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Edited Transcript of RAYMOND.NSE earnings conference call or presentation 2-Aug-19 10:00am GMT

Q1 2020 Raymond Ltd Earnings Call

Ratnagiri Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Raymond Ltd earnings conference call or presentation Friday, August 2, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bibek Agarwala

* J. Mukund

Raymond Limited - Head of IR

* K Mukund Raj

* Sanjay Behl

Raymond Limited - CEO of Lifestyle Business

* Sanjay Bahl

Raymond Limited - Group CFO

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Conference Call Participants

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* Amit Vora

PCS Securities Ltd., Research Division - Equity Fundamental Analyst

* Zain Iqbal

* Govindlal Gilada

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Presentation

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Unidentified Analyst, [1]

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On behalf of Antique Stock Broking, I would like to welcome all the participants in the earning call of Raymond Limited.

I have with me, Mr. J. Mukund, who is the Head of Investor Relations of Raymond Limited.

Without taking further time, I would like to hand over the call to Mr. Mukund. Over to you, Mukund.

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J. Mukund, Raymond Limited - Head of IR [2]

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Thank you, [Shubham]. Good evening, everyone, and thank you for joining us for Q1 FY '20 Earnings Conference Call. I hope all of you would have received the copy of our results presentation. I would kindly urge you to go through this along with the disclaimer slides.

Today, we have with us Mr. Sanjay Bahl, our Group CFO; Mr. Sanjay Behl, CEO of Lifestyle business; Mr. K. Mukund Raj, CEO of Real Estate Business; Mr. Vipin Agarwal, President Corporate; and Bibek Agarwala, CFO, Lifestyle business.

I will now hand over the call to Group CFO, who will give you the summary of the results before we open up for Q&A. Over to you, Sanjay.

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Sanjay Bahl, Raymond Limited - Group CFO [3]

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Thank you, Mukund, and good evening, ladies and gentlemen. Thank you for joining us today on the earnings call to discuss our results for quarter 1 financial year '20. At first, let me briefly discuss the prevailing market conditions for quarter 1 for the industry as a whole.

Quarter 1 is generally a moderate consumption period given the seasonality. The quarter began with sluggish and subdued consumer sentiment in the weak macroeconomic environment, mainly caused due to the liquidity crunch in retail across all consumer industries and low consumer sentiment. The trade channel was also impacted due to the overall subdued consumer sentiment and the liquidity front. However, during the course of the quarter, the sales at wholesale levels moderately improved on account of the wedding season in the latter half of the quarter.

In the apparel sector, at the retail sector level, the offtake was relatively lower in the month of April and May on account of, again, low consumer sentiment. In the middle of the quarter, the industry players came out with aggressive promotion offers during the Ramzan festivity and upcoming marriage dates in June. However, even USS did not meet up with the expectation of upliftment of consumer sentiments normally seen during the USS period. Consequent to the above consumer sentiment, the channel credit receivables increased in the market.

Coming now to our quarterly financial reporting. During the quarter, Raymond has seamlessly transitioned to Ind AS 16 with effect from April 1, 2019. As for this accounting standard, all leases are to be recognized in the balance sheet as assets and liabilities. Accordingly, the accounting treatment is given to the relevant items as applicable. While reporting for first quarter financial year '20 is based on Ind AS 116 basis, however, for the ease of reference for comparison with earlier quarters, pre-Ind AS 116 financials have been provided in the investor presentation. Coming to our quarterly performance.

All numbers that I'm going to now narrate are pre-Ind AS 116 for a like-to-like comparison. The quarter witnessed a growth across all our core segments. Our revenue grew by 14%. Excluding real estate, the growth was 9%, which is ahead of the guidance given in the last quarter. However, the EBITDA margins came in lower at 7.1%. Pre-Ind AS 116 net loss for the quarter was INR 12 crores.

The overall profitability was impacted mainly due to adverse product mix, increase in gold prices, stock correction in Branded Textile segment and the low capacity utilization of Ethiopia plant due to the political unrest which was prevailing in the country. And also there was a change in the product mix in the Indian operations for garmenting.

The interest cost was higher by INR 9 crores due to increase in average cost of borrowing and increase in the quantum of borrowings as well by around INR 161 crores. This was due to higher working capital requirements. Also there was a gain on account of income tax refund of around INR 3 crores. Now this has to be compared with the exceptional tax refund that we got in the previous year, which was around INR 9 crores.

Now let me highlight the business initiatives undertaken during the quarter. In line with our stated asset-light expansion approach in the core textile and apparel business, we opened 8 Mini TRS stores under the franchise route during the quarter. Overall, till date, we opened -- we have opened 308 Mini TRS stores in 250-plus towns, including new towns in Tier 3, Tier 4 and Tier 5 towns.

Tailoring hubs -- during the quarter, we have added 3 more franchise-based tailoring hubs, taking the total number of tailoring hubs to 54, with a total conversion capacity of 2 million meters of fabric per annum. This is in line with our stated strategy of facilitating quality tailoring services through tailoring hubs in which the customer's requirement is tailored in a very quality-controlled environment.

And let me get to the performance of each segment.

First, the Branded Textile segment. The core branded textile business grew by a moderate 2% to INR 600 crores due to impact of consumption slowdown in a quarter affected by sluggish and subdued consumer sentiments, and as I said earlier, liquidity constraints in trade channels, along with the inventory correction, which was done in the B2C shirting business.

The suiting business grew by 6%. While there existed lower offtake in the trade channels on account of lower secondary sales, the growth was led by expansion to use smaller outlets through low-priced products. The benefit from the price hike undertaken got impacted due to the adverse product mix. The B2C shirting top line de-grew by 12%, mainly due to lower offtake and inventory correction in the trade channels.

Out of the inventory correction, a planned stock correction of INR 12 crores in trade channels was done to compensate for the sluggish retail demand for the past few quarters. We initiated this correction in the fourth quarter for financial year '19, and we expect the revival of growth in the second half of the current financial year.

The EBITDA margin was 5% versus 7.5% in the previous year was impacted due to the adverse product mix and the impact of wool price in the suiting business.

Coming to the Branded Apparel segment. The segment sales grew by 12% to INR 313 crores, with growth across all 4 power brands. Strong double-digit growth was reported by Park, which grew at a rate of 27%, and Park Avenue at 15%.

