Filatex India Limited (526227) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Filatex India Limited Q2 FY '22 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Madhu Sudhan Bhageria, Chairman and Managing Director, Filatex India. Thank you, and over to you, sir.

Thank you. Good day to all of you. Once again, a warm welcome to all of you attending this earnings call for the quarter ended September 2021. I hope all of you are safe and are maintaining all necessary precautions to contain COVID. An old adage, "an ounce of prevention is worth a pound of cure," holds good in containing this pandemic. Though the fear of third wave has not vanished, we are back to business as usual, as the skilled workforce has come back from their native places. Public transportation has been restored close to a normal, in a graded manner. Restriction on hotels, flights and leisure travels have revived after easing the restrictions. With prayers in our hearts and CAB, COVID Appropriate Behavior, we hope there is no third wave causing disruption to our daily lives and business activities. Coming back to business matters, I presume you would have certainly gone through the presentation, which has been uploaded on our website as well as on the stock exchanges'. You would have noticed that our performance in second quarter of FY 2022 has been better than the first quarter, both in terms of top line and the bottom line. The slowdown effect due to second COVID wave has gradually waned. Let me quickly go through the results of this quarter. We achieved a production volume of 88,900 metric tons, which is around 93% of our capacity. As compared to Q1 FY '22, the production is 14% higher in this quarter. The revenue for the quarter is INR 965 crores, which shows a growth of 38% over Q1 FY '22. The operating profit EBITDA is around INR 125 crores, a growth of around 24% over the preceding quarter. Profit before tax is INR 110 crores, which is an increase of around 41%, and net profit has increased 42% to INR 74 crores. As evident from the numbers, the performance is quite remarkable when compared to first quarter of this financial year. In this quarter also, we are not comparing financial results on a year-on-year basis as Q2 of last year had vastly different conditions, and any comparison as such would exaggerate the numbers. The markets have shown good recovery ahead of the festive season. There is some buoyancy in the sentiments of the market. The pre-Diwali business has been good. Trader across the country are preparing for forthcoming wedding season. In about a month from mid-November to mid-December, more than 2 million weddings are slated to be solemnized across the country. Textile, jewelry and service sector are looking at a bonanza by way of wedding purchases. The demand for synthetic fibers in the domestic market has been good. However, as they are being trend over decades, the demand for yarns picks up in third and fourth quarter. Prospects for exports are also looking good. The government having recognized the importance of synthetic fibers for the growth of textile business is now focusing on increasing production of manmade fibers in India in line with international trend. Government policy initiatives have helped immensely in reviving the sentiments in the domestic market. Government policy initiatives like PLI, Production Linked Incentives, which is mainly to promote MMF, apparels and garments. RoDTEP, RoSCTL, mega textile parks. These stimulus have perked up demand and likely to lead to fresh investments. There are some signs about shortage of key raw materials from domestic suppliers. However, there is no global shortage and the shipping rates, which had skyrocketed, are showing some downward trends, coming down to tolerable levels. Coming back to our manufacturing facilities, we have commissioned our 30-megawatt captive power plant. However, as there is a global shortage of coal, the prices of coal have shot up almost 3x. High prices of coal, steep freight rates and erratic shipping schedules have put a strain on all coal users, like steel plants, processing houses and power plants. After having run our plant for several weeks, we have stopped generating power, and we'll resume the operations when coal supplies are stable and at affordable level. Our proposed plan of debottlenecking melt capacity of 50 tons per day and manufacturing lines of 120 tons per day of POY has moved to the execution phase. Ordering of long delivery equipment is complete. We are targeting to complete the installation by June 2022. The future of textile manufacturing is at an inflection point. Global production of textile and apparels have rapidly increased over the last decades, which has led to generation of large amount of textile waste. Polyester, owing to its affordability and versatility, is the preferred and most dominant fiber. To ensure sustainability and reduce environmental impacts in the textile and apparel industry, utilizing a sustainable and circular economy model is of utmost importance. As mentioned in previous con call, we had initiated in-house research work on recycling of polyester waste in all forms. This is based on depolymerization of polyester and removing color, additives, catalysts, et cetera, before re-polymerization. Our lab-scale plant trial results after rigorous efforts lasting over more than 18 months have given us confidence to scale up from 50 kg per day to a pilot plant of 1,500 kg per day. In this pilot plant, we will be able to revalidate our process parameters and more accurately compute cost of production for recycling. The output from this pilot plant will also give us an opportunity to test market the quality of recycled chips/yarns. We expect this plant to be ready by April 2022. Sustainability in the textile and clothing industry has gone beyond just using organic materials and efficient processes. Recycled fibers are fetching a good premium. The pressure on international brand is high, as these brands and retailers are increasingly being held accountable for what happens throughout the value chain. To sum up, as mentioned earlier, our capacity utilization is almost 100% in case of yarns. The demand is good. Our cash flows are steadily increasing. On the strength of strong cash flows, we will look at appropriate option for utilization, first and foremost, one being reducing the debt. The future of polyester filaments, after the COVID slowdown, looks good. As before, we are bouyant about the prospects of our company. Thank you for listening. Now we can move on to the question-and-answer.

