Arvind Ltd (ARVIND) Q2 FY23 Earnings Concall Transcript

Arvind Ltd (NSE:ARVIND) Q2 FY23 Earnings Concall dated Nov. 08, 2022

Corporate Participants:

Samir Agrawal — Chief Strategy Officer

Unidentified Speaker —

Swayam Saurabh — Chief Financial Officer

Analysts:

Sagar Parekh — One-Up Financials — Analyst

Unidentified Participant — — Analyst

Abhishek Nigam — B&K Securities — Analyst

Prerna Jhunjhunwala — Elara Capital — Analyst

Operator

Ladies and gentlemen, good day and welcome to the Conference Call for Analysts and Investors for Post-Results Discussion for Quarter Two Financial Year 2022-’23 Arvind Limited. [Operator Instructions]

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

Samir Agrawal — Chief Strategy Officer

Thank you and good afternoon to all of you for joining us in this call to discuss the second quarter results of Arvind Limited. Joining me today is Mr. Jayesh Shah, our Executive Director and Group CFO; Mr. Swayam Saurabh, Chief Financial Officer of Arvind; and Mr. Kaushal Shah, Head of Investor Relations.

Before I get into specific results, just wanted to share few observations around the [1.10] garment in which our businesses are operating today. From our vantage point, the export market continue to be volatile. As we scan through the results, disclosures and guidances issued during August-September timeframe, most of our key customers, the messages we have picked up, indicate a clearly weakening demand outlook given the inflation issue and the interest rate hike. While many of the revenue numbers for the key brands have been near flat or even shown minor increases, they indicate an underlying volume degrowth, because behind those numbers, our price realizations which are higher.

Secondly, the Russia-Ukraine war continues to take a toll, on the European bank and retail assets. Many have reported stores shutdown and consequent loss of revenues and volumes. As we are getting in the media, India is being an exception in our industry as well most of the large domestic retail players in fashion and apparel space have reported 40% to 60% growth in their Q2 results. This also indicates that continuing shift in demand from the unorganized to the organized players in our country.

Some of the momentum was related to the festival season buoyancy after two decades — two COVID impacted years and this is expected to continue well into the wedding season starting this month. On the cost front, input costs have certainly been on a downward trend. Cotton prices which had crossed INR1 lakh per candy are now quoted between INR60,000 to INR70,000 per candy and still stay volatile. We expect them to continue moving in that range in near future.

Other input costs have been on the lower side as well, especially the ones which are imported from China and elsewhere are enjoying the benefit of reduced inbound shipping costs. Energy prices continue to stay firm. So in this context, our Q2 performance was broadly steady and flat. Overall, revenues were up 3% and our EBITDA was up 1.5% compared to the Q2 of last year. Operating margin from continuing operations was 9.3% compared to 9.5% in the Q2 of last year. Profit after tax before exceptional items stood at INR85 crores and final reported PAT was INR125 crores.

Our note clearly explains these one-time adjustments, which arise from the sale of our interest in Arvind Internet which we had announced last quarter. Provisions for potential losses in trade receivables from our water treatment business and potential loss in land sale related to one of our land parcels. Textile revenues were up 3% at INR1,758 crores, woven and knitwear fabrics saw steady volume, while denim volumes saw a sharp decline. Garment volumes were also lower than planned at 8.1 million pieces as our customers continue to defer their buying, given the uncertain demand outlook and to some degree, continuing inventory correction.

Price realizations increased by 38% for denim and 24% for woven fabric categories. AMD continues to do well. The revenues were up 5% in Q2 of FY ’22. But if you take the overall H1, because last year what happened is that, a bunch of deliveries had spilled over from Q1 to Q2 and hence — and H1 is a better comparison, so compared to H1 of last year, this year H1 is 20% up in terms of revenue growth and this is very much in line with the full-year guidance we have provided earlier for this business. So we continue to get good traction for all AMD products across the board.

As an example, our compost business has started supplying parts for this one day [Indecipherable] program, train program, over the core factory and we are executing the first order which was INR80 crore and we expect subsequent phases to continue coming to us as well. AMD margins have improved to 12.3% as input cost pressures have also eased is a bit and helped continue getting up these businesses.

Overall, our operating discipline remains quite tight and this helped us achieve a reduction in working capital requirements as well, net working capital thus improved from 5.6 turns in Q1 to 6.1 turns in Q2. Looking forward, we see demand environment for textile exports especially to continue to remain uncertain, while domestic demand will be robust especially in Q3. AMD should be on track to deliver 20% growth in H2 as I said before. Overall, softening prices and a weakening rupee should start contribute to our margin numbers especially in Q4. We continue our plan to reduce the borrowings especially the long-term debt, so far in this year we have reduced the long-term debt by INR83 crore and we should kind of reduce it by almost INR300 crores by March 2023.