While subdued consumer sentiment impacted the retail network, EBO growth was 7% and TRS was negative at 3%. Our MBO channel showed strong performance, growing at 46%, along with LFS channel growth at 16%. The EBITDA margins improved to 5.1% versus 2.4% previous year due to the lower average discounting and operational efficiencies.

The high-value Cotton Shirting segment continued its strong performance with 11% top line growth, driven by yarn sales and EBITDA margin improved to 15.4% against 12.4% in the previous year, led by improved product mix and operating efficiency. The Garmenting segment top line grew by 16% to INR 190 crores, driven by higher exports to U.S. and Japan markets.

However, the EBITDA margins were lower at 1.6% as compared to 6% in the previous year, mainly due to a couple of reasons. One, the lower gross margins in the Indian operations, the top line was driven along with change in the product mix, which impacted the gross margins. There was lower capacity utilization of Ethiopia operations. The business faced challenges in Ethiopia operations, which was impacted by political unrest in the country, leading to high absenteeism and consequent lower capacity utilization.

We hope the uncertainty will end soon with the government of Ethiopia taking some effective measures.

In the Auto Components business, the top line grew by 8%, driven by higher demand from international customers. EBITDA margins came in lower at 19.9% versus 24% last year, mainly caused due to diverse -- reversal of a onetime provision amounting to INR 2 crores last year, and also the higher contribution this year from a low-margin TV segment.

Overall, the business has maintained its profitable sales growth momentum.

The Tools and Hardware de-grew by 5%, mainly due to slowdown in the domestic files market. The domestic files market was also impacted by the liquidity crunch facing the wholesale trade channels. EBITDA margins were lower at 7.3% versus 8.3% in the previous year due to lower contribution from the high-margin domestic business.

The Real Estate business has seen a good response from consumers. Within 4 months of launch, we have received 581 bookings with a booking value of around INR 612 crores in the 4 towers that we have launched with a total inventory of 1,050 units. Construction has commenced and progress is in line with the target schedules. The real estate business has contributed INR 61 crores to the top line and INR 10 crores towards EBITDA for this quarter.

Taking a brief look at the cash flows and the balance sheet. Our free cash flow was negative during the quarter at INR 215 crores. Our cash flow from operations for the quarter was negative at INR 94 crores, impacted by higher net working capital, which is namely higher receivables due to the liquidity grants prevailing in the market and also higher inventory, which is normally built up to service our quarter 2 sales.

Gross debt stood at INR 2,739 crores as on June 30, versus INR 2,578 crores last year. And the net debt was at INR 2,303 crores as on June 30 versus INR 2,135 crores last year. Our net debt levels increased this year mainly due to increase in working capital. Net debt-to-equity is stable at 1.1x. The average interest cost increased by 52 basis points to 8.5% for first quarter financial year '20 versus 7.9% in the previous year. The working capital front, net working capital number of days was at 97 days in the current year versus 102 days in the previous year.

Coming to CapEx, the CapEx spend was INR 60 crores during the quarter, mainly related to bulk -- change in the bulk line to MTM line in the garmenting business to cater to international MTM solutions. There was also CapEx expense in the auto component business capacity expansion and some maintenance CapEx in our textile plants.

Now coming to guidance for the second quarter. Domestic consumption remains impacted as the consumer sentiment remains subdued and liquidity concerns continue to affect the trade channel. The -- at the retail level, the quarter started with low consumer sentiment as the U.S., which started in mid-June, did not meet up with the expectation of upliftment of consumer sentiments normally seen during a sale season period. Overall, we expect the quarter to be modest in terms of growth and consumer sentiment and expect pickup in demand from mid-August with the onset of festivities.

On the cost front, the input prices such as wool, cotton, polyester has softened, and the benefit is expected to slow down from the second half of the year. We expect low single-digit growth in top line and the possibility of marginal dilution in EBITDA margins as compared to the previous year. As the economy in general is showing signs of muted growth in the short term along with the consumer sentiment, we stay invested in our core fundamentals and focused on maintaining our profitability and health of our working capital.

Thank you for listening in, we are now open for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Zain Iqbal from Alpha Invesco.

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Zain Iqbal, [2]

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So my first question pertains to the full year guidance in the textile business. So we already know that year-on-year the cotton and wool prices are [atypical, right]? So what will be the full year guidance in your textile business?

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Bibek Agarwala, [3]

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Thank you for this. I think, normally, if you see the seasonality impact of textiles, about close to about 90% of our profitability really gets pushed in the -- in starting quarter, total quarter 4. So in terms of profitabilities too. If you see the overall scale, about 80% of sales happens from quarter 2 to quarter 4. It's just take last 2 or 3 years and then look at that average.

Now Sanjay did mention that there are a couple of macros which are a little bit of a concern. One is the lower consumer spending in discretionary consumer product categories. One has seen the impact of a lot of industries and sectors in the first half, and we believe that particular macro will continue to be a dampener over the earlier estimates that we have done. However, specific to Raymond textile portfolio, given that 80% of the sales really happens, most of it gets pushed towards the latter part of quarter 2 and really builds up to quarter 3 and quarter 4, if there is a slight improvement in consumer sentiment, kicked off with festivity, we believe that we should be able to bounce that, if not entirely mostly as per our original guidance. So we continue to maintain our guidance of mid-to-high single digit growth, if you take the full year in terms of top line for our Textile business.

However, in EBITDA, I would say that we would like to stay a little conservative at this quarter. We will see the real impact of our price increase and the static wool prices in the last about 3 or 4 months really building to the second half. So at the annual level, we may come back to last year levels on the overall operating margins. On top line, we will maintain that we will be mid-to-high single digits in terms of top line growth.

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Zain Iqbal, [4]

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The second question is on the possibility of reorganizing multiple business that you have mentioned in the [BSE] disclosure, what is that about? Can we just throw some light on what reorganization are we looking at?

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Sanjay Bahl, Raymond Limited - Group CFO [5]

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What we have now is the authorization from the Board to look at how do we structure our businesses within the Raymond group. So we have what we have all stated earlier as to what is the core businesses and what is non-core, and we have diversity within the portfolio. So we will now look at how do we align some of these businesses, the core businesses, how do we structure them. And I think there is going to be work which we will do in this area. So it's early to sort of make a statement right now as to what it will be, but I think we have a direction now from the Board, which will now -- which will help us to work this out and come back to the Board with some of the proposals that we may have in terms of restructuring our businesses. And then we will, certainly, once we have the approvals from the Board, then we will certainly inform our investors.

