GROSS MARGINS SAVE THE DAY FOR INDO COUNT

News: Indo Count reported resilient performance in Q1FY23 with gross margins (low cost inventory) saving the day. It has completed acquisition of home textile business of GHCL which is reflected in current quarter’s revenue. Overall volumes for the quarter stood at 19.1 million meters (up 6% YoY, also includes GHCL volumes). We believe company to have utilised all its low cost cotton inventory which has resulted in company reporting abnormally higher gross margins of 62% (vs. average 51-54%). The significant delta in gross margins (up 730 bps YoY) more than negated the negative impact of higher operating cost due to integration with GHCL and negative operating leverage (employee and other expenses as % to sales increased 346 bps YoY and 511 bps, respectively). Hence, EBITDA margins declined was restricted to 120 bps at 17.3% (up 270 bps QoQ). Absolute EBITDA de-grew 8% YoY (up 28% QoQ) to Rs 122.0 crore. Higher depreciation (up 64% YoY) and finance cost (up 24% YoY) resulted in PAT declining by 34% YoY (down 9% QoQ) to Rs 77.3 crore.

Views: Despite significant cost inflationary pressure, company has been able to maintain its EBITDA margins in Q1FY23. While the company expect short term challenges to persist, it remains positive about the demand scenario in the long run on the back of China + 1 strategy and government steps to support the Indian home textile export market. With the latest acquisition of GHCL’s home textile business (~45 million meters), Indo Count has become the largest Home Textile Bedding company, globally, with annual capacity ~153 million metres. The demand trajectory for home textiles has materially slowed down in key geographies such as the US, UK and Europe, which has led to inventory pile up at the retailer’s level. India has also lost market share in US bedsheets segment (from 61% to 53%). Spike in working capital days (from 145 days to 175 days in FY22) and higher capex (GHCL acquisition: Rs 340 crore and organic capex: Rs 118 crore) has resulted in debt increasing significantly by 134% YoY to Rs 1300 crore (D/E: 0.8x) in FY22. We expect debt to remain at bloated levels in FY23E.

Impact: Neutral.