Banswara Syntex Limited (503722) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Banswara Syntex Limited Q3 FY '24 Earnings Conference Call. This conference call may contain forward-looking statements about the company which are based on beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ravindra Kumar Toshniwal, Managing Director. Thank you, and over to you, sir.

Thank you. Hello, everyone. Good afternoon, and I welcome you all to our quarter 3 and 9 months of FY '24 earnings conference call. Along with me, we have on the call our CFO, Ms. Kavita Gandhi and SGA, our Investor Relations Advisors. I hope all of you have gone through our investor presentation uploaded on the exchange and our company website. Let me begin with the industry landscape, followed by our financial overview. The capacity utilization rates throughout the textile value chain from yarn to textiles to garment production were all significantly affected downwards in 2023 by subdued demand, both in the export and domestic markets. The backbone of our textile industry, garment exports, experienced a downturn in the current year 2023, failing to surpass the $1.15 billion mark. This contrasts sharply with the flourishing export trends observed in our neighboring -- Bangladesh and Vietnam, highlighting the challenges that we are facing in the industry to achieve peak export. We have observed that the global demand for cloth has reduced. This is due to discretionary spending power on clothing being less. While it is expected that this demand may remain subdued, there is a shift to more premium products with better quality and more features. The customer is buying less and buying better. Banswara is moving its products to use available capacities to produce European standard better products that would be available for the large domestic market. There is a shift in our fabrics from export markets towards the larger opportunity available within India. At the same time, we do continue to offer our China Plus One alternative from India with better products for exports. Speaking about the export market, the demand from major markets such as the U.S., U.K. and EU, was significantly lower, particularly in the U.S. and Europe. The companies had ordered a lot more in the previous financial year and were struggling with higher inventories and inflation, along with some fears of a recession. But as we look ahead, inventory levels are coming down for all of our customers, and this, we hope will lead to demand improvement in these markets. Now let me take you through the financial performance of the company. Our total income declined by 18.4% to INR 920.8 crores in the 9 months of FY '24 on a year-on-year basis. The EBITDA stood at INR 89.8 crores during the 9 months. Profit before depreciation and tax came in at INR 36 crores. The company recorded a profit after tax of INR 26.9 crores in the 9 months of FY '24. The exports declined by 40% of the overall revenues in the last financial year. And as compared with -- the exports have declined to 40% of the overall revenues in the 9 months as compared with the 47% that we had of the total market. So that means exports has dropped from 47% to 40% of our total turnover, mainly due to the decline in export in the key markets of Europe, Turkey, U.S. and U.K. Now, let's look at each of our business segments. In the Yarn division, our yarn vertical witnessed a 8% decline in value in quarter 3 FY '24 against last year. This decline is attributed to about a 15% to 18% lower average price due to subdued demand in both domestic and export markets. The sales volume, however, increased in kilograms by 8% in the same period. Yarn sales declined by 11% to INR 383 crores for the 9 months FY '24 compared to last year. Despite these challenges, we were, as I said, able to increase the kilograms. The capacity utilization in the Yarn division stood at 80% for the 9 months. We are witnessing that new markets of Ludhiana and Tirupur are beginning to show signs of growth, and we anticipate promising business in the upcoming quarters. We will continue to focus on high-value yarn products that will lead to enhancing the value growth. In our Fabric division, the fabric vertical witnessed below par performance as revenues dipped by 22% to INR 324 crores in the 9 months of FY '24 as compared to the same period last year, while there is an uptick of 8% on a sequential quarter basis. This is giving us hope that we are out of the slump and we'll continue to see growth. The capacity utilization in the fabric vertical stood at 66% for the 9 months in FY '24, which is disappointing for us. Middle East market experienced a slow recovery due to regional conflicts, resulting in increased stock. Efforts are underway to expedite these dispatches. We are launching and are happy to announce the launch of Simone Federico & Figli, a new Italian brand, that will happen in quarter 1 of financial year '24 and is expected to be a substantial growth driver for value-added fabrics in the Indian market. For our garment business, for the 9 months of FY '24, the garment sales declined the most, by about 25% compared to last year to INR 204 crores on account of an overall market slowdown. The sales were impacted, particularly for suits and blazers. However, the domestic market has been good, and especially good for the trouser category. The company is currently exploring promising opportunities and receiving inquiries for the upcoming year. There are potential additions of new significant retail customers in the areas of suits, military uniforms and corporate uniforms from all over the world. On the regulatory front, we are expecting that, if the U.K. FTA happens, then it will significantly enhance our company's business outlook. At Banswara, we envisage a significant growth potential for man-made fabrics, as the trend which is ongoing of China Plus One, both within imports happening into India as well as the export markets, continues to be important. The market is increasingly demanding better value for money products that excel in performance aesthetics and are delivered faster. To meet these demands, we've introduced the quick response service. The QRS range is aimed at providing quick and efficient solutions to our customers' needs. Additionally, we are seeing a very strong demand for worsted fabrics, which necessitates the enhancement of our capacities and capabilities. The quality improvement overall is paramount, and we are addressing this. In pursuit of these goals, we have considered and are outsourcing yarns as a viable option, which we plan to pursue aggressively. Our endeavor is to aggressively expand our branded fabric business, focused initially on local markets and then venture into global territories. While these strategic shifts will take some time to reflect in our financial results, we are confident that this direction aligns with our long-term objectives and will ultimately lead to better results. Thank you. And with this, I would like to open the floor for questions.

