Ladies and gentlemen, good day, and welcome to the conference call for analysts and investors for post results discussion for quarter one financial year 2022-23 Arvind Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sunil Agarwal. Thank you, and over to you, sir.
Thank you. Good afternoon to all of you, and thank you for participating in this call to discuss the first quarter results of Arvind Limited for the financial year FY 2022-23. Joining me today is Mr. Jayesh Shah, Executive Director and Group CFO, Mr. Swayam Saurabh, our CFO of Arvind Limited, and Mr. Kaushal Shah, the Head of Investor Relations. The business environment in the recent months has been quite volatile, with multiple forces at play. In our key export markets, inflation has emerged as a primary concern for the policymakers, and all central bankers are busy with interventions, including interest rate increases. Consumers have also been feeling the pinch of expensive fuel and food, though government support and high appetite have kept the consumer demand strong thus far. Two quarters ago, our key U.S. customers were busy pre-planning their buying to preempt the potential shipping delays.
This had led to an inventory buildup in the supply chain. Now, this trend has been reversed, and with the first signs of consumer demand softening visible, our export customers have started to partially postpone their purchases. In U.K. and Europe as well, inflation is being a matter of serious concern. The prospect of Russia-Ukraine war dragging for long is further adding to a weak consumer sentiment. In domestic market, demand has been good, including through this ongoing EOSS season , and most players are expecting this to continue through upcoming festival season and are hoping for a good Diwali. Commodity prices peaked during this quarter and have finally started to come down. In case of cotton, the decline is quite pronounced, and as we speak, the normal deliveries are quoting at almost 35% discount to whatever peak price few weeks back.
Other raw materials and shipping costs have also started to come down. Anticipating price decline, some of our customers, especially in the trade segment, have started to delay their ordering as far as possible. On the whole, this market environment is quite interesting and complex it's playing out. Coming to the performance update, our first quarter result was best ever Q1 in terms of both revenues as well as net profit since the demerger of Arvind Engineering and Arvind Fashions. Q1 revenues were INR 2,352 crore, 2,352 crore , which were 64% higher than last year's Q1, and 7% higher on a sequential basis compared to Q4 last year. Excluding other income, EBITDA stood at INR 220 crore, which translates into overall operating margin of 9.2%.
Profit after tax was reported at INR 106 crores, excluding discontinuing operations. Our internet business is classified under discontinuing operations, subject to sale of Arvind Internet to Reliance Retail Ventures Limited , for a consideration of INR 152.3 crores, effective thirtieth June 2022. This transaction is expected to close next month. Textile volumes, especially in export markets, were robust during this quarter. Denim sold 20 million meters of fabrics, which was same level as last year's Q1. Woven volumes rose from 23 million meters in Q1 of last year to 32 million meters in this quarter. Price realization in both these segments, denim, woven fabrics , increased by approximately 35% compared to last year's Q1. Garment volumes, excluding essentials, stood at 10 million pieces for the quarter.
Overall, textile revenues were up 60% to INR 1,976 crore, 1,976 crores. AMD started this quarter on a strong note, and its revenues were up 45% to reach INR 279 crore and an EBITDA of INR 32 crore. Demand for AMD products continues to be strong among our customers. However, input RM costs and expensive shipping kept the pressure on AMD margins, which stood at 11.5%. Overall, we expect Q2 to be marginally weaker compared to Q1, given all the volatility in the business environment, and the rest of the year will depend on how the demand is impacted given the inflationary situation in global markets and the commodity prices, which are also quite volatile. At the start of the quarter, the RM prices were high, resulting in higher valuation and temporarily increasing the working capital required.
We expect to correct most of this excess working capital during the quarter and continue our debt repayment program as planned and communicated to you. We continued our trajectory of reducing our long-term debt, and in this quarter, we have repaid INR 56 crores, taking the balance to INR 999.01 crores. Overall net debt stood at INR 1,809.4 crores at the end of the quarter, which was INR 127 crores higher than the March ending quarter. And this was driven by working capital, as I explained. So this concludes my opening remarks, and I now invite you to ask any questions that you may have. Thank you.
Thank you. Ladies and gentlemen, we will now begin with the question and answer session. Anyone wishing to ask a question may please press star and one on your touch-tone telephone. 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. The first question is from the line of Pallav Agarwal from Antique Stock Broking. Please go ahead.
Good afternoon, everyone. Thank you for taking my question. Sir, the first question is regarding the real estate business. I mean, you have a joint agreement, JDA kind of agreement with Arvind SmartSpaces. Just trying to understand. So, is it like you get the share of the revenue and entire cost and everything, responsibility of execution goes to Arvind SmartSpaces, or you get the entire cost and debt in your books, and Arvind SmartSpaces just develop it and get a share of the revenue? Sir, that is my first question.
