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Rupa & Company Ltd
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Ladies and gentlemen, good day, and welcome to Q2 and H1 FY '23 Earnings Conference Call of Rupa & Company Limited, hosted by Orient Capital. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Nachiket Kale from Orient Capital. Thank you, and over to you, sir.
Hi. Good evening, everyone. Thanks for joining us on the call today. We are joined by the management of Rupa & Company Limited, represented by Mr. Vikash Agarwal, Whole-Time Director; and Mr. Sumit Khowala, Chief Financial Officer.
Before we begin, I'd just like to give a small disclaimer that this conference call may contain forward-looking statements, which are based on the beliefs and opinions as on date of this call. These statements are not the guarantees of future performance and involve risks, which are unfortunate and difficult to predict. A detailed disclaimer has been added to the presentation, which was uploaded on the exchange, I hope everyone had a chance to go through it.
With this, I would now like to hand over the call to Mr. Vikash Agarwal. Can you please take over, sir.
Thank you, Nachiket. Good evening, and welcome, everybody, and thank you for being with us today.
Well, we didn't had a great Q2, a bit disappointing rather, as we faced multiple headwinds this quarter. H1 financial year '23 has been one of the most challenging period for Rupa as well as the hosiery industry at large. Sharp volatility in yarn prices, rising inflation and overall [ weak sentiment ] result in calibrating price of finished goods by elevating the pressure on channel partners and, therefore, impacting our realization. However, with the stabilization of yarn prices, we expect the volatility to take back seat and confidence coming back to the market. Once the stability is obtained, we anticipate growth and margin trajectory to get [ enhanced ] in the coming quarters.
Talking about business, our expansion strategy continues in our quest to strengthen our retail footprint factory-wise. We are now planning to open stores in high footfall areas. Recently, we inaugurated our flagship store at [indiscernible] Camac Street, Kolkata. And we are going with our [ EBO plants ] more aggressively. Our modern trade business continues to deliver double-digit growth. Our modern trade business witnessed a growth traction and stood at 1.2x of H1. We are also seeing good traction in exports business, which stood at 1.7x of H1 '22. Exports and modern trade business contributed together around 10% of total revenue of H1 '23. This growth is encouraging as our strategy to focus on these channels is bearing fruit.
On the flip side, some of the big markets, our big market [indiscernible], so slower growth in sales. Consequently, there is a sales degrowth in quarter 2 due to decreasing contribution from our [indiscernible] states. However, as I mentioned in our previous quarter con call, that in order to course [indiscernible] macro headwinds, we do not compromise on our credit policy and indulge in aggressive pitching of sales in view of long-term perspective. Going forward, we are confident of emerging from these [indiscernible] challenges stronger than before.
Over the years, we have learned that good decisions taken between bad times lead to lasting long-term advantage. With a deliberate effort to increase productivity across business units, while maintaining a vigilant check on cost involved, we hope to bounce back and resume our growth trajectory in the coming quarter.
With this, I hand over the phone to Mr. Khowala to update on the quarterly performance. Over to you.
Thank you, Vikash, sir, and good afternoon to all the participants. I will now share some key financial highlights. The revenue from operations for the quarter ending September 2022 is INR 286 crores, down by 22% compared to corresponding quarter last year and up by 33% from quarter 1 FY '23.
The gross margin for the quarter is 30% vis-a-vis 35.5%. The EBITDA margin stood at 10.2% as compared to 19.4% over the same period last year and has registered a rise of 160 basis points from 8.6% in quarter 1 FY '23. The decline in EBITDA margin was majorly attributed to the volatile raw material prices, which has impacted the gross margin as well as significant increase in marketing expenses. Also contribution to sales from our high-margin products, such as thermal and athleisure, were much lower compared to the last year.
PAT is at INR 16.9 crores. It's down year-on-year, but it's higher by 35% from INR 12.5 crores In quarter 1 FY '23. For H1 FY '23, revenue stood at INR 500 crores, is down by 14.6% year-on-year. Gross margin stands at 33.2% versus 36.7%. EBITDA is lower from INR 113 crores in H1 FY '22 to INR 48 crores in H1 FY '23. As of 30 September, the company's working capital cycle stood at 223 days. However, the company expects to moderate this working capital cycle in quarters to come.
We may now proceed to question-and-answer session.
[Operator Instructions] The first question is from the line of Shikha Mehta from Equitree Capital.
I just have a couple of questions. Could you help by quantifying the number for the marketing expense this quarter?
The advertisement spend is around INR 37 crores, which is approximately 7.5% of the revenue.
