Ladies and gentlemen, good day, and welcome to the conference call for analyst and investor for quarter results discussion for quarter two, financial year 2022-23, Arvind Limited. As a reminder, all participants lines will be in a listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. If you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note this conference is being recorded. I now hand the conference over to Mr. Samir. Thank you, and over to you, sir.
Thank you, and good afternoon to all of you for joining us in this call to discuss the first, the second quarter results of Arvind Limited. Joining me today is Mr. Jayesha Shah, our Executive Director and CFO, who stands for us, Chief Financial Officer of Arvind, and Mr. Kaushal Shah, Head of Investor Relations. Before I get into specific results, just want to share a few observations around the macro environment in which our business is operating today. From our vantage point, the export market continues to be volatile. As we stand through the results, disclosures, and guidelines issued during August, September time frame, most of our key customers, the hemisphere network, 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 are high realizations, which are higher. Secondly, the Russia-Ukraine war continues to take its toll on the European brands and retailers. Many have reported store shutdowns and consequent loss of revenues and volumes. As we are hearing 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%-60% growth in their Q2 results. This also indicates a continuing shift in demand from the unorganized to organized players in our, in our country.
Some of the momentum was related to the festival season buoyancy after two decades of 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 INR 100,000 per candy, are now quoted between 60,000-70,000 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 or elsewhere, are enjoying the benefit of reduced inbound shipping costs. Energy prices continue to stay firm. So in this macro 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 INR 85 crore, and final reported PAT was INR 125 crore. Our notes clearly explain 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. Retail revenues were up 3% at INR 1,758 crore. 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 2022. But if you take an overall H1, because in 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 composite business has started supplying parts for this Vande Bharat program, train program, with Intergral Coach Factory, and we are executing the first order, which was about INR 80 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 a bit and help continue cleaning up these deficits. Overall, our operating discipline remained quite tight, and this helped us achieve a reduction in working capital requirements as well. Net working capital has improved from 5.6 turns in Q1 to 6.1 turns in Q2. Looking forward, we see demand environment for textile exports, especially, continue to remain uncertain, while domestic demand will be robust, especially 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 contributing to our margin numbers, especially in Q4. We continue our plan to reduce the borrowing, especially the long-term debt. So far in this year, we have reduced the long-term debt by INR 83 crore, and we should kind of reduce it by almost INR 10 crore by March 2023. So this concludes my opening remarks, and I now invite you all to ask questions. Thank you.
Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone phone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Thank you. We have the first question from the line of Mr. Abhishek Mehra, B&K Securities. Please go ahead, sir.
Yeah, hi, thank you so much for giving me opportunity. So a couple of questions first, you know, as you understand, demand is what it is right now, but, US was having a bit of a pipeline issue in terms of the inventory, which got piled up over there. Is there some sense that you have in terms of is that getting cleared out now? And could that sort of, you know, provide some support to demand in the coming months? That's my first question.
Right. So it is, we definitely expect the inventory buildup in US 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 is by mid of quarter four, is when we should see a normal level of inventory return. Actually, it will start to get more clear once we have the holiday season results out.
Okay. So maybe sometime in January or so?
Yeah.
Okay, fair enough. Fair enough. Yeah, I do understand that's a very evolving situation. The second question that I have is, you know, in an overall and macro environment, which is kind of getting tricky and, and tough, what I'm actually seeing is, okay, raw material costs are lower, logistics costs, container shipping costs, those are sort of, you know, normalizing lower. So, you know, first half, these were sort of the talking points on why margins were suffering. And, and so these are now sort of getting better. Demand I do see as a sort of maybe at a stable level now. So but do you think the margin sort of moving up from here on slightly, or, or do you think that it will probably just remain where it is at right now?
So, you know, 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%-30% of gross margin, which has now shrunk to closer to 25%. We do think that, perhaps in next 2-3 quarters, it starts to inch towards these margin levels, and, those improvements should start to reflect in the results.
Fair enough. That, that helps. Last question for me. Just on the debt side, so, are there also any, any progress on the land sales, or is this debt reduction just, coming from the operating cash flows?