[Operator Instructions] The first question is from the line of [ Apurva ], who is an individual investor.

So I have a couple of questions. The first one is, like, what is the -- where do we plan to spend in terms of capital allocation like -- in terms of -- like in the yarn segment or fabric segment or in garment segment?

Okay. So the CapEx that we have planned, is that what you're asking about, right?

Yes.

Right. So we are planning, and we have actually invested INR 40 crores in these 9 months in the Yarn division and a balance of INR 18 crores will be invested in the quarter 4. On our Fabric front, we have invested a CapEx of INR 18 crores during the 9 months of this fiscal year and no more is planned for this year. And in our Garment division, we've incurred INR 5 crores, and there is no more material CapEx to be done in the remainder.

Like, I mean, from the future perspective, like from the cash flow which we would be generating in the future, right, maybe like over the next 2, 3 years where we are focused?

Yes. I mean, see, the company is generally incurring between -- about INR 100 crores on an average every year on various different modernizations and expansions, but no more than that is planned. And I think next year we probably need to do even less. So we will just be focusing on modernization and the enhancement of capabilities in terms of compliance. There is no real CapEx planned for next year.

And sir, like, by when do we see the demand coming back to the normal -- like in export market?

Yes. So we've seen a very good year followed by a very bad year. And the capacity utilization percentages that we had this year have been surprisingly low and have never been so low for a long, long time. In fact, in my whole 40 years in this company I've never seen it so low. In spite of that, we are surprised that, really speaking, the demand for premium products has not gone down as much. As long as you're offering value for money to consumers and offering them something differentiated, there is demand. The demand for ordinary products at just -- which is available in plentiful, is lower. So we have looked at this and we are quite used to this idea of producing a more premium product, and have organized ourselves to do that in a better way to use our capacities and offer that premium product at value to the consumer. So we're hoping this strategy should get us to bounce back this year itself -- [ from ] financial year '25 onwards. FY '25 we should be back on course to try and at least get back to where we were in our best year, if not in 1 year, maybe in 2 years.

The next question is from the line of Amit Kumar from [ Putnam ] Investments.

Just on similar lines in terms of your capital allocation, I think in your initial commentary you talked about outsourcing the yarn and yet you have ended up spending about INR 40 crores on yarn CapEx in 9 months, and I think you're [ saying ] this a little bit [ left ] for fourth quarter. Could you just help me reconfirm this?

So most of the yarn that we are planning on outsourcing are either filament yarns which we don't produce on our own, or worsted yards where we have very limited capacity available. So we are seeing demand in these 2 types of yarn. The type of yarn we have invested in is poly viscose spun yarn, which is fibre-dyed. Here, the demand has actually gone down, but the demand for more premiumization has gone up. So we are converting our capacities by, even to some extent, having a reduced production on better quality yarns. This is what is happening within our installed capacities, which we were not able to use fully yet.

And in what sort of time period do you believe that demand will grow to sort of be able to utilize this expanded capacity?

Yes. So we are saying that this would happen in 1 to 2 years. We should be able to use all the capacity we have, and even use it in a way which gives us back to where we were in FY '23 in 2 years from now.

