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Rupa & Company Ltd
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Ladies and gentlemen, good day, and welcome to the Rupa & Co. Limited Q4 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nachiket Kai from Orion Capital. Thank you, and over to you.
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, 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 involves risks which are unforeseen and difficult to predict. A detailed disclaimer has been added to the reference presentation, which was uploaded on the exchange. I hope everyone had a chance to go through it. With this, I would like to hand over the call to Mr. Vikash Ji, -- over to you, sir.
Thank you, Nachiket, and good evening, everybody. I would like to extend a very warm welcome on behalf of Rupa & Company Limited to everyone for joining us on this call today. I hope everyone had an opportunity to go through the financial results and investor presentation, which has been uploaded on stock exchange and our company website. Well, this year presented significant challenges for our industry witnessing steep volatility in raw material prices, which were on an increasing trend at the start of the year, beginning of the year and then gradually declined steeply by more than 30%. This phenomenon is unprecedented in our industry, which led to destocking at distributor level throughout the year. As a result, operating margins suffered due to dual impact of high-cost raw materials and product supply at higher incentives and schemes to the distribution channel pursuant to declining trends in yarn prices.
The gross margin for the fiscal year ending financial year '23 stood at 28.6%. Our EBITDA margin was also impacted because of higher marketing costs over previous years and underperformance of thermal and athleisure segments. We anticipated normalization in market sentiment and pickup in demand with the stabilization of yarn prices around INR 270 to INR 280 per kg at the current level. Well, we are actively taking steps to enhance our brand through various marketing activities. Recently, we have onboarded celebrities to promote our premium and economic segment brands, which is Jon and Macroman. In terms of our revenue breakdown, exports accounted for INR 41 crores, showing 25% stronger year-on-year growth. Modern trade contributed INR 51 crores, also exhibiting a 32% year-on-year increase growth.
Overall, we generated INR 1,142 crores in revenue during financial year '23. This growth demonstrates our ability to seize opportunities in the evolving modern trade channel, where we have done quite good. During the quarter, we successfully launched 2 exclusive brand outlets, stores, the total EBO count currently stand at 28 stores. We will continue expanding our presence in retail and scale to give our retail customers, especially youth wholesome purchasing experience. Despite the challenges we faced, we maintained positive cash flow of INR 185 crores and efficiently manage working capital deployed in business. The same resulted in significant reduction of overall net debt position. Board of our company keeping the tradition of sharing profit with shareholders has proposed to maintain dividend at 300%.
Looking ahead, we anticipate improvements in margin for financial year '24 as the market sentiments normalize and the effects of the underperforming segments diminish. We remain focused on optimizing our operational efficiency, managing cost and leveraging growth opportunities to enhance shareholder value. Regarding our current year performance, management stand by the performance because of very unique situations. And we are quite hopeful in coming 3 years, we'll be clocking a turnover of INR 2,000 crores. With this, I request Sumit Khowala, our CFO, to give you an update on the financials, please. Over to you, Sumit.
Thank you, Vikas, sir, and good evening, everyone. I will proceed to provide a brief update on the financial performance. The revenue from the operations for the quarter 4 FY '23 is INR 407 crores, down by 10.9% compared to corresponding quarter last year. As mentioned by Vikas, sir, the headwinds in the industry have affected our margins. The gross margin for the quarter is 23.5% vis-a-vis 34.3% corresponding quarter last year. The EBITDA margin stood at 6.7% in quarter 4 FY '23 as compared to 16.2% in quarter 4 FY '22. PAT is at INR 5.5 crores with the PAT margin of 4.6%.
