Welspun Living Limited analyst Q&A

The first question is from the line of Prerna Jhunjhunwala from Elara Capital.

Just wanted to understand the demand scenario in the U.S. for home textiles, largely as consumer sentiment there continues to remain a little weak post December sales. So please give some color on how home textiles and other market went? And what is the figure that you're getting for next 1 year's demand scenario?

So I think I can just tell you about the global scenario. Global scenario - it's a mixed bag. There are certain times when there are seasons where you have the annual events or seasonal offsites, they will have -- there will be a peak. But having said that, United States still remains at a bright spot. It will come back. It is definitely going to come back. Middle East has its great opportunity as well. So I think overall, and I think I must tell you that having sa id that what the markets are, but I think India stands a great chance and opportunity to be a centerfold of supply chain globally for all the countries. And you have seen even the OTEXA data and even seen in the Welspun numbers that we've seen that despite the market, India, not only India, but Welspun has grown in the terms of exports from India. So just to sum it up, Prerna, while the markets can look the way it is, the consumption will continue in the United States being the largest economy of consumption for home textiles. U.K., Europe are subdued, but the Middle East and rest of the world are going to take that share in the terms of consumption, and India will be the centerfold of the exports and the supply chain for the world.

Okay. Understood, ma'am. My second question is, how should we look at gross margins in current scenario of declining cotton prices. Cotton prices continue to remain weak, so how is it likely to impact your profitability going forward?

As you know, cotton prices have been slightly coming down from INR56 to INR52 to INR53. So we have been continuously buying. We have about 5 to 6 months of stock with us. And hence, on a consolidated basis, we should be looking at about INR54,000 to a cotton. So we should see 1% to 2% benefit from this coming in the ensuing quarters.

Yes, you can continue then I'll ask again one last question.

Yes. So 1% to 2% margin gains, we can see in t he ensuing quarters due to cotton based on the current prices of cotton.

And overarching, if I look at the numbers, I think you're asking about the EBITDA and the subdued EBITDA, right, Prerna? That was your question.

No, I asked for gross margins only for how cotton can improve or what will be the impact of lower cotton prices on our gross margin. Last question is on -- you mentioned about there was a mix impact in our numbers this quarter. Is it going to continue going forward or it was a one - off?

It was a matter of one program that we did in this quarter actually, Prerna. So that mix impact has gone. However, there were these macro impacts that have been playing, the Red Sea and the others, and hence, tha t has also impacted our EBITDA. So having said that, our path towards our commitment towards a 10% growth on the top line remains. And a little deviation on the bottom line is there, but it's just a small deviation.

The next question is from the line of Yash Darak from RSPN Ventures Private Limited.

So yes, I do appreciate the fact that we are closer to meeting our yearly guidance of 10% to 12% revenue. If you could still shed some light on what led to a dip in the revenue in the Dece mber quarter?

So as we said in our opening remarks, so while export continued to grow, it grew at about 6%, maybe slightly 1% or 2% lower than what we had anticipated. However, the other businesses of Flooring and Advanced Textile were impacted due to the Red Sea issue, which led to increased rate of freight due to which the buying dispatch decisions were postponed by many buyers. And hence, we saw that reduction or we saw some dip in those businesses. However, as we go along, we have seen th at the Red Sea issue is setting itself right and also the cost, the freight costs have come down, which will ensure that we will do these dispatches in quarter 4 and the ensuing quarters.

Okay. And as far as the interest rates are concerned, I think the interest cost has increased despite the gross debt going down. If you could just give some color.

Yes. So during the quarter, we had to keep some stocks because of the delays in dispatches, which we were seeing due to Red Sea issues and the freight rates. And hence, during the quarter, we had to hold stocks, which we were able to sell to a large extent by the CN, but that led to a slightly higher interest cost during the quarter. However, the working capital is coming down, and you will see remission in that as well from quarter 4.

Okay. And there was a INR341 crores CapEx which was supposed to be completed by Q3. Has it been completed? Or when do we see it being completed?

It is on the verge of completion, so we should see that happening by this quarter.

Just a few questions more. Could you guide on the effective tax rate for the year? And do we see any benefit accruing to us due to tariffs being implemented on China by the U.S., if you could comment on that?