So this concludes my opening remarks and I now invite you all to ask questions. Thank you.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] Thank you. We take the first question from the line of Mr. Abhishek Nigam, B&K Securities. Please go ahead, sir.

Abhishek Nigam — B&K Securities — Analyst

Yeah, hi. Thank you so much for giving me the opportunity. So, couple of questions, first, I do understand the demand is what it Is right now, but the U.S. who was having a bit of a pipeline issue in terms of the inventory which got pilot projects. Is there some sense that you have in terms of — is that getting cleared out now? And could that sort of provide some support to demand in the coming months? So that’s my first question.

Samir Agrawal — Chief Strategy Officer

Right. So it is — we definitely expect the inventory buildup in U.S. to start to improve. It’s just that entering into quarter three right now. We don’t have complete visibility on when would it normalize, our current estimate sales by mid of quarter four is when we should see normal level of inventory fully return.

Unidentified Speaker —

Yeah, I think it will start to get more clear once we have the holiday season results out.

Abhishek Nigam — B&K Securities — Analyst

Okay. So basically sometime in January or so is —

Samir Agrawal — Chief Strategy Officer

Yeah, we’ll have a better visibility on that time only.

Abhishek Nigam — B&K Securities — Analyst

Okay, fair enough. Yes, I do understand that’s a very evolving situation. The second question that I had is, in an overall macro environment which is kind of getting picky and top, what I’m actually seeing is okay raw material costs are lower, logistics costs, container shipping costs, those are sort of normalizing lower. So first half, these were sort of the talking points on why margins were suffering. And so these are now sort of getting better demand. I do see as sort of maybe at a stable level now. But these things should compare it to EBITDA margins sort of moving up from here on slightly, or do you think it will probably be just remain where it is right now?

Samir Agrawal — Chief Strategy Officer

So, other than these two factors and the first one also includes cotton, which at this moment is extremely volatile. To give you a reference historically our business has been at about 29% to 30% of, let’s say, gross margin, which has now shrunk to closer to 25%. We do see that perhaps in next two to three quarters, we start to inch towards these margin levels and those improvements should start to reflect in EBITDA.

Abhishek Nigam — B&K Securities — Analyst

Fair enough. That helps. Last question from me, just on the debt side, so are there also any progress on the land sales or is this debt reduction just coming from the operating cash flows?

Samir Agrawal — Chief Strategy Officer

Right. So, we have now as on H1, we have collected close to INR40 crores of cash, which is essentially the advance which is coming out of land and we have maintained that we should get about INR100 crores which should basically contribute in our overall long-term debt repayment in this year. We think we are broadly on track.

Abhishek Nigam — B&K Securities — Analyst

Okay. So that’s INR100 crores by the end of this year, is it?

Samir Agrawal — Chief Strategy Officer

Yes, correct.

Unidentified Speaker —

Yes, INR40 crores, we have got, another INR60 crores, we expect, so for the full-year basis, we expect INR100 crores to come in from the land sales.

Abhishek Nigam — B&K Securities — Analyst

Okay.

Samir Agrawal — Chief Strategy Officer

Out of the total expected INR300 crores, so INR200 crores to be from the operating cash flow and INR100 crores from the land sales.

Abhishek Nigam — B&K Securities — Analyst

Okay. That’s it from me. Thank you so much.

Samir Agrawal — Chief Strategy Officer

Sure, thank you.

Operator

Thank you very much, sir. [Operator Instructions] We take the next question from the line of Prerna Jhunjhunwala, Elara Capital. Please go ahead.

Prerna Jhunjhunwala — Elara Capital — Analyst

Thank you, sir, for the opportunity. The performance has largely been great in terms of margin is what how I read it. But I would like to understand what shall I do to achieve better than — better performance on the margin front in this quarter, because the demand was weak and the costs were high. So, could you just explain how you managed a 9.5% kind of margins in this quarter whether it was the purchase of the yarn — lower-price yarn that helped you in this period or whether it was higher realizations from earlier order book and going forward we should expect some contraction on realization going forward. So just wanted to understand the business environment a little deeper?

Samir Agrawal — Chief Strategy Officer

Sure. So first on quarter two results. By design, a large part of our revenue is sort of part of an order book which is frozen in environment. So we do have visibility of one to three months forward which is how we indicated in the call. That quarter two will be a bit muted, which is what we have largely delivered. What we also see going into quarter three is looking at our order book, we expect the performance to be at a similar level likely muted from these levels given the uncertainty deferment of number of orders we see, for example, some orders from quarter two moved out to quarter three and we will have to wait and see if customers are actually picking those volumes which we forecast right now in quarter three. But balancing all of that, we do expect while the external factors remain uncertain given that we have better price realization also supported by currency, we would largely have similar quarter going into quarter three basis what we see right now.