For FY '23, revenue stood at INR 1,143 crores and is down by 22% year-on-year. Gross margin stands at 28.6% versus 34.8% last year. The EBITDA for the year is INR 89 crores, and the EBITDA margin is 7.8%. PAT stands at INR 54 crores with a PAT margin of 4.7%. A multitude of factors have laid down in sales, resulting in degrowth across key metrics. However, our prudent financial practices have ensured that we are able to free up working capital and shut down our net debt significantly. Net debt for the year FY '23 is INR 134 crores vis-a-vis INR 231 crores last year. Net working capital deployed in the business has reduced to INR 789 crores from INR 910 crores for FY '23. We have significantly improved our cash from operations from net outgo of INR 116 crores to the positive cash flow of INR 185 crores this year. Thank you for your attention. We are now happy to take questions.
We will now begin the question-and-answer session. [Operator Instructions] We have a first question from the line of Keshav Garg from Counter Cyclical PMS.
Sir, I'm trying to understand that you mentioned that we want to double our revenue over the next 3 years. So if we do so, then sir, our growth from FY '22 to FY '26, this 4-year period will come to around 7.9% only, which is more or less equal to the inflation rate in the country. Sir, so what I'm trying to say that, sir, don't you think that it's a conservative guidance...
Conservative guidance like next 3 years, we are saying INR 2,000 crores with a base of INR 1,140 crores. So -- does it come 7.9%?
No, sir, sir, I'm taking it from FY '22 base of around INR 1474 crores, so over the next 4 years.
Absolutely. So this is a minimum what we think, but it will all depend, and we want to -- and I don't want to overcome it. But with the current year, we at least want to grow by 25%, 30%. So once we have that growth, of course, we'll review these numbers again. But this [indiscernible] year is quite crucial, very important for us, where we are putting all the efforts. And once we have a strong base growth this year, I'm sure those numbers what you're talking will definitely improve from those levels.
Sir, also, sir, you think in your judgment as things stand today, that we will be able to reach if you are -- if we grow at around 20%, 30%, then we will reach FY '22 top line in this year itself. Sir, but as far as the margins are concerned, sir, you think that we will be able to reach around 18% operating margins that we did in FY '22?
So margins are difficult. Right now, and our understanding is we don't want to lose market share, and we are investing heavily on the advertisement and brand pool. We have invested more than 3, 4 celebrities. And when our EBITDA margin was 18%, that year, our marketing spend was 4%, which was much below our average. So this year, it will come back to 7%, 7.5%. So we are hopeful -- I don't know, I'm not sure about immediate quarters because a lot will depend upon how the yarn prices behave. But for this whole annual basis, I think we should be able to clock 11% to 12% EBITDA margin minimum. These are a sense what we'll be able to archive.
Sure, sir. And sir, what kind of CapEx are we looking at?
What kind of...
CapEx?
CapEx is what we'll do roughly INR 20 crores, INR 25 crores year-on-year is our annual budget.
We have our next question from the line of Shikha Mehta from Equitree Capital.
I just have a couple of questions. As you mentioned in your opening statement as well, cotton and hence yarn has sort of normalized now. But in spite of that, our gross margins this quarter took a beating, is that because we had high-cost inventory on our book? Is that the right way to look at it?
Yes, ma'am. To a large extent, yes.
So is the high cost inventory factor completely done away with now? Or are we still having some high cost mental...
I think in coming quarters, maybe 1 more quarter, we'll be able to -- 1 or 2 quarters max, things will average out.
Okay. So maybe the first half of the year should still see some impact of this, right.
A little soft, yes ma'am. And that's why we are giving a forecast of 11% to 12% EBITDA margin keeping everything in mind.
Okay. Got it. And sir, can you give me the ad spend figure for this quarter?
7%.
Okay. And that is what we're expecting for...
Quarter 4 FY '23 is roughly 7%.
Roughly 7%.
Okay. No issues. Sir, could you also help me understand how our credit terms have been for the quarter and for the year. I think in Q3, we said that we didn't want to let go of market share. So we're kind of loosening the credit term. How has it been for the quarter?
Data is a compared to -- like our [ debtor ] is to get INR 425 crores compared to INR 540 crores last -- quarter 4 of last year.