[Operator Instructions]. The first question is from the line of Sudhir Bheda from Right Time Consultancy Private Limited.

Yes. Season's greetings to you. Congratulation on very high turnover growth and strong cash flow. Sir, my questions are like, whenever in the past, we have seen whenever cotton prices goes up, polyester margins and polyester demand looks up. So now cotton prices are rolling at all-time high. What is the -- then outlook for our margin and industry as a whole and our company, in particular? That is the first question. And second question, what is the volume growth you are anticipating in second half of this current fiscal, as we have done from INR 159,000 yarn and total INR 167,000, including chips in the first half? So volume outlook, if you can give you in the second half? So these are the 2 questions, sir.

Yes. Regarding your first question, see the cotton prices have a very low correlation with our margins and prices because cotton prices are more than double and triple than the prices of filament yarn. In the fiber, it makes a difference because in fiber people blend polyester fiber with cotton. But we do not produce polyester fiber, we only make polyester filament yarn. So there is no correlation as far as that is concerned. The demand for all the fibers have gone up, whether it's cotton, filament -- sorry, polyester, nylon, viscose. And I feel the demand for the textiles will remain high, and that will give us decent margins going forward. And I think at least for 3 to 5 years, still some big capacities come in. I don't see any downward trend coming in the year as a whole. 1 month, 2 months can always be a little slack. But year, as a whole, the performance for the textile should remain good. And your second question was capacity. So what we have done in this quarter, we should be able to replicate that in -- double of that in the next half. So in this quarter, our production has been around 89,000 tons. So the next half year, I think, we should be able to do around 180,000 tons. And the margin should remain somewhat a little better than the Q2.

The next question is from the line of Vikrant Kashyap from K.R. Choksey.

Congratulations on a very good set of number. Sir, in the opening remarks, you mentioned there is a sign of shortage of raw material in domestic market. Could you please give some better understanding that how it is panning right now in this quarter and outlook for the second half? Will we be more importing or the raw material is still available that we will be able to meet our requirements?

See, there has been shortage because there have the sudden shutdown in the domestic plants. They had some breakdowns, and we did not plan for things like that. The breakdown happened in Reliance plant as well as in Indian Oil simultaneously. So some slight production cuts we had to take. But now going forward, we are making import arrangements, and we will increase our stock levels also so that we do not face such problems. Also, Reliance has taken over some of the plants, like Alok and even JBF. So their domestic self-consumption has gone up quite high. So almost to the tune of 65%, whatever raw material they produce now they are consuming by itself. So then we will be importing more and keeping the stock level a little higher so that we don't have the problem of shortage of raw materials in future. So we are taking necessary steps so that we don't face this shortage. The price parity is same as imports and what we buy from Reliance. There is not much difference in the prices.

Okay. Since the realizations for your product has gone up, vis-a-vis has the cost for your input materials also went up in a similar way because we have seen stress on margin?

Yes. Yes. The cost of the material has also gone up, more or less similar. Some power cost has gone up because lately power had become costly. And when our starting of the power plant was happening, we could not buy power on the bilateral agreements that had all finished so we had to buy from the grid, which was slightly costlier. But going forward, I feel from fourth quarter onwards, we should be able to start our plant again because now coal prices have started coming down. And maybe in a month or so, they will come to the desired levels.

Okay. Great. So how is the outlook for rest of the year for your input prices for crude derivatives?