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Zain Iqbal, [6]

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Is it related to monetization of the non-core assets?

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Sanjay Bahl, Raymond Limited - Group CFO [7]

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No, so that's the strategy that we have stated earlier that one of the strategy that we have to deleverage our balance sheet is to monetize our non-core assets. But this one is really about business structuring. So where does our textile, garmenting, our branded apparel business, these are branded businesses, integrated business that we have. How does this fit in within the group. So we will look at these structures for the portfolio of businesses that we have. So the engineering businesses, we have our real estate business, and we have consumer branded businesses. So we will look at the structuring of these businesses.

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Zain Iqbal, [8]

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Any timeline on this thing?

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Sanjay Bahl, Raymond Limited - Group CFO [9]

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It's just been given authority by the Board now. So we will certainly work now internally as well as with external consultants and come back. No time line really has been fixed. But whatever time it takes to come back to the Board with some concrete proposals and then take -- seek necessary approvals, I think we will work with that. It's -- we don't have a timeline to indicate, but this process does take some time, maybe over a couple of quarters at least.

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Zain Iqbal, [10]

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So my fourth question is on real estate, how many units are we planning to sell this financial year? We have already have close to 500, 600 bookings. So what are we looking for the full year?

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K Mukund Raj, [11]

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Yes, cumulative till now, we have done about 600 till July end, out of which over 200 were done in the last financial year. For this financial year, we have a target, we've set a target of 700 units. So at the end of the year, we're looking at reaching about 900 units.

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Zain Iqbal, [12]

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Okay. Sir, one more question.

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Operator [13]

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(Operator Instructions) The next question is from the line of [Puneet Kabra], who is as an individual investor. Please go ahead.

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Unidentified Participant, [14]

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Yes. So my question was around this liquidity trends, consumer sentiment, what's happening on the external front. So can you throw some color on what we are doing internally, whether it is in terms of policy change or channel partners or whether it is in terms of product innovation, whether it is any initiative terms? Wherein we are making sure that when the -- as in when the demand does come back and the liquidity grows, we are well positioned to actually capture it and we don't lose it because our channel partners are stuffed with the wrong stock or our channel partners are hesitant to pick up inventory because they're over stocked or over-leveraged kind of thing. So what exactly are we doing internally, whether it is a tie up with a brand for our channel partners, kind of to keep them in comfort.

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Sanjay Behl, Raymond Limited - CEO of Lifestyle Business [15]

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Sanjay Behl here. Couple of things that I think of -- a little bit of a word of caution here that while quarter 1 results may reflect some part of the external environment on our results. We are hoping that the next 3 quarters, which are the real quarters where we get most of our value-added business, really getting pushed back because of the seasonality, especially with the festivity which starts really middle of August is going to pickup.

So while general gloom and doom of liquidity seems to be the overarching kind of a perception one is having, I would, first of all, tell you the internal measure before that, the internal management teams intent and the mindset currently is -- remains extremely positive. We are continuing to invest in all the core fundamentals, and there is no real reason of any derailment of any of the internal plans that have been running for the last about 1.5 years, 2 or 3 years that you've been observing us quarter-to-quarter. So nothing strategically is getting derailed internally to manage a short-term perception of a liquidity crunch, which, obviously, is a reality, to some extent, but it's also getting a little more accentuated in a few categories.

So that I want to assure you that strategically nothing is material.

Coming to certain tactical measures, which is what you're asking about is management doing, there are series of tactical measures that we are taking. On the site of easing a little bit of liquidity in our channel, what we've done is we're looking at channel financing with some banks, non-recourse channel financing with a few banks. If you can hear, I understand the bankers are a little conservative at this stage in terms of lending and extending any credit limits to businesses. But given strength of our brand equity, given our kind of a track record, we are able to get a lot of headway made in terms of vendor -- channel financing, which is on the trade side of it.

Not only that, we're also working on other supply side of it. On supply side of it, we've been able to actually open up fairly significantly in the last few quarters and we continue to maintain over the next 2 quarters. We are making a lot of headway on vendor channel financing also. So channel financing both ends, whether it's vendor side, which is we looking at about INR 200 crores, INR 250 crores kind of a vendor financing limits to open up. And on the trade channel side, where we already enjoy about INR 200 crores we are looking at if we can extend it further. There are measures being taken on both the sides.

Some other measures that we're taking it, clearly, internally, there is a strong discipline that management team has put in relooking and reevaluating all the cost items which may have a little longer-term impact from medium to long term, can we recalibrate? Can we differ a little of those expenses without really curbing an investment in the strategic enablers like retail, go-to-market. But there are a few of them in terms of headwind, facility, infrastructure expansion plans.

So in a way, we are bucketizing a lot of our investments and relooking and rethinking to further ease up and keep a little tight leash on the actual investments that we do. In terms of overall -- some part what we're doing is at the sourcing, and we're also looking at vendor management inventory. So that we can get a little more time in our hand.

So if you see, look at the quarter 1 to quarter 1 last year, the net working capital position is pretty healthy from an organizational perspective, just about a day, despite real estate having come into this business, the rest of the business has actually come down by about 5 days. So if it's the real cash requirement or the burden on the business has actually been reduced by almost a week in quarter 1 despite all the liquidity on light of these initiatives.

So I would say we are keeping us in this trough. Obviously, there is a lot of action which is in the place right now, hopefully, middle of August as festivity kicks in, some easing of liquidity, some spending goes up, and I think we should be well placed with all the fundamentals being invested.

So that is what I will say, Puneet.

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Unidentified Participant, [16]

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Just one more question on the branded Apparel business. So we've seen a very good growth quarter-on-quarter on the MBO segment. Now given the liquidity challenge that we are facing, do we -- and even other way, on a stand-alone basis, do we think that kind of growth in MBO is sustainable? Or we are at the peak of it and then your next level growth will probably come from EBOs or from LFS or any other channels and branded apparels?

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Sanjay Behl, Raymond Limited - CEO of Lifestyle Business [17]

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So Puneet, on branded apparel, this kind of growth that we're seeing quarter-on-quarter are not sustainable. If you -- straightaway one look at the percentage CAGR, because where we started about 3 year journey, we have been talking about 35% to 40% CAGR year-on-year. Now 35% to 40% CAGR that we've got in MBO channel straightaway mathematics tells you we've grown about 3 to 4x in the last 4 years in this channel. So continuing to get those levels of category growth rate with most of the multi-brand universe now fairly well benchmarked with industry competitors of Raymond, the same level of expansion will not happen. So clearly that numbers will have to be now getting recalibrated.

