Pearl Global Ind Q1 FY25 earnings call

The numbers management led with

• Volume growth (YoY): 35% volume growth in Q1 FY25
• Capital raise via QIP: INR 149.5 crores raised from marquee investors
• Capex commitment: INR 500 crores over 2-4 years (per Feb '24 analyst meet)
• India capacity addition: ~3,000 machines in India; full ramp ~5,000-6,000 machines/day across Bihar, Orissa, MP

Guidance on this call

The industry, as management sees it

Global apparel trade is in a recovery phase — US retail grew ~2% YoY in Jan-May 2024 and ~4.3% in June, with retailers having largely cleared over-inventory. However, apparel imports to US were down 7% YoY in H1 CY24 (UK -12%, EU -7%, Japan -9%), expected to improve in H2. Bangladesh's LDC tariff advantage with Europe/UK remains intact till 2029. China is losing market share to South Asia under the China+1 theme. India has scope to grow 10-15% in exports this year if capacity ramps up.

Risks management named

• Bangladesh civil unrest and political transition — capacity may shift to stronger players, weaker ones exit
• Linen fibre remains inflationary even as other raw materials are stable
• Red Sea rerouting lengthens transit; customers expecting shipments ~1 week earlier (no FOB cost impact)
• US/UK apparel imports down 7%/12% YoY in H1 CY24; recovery expected in H2
• India wage and DA revisions plus higher absenteeism/attrition during election/summer affected Q1
• Standalone EBITDA margin compressed to 4.8% (-34.3% YoY) on factory-level productivity issues

Every question, with its answer

1. 1. Bangladesh impact and FY25 order outlook

   Vignesh Iyer, Sequent Investments

   Question. Bangladesh disrupted operations by a few days — how will volumes be impacted in the near term? And on a medium-term view, how is the Jan-Mar quarter panning out given that you typically have visibility on US/UK winter order flows around 6 months in advance?

   Answer, Pallab Banerjee, Managing Director. In general, order flow is much greater compared to last year and the company is solidly on track with its growth plan — no major concerns unless a new surprise emerges. On Bangladesh, 5 full days plus 1 partial day of production were lost; will be recovered via overtime and holiday work, with very few delivery delays to customers and slightly higher expenses. Attendance post-curfew has been better than normal; all factories are running at full strength and Indian staff are largely back in Bangladesh.

   Follow-up. What was the YoY volume growth in Q1 and is this number sustainable going forward?

   Answer. Volume growth was 35% YoY. Per the February '24 analyst meet, much of the revenue growth will be volume-driven with a 60 woven / 40 knit product mix. All FY28 projections were built on volume-led growth, in line with the strategy and therefore sustainable.

2. 2. Bangladesh capex, partnership model, FY25 volume, seasonality

   Palash Kawale, Nuvama Wealth Management

   Question. Do you see any change in capital allocation plans or are clients pushing you to shift supplies out of Bangladesh following the civil unrest? What was the partnership model contribution this quarter vs Q1 FY24? How should we model FY25 volume given the high Q1 base? And how is the seasonality pattern across quarters for a knit + woven player like Pearl?

   Answer, Pallab Banerjee, Managing Director. No client pushback yet; received supportive messages and had backup plans ready. Capital allocation across regions is unchanged. Partnership factories contributed ~21% in Q1 vs 79% in-house — slightly higher this quarter due to growth. On seasonality, Pearl's seven categories balance each other out — spring/summer favours India, fall/holiday outerwear favours Vietnam/Bangladesh; no major swing in consolidated numbers. CFO added that the long-term guidance of 12-14% revenue CAGR and 10-12% EBITDA by FY28 should be the modelling framework.

3. 3. Customer revenue mix and Tier-1 customer ramp

   Bhavya Gandhi, Dalal & Broacha Stock Broking

   Question. What is the revenue contribution from new customers in this quarter and how has it moved over the last 3-5 quarters? How big can the customer base added post-19-20 become — can they scale to ₹7,000-8,000 cr or peak at ₹2,000-3,000 cr? And what is the current size of the three USD100 mn target customers?

   Answer, Pallab Banerjee, Managing Director. FY24 split was 44% from <5-year customers, 56% from >5-year. That mix will gradually migrate as the 2019-20 cohort crosses 5 years, but new additions continue. Customer classification: Tier-1 target USD100 mn (≈INR800 cr); could be USD200-300 mn for Walmart/Target. Status: one customer has touched USD100 mn, second is about to, third is around USD55-60 mn. Second tier target USD40-60 mn; tactical customers below USD20 mn. Penetration of Pearl in each customer's procurement is currently single-digit — room to grow. CFO confirmed 12-14% revenue CAGR is a conservative base; a few percent higher is possible without over-committing.

   Follow-up. Are we seeing any consolidation in the industry?

   Answer. Question was cut off by moderator; analyst asked to rejoin queue.

4. 4. Capex allocation, FY25 capacity, EBITDA margin outlook

   Parth Patel, Unifi Capital

   Question. Given the Bangladesh situation, can you explain the strategic allocation of the INR 500 cr capex (from Feb analyst meet) across geographies? Where are you adding capacity in FY25? And how should we look at the EBITDA margin outlook if current-quarter EBITDA (including ESOP) is flat YoY — what is the outlook for the next 9 months and FY26?

   Answer, Pallab Banerjee, Managing Director. Capex will be spread across all locations. India is moving capacity to lower-cost states (Bihar, Orissa, MP). Bangladesh (~40-45% of capacity) will continue to attract capex. Vietnam, Indonesia, Guatemala will also get incremental investment. No immediate shift away from Bangladesh. CFO added that in FY25 capacity commitments will happen in India (Bihar, Orissa via partnership factory, MP) and Bangladesh — capacity commercialisation may spill to FY26. On EBITDA margin: optimistic about hitting double-digit adjusted EBITDA by end of FY25 and FY26 should be in line with that; current softness is in the standalone entity.