And just one sort of final point. This poly viscose yarn, there is no sort of opportunity to source it also from the market, either with your [indiscernible]

Like, available from the market is one which is, let's say, the -- is very poor. And we would like to premiumize the poly viscose to make it more like a poly wool. For that, we needed to make investments internally. Our belief is that there is a need to upgrade the quality of poly viscose, not get it at the cheapest price.

The next question is from the line of Harsh [ Joshi ] from [ Analyse India ].

I wanted to know the peak sales that we can do on the basis of the current capacity that we have?

Yes. I mean, like we've always said, we have capacities enough to go back to INR 2,000 crores without any CapEx really happening. Other than modernization and compliance-related investments, we don't need to do anything more to get to INR 2,000 crores. The real challenge has been demand and demand has to be stimulated by enticing customers to buy better products at great prices. Customers must feel they're getting a bargain out of what they're buying and be tempted to buy. Because if you look at what has happened globally, there are so many spends happening for your discretionary income on items other than apparel, where you need to spend money on different areas of travel, on holidays, on internet and on electronic equipment and stuff. So there is very little reason for you to increase your expenditure, unless you find something which is quite exciting and something new in the apparel part. So this is exactly what we are trying to help all our brands with, and we have found success in this in a way in which we are seeing many of the new brands coming into the country. The brands which are more internet savvy, the brands which are more current, have begun to increase their market share. And we begin to see that there has been a shift in the market, and we have to adjust ourselves to tell the customers, you don't need to import products from China and then sell them in India. We are going to traders who are doing these imports here and giving them the fabrics, which is going into a large unorganized garment sector in the India. And this itself has a huge potential. So, apart from that, we are also looking at premiumizing on our Federico Simone, and this is another brand which will be launched Pan India. So these are various opportunities available. We have seen a positive look at the fact that what we are selling in India and what we are selling for exports now, there is a homogeneity to the market. And this is going to help us to be able to deliver faster. We don't have to make 2 different ranges. We have only one range, both for the domestic and export market.

The next question I wanted to ask is regarding the Red Sea issue. Are we facing any, like cost escalations in our freight costs?

Yes. The freight costs have gone up due to this. We are not seeing the impact for the U.S. sales, but for Europe, definitely. And it does also increase the lead time a little. So this is a challenge for a moment. I hope that it gets resolved more soon, otherwise the export market will face some challenges due to this.

And the last question, sir. Are the promoters looking to sell any more stake in the company?

No. I mean, the stake that was sold, was sold by me personally for buying a house. Other than that, we haven't been selling.

[Operator Instructions] The next question is from the line of Ravi Shah from OPAL Securities.

I have a few questions. So, my first question would be, like, could you give you a more detailed understanding on the demand landscape, especially for exports and like, any kind of demand direction you can give me for U.S., U.K. and Turkey? And any specific region wise demand projections that we have internally maintained?

Right. So we've been talking to all of the different regions. The U.S.A. is the one where our demand projections for this year quite went against our expectations and were much lower. And then, we have now reevaluated and gone back to our customers, and they are seeing a buoyancy come back. In fact, the U.S. grew by 3% GDP and there is some optimism on the consumer front with the pipelines now for our customers being empty. So we are seeing that this export drop of 40% that happened for us, should recover back significantly. As well as in the domestic market there is a lot of buoyancy among the newer brands, as well as like -- customers like Tata Trent, customers like -- our whole supply chain of BlackBerry and all of the customers who work with the major brands in India, are doing pretty well. There has been a slowdown in their lifting and their apparel sales this year, but they are seeing a shift which is now going to go towards being able to deliver something which is like a little bit different in the makeup. The formal wear has moved to a little bit more casual. Everything has moved to a little more, let's say, sporty kind of look. And this change is why customers have not been able to sell the old looks and what people are looking for now is something new. So I think this is just an adjustment that happens in the market, particularly after something like as dramatic as the pandemic and then over ordering. So we will see a settling down happen. And this idea of giving the customer more value for money, of premiumizing the product and offering it yet at a bargain, this cannot fail. This is something which every customer is always looking for. Give them value for money in India, and you will have them lining up.

Sir, you had answered a question about the Red Sea, but I have a little more detailed question. Like -- so where will we be seeing the hit more on? So basically, they'll be coming from inventory costs [ or ] working capital, or will it be coming more from the shipping cost? [ Means ] where are we going to see some major effect [ with the] [ Red Sea ] [indiscernible]

I didn't understand the question. Can you repeat it, please?