That is for the half year, right?
Yes.
So sir, last quarter, we said our expense was higher, around INR 20 crores due to the Laal Singh Chaddha promotion. And this quarter, so the balance figure would be around INR 17 crores. So are we expecting to maintain this run rate? Or should this taper in the future? How should one look at this?
Probably, we should stick to say around [ 7% ].
[ 7% ] of the -- okay. And sir, could you also give volume and price data and give us a data on how much degrowth has happened in volume?
Our overall price growth is around 4% to 5% and rest is [ good ].
Okay. So we've taken a 4% to 5% price hike this quarter?
Yes.
All right, sir. Sir, any update on the CEO? It's been around 8 months, and we still haven't made any announcement.
CEO, we have met around 8, 10 candidates, but still they are not very sure about the [ CEO ]. We are still to finalize the candidate now. But still, we are meeting people and all, but we are not any confident on any particular [indiscernible]. But the process is on.
Sir do we have any sort of time lines in mind, anything, any update on that?
As time line, [indiscernible] time line, but at the same time, learning from our past experiences, we don't want to say any time line and just want to do real job. We are looking aggressively at the same time. But until and unless we don't have a suitable candidate who can do justice, we don't want to repeat our past learnings.
Sir, last quarter, on the con call, we gave a target of 15% growth for FY '23, which will now be difficult to maintain. So do we have any certain guidance?
Too early to comment on that because of the falling raw material prices, there's a very adverse effect on our trade with the dealers and all. But at the same time, the silver lining is with our dealers and all the [indiscernible] stock with them. So once the yarn prices stabilizes and once we have [ proper ] season, I'm sure quarter 4 will have a good traction from the market. Quarter 3, we are just worried about the [ thermal ] season. Winters are not so strong as desired. So if the winters are strong, we are quite confident Q3 should be strong as well as Q4 should -- equally with it. Only for Q3, all -- a lot will depend upon the intense. So thermals and our athleisure largely depend upon the winters, where our gross margins are quite high. Margins are quite higher.
Right. And sir, could you give us how much growth we had in the premium segment and how much growth we had in the athleisure segment?
As you can see, we have overall -- the growth is in negative. So even in [ women's wear ] and our athleisure, there is a negative growth in it. Athleisure, that is more than double-digit negative growth.
Ms. Shikha Mehta, may we request that you return to the question queue for follow-up questions. We'll take the next question from the line of Darshil Zaveri from Crown Capital.
I just also wanted to ask about how do we see our H2 panning out? Our H1 performance has not been as what we wanted it to be. So as to what uptick do we see right even in the 1.5 months has passed in quarter 3. So how are things panning out. Could -- some color on that would be very helpful.
I just mentioned that silver lining with the whole process is talk with our dealers, with our distributors. They are sitting on a very thin stock. Q4, we are sure, will do quite well. Q3, we are just worried about the thermal, about the winter season. If winters are strong, Q3 should be quite great.
Okay. Sir. And rather than just the short-term outlook, in the medium term, we are growing aggressively or marketing and everything. So could we have some color on what is our plan to grow about in maybe FY '25 or something, some long-term vision that we want to be able to maintain our previous thing about 15% growth and higher margin. So can we expect FY '24 to normalize with a stable yarn prices or something? Could -- some color would be very helpful, sir.
Our projection for growth year-on-year was always 15%. But this year, just because of the steep falling prices, we are disappointed with the demand and all. But I'm sure with the -- as the yarn prices are stable now, it should not go down further, things should pick up from here.
Okay, sir. If I may, sir, one more question. In the last con call, you mentioned that our credit policy has led to some adverse things. So will that now normalize? Or how is that standing out? Could -- some just color on that would also be helpful.
We are working on that, and we are looking for something -- channel financing route and all just to strengthen our dealers more with the credit policy and all. So we are working for a structure. So probably we'll be able to fix it and implement in the market soon. So that should take care of a lot of future price and the group plans.
The next question is from the line of [ Dipanshu ] from [ Shivansh ] Holdings.
Two questions from my side.
Sorry to interrupt you, Mr. Dipanshu, the audio is not clear from your line. Please use the handset.
It is better now? Is it better now?
Sir, you are on speaker mode right now. Audio is slightly muffled. Please use the handset mode?
So is it better now?
Please go ahead.
Please, go ahead.
Yes, I wanted to ask you if you can give us some guidance on the way the distribution channels have played out, how much contribution we are getting from each of the distribution channels? And which are the key segments on where we think that which of the following out of the modern trade and e-commerce and our own brand outlet, how do we see the rollout of the new outlets? And how do we see them to contributing in the second half?