5. 5. Bangladesh tariff, India opportunity, capacity addition speed

   Kaushik, AK Investments

   Question. Three questions: (1) What makes you bullish on Bangladesh given the LDC tariff risk after 2029? (2) How do you plan to capture the India sourcing shift from 5% to 15%? (3) How fast can you add capacity in any geography to mitigate a Bangladesh-like geopolitical risk?

   Answer, Pallab Banerjee, Managing Director. (1) Bangladesh LDC tariff status likely intact till 2029; beyond that, ROI calculations are made without it. Bangladesh advantages: lower food cost pushes workforce, higher productivity/efficiency, lower absenteeism, strong middle management. (2) India expansion already underway — Bihar, Orissa, MP will add capacity. Set-up takes 5-6 months if a building exists and 12-14 months to build from scratch. India partnership factory ecosystem still nascent. (3) India plan is already in motion — Bihar is 1-2 quarters away, Orissa has started, MP construction starting. 5,000-6,000 machines/day potential in India. CFO added that the company is on the path to 130-140 mn pieces capacity with ~3,000 machine additions in India.

   Follow-up. Can you confirm — is it fair to say Bangladesh economics remain strong till 2029 and capacity addition is easier in Vietnam than India?

   Answer. MD clarified: India is on the cards with Bihar, Odisha, MP plans already executing. Bangladesh has tariff advantage and higher productivity due to ecosystem; Vietnam has similar ecosystem advantages. Each location will be utilised per its strengths. India is not slow — capacity is being added now.

6. 6. Order book, guidance, India exports, capacity augmentation

   Varun Gajaria, Boring AMC

   Question. How is the order book filling up? What is your FY25 growth guidance? How is cotton yarn supply to Bangladesh panning out? How is the India export market doing — are inventory issues behind us? And how long will India take to recover earlier export numbers?

   Answer, Pallab Banerjee, Managing Director. Order book is on track — thoroughly on track. Guidance reiterated: 12-14% YoY growth with better bottom line, double-digit. No logistics issues in Bangladesh — inward raw material and exports are normal since 6th August. Some impact from productivity loss and higher costs but not very big. India exports: last 2 months have been good with double-digit growth; FY should see single-digit high growth. Industry view: India has scope to grow 10-15% this year but needs sizable capacity. China is definitely losing market share; Bangladesh may lose or gain a couple of percent. CFO added on capacity: Chennai facility completed and stabilising; new plants in India and Bangladesh under commitment phase, capex commitments in next 2-3 months.

7. 7. Capacity utilisation, Bangladesh customer exposure, finance cost trajectory

   Pulkit Singhal, Dalmus Capital Management

   Question. Are you reaching peak utilisation in some geographies with 35% volume growth and stronger H2 commentary? Are customers heavily dependent on Bangladesh looking to diversify sourcing over the next 3-4 years? And where is finance cost headed — currently INR 20-23 cr/quarter, ~INR 90 cr/year?

   Answer, Sanjay Gandhi, Group CFO. Capacity utilisation: blended was 68-69% last year, should exceed 80% in FY25 with current growth trajectory. There is still headroom on the 83.9 mn pieces base. MD added: Pearl doesn't have customers heavily exposed to Bangladesh — Australian customers were diversified successfully; US customers have balanced exposure. Sees a potential win-win if Bangladesh-exposed customers look to shift. On finance cost: 2.2% of sales; absolute will rise with capex and receivables; will follow 30-35% equity / 65% debt mix. ~INR 15 cr of high-cost (9.5-9.75%) long-term debt repaid via non-core asset sale — will reduce interest cost. Expects softening interest rates in 2-4 quarters to help. Non-core asset proceeds will continue to be used for long-term loan repayment.

8. 8. Worst-case Bangladesh scenario and Vision 2028

   Palash Kawale, Nuvama Wealth Management

   Question. Worst-case scenario: if Bangladesh doesn't normalise and clients push for diversification, how confident are you of reaching Vision 2028?

   Answer, Pallab Banerjee, Managing Director. Bangladesh's USD 50 bn apparel exports would have to shift to other geographies in a worst case — that would be a good opportunity for Pearl's other manufacturing regions. Pearl is not heavily dependent on any single geography, so well positioned. Even if 10% (USD 5 bn) shifts to India, Pearl is ready to take it. Vietnam, Indonesia also have opportunity. North Africa (Morocco, Tunisia) may see some movement but not large.

9. 9. Customer onboarding timeline, barriers, recent additions, Bangladesh consolidation

   Bhavya Gandhi, Dalal & Broacha Stock Broking

   Question. How long does it take to add a new customer and what is the entry barrier? What went right in 2019-20 that allowed Pearl to add so many customers simultaneously? Have new customers been added in the last 2-3 years? And are we seeing any early signs of consolidation in Bangladesh on the ground level (not just philosophically)?

   Answer, Pallab Banerjee, Managing Director. Entry barrier for big established customers (Gap, Walmart, Target) is high — usually need a strategic trigger (e.g., Bangladesh shift). 2-6 months for compliance approval. Pearl's 2019-20 success: global player positioning, China+1 wave, in-country design services, multi-category offering, multi-country supply chain. Customer onboarding can be 2-3 months if there's an immediate need, or years if waiting for the right opportunity. Yes, new customers have been added in last 2-3 years and some growing significantly. Bangladesh consolidation: has been ongoing for a year on the vendor front and will accelerate post-government change. Also: one customer acquired more brands and moved from weak to strong — Pearl looking to grow with them.

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In their words