Prerna Jhunjhunwala — Elara Capital — Analyst

Okay. And our customers revising your existing orders based on the input price correction or it will only happen in the new orders?

Swayam Saurabh — Chief Financial Officer

We think there is a larger play from demand side, as Samir explained in his opening remarks. The US part of market, which is fairly large for us, all large brands and retailers are sort of in the phase of reducing inventory, inventory which has been built up for the last two quarters. And that translates into sort of lower order book for us going into quarter three, also partly in quarter two. I mean, this is one reason which would keep quarter three flat. Other one is this energy crisis in Europe and general economic sentiment around it. So while we do see new order and also see repeat order, we think these are the two factors which are sort of counterbalancing our total order book, which translates into a flattish quarter, which we see ahead.

Prerna Jhunjhunwala — Elara Capital — Analyst

Okay. I have a question on garments. So in the garment business, we were quite confident that our Q2 is not seeing any major pressure, but our volume suggest that we witnessed pressure in the garment business also. So though you’ve highlighted that there were pressures in the key markets, could you give some sense if there was — how was the profitability in the garment business and should we expect similar volumes in the garment business also?

Swayam Saurabh — Chief Financial Officer

So let me address the profit part and Samir can come in on volume. Profitability, if you look at H1, we have delivered about 9% EBITDA, I mean, 9% to 10%, which is low-single-digits. We expect that to improve going forward also in future quarters. As far as volume is concerned, volume is really a result of deferment of orders. It’s largely tied to what we told you about the US market still adjusting their inventory, looking at not so strong demand outlook. And hence, most of the key customers, if you see their commentary also going forward, they’re all revising it down. One quarter back, they were all less pessimistic, but all the disclosures in September timeframe talk about revising it down. So it’s a result of that that they have deferred a bunch of orders. And on the supply side and the capacity side, we have shared in the past that we are shifting part of our capacity from Ethiopia. So that’s the work in progress as well.

Samir Agrawal — Chief Strategy Officer

But it’s largely customer deferment, a combination of inventory equalization as well as partly Europe situation, which we think will start to normalize as we go into quarter four.

Prerna Jhunjhunwala — Elara Capital — Analyst

Last question from my side as of now. On provisions for water treatment business in Ethiopia, so wanted to understand the nature of this and whether it is done for the entire receivables or we can see any further provision on that front again?

Samir Agrawal — Chief Strategy Officer

So let me explain the background to this. See, our water treatment business has executed four projects in Ethiopia over last three to four year timeframe. And the nature of these projects is that they were installed as common effluent treatment plant in industrial parts. So Ethiopian government has been for last five, six years pursuing a strategy of economic development basis like industries, like textiles, pharmaceutical, like electricals and so on. So they have established multiple industrial development parts where they invite tenants from across the world to setup factories. In four of such parts, our effluent treatment solutions were chosen as the CETP solution, common effluent treatment plant solution. So we’ve installed those, and in some cases, we also have the contract to operate those. Now the expectation was that as these parts get populated with tenants and their monthly fee that the tenants will pay-off on the investment and the other payables which were committed by the government. Because this whole plan sort of fell apart with this whole civil war and law and order and political situation, the whole chain of expected events did not play out the way it was designed to be. And hence, we kind of got into the situation and we expect that actually things are resolving there and some of this money might come. But on a prudent step, whatever is potentially the full exposure, we are taking that as a provision right now. We don’t expect, I mean, there is no more amount to be kind of discussed. It’s in fact, some of it may not fortify and create actual loss.

Swayam Saurabh — Chief Financial Officer

Very, very conservative.

Prerna Jhunjhunwala — Elara Capital — Analyst

So we can see write-backs also going forward from this amount?

Samir Agrawal — Chief Strategy Officer

Yes.

Prerna Jhunjhunwala — Elara Capital — Analyst

Okay. Thank you and all the best.

Operator

Thank you very much. [Operator Instructions] We’ll take the next question from the line of Mr. Sagar Parekh from One-Up Financial. Please go ahead, sir.