Right. So this question was asked last quarter as well. Arvind SmartSpaces acts as a developer for us. The land is owned by us, which is basically developed. We get cash directly, the cost is getting booked as project expenses, and later on, once the project is completed, revenue will get recognized. Right now, only cost is what you see in the P&L.
Okay, so it is booked in your P&L cost?
Yes, that's the development cost.
Okay. Okay, fine. That is fine. That's it. My second question is on your net debt. It's a good thing that long-term net debt has gone down, but if you see, for the last seven consecutive quarters, we have seen a consistent reduction in net debt. So this quarter, if I'm not mistaken, the net debt has increased a bit. So just trying to understand what led to this increase in overall net debts?
Right. So net debt has increased by INR 127 crore this quarter, and this is primarily the value of inventories which has gone up. As you know, input prices have continuously been going up. This we expect to largely correct by the time we exit Q2.
Okay. Okay. So, directionally, the net debt reduction would continue. Is that what you are saying, sir?
That's correct. That's correct.
Okay, one final question, sir. Sir, both RM prices, you know, elevated level, and, and you also mentioned about demand, you know, muted demand in your export market. Just trying to understand which is more concerning. I mean, both are, but just from a point of view, what will bring you, you know, more relief in, in, like, more better demand or the, the RM prices going down, sir?
So, you know, both are interrelated. You know, demand is, let's say, getting impacted because of discretionary nature of apparel, at least large part of apparel. RM prices coming down could make it more affordable to buy, but it depends on different segments. They are not really one to one, but, RM prices going down and demand continuing to improve should help outlook for a textile company like ours.
Okay, sir. I will come back in the queue. Thank you.
Thank you. A reminder to the participants, anyone wishing to ask a question, may please press star and one. The next question is from the line of Prerna Jhunjhunwala from Elara Capital. Please go ahead.
Thank you for the opportunity. Sir, I have two questions on the business side. You mentioned that the demand is muted in the near term, but just wanted to understand the relationship between RM and FG prices , going forward, at least for the near term. Whether you know, generally, we say that you know, fabric is, it takes time for fabric prices to correct. So, are the customers really wanting the prices to reduce in line with cotton prices? How are they behaving actually in terms of product pricing, in terms of order booking, whether they are ordering 50% of their general order book or 40 or 80? Just wanted to understand how is the customer behaving in both domestic and export markets to understand the underlying business scenario.
Yeah, sure, Prerna. So, let's kind of talk about domestic and exports, separately. As far as export markets are concerned, like we shared even a couple of quarters back, there was clearly a prepayment of buying, which was happening, because, you know, large customers, especially in the U.S., they had seen significant shipping delays, and some of them had even incurred airfare charges, and they want to avoid that. And hence, in our Q3 and Q4, we saw a slightly preponed, demand, compared with season, which normally buying happens, right? So that played out, and obviously we are aware, we've been aware that the inventories have been slightly higher than what we usually see in the pipeline.
Now, having said that, we are also seeing that, going forward, the consumer sentiment itself is going to become a bit of an unpredictable one, because all the COVID support from the government has come down, and then overall interest rate environment going up, price going up, is making it seem like consumer sentiment is likely to soften, right? So if you put these two together, quite obviously from a demand for our products point of view, there is a degree of uncertainty. So far, we have not seen any major cancellations. So you know our businesses work on really long contracts and lead times. So we have seen some small postponements, but not any major cancellation, right? Now, if you track the results also, the global company results declared until April or May have been reasonably strong.
Now, from this point onwards, how things unfold is something we are also, you know, going to see and will update you as and when things are happening. But so far, like I said, it's a process situation, but nothing which says that things have reversed for us from an export market point of view. In terms of, you know, domestic markets, it has been really good. I mean, the whole domestic markets have done quite well, right through the end of the season period in July. And most participants believe that we should continue to see a good holiday season for us, you know, the festival season coming up as well.
So on the whole, I would say that there is a possibility of things being a bit muted, but from what we see, there is nothing which kind of, you know, concerns us too much.
So then, can we assume that, you know, the sluggishness in the export market should, more or less, be compensated by the domestic market? Because we have, we had, you know, in the past, increased our share of export market volumes in the last one and a half years. So will that rebalance in the near term, is how we should look at?
Yeah, sure. So from quarter to quarter, it does kind of change our export domestic mix. And it will be fair to say that, in the coming days, we'll see stronger, you know, uptake from the domestic customers, and that possibility is there for sure. If I can, if I can add to that. So obviously, the risk which we see on export, the goal will be to try to compensate, and the goal will be via domestic. But it's also the fact that, you know, it's a little bit uncertain, you know, to what extent, let's say, further deferment of orders could happen, how fast the inventories would liquidate. Hence, you know, sort of a conservative view on the fact that orders are likely to be muted. It's a little bit uncertain out there.
