Welspun issue spillover not a concern for Indo Count, says ED

Latha: What is your sense when such big development happens? Are you preparing for some such questioning by the buyers?

Lalpuria: It is a routine for us because we outsource the raw material and we have a robust system in place and we buy from recognised supplier all the time as well as we periodically review the situation all the time, both the parties; the buyer as well as us, we periodically review all the qualities and everything and we continuously sell them. It is not like a promotion which we are selling there. It is all replenishment and the program goes for years and years. So, it is a routine for us. Normally we are well prepared for that.

Latha: You say you outsource the raw material. So is it possible that you have bought on the assumption that it is Egyptian cotton but the supplier has supplied a different brand?

Lalpuria: No, it is all tracked. These are involving big companies, reputable companies for last 50 years and they have to do business, they have been exporting Egyptian yarn out of India to all the countries worldwide, except that now the manufacturing has shifted to India rather than it has discontinued over there. So, they have started selling in India. So, that proves the mettle because India is the largest yarn exporter as of date; it supplies all kinds of yarn to the market place like Egyptian, Supima and everything all branded cotton. India is known for long staple cotton. India is very well-known for cotton worldwide; it has got a very good respect in the world market. So, we have proved ourselves for the last 50 years. So, you cannot doubt today that something will go wrong, they won't supply; if they have paid the right money why they won't supply.

Anuj: The issue here is do companies now need to spend a bit more, maybe say in quality control. Would this be a bit of a lesson in terms of as Latha was pointing out maybe the outsourcing, you might believe in them but maybe you need to spend some money in terms of some quality control?

Lalpuria: I don't think so, because as I mentioned the systems and checks are in places while buying and also I would like to stress one thing, when you buy such products there is an aesthetic value which is attached to it, from normal cotton to an Egyptian cotton. So, you can recognise the fact out of the finished product. It is seen, it is on the feel of it.

Latha: There was one guess by experts or analysts that Egypt went through a lot of turmoil. So, did your raw material sources have perforce to buy cotton elsewhere? Was that the reason, could that have been a reason?

Lalpuria: Egypt, as far as I know, has been producing this cotton for a long. However, sometimes there are crop issues in the countries but as we all know Egypt doesn't consume their own Egyptian cotton; major cotton is being exported worldwide. Now, where does this cotton goes, is the countries where there is fine count spinning.

Latha: In your experience in the last three year there was no problem of getting cotton out of Egypt?

Lalpuria: No, even today we get cotton to all extent and India is a big buyer because India has got an established spinning segment. India has got 50 million spindles to convert yarn.

Anuj: This does not put other companies at risk in terms of reputation and in terms of some other large clients, also in terms of cost benefit. Are there some other companies coming up with better products at a better pricing, could that also be one reason?

Lalpuria: It is not logical to think like other companies would be affected by this and there is no cost involved into sourcing. We have been sourcing this normally from day one and we have been exporting yarn also worldwide. So, there is no such issue of us getting affected or the other companies getting affected.

Sonia: Let us talk about your own numbers then because your own revenue growth has also slowed down. The expectation was double digits but it has slowed down to 7 percent. Is this a new normal and should we expect single digit growth over the next few quarters?

Lalpuria: Basically traditionally if you look at the first quarter everywhere in exports it is generally slow. Last year our quarter was better because we ventured into a new category called 'Back to School and Back to Campus' because we saw that we were slow in the first quarter. So, we ventured into a new category, developed it and sold it. Now the whole effort was to maintain and sustain that quarter because we entered into new customer, new category. So, we were eyeing to maintain and sustain this. And if you look at the first quarter, 8 percent or 7 percent, we are fairly to the expectation what we have been predicting.

Anuj: Are you saying that, for example 2015 to 2016 you had from Rs 1,680 crore to 2,000 crore. From 2016 to 2017, for the full year even if we were to give you benefit of doubt for Q1, what kind of revenue rate do you think you will be able to deliver?

