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May 16, 2013, 02.10 PM IST | Source: CNBC-TV18

Backward integration to boost EBITDA margin: Welspun India

Welspun India hopes to improve operating margins going ahead as the company has plans to spend Rs 1000 crore on backward integration.

Textile company Welspun India hopes to improve operating margins going forward aided by backward integration and change in procurement strategy despite lower revenue growth, Akhil Jindal, Director of Welspun Group told CNBC-TV18 today

The home textile maker, which gets nearly 70 percent of its business from US, plans to spend Rs 1000 crore on backward integration. The company will put up 170,000 spindles and will also have more looms.

“On overall basis 75 percent of our internal requirement would be met in-house instead of 40 percent odd because today we are buying 60 percent material from outside,” Jindal claimed. In FY13, the company reported earnings before interest tax depreciation and amortization (EBITDA) margin of 17.7 percent. 

However, Welspun India sees its revenue growing at a slower pace around 10 percent in current financial year as compared to 13 percent in 2012-13.

“Margin is what we care for. We are already one of the largest company in US. So, I do not see tremendous revenue growth going forward but our efforts would be to continue to improve the margins here,” Jindal said.

The company today reported 26.6 percent on year increase in consolidated net profit at Rs 63.2 crore, but its consolidated net sales were slightly down by 4.7 percent on year to Rs 665 crore. Discounting the lower sales in fourth quarter Jindal said it was a one-off quarter and stressed that the annual results reflected true business position of the company. For the full year 2012-13. Welspun India reported 13 percent rise in revenue at Rs 3,647 crore and a profit of Rs 224.8 crore as against a loss of Rs 13.4 crores.

Below is the verbatim transcript of the interview

Q: To start with Q4, the sales have been flat at 665 crore, any reason why or is this a one-off. How will FY14 pan out? Is there a demand problem?

A: If I take the entire annual numbers; our annual number sales are up 13 percent, our EBITDA has grown up by 56 percent and the cash PAT has gone up by 139 percent. Therefore, one-off quarter does not indicate our annual performance.

Q: Why would it have been lower? Is there demand issue because all companies complain of a lack of demand. We see it in the two-wheeler, in the four-wheeler space. Is there a demand resistance and therefore will FY14 first two quarters at least continue to be flat on sales?

A: Unlike other companies that you mentioned, ours is very export oriented business. Our total export is 90-95 percent and domestic is only 5-7 percent. Largely to the US market. In US we have around 70 percent of our business.

We have changed our business model from promotional business to replenishment model and it means that there is a sustainable demand that will be there throughout the year rather than a one-off demand. So, there has been some destocking that has happened at retailers’ end because at different point of time they have different inventory management scheme but otherwise we have done remarkably well in this year, our bottomline has improved many-many folds and that is the silver line. Therefore, all the tough decisions that we took in the previous years are now resulting into creating shareholders’ value going forward.

Q: Your higher profit in the Q4 is also because you saw a tax reversal of Rs 20 crore. If you took away the tax reversal then your profit will be lower quarter on quarter. It will be Rs 43 crore instead of Rs 63 crore?

A: There is a direct sales impact because there has been lesser sale in the Q4. However if one sees the entire year’s number; again I am pushing for the entire year number because that reflects the business position. Our cash PAT is up by 140 percent. It means that all the restructuring, all the business reorganisation that we did in the previous year are now proving to be the right strategy and going forward the growth is going to come from there.

Q: It does not take away from the fact that the margins for Q4 however been extremely weak at around 3-3.5 percent odd. What is a sustainable range for the margins on year on year basis? What led to this crash and what is the trajectory?

A: On margin front we have overall done around 17.7 percent EBITDA margin. After three-four years of consolidation we have announced our new capex plan of Rs 1,000 crore. This capex plan will mean that we will be putting up more looms, more spindles. We are going to put almost 170,000 spindles. So, whatever cost element was there, we are trying to have better control on that and whatever material we are buying from outside and kind of margin leaving with them, will also now be captured by the company. So, on overall basis 75 percent of our internal requirement would be met in-house instead of 40 percent odd because today we are buying 60 percent material from outside. So, we are open to those wide fluctuations that happen at the market place. Therefore, going forward within a year’s time we will have 75 percent of the sourcing from internal sources.

Also read: Arrow Textiles standalone Mar '13 sales at Rs 11.08 crore

Q: You will have to raise any loan or equity for this Rs 1,000 crore?

A: It is financially closed. Indian banks and institutions have funded the entire project.

I must tell you about the Gujarat policy because Gujarat has come up with wonderful scheme because textile is one of the labour intensive industry so they have given a good boost to this industry. Therefore, beside the textile up gradation fund (TUF) there is a Gujarat benefit also, which is another 6-7 percent. So it means that cost of funding has become 2 percent for us and that promotes lot of investment and this is a much needed investment for us.

Q: Has all your capex and restructuring being completed or is there more additional restructuring and capex?

A: There was no loan restructuring. It was business reorganisation so we have merged two companies, which were listed. So, rather than keeping two listed companies which has similar business model, we merged them together to make one listed company. That was the business reorganisation that we did. So, there has been a lot of consolidation effect that has come. All the loans have been raised with IDBI as the lead and four-five nationalized banks. Therefore, entire Rs 700 crore odd, which was needed for loan purpose, is already raised.

Q: What you expect will be the revenue increase in FY14 and what may you do by way of margins?

A: More than the revenue increase I am more excited by the margin growth because a lot of backward integration is happening within the company and that will not only make our business more sustainable but it would make us more profitable going forward.

Also, to mention that our customer recognition has improved dramatically just in last six-eight months, we have got one of the best awards from our customers like the Macy 5 Star Award, also the Sustainability Award and CSR awards.

Q: What might your revenue growth be?

A: I would say around 10 percent levels, but the EBITDA growth could be much higher because there is a backward integration that is happening. Margin is what we care for. We are already one of the largest company in US. So, I do not see tremendous revenue growth going forward but our efforts would be to continue to improve the margins here.

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