I completely understand, on that, and this is really helpful, sir. So just wanted to know, current utilization, is it higher, lower than the numbers reported?
Current utilization of what?
Capacity. Across capacities in denim, woven and garmenting.
So you would have seen already in woven, as well as, garmenting, we are quite, you know, close to the total operating capacity we have. But in denim, we are not fully using capacity because the cotton impact, as you know, as a percentage, highest is in denim fabric. And as the cotton prices start to subside, we would see improvement in denim capacity utilization.
Thank you. So that was quite helpful. I have few bookkeeping questions. I can return back to question to you. Thank you.
Sure.
Thank you. A reminder to the participants, anyone wishing to ask a question, may please press star and one. The next question is from the line of Pallav Agarwal from Antique Stock Broking. Please go ahead.
Sir, just on the cotton, you mentioned that the cotton prices have been now trading at almost 35% discount to the peak prices, which is heartening. So and I think, I think, the cotton output in the next cotton season, hopefully, would be better. Just trying to understand in terms of availability, availability of the cotton, how's the situation? I mean, we have been hearing that many, many of these companies are not buying cotton, so not building an inventory.
Can you give us some idea if people are not buying from—a few are not buying, a few have small pairs of shutdown shop, then how this price level, I mean, 85,000 at candy level , how they are trading? I mean, what is the availability situation? Just trying to understand what's happening in cotton.
Yeah, sure. So, just to be very precise, when I put the word 35%, it's for the November delivery, so it's a forward-looking price. So I'm not saying that currently the cotton is trading at 35% left, right? That's one small precision there. But, to answer your question more broadly, see, what happened is, if you see the global sort of, you know, supply side situation, that's also a little bit more nuanced and complex. So like if you take American cotton, which is one of the big sources, that excess crop has been spoiled by, you know, situation there, available in there, right? So that's one part of supply is impacted there. The Chinese cotton continues to be outlawed, to be used by any of the Western buyers, so that part also is impacted.
The Indian cotton outlook is kind of, you know, yet to be kind of so slightly certain. So yeah, we know only by September, end of October, which way the rains will play and how much of a good harvest we see this season. So on the whole, all the sources of supply which impact our availability and prices are still, in a way, uncertain. And hence it's very difficult to say which way things will go. Yes, from a demand point of view, we do believe that the pressure which was there may not be as steep. So we expect some softening, but at the same time, given all the supply side challenges I talked to you about, we don't expect that the market will crash down completely.
Market prices, we believe, will hold, and of course, it's difficult to say which way.
Okay, okay. Sir, final question on the water business. I mean, what is happening in that water business? Are you getting orders and, how do we going to see as we get it in the next one quarter or so, you know, you would see some profitability or breakeven kind of thing in the water business?
So, water business is going as planned. And we have never, you know, given specific numbers around performance. We have basically talked about the other segments not being a driver of overall EBITDA. And water business is progressing as planned, and it is profitable.
Okay, thank you.
Thank you. A reminder to the participants, anyone wishing to ask a question, may please press star one. The next question is from the line of Riddhesh Gandhi from Discovery Capital. Please go ahead.
Hi, sir. You just had a couple questions. So I mean, just to understand this implication of the cotton price and the spinning spreads being extremely low right now, given the differential in India price and international price, is that expected to impact us in terms of like, actually on the denim side, or I mean, how should we be thinking about this?
If cotton prices start to come down, assuming demand remains constant-
Yeah.
Cotton prices starting to come down and, spinning margins start to get thinner, this will help our costs in denim as well as in woven. So that's, you know-
So if spinning spreads are lower, it helps us, yes, or it helps?
Yes, because we don't have 100% in-house spinning capacity. If spinning spreads, when they were higher, we were paying those charges.
Got it. So how much of our capacity do we use internally for spinning as opposed to purchasing outside yarn?
At textile level, it will be about half, half.
Half, half. So then I'm just assuming that, that, when overall spreads in spinning are higher, it would also be helping the other half where we have our own spinning, right? Because effectively, other people who actually aren't integrated wouldn't be able to profit on.
That's correct. In-house is on cost, but the other half on which, you know, you would pay what market would pay. So if this margin starts to get thinner, this should help.
Got it. So effectively, right now, if you see, from what we understand is that, I mean, spinning spreads are extremely low. So would that sort of imply that this is slightly higher than our normalized rate of profitability?
So of course, I mean, I answered it already. When spinning spreads are low, by design, this would aid, but there are just too many variables to determine ultimate profitability or cotton cost, you know, consumer pricing, customer pricing, and demand.