Okay, right. And sir, another thing I wanted to understand from you is if you can shed some light on the channel inventory levels and whether we're seeing restocking happening now?
Yes, we are seeing the -- we are dealing in a product which are essential in nature. Currently, we are seeing that there is an uptick in demand. So we think this will maintain same inventory level going forward.
We don't see any [indiscernible] because these are essential, so we have to maintain inventory. Because of the falling cotton prices, there was a negativity in the market because of [indiscernible] is more than 30% [indiscernible], which is unprecedented, historically, it's never happened. So the silver lining is probably delayed and they don't have much stock inventory -- once we are confident about the yarn stabilization, I think the market should pick up.
Okay. Sir, got it. Can you also help you with the growth somewhat in the mass segment, the medium segment, the premium segment and in women?
Is the overall...
For FY '23, yes. In [ mass ], in the medium and premium and in women?
Okay. The overall price degrowth is 5% to 6% and the volume degrowth is around 15%, 16%, okay? And if we talk about economic segments, the price degrowth is 5% -- mid-premium segment, it is 7% and premium segment, it's around 4% to 5%.
Okay. Got it. This is on the price, right? And on the volume side or this is overall.
It's on the price side for the economic segment, volume degrowth is 15% around for mid-premium segment, it's around 16%. Premium segment is about 20% -- around 20%.
Okay, sir. And same thing for women.
Women segment will -- largely menswear.
Yes, it's roughly the same ma'am. What we have the mid-premium.
Okay. Got it. Got it. Got it. And also, how is summer shaping up for us currently? How was Q1 making so far.
Q1, we are quite hopeful things would do well. We are investing heavily on the brand pool and all. We never advertised for our economy brand, which is Jon. So we have recently taken 2 brand ambassadors one is Ranbir Kapoor and other is a local hero of East. So we are quite hopeful with the kind of brand pool we are creating and the kind of schemes we are giving the market a quarter 1 should do decent for us.
And apart from the price correction we've seen so far, do we expect more price correction going forward considering the raw material prices are stabilizing?
It will depend upon the yarn prices. If yarn prices start increasing, we will increase rates. So if it stays at this level, our prices will stay for a quarter at these levels, but gradually it should decrease on a yearly basis by 3% to 5%. It will all depend upon the yarn prices. So it's very difficult to comment anything at the moment. So a lot depends upon the cotton -- what is happening globally on the cotton prices. So...
We have a next question from the line of Resha Mehta from GreenEdge Wealth Services.
Sir, my first question is on the working capital. So it used to be in the 45% to 50% of net sales range. And in the last year, it has shot up to around 70%, perhaps the extended credit cycle contributing to this. So one, where -- how quickly do we see this reverting back to the old levels of 45%, 50%? And second, what is your desirable optimum working capital that you're not targeting? And what steps you are taking to kind of get there?
And this year, net working capital deployed in the business has reduced to INR 789 crores or INR 910 crores. So this time, the turnover was a little bit lower. So working capital days are looking at on a higher side. But ideally, it means we feel that 150, 160-day net working capital would be ideal for the industry -- for our company.
Once we achieved the given growth top line, it will automatically fall in the right numbers, 150, [ 160-odd ] some increases.
Okay. So that would still be roughly 40% of net sales, right?
Yes.
Okay. Okay. And do you see this going back to 40% levels in FY '24?
Yes, we are quite hopeful.
Okay. And will be led by reduction in debtor days or inventory days or both?
Both and we had the new software at SAP HANA in placed. So operationally, and our efficiencies would be better than it will help us to do proper planning and proper control also. So we have recently implemented the [ AFS ] model in this April last month. So things would do better.
Sir, related question here. So you do have distributor management system, right? So this has been implemented across how many of your 1,500 dealers?