It's very difficult to predict that. It's a pass-through. But I feel crude should remain around plus/minus $4, $5 at $80 per barrel. So the prices should hover around these numbers only. But yes, they fluctuate a little bit because they are determined from China, and Chinese by nature are very speculative. So prices keep fluctuating 2%, 3% every fortnight.

Okay. Sir, one or two more questions for me. Number one, you talked about better prospects in exports. Will you please explain more? And how do we are looking at the exports market?

We have a presence in export market, and we have increased our texturizing production. So textured is the main product, which is exported. And previously, we were facing shortage of containers and freights were very high. As the freights come down, then we will be able to export more competitively.

Okay. Sir, one last question. We have improved our product mix over the years. Do you still find better scope for further improvements because we are more focused on FDY and DTY?

Yes, there is always scope for better improvement, and that's a very ongoing process. So I think even after 10 years, there will be some scope for improvement. So that we are continuously trying to improve and going to different products or making different products where we can fetch better margins. So that's a very ongoing process.

[Operator Instructions]. The next question is from the line of Riddhesh Gandhi from Discovery Capital.

So I just wanted to understand. I mean we understand the prices are up, RMs are up as well. Just wanted to understand -- I mean Delta going on at the moment and how you see this happening in Q3 and Q4? And any expectations around spreads or the EBITDA per ton as opposed to, if not, margin, how should we be looking at that?

I think in our case, EBITDA absolute is very important as I have been saying time and again. So we try to always improve the absolute EBITDA. By changing the product mix, our margins per ton can go down, but absolute EBITDA can increase because if we increase our productivity by making coarser deniers, like where the production is more, so the margin is less. But overall, the profitability from the same machine increases. Also sometimes we are buying POY and selling certain other POY so that can get more value. So I think a better benchmark for -- benchmarking our company is to see the absolute number of EBITDA. Like we did INR 125 crores this quarter, INR 101 crores last quarter. Going forward, I feel that we should do much better than INR 125 crores in the next 2 quarters. This is all I can tell you.

And do you see any kind of slowdown at all happening in the market? Or are there any initial signs of slowdown in the end market?

Slowdown, I think, it can only happen like if the COVID third wave comes in or something unforeseen happens. Not -- in normal circumstances, I don't think slowdown should happen.

So right now demand is strong and prices are strong and spreads are strong?

Yes, I think it should remain for some time to come. It's not a very short period demand. See one should appreciate for last 2 years, since the COVID has happened, the production capacities have not increased for most of the product. But the demand is increasing. Population has been increasing for the last 2 years, and also there's pent-up demand from people. So I don't foresee for next 2, 3, 4 years, till the new capacities come in, in products. The demand all around should remain good, until and unless there is some...

Because with Reliance talking over Alok and JBF, as you indicated, is that going to be an issue in supply or we don't expect that...

No. Rather that will consolidate the industry because these people who had cash crunch used to spoil the market. They could not hold on to their product and would sell at a lower price to get money. So I think this will be a positive for the industry as a whole.

Interesting. Interesting. And have we seen a whole host of the smaller players actually closed down because of lack of economies of scale, which has led to consolidation even more?

No. No, that's not happened. Only players who have not been able to manage their finances properly, like Alok, JBF, Garden. They have only -- now they've been taken over, actually. I don't foresee any other player having some problem because last 1 year has been good for the industry. So whatever small problems people had, they must have overcome by the profitability the last 1 year. So going forward, and their consolidation has happened. Only in the polymerization sector, if you see, we are hardly 13, 14 players. There are not too many players in that. Rest are around 15, 16 who make from chips to yarn. That's the whole industry.

Good. Understood. Sir, and then also just to understand that, our -- I mean debt levels have gone down materially and we're generating a reasonable amount of free cash flow as well. How do we look at our growth plan going ahead? Is the plan to then return some of this to shareholders in the form of buybacks and dividends? Or is there a CapEx plan to expand? Or is it a combination of? How should we be thinking of that?

I think that it will be a combination. We do have some CapEx plan, which are already there, which involve a CapEx of around INR 140 crores and some godowns and other things we are building, maybe another INR 10 crores, 15 INR crores. But rest, we will reduce our debt. And certainly, after the year-end, we will reward the shareholders by a buyback or a dividend, as deemed fit by the Board.

