Indo Count Industries' Q4 revenue came in line with estimates but margins were a big miss.
In an interview to CNBC-TV18, Kailash Lalpuria, ED of Indo Count Industries spoke about earnings and outlook going forward.
He said that a mark down in US subsidiary gave a hit to margins.
"The volume growth is good and we are expecting between 62 and 63 million meters. We finished with 56 million meters, so it would be almost 10 percent," said Lalpuria.
Lalpuria said that the company has always maintained 20 percent plus margins. We feel that reasonable margins should be 20 percent going ahead, he added.
Below is the verbatim transcript of the interview.
Anuj: Your overall margins came down to 17.6 percent versus 23.8 percent. What happened in the quarter and was this a one-off or could things stabilise here?
A: It is one-off because the raw material cost has given us a hit and secondly in our US subsidiary we have to mark down one line item, so that also gave us a hit.
Latha: What made you to mark down?
A: There was a strategic product offering which changed with a retailer. So we have to associate with them to mark down it and also currency fluctuations, we have to value the inventory at the end of the year at 64.50 per dollar against 67 per dollar earlier.
So that also brought in a hit. So overall we got 20 crore hit over there and additionally the job work, the commission weaving charges which we show in other expenses, which is below the raw material, that also gave us a hit during the last quarter.
Latha: Why was that?
A: We had hedged till November and December.
Latha: Even that is a currency issue?
A: Yes and now we see that the raw material cost is tapering. Cotton sowing is better and it is coming back to the normal prices. So we feel that it is one-off and it should stabilise because sowing is better, the crop would be better and it is more of a speculative nature.
Latha: Does the currency hit only mean a mark to market loss for you, a hedging loss for you or does it also make you less competitive? Are other countries products taking away a little bit of your market?
A: The impact on the currency appreciation, in our business is because we take currency appreciation as a means of transacting business because we are doing business at even 60-63 per dollar. We hedge forward in plain vanilla six months so we are covered for FY18 and if there is a phenomena which is a macro phenomenon existing even after that, then there is a price revision because we are not one-off in the whole trade.
Sonia: You spoke about there being a change in strategy of one of your clients in the US. What is the outlook from the US market considering you have 70 percent revenues from there? What kind of volume growth are we looking at overall?
A: The market is stable, it is good. It was just one of our product strategy, sometimes we get in association in order to increase for a new product or a new offerings. So there is a mark down and there is either a rollback. So we need to get in along with the customer.
Sonia: What would the volume growth be?
A: The volume growth is good like we would be expecting between 62 and 63 million meters. We have finished with 56 million meter, so it would be almost 10 percent.
Anuj: Getting back to the first question. You said it was a one-off but is your business so vulnerable to raw material price hike. You have absolutely no pricing power because who knows this is one-off. It could then again come back in the future?
A: The raw material cost increased in India because of demonetisation and it is much more speculative in nature. If you look at demand and supply, the supply is there and it is bound to increase because the yield would improve, the hectares are improving as per the sowing information which we are getting. India is sowing 20 percent more.
Anuj: That point is taken but my question is what if because of other reasons in the future there is raw material price increase. In that case is your business so vulnerable to this kind of margin hit that you do not have any pricing power at all?
A: I think our business, with the kind of relationship which we have with the customer which is more product driven than price driven because they do not change for a dollar or two, one. Second, we always go in for price revision, every six months because cotton being a global commodity, everyone, like all peers and we all are concerned about it.
So it is a macro phenomenon rather than micro to us only. Of course we are all vulnerable, we have to plan our material better, we being export driven company we have to monitor the exchange but all these are part of your business process.
Latha: Can you give us what might be your regular margins. Can you be protected at 17-18 percent or can it get worse if the pressures are so?
A: We have always maintained 20 percent plus. If you look at our margin, over a period of time we have been able to maintain and that is how we have been able to upgrade our product offerings as well when we went into fashion, utility, and into brands as well.
So we feel that the reasonable margin should be 20 percent but we all know that there are some reasons like sometimes it does happen, if you look at our consolidated result, had it not been this line item, we would have finished at the same margin.
Sonia: You spoke about a 10 percent volume growth at 63 million meters for FY18, you are putting on new capacity on stream as well, so for FY19 what kind of growth are we looking at once the capacity comes in?
A: Now we have already completed from 68 million meters to 90 million meters and we have finished 56 million meters which is around 85 percent of our old capacity. So, we expect that the same rate of growth.
Latha: Beyond 90 million meters you don’t have a capex planned for FY18?
A: Not at the moment because we always view capacity expansion not only for the sake of building capacity.
Latha: What will be your capacity utilisation of that 90 million meters this year?
A: This year it would be 56. So it is around 70 because you can always consume only around 82-83 out of 90. So, if we are at 56 and next year at 62, we would be like almost 75 percent of our capacity utilisation.
Latha: You have a big cost push because of employees, that is about 28 percent higher, is that a one-off or should we now start factoring in the higher employee cost pro rata?
A: It is like when we are building any business, like the product offerings and we did mention about last time bringing in talent within the company abroad and domestic as well. We have like setup an entire domestic team for our domestic business, then we have appointed all designers, product development team for our fashion bidding, and utility bidding and we have spent a lot on building in people, talent within the organisation to take on the next quantum jump.
So, we have spent on those areas and that is what is reflected like around Rs 10 crore which was additional. This would give us benefit in the longer run.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