The first question on tax, our average tax rate is about 25% to 26%, effective tax rate.

For the year?

Yes, for the year.

And for the tariffs to your question, let me say that I think India has anyway become a part of the supply chain globally, so that's the opportunity India continues to enjoy and will, in the future, also continue to do so from the terms of traceability of the cotton and also the stable democracy and the integrated supply chains that we have in India. So that will continue here. I think that's what we will maintain as of now.

The next question is from the line of Bhavin Chheda from Enam Holdings.

Sir, I missed on the margin guidance, w hat you gave of FY '25, you're maintaining sales guidance. What is the revised EBITDA guidance for fiscal '25?

So we gave in our opening remarks that due to some onetime costs that we had to incur in quarter 2, quarter 3, we are revising it to about 14% for the entire year.

Okay. And yes, I heard that you said that there was contribution margin impact of 1%, ocean freight of 40 bps and rupee depreciation of 30 bps. So that -- you also said that this will last for 1 or 2 quarters more only?

Only for U.S. dollar impact, because we have covered 60% to 65% dollar for next 1 year. And because we are out of the money at the current U.S. dollar rate, so it's just an accounting impact. There is no cash impact. So because of the hedge accounting.

About 60% to 65%. So we are covered about 60% right now.

You're covered for 60% of the 12-month rolling sales for next year. And at what rate, sir?

So I mean -- yes, we cover it at various points of time. So that rate, we cannot disclose, but we are currently out of the money.

Okay. So -- and that is accounted before the EBITDA line?

Yes, that's accounted before the EBITDA line. And that's only an accounting entry, not cash. If in the next quarter, we realize better, then that loss goes away. But setting itself right, it will take about 1 quarter or 4, 5 months.

You said 2 quarters, basically. Then obviously, the forward rates will keep continuing higher. So that is -- that depreciation impact was 30 bps in the EBITDA margin, which possibly may continue for next 2 quarters. The other 2, you're saying ocean freight has largely reversed now, so that impact would start getting diluted from next quarter onwards, right?

Correct. So in quarter 2, we saw about 1% impact because of this. In quarter 3, we saw 0.4% for freight. Now we don't foresee anything -- any impact on freight. Dollar, 0 .6%, we saw, but the impact of it will taper down and will become close to 0 in about 4 to 5 months. And the 1% impact for the COGS because of mix will also not be there.

On the operational side, if I see even bath linen sales on a Y-o-Y basis declined in volume terms by almost 6% to 7%, whereas your bed linen actually showed a very good growth. So was there any base effect issue or a specific client issue where -- actually the U.S. bed linen has picked up in quarter, but the bath linen has not picked up. So anything specific here? Or was it just a general inventory or a program-related issue, which had such diverse figures in 2 product segments of home textile?

I think in America, if I look at the bath, the bath has actually degrown in America according to the OTEXA data, but we have seen a growth of 2%

In just stocking, yes.

So it is just a stocking issue, and which will actually be corrected in this quarter. It has already picked up.

So our production was slightly lower. We had stocks already there, so we sold. So we saw growth both in towel and bed sheet. Of course, towel was slightly lower, bed sheet was slightly lower, but we saw growth both in that in the sales.

Bed sheet has actually grown for us in 15%. Towel has been flattish, but that is a matter of a quarter.

Correct.

Yes. Because it's a matter of goods in transit and also the matter of warehouse inventory also. So there's a whole lot of mix there.

And bed linen growth was much, much higher than the bath linen growth.

Yes. Yes. Absolutely.

Okay. And post December, you think this has normalized now and both will move in tandem going forward? So this was a stock-related client-related issue, but this would now largely -- if that is sorted out by December or a calendar year -end in U.S., this wi ll normalize from next quarter?

Correct. So quarter 4 -- so we -- whatever stock we had, many of which we sold off, hence, you are seeing also a reduction in our total stock as compared to September and December. So more or less, it's in order. However, if we sell more out of stock, then probably we also see again more sales.

