Lux Industries Limited — Q2 FY22 earnings call

Call held 2 Nov 2021

Management summary

Lux Industries reported a strong Q2 and H1 FY22 performance, driven by healthy demand across product categories and a strategic shift towards premiumization. Revenue and profitability saw significant year-on-year growth, with EBITDA and PAT margins expanding. The company is investing in capacity expansion, expanding its distribution network, and focusing on e-commerce and export growth, while managing raw material inflation through continuous price hikes.

Highlights

  • H1 FY22 Revenue grew 28% YoY to ₹1052 Crores.

  • Q2 FY22 Revenue grew 25% YoY to ₹631 Crores.

  • H1 FY22 EBITDA grew 50% YoY to ₹232 Crores, with margin expanding 327 bps to 22.05%.

  • Q2 FY22 PAT crossed ₹100 Crores for the first time, registering 50% growth YoY.

  • Premium category revenue grew 83% YoY to ₹144 Crores in H1 FY22.

  • Women's wear brand Lyra contributed 12.8% of total revenue (₹133 Crores) in H1 FY22.

  • Working capital days stood at 159 as of September 30, 2021, with a target to normalize to ~120 days by March 2022.

  • Greenfield capacity expansion of ₹110 Crores is on track, expected to generate ₹400 Crores in incremental sales.

Key financials

3 periods

Headline

  • Working Capital Days
    159 days
  • Debt Equity Ratio
    0.14

Q2 FY22

  • Revenue
    ₹631 Cr
    YoY +25%
  • EBITDA
    ₹141 Cr
    YoY +44%
  • PAT
    ₹100 Cr
    YoY +50%

H1

  • FY22 Revenue
    ₹1,052 Cr
    YoY +28%
  • FY22 EBITDA
    ₹232 Cr
    YoY +50%
  • FY22 EBITDA Margin
    22.1%
  • FY22 PAT
    ₹164 Cr
    YoY +58%
  • FY22 PAT Margin
    15.5%

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

  • H1 FY22 Product Segment Revenue Contribution
    56% Mid Premium30% Economy14% Premium
  • H1 FY22 Regional Revenue Contribution
    30% Northern India30% Eastern India22% Western India15% Central India3% Southern India

Guidance & targets

Capacity

  • Incremental Sales from Capex Capacity · Post capex coming on stream · High confidence ₹400 Crores
    With the capex coming on stream, the company is expecting to generate an incremental sales of Rs.400 Crores from it.

    — Saket Todi, Executive Director

Exports

  • Exports Revenue Growth Exports · by 2025 · High confidence 60%
    our endeavour is to grow our exports revenue by 60% to 60+ countries by 2025.

    — Udit Todi, Executive Director

  • Number of Export Countries Exports · by 2025 · High confidence 60+

    — Udit Todi, Executive Director

Market Share

  • Premium Wear Contribution to Sales Market Share · next 3-4 years · Medium confidence 20-25%

    From 14% today

    In the next three to four years, obviously something which is contributing at 14% right now should be in the range of about 20%, 25%.

    — Udit Todi, Executive Director

Distribution

  • Number of EBOs Distribution · next 6-9 months · High confidence 40-50

    From 10-15 today

    We are working towards our direction like to have around 40-50 EBOs over a period of another six to nine months.

    — Saurabh Kumar Bhudolia, Chief Financial Officer

  • Number of EBOs (FY23 Target) Distribution · FY2023 · Medium confidence 70-80% of 150

    Previously 150 → 70-80% of 150

    Yes this can take some time, because as we know there was a lockdown and there was a lot of reshuffling going on in the market because of this pandemic. So, we are reevaluating the situation and we will come back with a revised number or with the timelines, but very much to the extent of 70% to 80% we are on track.

    — Saurabh Kumar Bhudolia, Chief Financial Officer

E-commerce

  • E-commerce Sales Growth E-commerce · FY2022 · High confidence 50-100%
    E-commerce we feel that this year we will be looking at least about 50% to 100% growth compared to last year.

    — Udit Todi, Executive Director

  • E-commerce Sales Figure E-commerce · next 3-4 years · Medium confidence Three-digit figure
    going forward also e-commerce will be one of our focus areas and we are quite sure that in the next three to four years we are targeting to reach a three digit figure for sales coming in from the e-commerce side.

    — Udit Todi, Executive Director

Margin

  • Total Advertisement Expenses as % of Revenue Margin · FY2022 year-end · High confidence 7-7.5%

    From 6.5% (H1 FY22) today

    we are expecting that our year should end with around 7% to 7.5% kind of total advertisement expenses to the extent of H1 closure, we have incurred around 6.5%.

    — Saurabh Kumar Bhudolia, Chief Financial Officer

Working Capital

  • Working Capital Days Working Capital · Long term (steady state) · High confidence 100-105 days

    From 159 days (Sep 30, 2021) today

    Going down the line we will be looking at a similar number maybe reducing it by another 10 to 15 days, but that would be a steady state number, below which we will not be able to go now.

    — Udit Todi, Executive Director

Revenue

  • Lyra Revenue Revenue · next 3-4 years · High confidence ₹500 Crores

    From ₹250 Crores+ today

    in the next say three to four years we are looking at reaching the Rs. 500 Crores mark.