Right. So, you know, we have now, as on, H1, we have collected close to INR 40 crore of cash, which is essentially the advance which is coming out of, land. And we have maintained that we should get about INR 100 crore, which, which should basically contribute in our overall long-term debt repayment in this year. We think we are broadly on track.
So that's INR 100 crore by the end of this year, is it?
Yes. The INR 40 crore we have got, another INR 60 crore we expect. So on a full year basis, we expect INR 100 crore to coming from the land sale.
Okay.
Out of the total expected INR 800 crore. So INR 200 crore will be from the operating cash flow and INR 100 crore from the land sale.
Okay. That, that's it for me. Thank you so much.
Sure. Thank you.
Thank you very much, sir. A reminder to all the participants, anyone who wishes to ask a question may press star and one on their touchtone phone. We take the next question from the line of Prerna Jhunjhunwala, Elara Capital. Please go ahead.
Thank you, for the opportunity. The performance has largely been, you know, great in terms of margins is what. How I read it, but I would like to understand, what helped you to achieve, better than, you know, better performance on the margins front in this quarter, because, the demand was weak and costs were high. So could you just explain how you managed, a 9.5% kind of margins in this quarter? Whether it was, purchase of 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.
Sure. So, first on quarter two results, you know, by design, a large part of our revenue is sort of, you know, part of an order book which is frozen in advance. So we do have visibility of, you know, 1-3 months forward, which is how we indicated in the last call, that quarter two will be a bit muted, which is what we have largely delivered. What we also see, going into, you know, quarter three, is, looking at our order book, we expect the performance to be, you know, at a similar level, slightly muted from these levels, given the uncertainty, deferment of a number of orders we see, for example, some orders from quarter two out to quarter three.
We will have to wait and see if our customers are actually taking those volumes which we forecast right now in quarter three. But balancing all of that, we do expect, while the external in, you know, factors remain uncertain, given that we have better price realization also supported by currency, we would largely have similar quarter going into quarter three, which is what we see right now.
Okay. Are customers revising your existing orders, based on the input price correction, or this will only happen in the new orders?
We think there is a larger play from demand side, as Amir explained in his opening remarks. The US part of market, which is fairly large for us, all large, you know, brands and retailers are sort of, you know, in the phase of reducing inventory, inventory which has been built up for 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, which is, you know, which would keep quarter three flat. Other one is this energy crisis in Europe and the 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.
Okay. I have a question on garments. So in the garments business, we were quite confident that, you know, our Q2 will is not seeing any major pressure, but our volume suggests, that, you know, we witness pressure in the garments business also. Although you've highlighted that there were pressure in the key markets, could you give some sense if there was, how was the profitability in the garments business? And, should we expect similar volumes in the garments business also?
So, so let me address the profit part, and maybe Amir can come in on, on volume. Profitability, if you look at H1, we have delivered about, 9% EBITDA, I mean, 9-10, which is low single digit. We expect that to improve, going forward also in future quarters. As far as volume is concerned, the volume is really a result of deferment of, orders. It's, it's largely tied to what we told you about the US market still adjusting their inventory, looking at a not so strong demand outlook. And, and most of the key customers, if you see their commentaries also going forward, they're all revising it down. One quarter back, they were all lot less optimistic, but all the disclosures in, September timeframe talk about revising it down.
It's a result of that, that they have deferred a bunch of orders. On the supply side and capacity side, we've shared in the past that we are shifting part of our capacity from Ethiopia, which is also working for us as well. But it's largely customer deferment, a combination of, you know, inventory equalization as well as, partly Europe situation, which we think will start to normalize as we go into quarter four.
Okay. 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 quarter, you know, receivables, or we can see any further provision on that front again?
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. The nature of these projects is that they were installed as Common Effluent Treatment Plant in industrial parks. Ethiopian government has been, for the last five, six years, pursuing a strategy of economic development, based light industries like textiles, pharmaceutical, light electricals, and so on. They have established multiple industrial development parks, where they invite tenants from across the world to set up factories. In four of such parks, our effluent treatment solutions were chosen as the CETP solution, Common Effluent Treatment Plant solution. We will install those, and in some cases, we also have the contract to operate those.