Sagar Parekh — One-Up Financials — Analyst

Yeah. Hi Samir and Swayam. So decent performance, at least on the margin side. A few questions from my side. One, on the denim side, we have seen volume decline both on exports as well as domestic. Exports, I understand, as you said, on different seasons in US and Europe. But on the domestic side, I’m really surprised to see a decline in volumes. So if you can explain that? And going forward, how should we think of denim volumes for Q3 and Q4? Q3 will be similar about 13 million, 14 million pieces, I mean, 13 million, 14 million meters or do you think [Technical Issues]

Samir Agrawal — Chief Strategy Officer

Right. So on export side, denim is largely impacted by inventory build-up in US, which has translated into customers like Gap and few other deferring shipments till they clear inventory. And within the denim portfolio, US has a very large percentage of revenue, which is one large reason for this impact. This we believe is also temporary. Once inventory starts to clear up, we think they should start to normalize perhaps later part of quarter four. Then there is another smaller impact in exports, which is related to European energy crisis, where we see some of the brands are slowing down the order intake, but we will have to wait and see. Although this is not very large as large as US, but we will have to wait and see how quickly this can normalize.

On domestic front, we see a pretty unique situation. A large volume of our domestic goes into trade. And from there, it gets supplied to mid-tier value brands, which are neither Levi’s and Pepe nor mass market. What cotton prices has done is taken their basically USP away in the sense that the differentiation is less while the brand’s ability to take price hike to maintain their margin has come down because of the input costs going up. That’s where we see a volume shrinkage. And as cotton has started to normalize, although it is still very volatile, we do expect that it should correct itself in next one, one and half quarters, and this would follow how cotton normalizes.

Sagar Parekh — One-Up Financials — Analyst

So in terms of volumes, quarterly volumes for denim, can we expect pickup now going forward or you still think that —

Samir Agrawal — Chief Strategy Officer

As I said, these three large reasons, European energy crisis, we will have to wait and see. We do expect some positive uptick in US market going into quarter four. And the domestic, while we have shown that we could compensate part of the volume loss by moving into other channels, but it will entirely depend on how quickly cotton goes back to stable normal level. We are hopeful that in the next one, one and a half, two months, cotton should normalize. And once that happens, then you should see that improvement as well.

Sagar Parekh — One-Up Financials — Analyst

My second question is on the — you mentioned that on garments your profitability was 9% to 10% in H1. Did I hear it correctly? It’s just the questions that Prerna asked on the garment side. Did you mention that the profitability for H1 was 9% to 10%? And we expect the profitability to improve from H2 onwards?

Swayam Saurabh — Chief Financial Officer

Right. So what I referred was actually textiles. Garmenting are at low-double-digit right now, which we expect to inch up as our factories are better loaded, as volume picks up. We do expect this to go closer to double-digit.

Sagar Parekh — One-Up Financials — Analyst

We expect the margins to go to double-digit in H2 then?

Swayam Saurabh — Chief Financial Officer

That’s correct.

Sagar Parekh — One-Up Financials — Analyst

Fair enough. And how should we think of overall volumes for garments for the year? So I think H1, we are still seeing some growth in terms of garmenting volumes. We will still be growing for FY ’23 or —

Swayam Saurabh — Chief Financial Officer

So in value terms, we believe we will have a growth. Volume as the single largest reason is deferment of orders which we also see continuing into Q3. We will have to see. We believe quarter four onwards, the volumes should start to get better. And that’s how we see right now.

Samir, do you want to add something?

Samir Agrawal — Chief Strategy Officer

Yeah. I think on the full year basis, we should be broadly in the same range as last year because of all of what we are going through. I don’t expect any significant change in the full year number.

Sagar Parekh — One-Up Financials — Analyst

Fair enough. My last question would be on the capex. So we have done about INR100 crores capex in H1. What should be the capex number for H2? And have you finalized any plans for PLI scheme for garments as well as for Advanced Materials Division yet?

Swayam Saurabh — Chief Financial Officer

Right. So on a full year, we expect to be between INR150 crores to INR180 crores range. That’s our current visibility for this year. On PLI, we have taken all initial preparatory steps, including the process of formation of company. But we are still internally sort of finalizing our capital allocation also given that businesses like AMD, which is very attractive and finding that balance. So perhaps in the next quarter call, we will have more clarity on capex for next year or so. And of course, when PLI-II comes, we will definitely apply.

Sagar Parekh — One-Up Financials — Analyst

Okay, got it. Thanks. Thanks a lot. That is it from my side.

Operator

Thank you very much sir. We’ll take the next question from the line of Mr. Amit Kumar from [Indecipherable]. Please go ahead.

Unidentified Participant — — Analyst

Thank you so much. My question was just answered. So that’s it at my end. Thank you so much.

Operator

Thank you sir. Ladies and gentlemen, that was the last question for the day. I now hand the conference over to Mr. Samir for closing comments.

Samir Agrawal — Chief Strategy Officer

Sure. Thank you all very much for joining us today. We’ll meet you in December quarter. Thank you. Bye, bye now.

Swayam Saurabh — Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]