Lalpuria: We should be anywhere between 12-15 percent for the larger base because the base has increased and we have entered into fashion bedding, utility and all of them, new categories we have gone into the premium segment into developing a brand portfolio, about three new license brand which we have launched recently and all those efforts are now gone into those areas where we need to develop and see how we can further generate more revenues and more margins for us because we have established the business, we have established the fundamentals of the business. So, now we are vying for better business in the future, selling better product mix to better customers.

Sonia: Any new customers that you have got into your kitty apart from the usual Wal-Mart, Target?

Lalpuria: Yes, every year we add up. We do add up new customers.

Latha: Is there any capital expenditure (capex) plan?

Lalpuria: Capex, we had already discussed in our last information which we floated. There are two phases. Phase one, which is for Rs 175 crore out of which Rs 110 crore is already spent that is inline and we will complete that expansion in our processing from 68 million metres to 90 million metres by this year end and the second is a Greenfield project of Rs 300 crore which we will add up for which we have a board approvals. We are short listing lands in Maharashtra state only and we will do it on time. So, by March 2018 probably we would come up with that project.

Latha: Your long-term debt has gone down considerably. Will it fall further or will it see it rising because you will be borrowing for the new plant?

Lalpuria: What our idea was when we came out of the corporate debt restructuring (CDR) was to become a debt free company and we are going into that area only. So, our long-term debt is just Rs 45 crore. We have a cash equivalent of Rs 30-32 crore in the books and we have a short term debt of almost like Rs 230-240 crore odd. So, the net debt is only Rs 230 crore. What we are doing is we are ploughing our internal accruals into the working capital, making the company financially strong. For that reason we are credit rated A for the long-term and A1 for short-term. So, we hope to improve the financial stability of the company.

Yes, of course to answer your question we have to add some capex for the growth but whatever we will be adding up Rs 475 crore we expect revenue of Rs 900 crore from that. So, if you look at a split between Rs 475 crore; Rs 225 crore will be the capex and Rs 250 will be ploughing the internal accruals. So, we will increase by Rs 225 crore but that is available at 2 percent because of the Maharashtra state subsidy and the central. So, we are happy to draw that fund and finance the business.

Sonia: You track many of these companies. The worry is that more Indian companies could go through a scrutiny now because of the issues that Welspun has faced. Would you be concerned?

Raina: No, not at all because just one company is in front of this radar. I don't think we should be saying that it should be happening to the others too. However, if you talk about home textile, there are largely three players; one is Trident, second is Welspun and third is Indo Count. And if you just look at the numbers for this quarter, Welspun actually grew by 15 percent. Indo Count was 8 percent and only Trident actually this quarter did very well and I don't think so we should worry about what fiasco has happened to other companies at all.

Latha: You must have heard the Indo Count management. The numbers we were told were below the street expectation of double digits, 10-12 and they turned in 7 percent. Does it worry you or did the management speak enthuse you?

Raina: Frankly my expectation was also 11-12 odd percent and of course higher on the margin side because we believe the margin would have improved and they have done that. Now for the year they will be at 15 odd percent. My earlier expectation was closer to 18 odd percent. So, not to worry at all, but on the margin side or the profit after tax (PAT) side the growth will be 18-19 percent odd. So, given the valuations and 18 percent growth the stock is very good at these levels.

Anuj: Are you tempted to take a punt on Welspun India as well after the 40-50 percent decline?

Raina: No, not at all. I don't think so because I don't know what has happened there, how big it can be. So, as a prudent investor I will not try to get into that.

I have a better option right now, Indo Count which has corrected and if you see both the stocks, Welspun had done very well in the last six-eight months and has corrected 40 percent till now. But Indo Count actually if you see Rs 1,200 was the top. So, at Rs 1,000 it is just there. So, you know it is performing. So, after that also there is 20-25 percent odd correction. So, for me to buy Indo Count becomes very lucrative and given the fact that it is jut closer to 10 price-to-earnings ratio (PE) FY17 based on the revised number also. So, I will go for Indo Count.

Anuj: What about Trident? Do you have coverage on that as well?

Raina: No, I don't have coverage on Trident.