No, right now, I was talking about the AFS SAP HANA model. So now you're talking about the [ DMS ] model. For DMS, we are trying -- we have hardly 70, 80 distributors, but we recently hired the agency now is on the board. They should help us to extend this to a large number of distributors. So how to focus on the retail and have a more clear visibility on the secondary, we have just tied with the agency now and that should help us to have a better control on the marketing visibility chain.
So if I were to understand this a little bit more. So basically, you have 70, 80 distributors, who in turn supply maybe to 1,500 dealers or to retailers directly. Is that the correct way to look at it?
No, no. We supply to distributors, 70, 80 distributors, and they supply to retailers, their retailers. So we're starting DMS in...
This is around 1500 dealers. So...
1500, 1200 is our total size of distributors we have PAN India. Out of that, wherever DMS is implemented is around 70, 80 dealers, which is 5% of the total dealers, retailers we have.
Right, right, right. Okay. So basically, we have direct visibility and the tracking is possible only for our primary sales as on today, right? What we sell to the 70, 80 dealers, correct?
Yes.
Right. Right.
We have a primary visibility of all 1200 dealers and what we have, but secondary visibility of 70, 80 dealers wherever we have DMS is there.
Okay. Okay. Got it. Got it. And how big would fruit of the low and this FCUK brand, how big could these brands be in terms of size, what revenues would we have done in FY '23?
The size is not [ enough ], like as updated on our previous calls also, like after the COVID years, before that, there's brand, we're doing very good, and we invested heavily on these 2 brands. But after the COVID LFS were all shut in all. So there's a big drop in the top line of the brands. And for us to revive the brands again, we have to invest heavily again which at the moment, we are not very keen with management -- management is not keen with. So whatever organic growth they had from our EBOs and from online, we are pushing more of that than investing the brand into general trade duty.
And otherwise, we have an exclusive license, right, for these 2 brands?
Yes. Yes.
And pre-COVID, what was the revenue number for both of these brands?
Around INR 43 crores.
Sorry, around.
Around INR 40 crores.
Both put together?
Yes, ma'am.
Okay. Okay. And can you talk about your revenue split between urban and rural, if you all bifurcated that way?
So as I said, we have more of the primary numbers with us. So our understanding is 50%, 50%. So we don't have -- because a lot depends upon the secondary again. So primary wise, it's roughly 50% each, 50% primary and rural 50% urban.
Got it. And I think the presentation also mentioned about drop in realization. So is that through a reduction in MRPs or we've passed on as discounts to channel partners?
We usually pass on the discount.
So there's no reduction in MRP, right, that we have taken?
There was a reduction in MRP as well because there was a steep fall in yarn prices, so in our schemes also. So we have reduced the prices also a couple -- around March, April. But that doesn't matter -- that doesn't affect us a lot because we -- our products are not selling much on MRP and the fluctuation between the net WSP and the MRP was quite high. So it was demand from the trade because of the corrected prices, they wanted to reduce the MRP, which we have done in sync with the increased benefit of what we have given to the distributors.
Right. And lastly, if you could talk about how is the demand shaping up, demand outlook? I'm sorry, I missed your opening remarks in case if you have already mentioned back then.
I think last year -- last 2, 3 years, we ended soft on the marketing side and all -- on our economy segment where we have a big turnover. So this year, the idea is we don't want to lose on the market share. We want to increase the market share. So spending large in the marketing part. And this will surely take care of the top line. We might compromise on the bottom line for a few quarters. But for long-term, things should be healthy, should be much better numbers what we have today.
All right. And what would be your revenue contribution from athleisure and thermal wear for both FY '22 and FY '23, -- just as a percentage of revenues, which we could tell me.
Percentage of revenue, it was quite less this year from COVID year, both athleisure and the winter wear and thermal wear, largely because the demand was less. So our -- we took a big hit on our margins also because these 2 ranges contribute a lot to the bottom line where the margins are quite high.
[indiscernible] and thermal 5%. Contribution from athleisure wear is -- revenue contribution from our athleisure wear segment is 8% and from thermal wear, it's 5%.