Yes. Major portion of distribution belongs to a general trade and approximately 87%, 88% comes from general trade business. Our modern trade contributes around 5% and export -- overseas business contributes around 5%.
So do we see our e-commerce and the modern trade segments starting to reap some results? Some...
Growing in a double digit. So we are quite hopeful for that. And the contribution to overall business is increasing only.
The next question is from the line of Anika Mittal from [ Nvest ] Research.
Sir, can you provide some insights regarding the industry, say that in your con calls, you have guided about significant price volatility on the raw material side because of which they have a disruptions in the supply side also. So how we are seeing the overall outlook of the industry, both from raw material side as well as from demand side in the coming 2 quarters?
As I said, ma'am, the yarn prices to rise now, and it should rather pick up from these levels. We are quite hopeful. And when -- as the prices are stable and once it starts picking up, demand is also picked [indiscernible].
The next question is from the line of Shikha Mehta from Equitree Capital Advisors.
I just have a couple of more follow-up questions. So currently, the company has around 24 EBOs and plans to add another 50 in FY '23. So at what level would we be happy with how many EBOs? And how much are we looking to invest in this segment?
I think we should end the year with at least 40 EBOs. And going forward, we are quite happy with whatever results we had from our EBOs. So we are focusing on modern trade EBOs. And this is contributing actually to around 10% of the total top line. So we are quite hopeful on this end.
Sir, these are all franchise-driven?
Yes, mostly franchise-driven. Other than a few flagship stores, it's mostly franchise-drive.
And sir, could you help me understand the economics on this? What kind of IRR do we generate on the EBOs?
Basically, it's franchise. We own franchisee operated. So means, we have -- what we do is the outright sale to the franchisee. So even a 1 lakh, 125,000 sales to a small EBO per month is a breakeven today.
We don't have any loss or profit in the books and all. It's [indiscernible] and all. For us, it's a normal case. The margins are same as due to [indiscernible] or EBO.
And also, could you help me with the split between our sales in the urban areas and rural areas and sales trends in both?
Around 40% in the urban areas and 60% in the rural. You can say 50-50 roughly.
Okay. And are we seeing good demand in the rural areas? Or has it been at [indiscernible]?
Probably this quarter, what we said in rural area, the demand has been soft from previous year. But what is the reason we are -- because of the falling yarn prices or the [indiscernible] prices, that is the reason that we are able to [indiscernible].
And so in Q3, are we seeing any recovery or not yet?
Q3 recovery is there, of course, but the performance will actually depend upon the winter because it's more of a [ thermal ] season. So inner wear is recovering, but largely depend upon the [ thermal ].
And sir, ex factor areas have also seen some amount of degrowth. So could you just throw some light on that? What are we expecting for the year and for FY '24?
We have projected a growth of around 40% for the year-end, and we are continuously focused -- focusing there and doing aggressive marketing in that state. So we are hopeful that we will achieve that target.
Okay. And sir, last question from my end, if I could just squeeze it in. Last quarter, you said some states, that is U.P., Maharashtra, Rajasthan, saw lesser growth due to tightening credit policy. So this is a 15% to 17% of our turnover. So could you help me understand why our top line has almost halved from Q4 to Q1 and now even in Q2?
Largely because of the falling yarn prices what we understand because if prices are correcting, the dealers are in hopes prices will further correct. But we had steep falling prices, we don't think -- even the trade understand the prices should not fall further, beyond these levels. So from November, December, usually the trend is January is a peak demand time for yarn and all, whether it is domestic or export, so things should start picking up from these levels. So by November, December, we would know what yarn prices -- what is the worst. Worse should be over by the end of December.
The next question is from the line of Yash Aggarwal, an individual investor.
I have a few couple of questions to ask. The first one is, sir, your guidance on the marketing expense for the full year FY '23. Second is, sir, could you throw some light on the working capital days, that is your data's -- receivable days, payable days and inventory days.
Our total marketing spend would be around 7% to 8% of the total revenue. This is a marketing guidance for the year, and our working cap -- total working capital days is around 223 days. Out of which, the inventory days is around 160 days, receivable days is around 95 days, and payable is around 40.
As there are no further questions from the participants, I now hand the conference over to the management for closing comments.
Thank you all. Thank you for joining us. In case you have any questions and further queries, you can connect with Mr. Nachiket Kale and Mr. Rajesh Agarwal, our IR partners from Orient Capital. Thank you. Thank you for joining us.
Ladies and gentlemen, on behalf of Rupa & Company Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.