The second is the reason that you specifically pointed out about liquidity in multi-brand channel also getting now squeezed up because largely, these are -- this is a universe which really works on borrowed capital from various institutions such as NBFC or bankers and that's where if there is a bit of a squeeze happening, then clearly it is putting pressure on us also in addition to their consumption also going down because retail portfolio also continues to go up.

So to answer your question, MBO channel is it sustainable? The answer is no. Will it continue to be the front runner channel for apparel for some time to come? I think, yes, it has some life over the next 1 to 2 years, where we see this channel continuing to be strong double-digit growth, but clearly not 40% to 50% kind of CAGRs that we've enjoyed. This is going to come down.

On the other side, what is the role of other channels there? We see the value channels will do well in any slowdown, any kind of a perception of some liquidity crunch, lower household savings, lower spends on products. In our industry, specifically, we see some down-trading happening across sectors, which is also visible, if you see in the last about 2 months or so, whether it's towards e-commerce products or value players. There is going to be some down trading, which is adverse to Raymond.

However, if we have a relevant footprint in the right markets and the right locations, which is what we believe we are building up over the last few years, then we'll continue to stay invested in EBO, in the right LFS doors, in our Raymond shops, which is now crossing about 1,000 stores in the country there. We believe that we have enough in our platform to not really depend on one channel, but to really have a fairly balanced growth profile across channels.

But the channel which is going to have a big pickup in addition to MBO, because MBO slowed down by 20% today means what we used to get 40% earlier in absolute terms, will definitely have to be EBO because EBO is a profitable channel. That's where the product plays the best. Our retail margins are also the best there. So clearly, that's the channel that currently last quarter is only -- it's a flat like-to-like for apparel business. So we had 0 LTL growth in apparel. We believe that is going to start picking stock and we'll start touching mid-single digits and could go up to 7% to 8% in about 1 year, 1.5 years from now. That's what we believe.

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Operator [18]

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(Operator Instructions) The next question is from the line of Govindlal Gilada, who is an individual Investor.

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Unidentified Participant, [19]

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So I've got 2 questions. One on unlocking of our noncore assets, anything that we are -- any of -- you are developing 20 acres land bank. Anything outside sale land bank, anything is happening on that front, sir?

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K Mukund Raj, [20]

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Yes. So we are -- we have mentioned earlier that we were open to selling smaller parcels of land. That exercise is currently on as well. And it does take time. So there is no time line that we really can give in terms of any land sale will conclude, but it's a long process.

From an intent perspective, we are very clear that we would like to sell smaller parcels of land. And I think an activity and all our focus is in that direction. The market situation is tough. But in terms of liquidity as well as in terms of funding land acquisitions. But having said that, we remain focused on this activity. This is very strategic to us, and we will continue with our efforts on this.

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Unidentified Participant, [21]

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So anything something advanced level, anything going on land sales, sir? Because Singhania has gone on record saying there's something, work in progress is happening on land sale.

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Sanjay Bahl, Raymond Limited - Group CFO [22]

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No, I don't -- I can't make a comment on this. I mean from a mandate perspective, yes, we have mandated one of the leading agencies in real estate to really look for potential buyers for smaller parcels of land. So yes, the mandate has been given.

And as I said, it will take some time on if there is closure that has to happen, if there are offers, which we are happy with or we can conclude, we will certainly do so. But right now, it continues to remain work in process.

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Unidentified Participant, [23]

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Okay. And then second my question is on guidance. First quarter was disappointing year-on-year, loss has gone up, it is INR 12 crores already loss is there and second quarter is not going to be great what you are guiding.

So now coming back to 2020 guidance, earlier, we have been reiterating that we are on track of revenue growth, 10% to 12% margin improvement, 17 to 100 bps all that. So seeing now, first half, how it is going to play now. Are you still sticking to your full year guidance for 2020?

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Sanjay Bahl, Raymond Limited - Group CFO [24]

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So when you take first quarter, thankfully, in the overall scheme of things for Raymond, if you see, let's say, our textile business is 19% revenue and 10% EBITDA. So 81% of revenue is in starting quarter 2 onwards and about 90% EBITDA is really there. Similarly if you compare the same numbers with apparel, first quarter is 17% revenue, so 83% revenue happens in the next 3 quarters and about -- clearly, about 90% EBITDA is really skewed towards there. So looking at first quarter to be the reflection of the other, specifically, in context of our business of Raymond, given our skills and seasonality, may be a little far fetched and the reality may pan out if things start improving with the festivity. A little better is our view. So at this stage, it may be a little premature to give a wide variance versus our guidance that we gave you last quarter. So I think it's too early.

Having said that, macros are not looking as good as we saw about a quarter back, as you're aware. Across industries, there is both consumption side as well as liquidity side crunch which is building up. It then remains for the management team now to look at some of these macros and see how do we recalibrate our mid- to long-term investments versus tactical investments and still continue to make the ship afloat and come very close to the guidance. So at this juncture, sitting more or less in early August till the end of March 2020 guidance, I think I would like to say that, let's hold on to the guidance that we had given. There could be some variation given quarter 1 dampening, which you already have seen the results, and our guidance of quarter 2. But with a bit of a stroke of some consumption increase happening, some liquidity being put, some measures taken by government structurally to infuse more positive consumer sentiment in the market, hopefully, which we believe should come and it's no later than about 4 to 8 weeks, some concrete actions will come either on the side of GST or other measures that government is currently in dialogue with the industry. So we would be able to give you a better guidance at the end of quarter 2 rather than giving you today for the 2020.

But what we see is that almost sitting 4 weeks into this quarter, this quarter is the guidance that Sanjay has already given that we should -- we internally, we're targeting to come close to our operating margin, but there could be marginal dilution. There could be 300 to 500 bps point, I'm sure, is a risk that we are sitting on in this quarter in terms of the way -- the first 4 weeks, and how it's panning out to be. But the real guidance for FY '20, I will give it only, I think, by middle of the year, that will be better.

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Unidentified Participant, [25]

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No, I can understand macro factors have deteriorated in the last one quarter. But just sometimes like you told that we will be back to last year operating level, that's what worrying me. Last year operating level and this guidance for 2020, a lot of variations in there. So are we going back to last year operating level then it is disappointing.