This is for FY '23?
Yes.
Okay. Okay. And how high would the -- what would be the margin differential between, let's say, a company average versus athleisure and thermal wear, which are higher margins?
At least 5% to 7%.
5% to 7% at the gross margin level, right?
Yes.
We have a next question from the line of Rohit Ohri from Progressive Shares.
A couple of questions. The first one being on the growth CapEx plan that we had. We were looking for some dedicated export unit and [indiscernible] an investment of INR 18 crores and the cutting unit of around INR 18 crores, INR 20 crores. So -- by when do you think will this be commissioned?
It's already commissioned and will start this year. Cutting unit is now already commissioned and started gradually, it will win full capacity in next coming quarters, coming months.
And export unit is more or less ready. We can -- we will be commissioning in the month of May -- in May '24 -- May '23.
May, June. May has already gone. So June, June, we should be able to...
Okay. Okay. Vikas ji you were talking about CAGR growth of around 20% or so, while at the same time, we are saying that there is softness in the market. So what gives us this confidence that we will try and get that 20% target growth over the next 4 or 5 years to achieve the target of INR 2,000 crores.
The end of the day, we have to survive. So with the disappointing result where we are extremely [indiscernible] satisfied. So a lot of lending, what we did last year. Last year, we took it a lot knowingly to have a control on the credit policy to have a healthy credit policy for long-term in few of those regions. But on a lower base, we have to grow at least 25%, 30%. And we have taken a lot of initiatives in terms of marketing, in terms of scheme penetration and all. We are sure 25%, 30%, we should be able to achieve -- and once we add that number for the coming years, once we achieve that, once few initiatives, what we have taken in place in terms of modern trade, export, EBOs and all, those are also contributing good and we have done good in those areas. Only the GT has been a problem. Once we have a support from GT as well, we are sure we'll be able to achieve these numbers. We are hopeful.
Go ahead.
Sorry.
I think the new machinery and the investments that we have been doing and small debottlenecking that is happening. So the benefits of these will start coming from the next year onwards or anything that you would like to share on that?
The start from this year only. The new export unit what we have set in all will help us in export will help us in modern trade as well. So in coming quarters, it will start adding to the contribution.
Okay. For the FOTL, we have this license agreement, which was seeking an extension. So do you think we will extend it beyond the 30th of June or how will that be?
It will all depend. We'll still trying to negotiate in all our terms and all. So if you have a favorable term, we'll try and extend. It all depends upon the negotiation, what we are doing at the moment.
Okay. But there is no write-off that we should be expecting or some negative surprises from there? Because they are holding some inventory of around INR 11 crores, INR 12 crores. So that shouldn't come as a surprise to us, right?
The idea is to liquidate that stock before we terminate anything. So and all provision everything is in place, yes.
So we are hopeful that we'll be able to negotiate and renewal will be done and approved -- inventory, all the inventories are in good condition, and we're able to sell in the market.
Okay. Of these 5 subsidiaries that we have on [indiscernible] fashion, which of these are absolutely PAT positive and which of these are probably at the breakeven point for EBITDA levels.
We are not doing much activity into Rupa fashion or anywhere because a few initiatives we took during -- before COVID, like Bangladesh and all is still on hold, but [indiscernible] we are PAT positive.
And Oman, as we have also PAT positive.
Oman, as well we have PAT positive.
Okay. Sir, a broader question, which is related to the industry, probably at Tirupur cluster and they had certain issues during the entire year as well as the industry. And currently, what is the situation with the export associated to knitwear if you can take us through that.
The demand is still subdue and the reason why the yarn prices are still soft. So once the demand picks up, then only Tirupur does well, the export does well from Tirupur. So the yarn prices will tell everything. When the demand comes up, yarn prices is a trendsetter. So that is -- from the movement of yarn prices, one can make out how is the export doing now the export demand and all. So at the moment, it is soft.