Last question on the Flooring business run rate, which declined after many quarters. So you mentioned Red Sea issues in that. So is that l argely sorted out and this will go -- move back to INR250 crores, INR260 crores type of a quarterly run rate with improved margins? Or this should also take time to normalize? Because we have -- because obviously, we are also maintaining a INR15,000 crore top line run rate for reaching by FY '27, and Flooring has to play a very big role there, almost like if I'm saying I figure like incremental INR1,000 crores to INR1,200 crores. So what confidence are you getting on the Floorings to get back to normalized run rate and in fact, a double-digit growth rate in the Floorings business?

So I think Red Sea actually has played a very big role in the terms of being a deterrent in the terms of our Flooring business globally. However, I must tell you that the carpet tiles grew by double digit. It is basically the hard flooring which actually degrew. And we are going to actually -- it will get mobilized by, I think, quarter 4 end, and next year looks as a steady run rate.

We continue to grow at 20% to 25% next year onwards, so we should see closer to our number of financial year '27.

The next question is from the line of Pratik Tholiya from Systematix.

Just wanted to understand the reason for the sharp increase in your finance cost in this quarter.

So Pratik, as I was mentioning earlier, so we had to hold larger stock during the quarter. If you see our quarter 2 end stock was quite high, and we are building for the festive business, so some of which trickled into quarter 3, and quarter 3, we will continue to face the Red Sea challenge and higher freight rate. So the dispatches are getting pushed, so we had to hold larger stock and hence, investment in working capital. So we saw a slightly higher interest cost. If you also see from last year to this year, our interest cost per se has also gone up by about 1% because of the increase in interest costs. So these are the main reasons why interest cost. But as we have pared down our working capital, you should see a reduction in this cost as well from quarter 4 and more so from quart er 1 on.

So what is the average cost of debt?

It's about 7%.

Which you were saying earlier was 6%.

Earlier was 6%, correct.

And sir, you are expecting your 9 -month balance sheet al so, your gross debt to be around INR2,800 crores. So how do you see this number by the end of this financial year?

So we have guided towards a 10% to 12% growth for the whole year, and so we are standing on that behind that. So we should reach that number.

No, I'm asking the gross debt number.

Okay. Gross debt. So gross debt -- so we talk about net debt, net debt, we are at INR1,650 crores. Yes, so gross debt is about INR2,800 crores. So while for quarter 4 end, w e should reach a net debt of about INR1,400 crores to INR1,500 crores. That means a reduction of about INR200 crores in financial year '25. Financial year '26, we should be at INR1,000 crores; financial year '27, about INR400 crores, INR500 crores; financial year '28, 0.

The next question is from the line of Prerna Jhunjhunwala: from Elara Capital.

Just wanted to understand the volume growth number for the quarter and how average realizations have moved for this quarter and 9 months?

So we actually don't give out those numbers. So overall growth is 3%. And we have -- in some quarters, we have volume growth, some quarters, we have price growth. But...

But -- and we maintain our numbers here, Prerna. Our numbers growth that we have discussed, I mean, the 10% growth annually, we are on that track, Prerna.

The next question is from the line of Monish Ghodke from HDFC Mutual Funds.

Just wanted to ask about pillow business. So wh at was the revenue from this business in Q3, if you can share?

Okay. And when you say the effective capacity, I mean, it's 4.7 million pieces and install is 13.5 million. So how much time will be required to ramp up this from 4.7 million to 13.5 million?

It will take about 2 years. So this is based on the machine capacity and then 1 shift, 2 shifts, so it will take about 2 years to reach the full capacity.

And do we have to do any capex to increase this capacity?

No, no, no. Just people.

It is a matter of kind of productivity because it is automated.

And could you just give a broad idea as to what would be the realization per piece in case o f pillow?

As of now, we will not be giving out that. But...

But there's one thing, Manish. We will play in better and best category here. We want to -- we are not going to go into the deep down dirty good, like a cheap category, but we are going to talk about better and best. That's what we are working on.

The next question is from the line of Resham Jain from DSP Asset Managers.

Resham Jain here. So I have just one question on the cotton. Since t his year is a unique year where a lot of cotton has been bought by CCI, and typically, we have seen that in the past, CCI has resorted to selling cotton even below the price and incurred huge losses. And you are currently having a good amount of cotton with you, as you mentioned in your remarks. So what are -- how are you thinking about the overall cotton dynamics playing out this year given the kind of unique situation of cotton being bought by CCI?