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Sanjay Bahl, Raymond Limited - Group CFO [26]

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No, no. No. But the guidance was that we will do about 50 bps to 100 bps more than last year operating level in terms of margin. That is the guidance which was given.

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Unidentified Participant, [27]

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70 to 100bps.

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Sanjay Bahl, Raymond Limited - Group CFO [28]

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Correct. That's what it was given, isn't it, last year? So at this point in time, I'm just saying we may get back to the guidance that we had given by the end of the year.

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Unidentified Participant, [29]

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No, I got confusion that last year operating levels we'll be achieving, that is what I was wondering.

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Sanjay Bahl, Raymond Limited - Group CFO [30]

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I would say that we would need another quarter to make a formal estimate on that. But there is risk to that. There is a risk to that. And I would not say that I would have possibly -- I see the risk in the first 4 months what has happened. But we are hoping that at the end of 2 months, things will with the festivity and some measures should improve. If they improve, we are well positioned. We are well positioned as a company with our brands, with our strength of retail, with our go-to-market strategy with our investments, we are well positioned to do a bit of catch-up. That's what I'm saying.

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Unidentified Participant, [31]

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One more question, last question, sir.

Anyhow this first quarter debt has gone up by INR 161 crores already. So we are sticking free cash flow generation this year or year-on-year we are seeing further debt going up this year? Is there any reduction debt possible this year?

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Sanjay Bahl, Raymond Limited - Group CFO [32]

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The way we have begun quarter 1, we've seen this liquidity crunch it has impacted our revenue growth in quarter 1. Quarter 2, the start has not been very encouraging, and we have planned for, clearly, a higher growth quarter. That was at the end of last year, fourth quarter, we had planned for higher revenue growth. Now inventories have gone up, so we've seen that impact coming in working capital. We've clearly said that our focus now will be to really maintain our margins, focus on profitability and a very healthy working capital as well.

So -- but if the margins impact depending on how quarter 2 goes, we'll have to see if the impact is marginal, and we are able to sustain our revenue growth, then we should be on course in the second half of the year to remain true to our earlier guidance of free cash flow. Otherwise, we will give you an update on quarter 2, if there are -- if the headwinds continue as they are now, then we may have to revise our guidance at the end of quarter 2 because there -- the journey may take a little bit more time than we had earlier estimated.

However, as I said, we are also focused on deleveraging through sale of noncore. So if we are able to achieve that over the next 2 to 3 quarters, then we may still be able to stay as per earlier guidance of getting to free cash flow. So it's a mix of multiple factors right now.

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Operator [33]

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The next question is from the line of [Kaval Shah], who is an individual investor. Please go ahead.

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Unidentified Participant, [34]

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It seems in the business line article, Mr. Singhania has mentioned given a time line of 42 months for the completion of our real estate project, and in our presentation, we mentioned around 5 to 6 years. So can you please explain the difference?

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K Mukund Raj, [35]

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Yes. So the first set of towers that we have launched and for which the construction has commenced, we have an internal target of 42 months for handing over these apartments. But then we have 10 towers to be done in this particular 14 acres of land parcel. So the entire project could go 5 to 6 years, but the 42 months, which the Chairman has talked about is our target to hand over the first set of apartments.

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Unidentified Participant, [36]

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Okay. Sir, in garmenting business, so when do we expect the business to turn around? And so what would be the current ROC for the business and what would be our target ROC for it?

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Sanjay Behl, Raymond Limited - CEO of Lifestyle Business [37]

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In terms of garmenting business, I don't know what you mean by turnaround, so it's an existing business, which has been continuing at a reasonably okay profitability level, it's just that the last 1.5 years we have expanded the greenfield into Ethiopia. And like any garmenting plant, given the mix of the product and the volumes between Indian operations and the Ethiopian operation, there is dampening of margins that you see, which is a temporary phase because, obviously, we're creating more capacity.

Having said that, last quarter has been exceptionally low in profitability, and I think that is maybe what you are referring to, that 6% getting diluted to 1.6%. And possibly, if you trace back to last about 1.5 year, 2 years, you will see 10% kind of margins in this business, and maybe that's what you're referring to. And if that is the context of your comparative, then 10% was India stand-alone operation, 6% is with initial phase of Ethiopia, which should have been [a rarity] and it should have gone up.

However, the first quarter margins are a little under 2%. The reason for garmenting business to show low margins in this particular quarter was briefly mentioned in Sanjay's opening remarks, but let me reiterate that. It is to do with about -- close to about 15% to 18% of our revenue in this quarter was targeted to come from Ethiopia, and there are certain fixed costs in line with that 18% revenue that we should have got. Against that, we had a drop in that revenue because of ongoing political situation in the country, wherein there has been a very high level of civil unrest, ethnic clashes, due to which all operations, manufacturing and logistics have got disrupted, not once, but time and again, almost through the quarter, April, May and June, only aggravating towards the end of June.

That's led to against our budgeted number of, let's say, 100, we've not been able to do even 65% of the production by -- as garmenting is largely a fixed cost operation.

So if I had to maintain my margin of last year, quarter 1, I should have delivered a INR 12 crores EBITDA, against that it's a INR 3 crore EBITDA. So it's a 9 crore dilution. This INR 9 crore dilution is not a story of turnaround going forward. This INR 9 crore story is to restore back Ethiopia into stable operations what we had earlier targeted internally. Now as we see in July, we've come close to over 90%, 95% of our production has been met. So Ethiopia is getting back to normalcy.

Of this INR 9 crore dilution that you see in percentage gross margin, INR 6 crores out of that is attributable only to one plant, which is Ethiopia, because of the long disruption periods that we've had in the quarter 1.

But as I told you, July has been over 90% production. August, we are hoping that it will go up over 95%, and that's the level that we should be able to sustain over the next few months. In terms of our order books from now till December, our order books in these plants are full. So if we are able to get a little benefit of political stability and continuity of workers reporting on to work and no real civil unrest in the country, no security threat, we believe that we will start seeing a jump in the margin from this quarter itself because as I told you July was fairly good, and we're hoping that the normalcy will restore there. So it is about a quarter getting impacted because of one plant, and it's a quarter -- if the plant comes back, we should see the turnaround in what you say in this quarter itself and then only the numbers moving up.

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Unidentified Participant, [38]

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Sir, what kind of ROC can we expect from this business?