Sir, this is the last question. If you could just sort of speak a little bit about the opportunity in your renewable yarn? How large the opportunity could be? And how unique our technology is, and any barriers to entry in this particular area?

See, this is a very unique technology, which we are developing. And there are very few companies in the world. They are also in the stage of developing only. Nobody has fully developed this technology. And anybody who is doing also a little bigger project is not using every kind of waste. They are using very selective kind of waste and are able to do it. So we are developing a technology. We will be able to use yarn waste, pet bottle waste, even fabric waste where fabric in that polyester content is more than 70%. This is basically a chemical recycling compared to what other people are doing is mechanical recycling. So we take out the impurities, which are embedded inside the waste, not just surface impurities. And then we repolymerize and make. And there's a huge demand for this material. These are not available. At the moment, they are being sold at around 60% premium than the virgin. So we expect a very good profitability. And going forward, our main concentration of growth will be in this field once this technology is established. We have already applied for the patents. And I think by year-end, we should have -- the next year-end, we should -- the patents also would be there. We already have a go ahead to go for commercial production.

[Operator Instructions]. The next question is from the line of M.S. Rajasekar, Individual Investor.

Congrats on a good set of numbers. I just wanted -- in your last con call, you mentioned that you have developed new types of yarn. I just want to know whether has it been launched? And how is the response?

Yes. They are being launched, but it takes a lot of time to convince people and showcase. So it's an ongoing process. We have launched. They will make samples, then they'll go to their customers. It's a very slow process. There is some achievement also, some products have started, some small sales have happened. I think it will take some time.

Okay. And these new types of yarn are high value-added or high-margin yarns? Or how is it?

Yes, these are high margin yarn because these are some yarns which give a very different feel and effect in the fabric. And these are quite unique to the company, some of them.

Okay. Very good, sir. And then my next question is in your recycled polyester, which -- in which you are concentrating, and I'm sure you will succeed, is this going to be a game changer for Filatex India?

I think so. It will be a game charger.

Okay. Right, sir. Then my last question is, in your FY '19 has been your highest turnover of INR 2,874 crores. This FY '22, I think you should exceed that, correct?

Yes. I think FY '22, we should exceed INR 3,500 crores.

INR 3,500 crores.

INR 3,500 crores.

You're right. Absolutely.

Because INR 965 crores we have done in this quarter. And I think the next 2 quarters should be very close around that much. So if we add up, it should be close to INR 3,500 crores.

Correct. And so your margin levels also should remain the same? Or it should be slightly better, correct?

They can be better.

[Operator Instructions]. The next question is from the line of Manoj from Alchemy Capital. As there is no response, we'll move to the next question from the line of Naidu, individual investor.

Actually, I just joined a few minutes back. I am Naidu. I am the investor of Filatex. So I don't know whether this doubt is clarified or not earlier, in this call. First, I just want to ask Madhu Sudhan, sir. There is a news coming out to just a few days back that there is IT raids happening in Filatex manufacturing unit. I just want to know about the clarity on this.

Yes, we had an IT search in the first week of September. And our all operations are still going on. There's no such adverse on the company. And there is no claims or demand from the department as of now.

Okay. So there is no issue at all with us, right?

Yes, that their assessment is still going on. It's a long process. But I feel there will not be any major issues, which the company will face, which can hamper its financials.

[Operator Instructions]. The next question is a follow-up question from M.S. Rajasekar, individual investor.

Sir, I just wanted to know your were second generation of persons. Who are they? Have they joined? And what is your plan for your succession planning, please?

Yes. 2 people from our family have joined. One is my niece, Stuti Bhageria. And she is looking after finance now. She was -- she's also looking after purchase. And one is my nephew, Vedansh Bhageria. He's also joined the company and his looking into marketing of the products. And he had been in the plant for 1.5 years before this and looked at the working of the plant and operation. So they are under training. And hopefully, in the next 3 to 5 years, they would be able to take over.

As there are no further questions, I now hand the conference over to management for closing comments.

I thank all the participants for sparing their time and attending our conference call. In the future, also, if you have any questions, you can always get in touch through our website or e-mail us. We'll be happy to answer that. Thank you, everybody. Bye.

Thank you very much, sir. On behalf of Filatex India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.