact, but the impact is felt only in the long term, when the people start -- you need to -- your brand always needs to be fresh in the minds of your consumers. Brand image is something which gets -- which takes time to build. It takes at least 3 to 4 years to build that image. And people also don't forget that image in 3 to 4 years. They take time to forget that image. So in order for the brand to be relevant in the minds of the consumer, a certain amount of money has to be spent, which what we maintain in the long term, 7% to 8% of our top line.Also, as and when the company grows, you keep on launching newer and newer products, under newer and newer sub-brands or mother brands. So in order for newer products to become more popular, we carve out the advertisement expenditure from the 7 -- from the same pool, which is about 7% to 8%. So the pool is 7% to 8%, maybe the ad spend on a certain established product might go down and a certain newer product might be more. But overall, the pool is 7% to 8%.
Okay. That makes sense. So the second question I had was, sir, what's the proportion of sales from the online channel so far? I know it is low, but what has been the range for FY '20?
So talking about online sales, the kind of products which we are dealing with is present in every nook and corner. So online sales for us as a channel is quite minimal. And for the mass and the medium segment products, online sales do not matter much because the products are really, really present across everywhere. The online sales becomes quite relevant when it comes to the premium category.So for our premium category, the online sales is contributing anywhere around 1.5% to 2% of our top line.
Okay. And is this number consistent for the Lyra brand as well? Or is that at a slightly higher number?
No, it's consistent. Even the Lyra brand, it's been similar, about 1.5 percentage of our top line is coming in from online.
Okay. So one final question from my side is, right now, we seem to be, on a relative basis, underrepresented in the southern part of the country. So do we have any plans of targeting that in the medium term? Or do you think it's a better idea to focus on the stronger areas where we are present?
So we have always been quite strong in the northern, eastern and central belt of India. Southern has been relatively weak for us, and we've been focusing on that market. And over the last 2 to 3 years, we've seen good results also coming in. So it takes time to develop our market. So we believe we need another couple of years when we see South India also emerging as a big contributor into the top line.
Ladies and gentlemen, due to time constraint, we'll take this as a 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 Strategic Growth Advisers, our Investor Relation advisers. Thank you once again.
Thank you. On behalf of Lux Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.