Good. Okay, got it. So on to the garmenting side of things, what I understand is that obviously people look at the current actually cost of fabric and materials, RM, et cetera, and your pricing is under the model, it's under dynamic. You know, I mean, denim also, is it the cost plus effectively, where your buyers look at, or is it looked at a bit differently?
No, not really. See, we don't sell—we don't do any customer contracts on a cost plus basis. We either sell them fabrics on, for a given variety, on a per meter basis, all we can fully make good. And that output is based on a per unit output sizing. It's got no direct linkage to a cotton price. I mean, it is linked to cotton, but there are other variables in play, the design, you know, the R&D, which goes into it. Yes. Relationships with the customer, correct. There's no one-to-one. There is no cotton price link clause, if you're asking that.
Got it. Got it. Got it. So, the other question was on the garmenting side, how are you guys seeing overall the demand?
Because obviously, on one hand, we're hearing stories about, you know, excess inventory at a retailer end. On the other side, we're hearing that India is, I mean, gaining share as a percentage. So how should we be by looking at, I mean, our order book, our discussions, our ability to pass on increases in prices, et cetera, to our customers?
No, good that you asked. So garmenting in quarter one, we have done well. And, also, you know, we have spoken about it, garmenting and AMD being two growth engine, also accretives from an EBITDA perspective. Yeah. garmenting we have done well, so have on AMD, and, this should continue also going in the future quarters.
Okay. So, so...
And, and the reason we aren't seeing any impact on overall demand is because of us gaining share?
No, no. So, you know, future quarters, demand does make things uncertain. garmenting as a business for us has underperformed, but have last three quarters stepping up quite significantly. And I was just making a point that garmenting has done well in quarter one, in line with what we have guided, and should expect it to continue that trajectory, subject to demand holding well. Is there one more thing to add on what's-
Sorry to interrupt. Mr. Gandhi, may we request that you return to the question queue? There are participants waiting for their turn.
Sure.
Thank you. The next question is from the line of Chinmay Kabra from Emkay Global. Please go ahead.
Yeah. Hi, sir. Am I audible?
Yes.
Sir, I just had one, a couple of questions. The first was that we have witnessed postponement and postponement, like you said, in the orders. So by when do we expect the orders to arrive at the normal flow? Like, any estimated duration or estimated time?
I think the whole inventory correction, correction cycle should kind of play out in the next quarter or so, and we should be kind of past that by the next quarter or in the second. Then after that, obviously, things will depend on the market, no demand and supply, and this whole inventory correction story will be over.
Okay. I just had one more question. I'm not sure if this was asked previously, but just wanted to know if whether we are passing any of the benefit of lower rates, the current lower, rates which have fallen, are we passing on the benefits to the customers for this?
No, not like that. Not yet. Obviously, over time, as the cost structure changes, it's a competitive market, so the pricing would reflect that in the medium term. But there's no direct linkage. Like I said, our price contracts are not linked to input price entirely.
Okay. Thank you, sir.
Thank you. The next question is from the line of Nirmal Shah from Seraphic Management. Please go ahead.
Good evening, sir. I just wanted to understand, what's your exposure for domestic market in denim woven on the fabric side?
What do you mean by exposure?
Means, how big is the domestic market for you in terms of supplies vis-à-vis exports?
The domestic market is about 30% of total... Oh, sorry, about 35% of the denim and woven combined.
Right. So when you expect some sort of a buoyancy in domestic market to compensate for the slowdown in exports, you mean the entire thing can be taken care by the buoyancy in the domestic market? Or you think there'll still be some-
No, we don't know. So, I mean, we do not know how bad exports can get. Right now, there are two situations. One is inventory, which some of our customers are sitting on, and others could be how demand could deteriorate. It's a very evolving situation. We do see that domestic has been very positive so far. We will have to, we'll have to just wait and see how next two months evolve. And of course, our role will be to respond. But it's difficult to put a number to it. It's, you know, what will be the level of impact and if it can be entirely absorbed by domestic market.
Right. But in that case, for your garment business, you would have already started receiving the orders to be supplied for the Christmas and the December quarter, right? So if you can just give us how does it look like, the order book for garments?
No, correct. But you know, at any point in time, we have a forward order book across our businesses. And at this moment, the order book is a little weaker than a normal quarter. Hence, we expect, you know, the future months to be a bit muted.
Right. So can you just quantify or give some range on a YOY basis, how short it is?
No, at this point, we will not be able to quantify. It is very dynamic. It changes every alternate day.
Okay. Thank you.
Thank you. Ladies and gentlemen, that is the last question. I now hand the conference over to Mr. Sunil Agarwal for his closing comments.
Sure. Thank you, everybody, for joining us today. We will meet in one more quarter. Bye now. Thank you.
Thank you. Ladies and gentlemen, on behalf of Arvind Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.