Now, the expectation was that as these parks get populated with tenants and their monthly fees of the tenants will pay off all the investments and the other favors, which were offered by the government. Because this whole plan sort of fell apart with this whole civil war and law and order and political situation, that whole chain of expected events did not play out the way it was designed to be. And hence, we have got into this situation, and we expect that actually things are resolving there and some of this money might come. But as 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 justify a greater actual loss.
So we can see right back? Okay, so we can see right back also going forward from this amount.
Yes.
Okay. Thank you, and all the best, sir.
Thank you very much. A reminder to all the participants, anyone who wishes to ask a question may press star and one on their touchtone phone. We take the next question from the line of Mr. Tarun Pahwa from OneUp Financial. Go ahead, sir.
Yeah, hi, Samir, and 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 pretty surprised to see a decline in volumes. So if you can explain that, and going forward, how to think of denim volumes for Q3 and Q4, where Q3 will be similar, about 13-14 million pieces? I mean, 13-14 million meters or do you think that worse is over for denim?
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 this 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 slowing down the order intake, but we will have to wait and see, although this is not very large, as large as Europe or US, 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, you know, Levi's and Pepe nor mass market. What cotton prices have done is taken their basically USP away, in the sense that the differentiation is less, while these brands' ability to take, you know, price hike to maintain their margin has come down because of the input cost going up. That's where we see a volume shrinkage. And, you know, as cotton has started to normalize, although it is still very volatile, we do expect that this should correct itself in, you know, next one, one and a half quarters, and this would follow how cotton normalizes.
So in terms of volumes, quarterly volumes in denim, can we expect a pick up now going forward, or you still think that-
So as I said, you know, we see large reasons. European energy crisis, we will have to wait and see. We do expect some positive uptick in U.S markets, going into quarter four. And the domestic, while we are, you know, we have shown that we can 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 levels. We are hopeful that, you know, in next 1, 1.5, 2 months, cotton should normalize. And once that happens, then we should see that improvement as well.
Okay, got it. My second question is on the, just, this is, you mentioned that on garments, your profitability was 9%-10% in H1. Did I hear it correctly? Just a question that Prerna asked on the garment side. Did you mention that the profitability for H1 was 9%-10%, and we expect the profitability to improve from its H2 onwards?
Right. So, you know, what I, what I referred, was actually, textiles. Garmenting are, you know, at, you know, low double digits, right now, which we expect to inch up as our, you know, factories are better loaded. As our factories are loaded and, as volume picks up, we do expect this to go closer, to double digits.
We expect the margins to go to double digits in H2 then?
That's correct.
Fair enough. And how should we think of overall volumes for garments for the year? So I think H1, we have been seeing some growth in terms of garmenting volumes. We will still be growing for FY 2023, or?
So, so in value terms, we believe we will have a growth. Volume as the single largest reason is replacement of orders, which we also see continuing into Q3. We will have to see. We, we believe quarter four onwards, the volume should start to get better, and that's how we see right now. Samir, you want to add something?
Yeah, I think on the full year basis, we should be broadly in the same zone as last year. Because of all of what we are going through, I don't expect any significant change in our full year number.
Fair enough. My last question would be on the CapEx. So we have done about INR 100 crore CapEx in H1. What should be the CapEx number for H2, and have you finalized any plans for the PLI scheme for garments as well as for advanced materials division yet?
Right. So, on a full year, we expect to be between INR 150 crore-INR 180 crore range. That's our current visibility for this year. On DLI, we have, you know, taken all initial preparatory steps, including, you know, the process of formation of company. But we are still internally sort of finalizing our capital allocation also given that, you know, 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 then, of course, when DLI 2 comes, we will we will definitely apply for it.
Okay, got it. Thanks. Thanks a lot. That's it from my side.
Thank you very much, sir. We take the next question from the line of Mr. Amit Kumar from the Mirae Investments. Please go ahead, sir.
Yeah, thank you so much. Yeah, my question was, it was answered, so that's it at my end. Thank you so much.
Thank you, sir. Ladies and gentlemen, that was the last question for the day. I now hand the conference over to Mr. Sunil for closing comments. Thank you, over to you, sir.
Sure. Thank you all very much for joining us today. We'll meet you in one more quarter. Thank you. Bye now. Thank you.
Thank you. On behalf of Arvind Limited, I conclude this conference call. Thank you for joining us, and you may now disconnect your lines.