So there are around 18 lakh bales in the market, and they have taken on -- around 185 lakh bales that are there in the total arrival, they have taken around 85 lakhs. And today, if I look at it, the average cost is around INR53,000, INR54,000 per bale. And I think the opportunity right now, which I see as India and the others, is that globally, the Brazil and the other countries are the countries from where our peers are outsourcing their cotton. We have an import duty from outside into India. So hence, I think we'll be consuming our cotton internally. So overarchingly, our cotton cost will be around INR55,000.

So to carry it forward, you talked about MSP in CCI. So yes, CCI is buying, MSP is much more than INR53,000, INR54,000. So when M SI sells it, depending on the seed prices, we may see cotton going up to maybe INR56,000 as well. However, everything depends on at what seed prices are. If seed prices are higher, the cotton cost will be lower, if seed is lower, then yes. So it could be -- but we are seeing only a INR2,000 to INR3,000.

No. So we have to pay duty. In some cases, we may get a remission if we export out of it, but that's a long drawn affair. And we don't get into it because getting the remission takes time, a lot of time.

So you don't use advanced licensing for importing cotton.

No.

Okay. Understood. And the second question is generally on the demand. How do you see the overall demand shaping up in U.S., given that the festive was not as great as expected? And I presume that there will be some inventory left with some of the retailers, given some of the retailers have already -- were out with numbers. So overall, what is your sense, what kind of order book you are seeing both in bath linen and towels?

So our top line, we are going to maintain what our steady -state top line we're talking about, around 10% growth. And I think that's what it is going to be. One thing is that right now, the inflation impact in America is high, which I think with the new administration coming in, is something that they're going to be working on. And that is going to be something to be seen regarding the housing market and the inflation.

Okay. So for you, the order book is normal. There is no change. Okay. Understood. Can I ask one more?

Sure. Sure.

So the last one is on the branded piece in India, and because it is still in the buildup stage where you are doing a lot of activities, so I presume that the margin in that business will be low. So how is the profitability going to shape up in that business? Because that must be pulling down your overall margins as well.

So I think India is big market that we are definitely investing in. And so it is going to take time, and with if I look at all the global economies, India has got the highest potential of growth. And as we look at it, we are actually focusing on both our brands, Spaces an d Welspun, at a steady- state growth of CAGR of around 25% to 30% and at a breakeven. And that is something is going to be a very important aspect that you will see this year in 2025 as well.

The next question is from the line of Biplab Debbarma from Antique Stock Broking. Biplab Debbarma I have just one question regarding the new regime. I mean, Trump has become President again. So do you see any uncertainty regarding tariff in Home Textile? So do you see any uncertainty? Because we have been hea ring some news that left, right and center is putting some tariff on some products. I'm not an expert in those. But on Home Textile, do you see any uncertainty, any challenges going forward?

So there are 2 things. Actually, this regime is ta lking about balance of trade across the globe. That is the first thing. Secondly, the focus towards inflation in control is going to be a very important focus. Now Biplab, when you talk about India, I think India being having the most important robust supply chain in the terms of cotton, traceability, stable democracy, the vertical integrated plants, we, I think here are stand to gain. And the relationship of India is strong. So we will wait and watch there, Biplab.

As there are no further quest ions from the participants, I now hand the conference over to Ms. Dipali Goenka for closing comments.

So thank you for your time today. The mid- to long-term attractiveness of the business continues to be high as we work with unwavered focus to achieve our current and future objectives of sustainable and profitable growth. Home Textile export business continues to grow in excess of 14%, with positive momentum across U.S., Europe and rest of the world and steady start of our U.S. pillow facil ity. We'll continue to focus on our branded sales with Christy leading our global presence, and Spaces and Welspun in India reinstating our Har Ghar Se, Har Dil Tak Welspun. Our sustainable and responsible practices have made us leading ESG corporates, no t only in India, but globally, and we are well on our way towards achieving our targeted matrices by 2030. Thank you for your continued interest in Welspun Living. For any further queries, please feel free to connect with Salil and Sanjay.

Thank you, everyone.

On behalf of JM Financial, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.