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Sanjay Behl, Raymond Limited - CEO of Lifestyle Business [39]

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So because it's a large investment that we have made in Ethiopia, the ROCs have got dampened, but one can assume that in the long run, we can start looking at about a double digit ROC , starting middle of next year. So we should start looking at about 12%, 13% return on a B2B operation, that's what it should be.

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Operator [40]

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The next question is from the line of [Deval Kabra], who is an individual investor. Please go ahead.

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Unidentified Participant, [41]

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My question is for branded apparel. Now you had the spring/summer trade fair, which has just recently completed. And considering that what you had mentioned in the growth aspect scenario of MBOs, I will like to ask in the overall scenario of branded apparels given in the multiple channels, what is the growth which we are expecting with regards to the industry?

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Sanjay Bahl, Raymond Limited - Group CFO [42]

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We've been doing about 16-odd percent CAGR for the last about 5 years now. (technical difficulty) close to about 10%, 11%. Other years have been close to 18%. So that's the kind of growth rate that we've been getting. Broadly double-digit across all the 4 brands that we have, 4, 5 brands that we have.

First quarter, we have registered a 12% growth. That's been the growth. This -- Park being actually a stellar performance with 27% growth.

Park revenue at about 15%. Raymond at about 9%. ColorPlus at 5%. So that's been the growth in our ethinics which we've added to our portfolio has grown 60%. But that's on a very small base. So overall, we've got about a 12%, 12.5% growth in our apparel portfolio.

In [the 14 acres we see] next 3 quarters with the channels and the specific comment you made on MBO channel possibly slowing down and not sustaining that level growth, what would be the growth forecast? We continue to believe that we should get a strong double-digit growth, barring a quarter here or there. So this quarter may be a little dampener because of poor USS, that has been a laggard, USS, from June and continuing a little bit of impact, which happened in July, where we saw a dampened consumer sentiment there.

But we see a recovery happening in second half, back to our double-digit growth there. So on an annualized basis, we should still score a strong double-digit growth. And maybe this quarter, there could be an exception where we could get a little, but still it will be a growth. So it will be a strong single-digit growth. But overall, it should get back to double digits, yes.

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Unidentified Participant, [43]

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One more question. What is the targeted revenue from the Ethnic wear segment by -- in FY '19/20?

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Sanjay Bahl, Raymond Limited - Group CFO [44]

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So we don't report actually segmented the numbers in terms of specifics, so difficult to give you a specific number on that. But we expect that it will be about twice of what we did last year. So there is a continued growth which we'll see at least in the next 1 or 2 years. Given the base is quite small, we see this portfolio doubling at least for the next 1 or 2 years.

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Unidentified Participant, [45]

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Okay. What do think of store count? If you could give me the store count if not the exact number for Ethnics?

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Sanjay Bahl, Raymond Limited - Group CFO [46]

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For Ethnics right now?

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Unidentified Participant, [47]

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Yes, by end of year, what will be increase in number of stores for Ethnics?

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Sanjay Bahl, Raymond Limited - Group CFO [48]

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Yes, so we currently have about 8 stores. If we have 8 stores and we have a plan to open about 2 stores, 2 to 3 stores every month. So you can add another 20 to 25 stores by the end of this year. So we should be close to about 30 to 35 stores by the end of this year.

Again, this is because we go for these stores which are franchisee investment. The large part of our plan is also dependent on franchisee sentiment to invest in this kind of a macro scenario that we have seen. So on the realistic side, we should cross the 30 stores, but if things don't pan out exactly the way, we could end up with about 20, 25 stores. So that's the ballpark number I can give you.

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Operator [49]

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The next question is from the line from [Rawal Mishra] from [Zen Wealth].

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Unidentified Analyst, [50]

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So just wanted to understand a couple of things. So at the beginning of the presentation, you have mentioned that in a couple of segments, the decline in margins was also due to change in product mix. Can you please elaborate a bit further on this particular thing?

And the second thing is, what's the CapEx on the Ethiopian plant?

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Sanjay Behl, Raymond Limited - CEO of Lifestyle Business [51]

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Okay. So on the margin side, the specific point was made. If you see apparel segment, the margin has increased, and it's only the textile segment. So this comment that Sanjay made was specific to textile segment. In textile segment, we have seen a margin dilution of 245 bps. So that's basically from a 7.5% quarter 1 last year, we have ended up at about 5.05%. So it's a 5% EBITDA margin this year.

And that is a total of about close to INR 15 crore dilution in EBITDA, which has happened. Half of it, almost close to about INR 7 crores is actually on account of the increase in wool price. Now if you see the quarter 1 last year, prevailing price versus quarter 1 this year prevailing price and the consumption mix of Raymond between the 2 quarters, it's about INR 7 crores, which is there. However, we had foreseen that, and in the end of quarter 3 and early quarter 4, we have taken a price increase of close to 4% to 5%, anticipating a -- getting into a much higher wool price and anticipating that it's not going to soften so rapidly. So to neutralize that. So we have had a price increase benefit of INR 7 crores in the quarter, and we've had a wool price impact of INR 7 crores, so more or less they neutralized.

The rest of the entire impact is on account of about 2/3 of the rest of the impact, about INR 9 crores of the rest of the impact is on account of poor product mix. Poor product mix is really about dilution of ASP from high margin, high revenue products to low margin, low revenue products. That's what has happened in specifically 2 segments, but 1 segment which has come very strongly.

We had about 10% of our revenue contribution in quarter 1 last year coming from combo packs. Now combo packs are the ones which sell at about a price point about INR 500 to INR 600 in the market but pack about 3 meters of fabric. So you can understand the average selling price per meter is much lower. So this 10% versus 10% last year quarter 1, that's almost double. So it's gone to about 18% contribution of sale in the first quarter has happened because of combo packs.

In the overall things of slowdown, this is the lower-priced packs, more affordable units, more value attractive products have found far better traction than the high-value products and expensive items. So that is the reason why overall mix in textiles has diluted, leading to this INR 9 crore to 10 crore margin dilution. The rest of the INR 3 crore or INR 4 crore is largely in terms of the nominal inflation and cost escalation on the overall overheads of the business.

So that really explains. So INR 7 core wool, about INR 9 crore, INR 10 crore product mix, about INR 4 crores normal inflation, partly made up because of the price increase we took in first quarter and that first quarter calendar is basically January of this year, and that helps us to neutralize part of this in turn. So that is it.