Okay. But then any hope that it will start picking up by maybe the thermal season or anything -- any guidance that you'd like to give?
Difficult to comment on the export market, but domestic market, these are all essentials. So we are sure -- there are 2 types of demands. One is consumer demand and other is a trade demand. So last year, trade demand was soft. So whatever stock they used to keep and so they are not maintaining that kind of inventory. And once the market has some kind of firmness, I'm sure the [indiscernible] will -- should do well, should pick up. There's no reason it should won't pick up. We don't see any reason.
Okay. Last 2 questions. One is related to the entire thesis that we had for Rupa and try to look at premiumization of the brand and the products that we have. By when do you think this will start kicking in...
So the process is on. We have the opening EBOs and all. We have recently for our brands like Macroman M-series, we have endorsed there is brand ambassador Yash, who is a very big star from South and all. And we have started the campaign. We are getting very good reviews and other brands like frontline, we have launched frontline colors where the MRP of the product is at least 20% higher than the current range. So we are introducing new range every quarter, every month. And EBOs modern trade, as I've said, has contributed a better number from last year. So the process is on and gradually should reflect into numbers as well.
The last question being on the share for the women segment, which we thought that just because of the pandemic, it went down. But then we were quite [indiscernible] on the entire segment or subsegment of women, which is currently around 11% or 12%. So what are the efforts put in by the team to kind of increase this or probably increase the volume from here because this segment seems to be a slightly higher margin segment. So what are the efforts that are put in by the team to put an uptick over here and try to move this to around 15% or 20% of the total revenue?
Absolutely, it's very important for our company also to grow on the top line in the women's segment where we are not that strong so far. So we are investing in the product line. We are investing into team as well. And either it is online or EBOs, we have tried with opening few EBOs exclusively for women as well. And we are spending on the campaign with the celebrity Kiara Advani. And we are doing some retail types also which will start this year in this quarter. So those things would help us. And our network is already there. We are trying to do something new with the campaign as well. So I'm sure these efforts will help us to -- if not last year, this year should do better.
We have a next question from the line of Vinay Mehta from AG Investment.
So my question was on the distribution network part. So what is your plan to expand the distribution network from current levels? And let's say, I mean, next 3, 4 years, where do you see this number to go?
Since we have untapped area just like Madhya Pradesh and Chhattisgarh portions of South, we have -- I mean we have a total revenue contribution from the South India is 7%. So we are planning to set up a distribution base in South India. Currently, we have around 1,500 distributors. We are targeting around 2,000 distributors in next 2 years -- 2, 3 years.
Okay. And with regards to the EBO network, and I mean a few couple of quarters back, you had mentioned that you had a plan to add around 50-odd stores in FY '23 and PAN India presence of around 150 EBOs in the next 2, 3 years. So what's the situation like right now with regards to the EBOs?
As we mentioned, we opened 2 new EBOs. At the same time, we have shut the -- we have to shut 2 EBOs. So the current strength is 28 stores. And the plans were aggressive, but the market is a little soft now, which we can see that the market is not so strong. So the franchisee at the moment is not very willing to open the EBOs. So we'll wait for a couple of months. But we have 2 stores in line up 4, 5 stores will open in a month or 2. But when the market revised slightly better demand is there, this number should improve.
Okay. Cool. And one last question I had on the marketing budget part. Could you please throw some light, and I mean, on the marketing budget? And what kind of volume growth do we see in the next 2, 3 years down the line?
So like COVID years, our average was always 7% to 8% for marketing spend. COVID year, it was 4%. But now again, we will come back to 7% to 8% on the marketing spend. And volume growth we are looking for at least 15% volume growth current year, 15% to 18%.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to management for closing comments. Over to you, sir.
Thank you, everybody, for joining the call. In case of any clarification and further information, please connect our IR partner, Orient Capital. Thank you. Thank you so much.
Thank you, everybody.
On behalf of Rupa & Company Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.