    — Udit Todi, Executive Director

Market context

  • Economy Segment Volume Growth Volume · Annualized basis · Medium confidence 7-8%
    overall on an annualized basis the economy segment should, volume wise the economy segment should grow around that 7% to 8%.

    — Saket Todi, Executive Director

Risks & concerns

  • Raw material price inflation

    medium

    Continuous increase in cost for last 10 months, expected for next 6-7 months, being passed on through price hikes (11-12% in last 12 months, 5-10% in Q3 FY22).

    Both acknowledged

  • GST rate increase (5% to 12%) from Jan 1, 2022

    medium

    Incremental 7% is a fundamental change and will be passed on to dealers and then consumers.

    Both acknowledged

  • Increase in working capital days

    medium

    Working capital days at 159 as of Sep 30, 2021, attributed to raw material stocking due to price increases and liquidity held by debtors due to COVID fears. Management expects normalization to ~120 days by March 2022 and 100-105 days long term.

    Both acknowledged

Areas of evasion (1)

  • Specific athleisure growth numbers were deferred to the IR team.

Q&A highlights

3 direct
Volume growth and price increases in H1 FY22 Direct
The H1 the volume growth was mainly subdued because of the higher ASP growth in the increase in the cost of productions... Last 12 months the average price would have gone up by around 11% to 12%.

Clarifies that low volume growth was a consequence of necessary price hikes to offset rising production costs, and quantifies the average price increase.

Asked by Chirag Lodaya

Sustainability of current high margins (20%+ EBITDA) Direct
despite increasing our ad expenses by 200 basis points, we have still been able to expand our EBITDA margins because ultimately the gross margins have increased and that is flowing directly to your EBITDA and PAT... going forward also we will be able to maintain these margin levels.

Addresses a key investor concern about margin sustainability, attributing it to a favorable product mix shift towards higher-margin premium segments and effective cost management despite increased ad spends.

Asked by Prerna Jhunjhunwala

Working capital days spike and future targets Direct
inventory levels has definitely gone up, the raw material prices are on the increase, we have seen a very sharp surge in prices, and the company is also stocking up on the raw material... Going down the line we will be looking at a similar number maybe reducing it by another 10 to 15 days, but that would be a steady state number, below which we will not be able to go now.

Explains the temporary increase in working capital due to raw material stocking and liquidity holding by debtors, and provides a clear long-term target for working capital days, indicating management's focus on efficiency.

Asked by Aakash Manghani

2 min read 6 chapters

Detailed narrative

Robust Financial Performance in H1 FY22

Lux Industries delivered a strong financial performance in H1 FY22, with revenues growing 28% year-on-year to ₹1052 Crores. This growth translated into significant profitability improvements, as EBITDA surged 50% to ₹232 Crores, and PAT increased by 58% to ₹164 Crores. The company's EBITDA margin expanded by 327 basis points to 22.05%, while PAT margin improved by 300 basis points to 15.5% compared to H1 FY21.

Strategic Shift Towards Premiumization and Athleisure

The company is actively shifting its product mix towards higher-margin premium and mid-premium categories, which drove margin expansion. The premium segment reported stellar growth of 83% year-on-year, contributing ₹144 Crores to H1 FY22 revenue. Lux is also diversifying from pure-play innerwear to athleisure and outerwear, with its women's wear brand Lyra contributing 12.8% (₹133 Crores) of total H1 FY22 revenue. Management targets Lyra to reach ₹500 Crores in revenue within the next 3-4 years.

Capacity Expansion and Distribution Network

Lux Industries is undertaking a Greenfield capacity expansion of ₹110 Crores, funded through internal accruals, which is expected to generate an incremental ₹400 Crores in sales. The company boasts an extensive distribution network with approximately 12 depots, 1170 dealers, and over 2 lakh retail touch points across India. While South India currently contributes a minimal 3% to revenue, it is identified as a key focus area for aggressive marketing and dealer expansion.

Working Capital Management and Raw Material Inflation

Working capital days increased to 159 as of September 30, 2021, primarily due to raw material price increases and strategic stocking of inventory, as well as some liquidity holdbacks by debtors amidst COVID fears. Management confirmed that raw material prices have surged, leading to average price hikes of 11-12% over the last 12 months. They expect to normalize working capital days to around 120 by March 2022 and target a long-term steady state of 100-105 days.

Marketing Investments and E-commerce Growth

The company continues to invest significantly in branding and marketing, with H1 FY22 expenses at ₹67.57 Crores (6.42% of revenues), aiming for 7-7.5% by year-end. E-commerce sales are a key focus, with over 4000 online orders daily. Lux anticipates 50-100% growth in e-commerce sales for FY22 and aims to achieve a three-digit figure (in Crores) for e-commerce sales within the next 3-4 years.

Price Hikes and Margin Sustainability

To counter continuous raw material cost inflation, Lux has implemented price hikes of 11-12% over the last 12 months and plans further increases of 5-10% in Q3 FY22. An additional price hike is anticipated in Q4 FY22 due to the new GST regime (5% to 12%) effective January 1, 2022, which will be passed on to consumers. Management expressed confidence in maintaining current healthy EBITDA margins (20-22%) due to the favorable product mix shift and efficient cost rationalization.

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