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Unidentified Analyst, [52]

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This is helpful. CapEx on the Ethiopian plant?

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Sanjay Behl, Raymond Limited - CEO of Lifestyle Business [53]

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Our total CapEx, in fact, that we have invested till now close to about INR 90-odd crores in the Ethiopian operations.

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Unidentified Analyst, [54]

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Okay. Can I ask one more question if it is okay?

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Sanjay Behl, Raymond Limited - CEO of Lifestyle Business [55]

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Yes, please go ahead.

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Unidentified Analyst, [56]

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So you said Q1 CapEx was approximately INR 60-odd crores. So what's the full year CapEx you're looking at? And for what requirement?

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Sanjay Bahl, Raymond Limited - Group CFO [57]

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We had given guidance earlier that would be within INR 200 crores. And we are looking at now at any future CapEx, given the current macroeconomic environment will be put through more filters in terms of whether this could be postponed, given the economic benefit from the CapEx, so those decisions would be taken. So we hope to contain this, certainly, within INR 200 crores. So the target would be whether we can do it within INR 150 crores to INR 200 crores.

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Operator [58]

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The next question is from the line of [Prashant Hazaliwala] who's an individual investor.

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Unidentified Participant, [59]

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Hello?

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Operator [60]

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Prashant, we can barely hear you. Request you to use the handset if you are on the speaker.

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Unidentified Participant, [61]

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Hello?

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Sanjay Bahl, Raymond Limited - Group CFO [62]

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Yes, its clearer now.

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Unidentified Participant, [63]

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Yes. I had just one question. What about the debt reduction plan from [the operations], like, not any strategic diversement or anything else, but what about from the operations only?

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Sanjay Bahl, Raymond Limited - Group CFO [64]

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Yes. So we are focused, really, as Sanjay also mentioned that we are focused to stay fueled in terms of all our activities during the year to focus on our core fundamentals and investing in what is really core to each business. The guidance, also, he talked about the full year as well. So really, the journey to a free cash flow is through better operating margins, revenue growth and higher operational cash flows.

So we will -- and I also covered this earlier when I said that it's really after quarter 2, we will have to give you a better focused guidance rather than probably now when the situation on the macro side is still looking to be fairly weak with headwinds still facing the business segments, especially in the consumer discretionary spend segment. So yes, we are looking at generating positive free cash flows from the operating side. And that remains our goal. Whether we will be able to achieve it in financial year '20 remains a question mark in terms of how the year pans out, how quarter 2 also pans out. And how our growth outlook remains for the rest of the year.

But what we are clearly focused on is, given the situation on the liquidity side, on the consumer lending side, is to look at our working capital and our pipeline stock, health of our inventory and our data, I think, very, very closely. And we have a plan within each of our core businesses to really look at working capital metrics clearly on a week-to-week basis. So I think there is a greater degree of focus on working capital, confirmation of working capital. And I think that remains.

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Unidentified Participant, [65]

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All right. I have one more question like that. If everything goes well [with -- it as in plan], what kind of margin do you expect by the end of the year for garmenting?

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Sanjay Behl, Raymond Limited - CEO of Lifestyle Business [66]

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So garmenting business, we should be able to restore back the margins, definitely come back to the level of last year, if not better, because I think the dampening that we've had in the first quarter should get recovered in the balance 3 quarters. So we should be coming back to the last year levels in overall margins.

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Unidentified Participant, [67]

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So 6% kind of thing, right?

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Sanjay Behl, Raymond Limited - CEO of Lifestyle Business [68]

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Yes. About 6% to 7%, which is the last year margin. We should be back between 6% to 7% EBITDA margins.

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Operator [69]

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(Operator Instructions) The next is from the line of Amit Vora from PCS.

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Amit Vora, PCS Securities Ltd., Research Division - Equity Fundamental Analyst [70]

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I know you've spoken a lot about the debt aspect. Just that the interest cost has gone up because of the increase in working capital in Q1. Now that we are already through the first month, and how are you seeing this playing out? And can we expect that INR 61 crores kind of bringing this interest cost will remain in the following quarters?

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Sanjay Bahl, Raymond Limited - Group CFO [71]

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Yes. So what is really happening in the increase in the interest cost is a couple of factors. One is, of course, the increase in working capital that we have seen. The other is also the rate increase that has happened. Now the mix of our total debt portfolio that we have had earlier subsidized textile loans, which are called tough loans. I think as they mature, they are getting replaced with now the prevailing cost, which is higher. So there is a mix which is changing. And as a result of that, you are seeing marginal increase in the interest rate as well.

So from our longer-term perspective, I have mentioned this earlier, that the focus is clearly to get to positive free cash flows. And really, the -- if you are able to sustain that within the year, then surely, we will see debt levels coming down, purely on account of higher cash flow generation. The other aspect of our focus is to really look at strategic sale of noncore, and that will give a boost to, really, a big reduction in the total debt portfolio and bring down the interest cost substantially.

So it's a combination of both these that we will -- that we are focused on in the current year. Of course, it's not -- the dampener is really the liquidity issues and the other slowing down of the demand side, and that will remain to see how it pans out.

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Amit Vora, PCS Securities Ltd., Research Division - Equity Fundamental Analyst [72]

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If not for the working capital, what has been the incremental and the cost of funds? And would that be continuing, I'm assuming, for throughout the year?

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Sanjay Bahl, Raymond Limited - Group CFO [73]

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So if you see what is playing out in the financial markets now with the bank that there is a little bit of risk aversion that they see. So the cost of mutual funds investing in commercial paper, the cost of that is moving up. There is -- earlier, there used to be availability of low-cost, short-term paper. So that is changing now as well. So the mix is changing, mix of debt profile is changing. And we have to recognize that in the current prevailing situation where liquidity issues are facing nearly all sectors. So there is an impact that we see. However, we also are looking forward to RBI's monetary policy declaration later in this -- in the first week of August, and we hope to see some rate cuts happening there. We look forward to seeing some measures taken by RBI to reduce interest costs as well and make liquidity available with the banks.

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Amit Vora, PCS Securities Ltd., Research Division - Equity Fundamental Analyst [74]

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Yes, point taken, sir. My only thing is that our debt cost has gone up from around INR 50 crores quarterly level to INR 61 crores. How.

(technical difficulty)

Normal for some time? Or how are we are seeing this?

