Lux Industries Limited — Q1 FY23 earnings call

Call held 10 Aug 2022

Management summary

Lux Industries reported robust revenue growth of 36% YoY in Q1 FY23, reaching ₹572 crore, primarily driven by strong performance in its power brands ONN and Lyra. However, profitability saw a decline with EBITDA down 14.3% and PAT down 21.9% from the previous year, largely due to high-cost inventory stocking and volatile raw material prices not fully passed on to customers. The company is focusing on expanding its distribution network, particularly in South India, and investing in CAPEX for production and storage capacity, while anticipating a market bounce-back from the festive season.

Highlights

  • Revenue of ₹572 crore, up 36% year-on-year (YoY).

  • ONN brand net sales ₹30 crore, grew 94% YoY, contributing 5% of top line.

  • Lyra brand net sales ₹97 crore, grew 136% YoY, contributing 17% of top line.

  • EBITDA at ₹78 crore, declined 14.3% YoY (from ₹91 crore), with margin at 13.6% (vs 21.6% YoY).

  • PAT at ₹50 crore, declined 21.9% YoY (from ₹64 crore), with margin at 9%.

  • Working capital cycle stood at 209 days, and inventory days at 143 days.

  • Raw material prices have started to decline post-June 30, with expectations of better gross margins in Q2 and Q3.

  • Company aims to generate about ₹100 crore of top line from the online channel.

Concerns

  • Raw material price volatility and its impact on gross margins

  • Ongoing SEBI insider trading investigation and its potential impact on brand perception/market valuation

Key financials

  1. Revenue ₹572 Cr +36%YoY
  2. EBITDA ₹78 Cr -14.3%YoY
  3. EBITDA Margin 13.6%
  4. PAT ₹50 Cr -21.9%YoY
  5. PAT Margin 9%
  6. Working Capital Cycle 209 days
  7. Inventory Days 143 days
  8. Cash & Cash Equivalents ₹110 Cr

What they filed

Q1 FY27: revenue up 0.8%, net profit up 0.0% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue677 553 818 604 779 +15%673 +22%873 +7%609 +1%
EBITDA65 50 77 35 44 −32%36 −28%64 −17%43 +23%
Net profit52 32 48 23 23 −56%13 −59%47 −2%23 +0%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

  • Revenue Contribution by Segment
    52% Mid-premium35% Economy13% Premium
  • Revenue Contribution by Region
    35% North India21% East India25% West India16% Central India4% South India
  • Exports Share
    6% Exports

Guidance & targets

Revenue

  • Online Channel Top Line Revenue · future · High confidence ₹100 crore
    Going forward, the Company aims to generate about Rs. 100 crore of top line coming in from the online channel.

    — Udit Todi, Executive Director

  • FY23 Sales Growth Revenue · this year · Medium confidence double-digit growth
    So, it will be a double-digit growth, but it would be very difficult from our side to give any kind of guidance at this point of time.

    — Saurabh Bhudolia, Chief Financial Officer

  • Additional Business from Eastern India CAPEX Revenue · over a period of 2 to 3 years · High confidence ₹400 crore
    Company can easily see that over a period of 2 to 3 years, we should be in a position to get a Rs. 400 crore of the additional business in the top line side.

    — Saurabh Bhudolia, Chief Financial Officer

  • Premium Segment Revenue Revenue · over 3-4 years · Medium confidence ₹500+ crore
    the premium segment should reach to a number of around Rs. 500-plus crore.

    — Saurabh Bhudolia, Chief Financial Officer

Capex

  • Ludhiana New Setup Investment Capex · starting this year · High confidence ₹50 crore
    The Company intends to invest another Rs. 50 crore in Ludhiana along with other capital expenditures that are on track and progressing according to plan.

    — Udit Todi, Executive Director

Working Capital

  • Working Capital Cycle Stabilization Working Capital · towards the end of third quarter · Medium confidence stabilize
    And my working capital cycle should get stabilized towards the end of third quarter.

    — Saurabh Bhudolia, Chief Financial Officer

Volume

  • Premium Segment Volume Growth Volume · from quarter 2 onwards · Medium confidence volume growth
    So, I believe from the quarter 2 onwards, definitely, there will be a high chances that we can see the volume growth in the premium segment.

    — Saurabh Bhudolia, Chief Financial Officer

Margin

  • Gross Margins Margin · in the near future (Q2 and end of Q3) · Medium confidence better
    So, by quarter 2 and end of quarter 3, you'll see better margins coming in.

    — Udit Todi, Executive Director

  • Premium Segment Gross Margin Margin · future · Medium confidence 40%+
    We should hold on kind of like, again, the way we are seeing the premium segment should give me a gross margin in the range of 40% plus.

    — Saurabh Bhudolia, Chief Financial Officer

Market Share

  • Premium Wear Growth Rate Market Share · future · Medium confidence outgrow overall Company growth rate
    So, we believe that the premium wear should outgrow the overall Company growth rate.

    — Udit Todi, Executive Director

  • Premium Segment Contribution Market Share · over 3-4 years · Medium confidence 15-20%

    Previously 12-13% → 15-20%

    we are expecting that between 15% to 20%, my premium segment contribution should come in.

    — Saurabh Bhudolia, Chief Financial Officer

Ad Spends

  • Ad Spend as % of Top Line Ad Spends · this year · High confidence 8-9%

    Previously 4.5%-5% → 8-9%

    So, maybe this year, we might exceed 8% or maybe it will be border line 8% to 9%.