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Sanjay Bahl, Raymond Limited - Group CFO [75]

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Yes. So as I said, I mean, it will -- we are at a certain level of working capital and investments that we have done in the real estate business. So that has resulted in an increase in the total amount of investment side, which has been partly through borrower's capital as well on the -- and real estate, we had earlier given guidance that the total investment would be contained at INR 250 crores. I think we are at that level, and we do not see any increase further in the total fund infusion in the real estate projects. The business is now construction has picked up, sales velocity is high, so the business would be a positive contributor in the coming quarters. So maximum investment that had to take place has been done. So -- but that has also resulted in an increase from the INR 50 crores to INR 60 crores that we see. But future increases will be entirely on really working capital [let].

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Operator [76]

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The next question is from the line of Govindlal Gilada, who is in an individual investor.

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Govindlal Gilada, [77]

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Anything on non-core asset sale, auto and engineering also, anything we are considering, sir?

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Sanjay Bahl, Raymond Limited - Group CFO [78]

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So auto, we had mentioned earlier that auto we believe that we would be looking at the -- any offer or opportunity that comes for consolidating this business or looking at any value-creating opportunity in this business. We are certainly open to that. However, given the current situation that is prevailing in the auto slowdown space, it will be a tough scenario to sort of look at any option here. I mean there would be -- I think we will have to wait for a while before the sentiment changes in the whole auto space.

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Unidentified Participant, [79]

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Hello?

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Sanjay Bahl, Raymond Limited - Group CFO [80]

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Yes.

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Govindlal Gilada, [81]

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Then I keep a track of wool price, sir. They have substantially come down year-on-year. It is because of old inventories, is the effect has come on margin, wool prices, sir?

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Sanjay Behl, Raymond Limited - CEO of Lifestyle Business [82]

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So wool price has come down, but we need to see what part of the wool price really comes down. So wool ranges from about 10-micron to 30-micron, 35-micron wool. And what Raymond uses for 90%, 95% of our consumption is between 17- to 24-micron wool.

Now some part of the wool, while it has come down, but it had gone up by 35% last year, and it's been going up by that kind of a number, 25% to 35% for the last 2.5 to 3 years. So what has happened is the rate of acceleration or the increase is not happening at that level. And it has kind of been running pretty much flat over the last 2 quarters. So whatever it peaks to in the last quarter, quarter 3, is where is it at this point in time or there is a marginal softening of about 3% to 5% that we've seen in the wool index prices.

But when you look at our base, for example, quarter 1 last year to quarter 2 this year, we still have a INR 7 crore hit in terms of [pure] -- because of the wool prices despite us having taken, of course, price increase to neutralize it, but it still was pretty high. So at this level, I would say, even if it stays at this level, we should be able to be purely on the wool prices, our guidance doesn't get shaken because of this one commodity price. It will stay at the current level. But if it goes up again as the levels of -- even half the levels of what it has been going in the last 2 year, then there will be a serious concern and we'll have to, again, either neutralize it through price increase, which is very adverse environment to do that or take some extreme measures to really neutralize or mitigate that risk.

But at this level, the benefit of the wool pricing softening, you will see in the second half because second half base will have a price increase impact this year, which was not there last year, and will have a moderated wool price, which was not there last year. So both the double impact will happen only in the second half, which is where most of my wool mix has been in any case. So we should see a good impact of that in the second half, not in this quarter, but from quarter 3 and quarter 4.

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Unidentified Participant, [83]

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Our net debt, at least comparing last year, second half this year, second half, we can see at least hope of entering margins?

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Sanjay Behl, Raymond Limited - CEO of Lifestyle Business [84]

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Yes, that is absolutely right. There will be some bump up because of the benefit. If wool stays at this level Govindji, then there will be some benefit. But if wool (foreign language). Definitely.

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Unidentified Participant, [85]

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Wool, polyester, cotton (foreign language)

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Sanjay Bahl, Raymond Limited - Group CFO [86]

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(foreign language)

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Unidentified Participant, [87]

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(foreign language) second half should be at least (foreign language) comparing it was disappointing. Second half can we make up that is what I was wondering? Comparing last year, this second half should be more better?

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Sanjay Bahl, Raymond Limited - Group CFO [88]

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So Govindji, as I said, reiterating the principal point, we have still invested (foreign language) fundamental product quality, product mix, go-to-market, retail stores, everything is aligned. And if we can get a bit of tailwind to help with what you're saying tailwind (foreign language), then we should have a reasonably good second half. But that is also a very big dampener.

(foreign language) but cycle has slowed downed a little. That is the only thing. And liquidity also slowed down. So there is a bit of goal impact there.

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Unidentified Participant, [89]

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(foreign language).

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K Mukund Raj, [90]

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That is the expectation, clearly. That is what I had also mentioned, that is the expectation. Whatever investments that we have to make, we have done.

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Unidentified Participant, [91]

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Yes. So no, that cash flow we'll be using for our debt reduction? Or any other plans are there on real estate further investment, further development immediately?

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K Mukund Raj, [92]

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So I think the only thing is that we can't look at these positive cash flows coming from real estate on a quarter-on-quarter basis. The project is over a 4 to 5 year period. So really, the bulk of the cash flows will come in through this period. But as and when it comes in, we'll certainly evaluate. I mean one of the first tasks that we have to do is to look at reduction of debt in terms of priority and reduce our interest cost. So that remains number one priority.

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Unidentified Participant, [93]

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Yes, that's one only. I wanted to understand. I know it is back ended cash flow we will get. So that time, at least, we should have clarity that it will be going for debt reduction, not for further land development all that. That was I was asking.

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Sanjay Bahl, Raymond Limited - Group CFO [94]

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As of now, I mean, there is really no other plan on the task. The first focus is to achieve our targets on deleveraging, reducing interest costs, et cetera and all that. That remains priority number one.

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Unidentified Participant, [95]

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Yes, that's what, as a shareholder, I request to convey to management, Board of Directors, that debt reduction, all that, these parameters have to be top priority [of us right now].

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Sanjay Bahl, Raymond Limited - Group CFO [96]

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Right. Absolutely. Absolutely agree with you.

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Operator [97]

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That was the last question. I would now like to hand the conference back to the management team for closing comments.

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J. Mukund, Raymond Limited - Head of IR [98]

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Thank you. I would like to thank all participants for taking the time out and participating in the earnings call. In case of any further queries, you can reach out to us on phone or e-mail me. Thank you, again.

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Operator [99]

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Thank you very much.