    — Udit Todi, Executive Director

Risks & concerns

  • Raw material price volatility and its impact on gross margins

    high

    Volatile raw material prices impacted gross margins in Q1, but prices have started to decline, and better margins are expected in Q2/Q3.

    Management acknowledged

  • Ongoing SEBI insider trading investigation and its potential impact on brand perception/market valuation

    high

    An analyst highlighted a significant market cap decline linked to the insider trading case, which management addressed by stating the legal process is ongoing and restrictions on trading in other scrips have been lifted.

    Analyst deflected

  • Elevated working capital cycle and inventory days

    medium

    Working capital cycle at 209 days and inventory days at 143 days are elevated due to stocking, but the company expects to optimize this by Q3.

    Management acknowledged

  • Sluggish market demand

    medium

    The market has been slightly sluggish of late, but management expects a bounce-back from the festive season through winter.

    Management acknowledged

Areas of evasion (2)

  • Quarter-to-quarter volume growth for segments
  • Direct impact of insider trading case on brand value/company perception

Q&A highlights

1 direct, 1 evasive
Quarter-to-quarter volume growth for segments Evasive
Mayank, we do not have the figures handy with us. This is something which we can provide with the IR team. If you can just get in touch with them, we'll provide them with the data. We don't have it ready with us right now.

This indicates a lack of immediate transparency on a key operational metric for understanding short-term trends.

Asked by Mayank Makkar

Impact of insider trading case on brand value and company perception Partial
I believe this is what we are not here to judge that. Actually, this is an insider trading case or not. Either I believe the case is already being ruled by the SEBI. They are already doing the necessary investigation, and we should protect our comments till the time we are getting the final order from the SEBI.

The analyst directly linked the insider trading case to a significant decline in market capitalization and brand value, but management largely deflected, focusing on the legal process rather than the perceived business impact.

Asked by Abhishek Singhal

Inventory correction and raw material price decline impact on P&L Direct
So, definitely, that kind of fluctuation would be there, then the Company definitely is going to, that kind of hit in the P&L. But as you will see my stock turn, my stock turn is around 4.5 plus, so I'm not getting inventory more than, 3.5 to 4 months, right. So, the inventory which I'm carrying now, definitely, this inventory will get channeled by the end of next quarter.

Management directly addressed the potential P&L hit from falling raw material prices on existing inventory, providing clarity on a key risk.

Asked by Prerna Jhunjhunwala

3 min read 7 chapters

Detailed narrative

Q1 FY23 Financial Performance Overview

Lux Industries reported a robust revenue growth of 36% YoY, reaching ₹572 crore for Q1 FY23. However, profitability saw a significant decline, with EBITDA falling 14.3% to ₹78 crore, resulting in an EBITDA margin of 13.6% compared to 21.6% in the prior year. Net Profit After Tax (PAT) also decreased by 21.9% to ₹50 crore, with a PAT margin of 9%. This decline was primarily attributed to high-cost inventory stocking and volatile raw material prices that could not be fully passed on to customers.

Brand and Segmental Growth Drivers

The company's revenue growth was largely fueled by its power brands, particularly ONN and Lyra. ONN reported net sales of ₹30 crore, growing over 94% YoY and contributing 5% to the top line. Lyra, the womenswear brand, achieved ₹97 crore in sales, marking a 136% growth YoY and contributing almost 17% to the top line. The mid-premium segment, including Lux Cozi, Lyra, and GenX, witnessed a 52% increase in sales, while the economy segment grew by 20% and the premium category by 25%.

Raw Material and Margin Outlook

Management acknowledged that the decline in EBITDA margin was mainly due to the inability to fully pass on increased raw material costs, with yarn prices rising from approximately ₹350 to ₹450, absorbing the difference in the P&L. However, raw material prices have started to decline post-June 30, and the company expects better gross margins to materialize in Q2 and Q3. The strategy is to maintain flexibility to manage raw material volatility and deliver competitive growth.

Distribution Network and Online Expansion

Lux Industries boasts a strong distribution network with 1,170 dealers as of June 30, 2022, and plans to add 20-25 distributors annually. The company aims to expand its presence in under-tapped areas, particularly South India, which currently contributes less than 4% to revenue. In parallel, Lux is aggressively expanding its e-commerce presence, partnering with major platforms and targeting ₹100 crore in top line from online channels. The company also operates 12 EBOs, primarily as a marketing strategy, with 70-80% in a COCO model.

CAPEX and Future Revenue Targets

The company is on track with its CAPEX plans, including a ₹110 crore investment for expansion in Eastern India, expected to be functional in 3-6 months. This facility is projected to generate an additional ₹400 crore in top line over 2-3 years. A new CAPEX of ₹50 crore is approved for a new setup in Ludhiana, starting this year, aimed at enhancing production and storage capacity. Management anticipates double-digit revenue growth for FY23, with better visibility expected by the end of Q2.

Working Capital and Industry Dynamics

The working capital cycle stood at an elevated 209 days, with inventory days at 143 days, attributed to raw material and semi-finished inventory stocking. Management expects to optimize the working capital cycle towards the end of Q3. The industry continues to see a shift from unorganized to organized players, a trend that benefits Lux, especially with high raw material prices impacting smaller players. The market is expected to bounce back from the festive season through winter.

Premium Segment and Ad Spend Strategy

The premium wear segment is growing faster than the overall company, with a current revenue share of 12-13%. Lux aims to increase this contribution to 15-20% and achieve over ₹500 crore in premium segment revenue over the next 3-4 years, targeting gross margins of 40%+. Ad spends, historically around 8% of top line, were reduced to 4.5-5% during COVID but are expected to return to 8-9% this year to support brand building and market penetration.

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