Filatex India Limited (526227) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Filatex India Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Madhu Sudhan Bhageria. Thank you and over to you, sir.

Thank you. Good afternoon and a warm welcome to all of you attending this earnings call for the quarter ended June 2022. Joining me in this call are Mr. Ashok Chauhan and Ms. Stuti Bhageria. I presume you would have certainly gone through the presentation, which has been uploaded on our website as well as on the stock exchange. After good performance in FY '22, this quarter Q1 FY '23 has been rather turbulent for the global economy and international trade strained by challenges on all fronts, including ever-changing variants of COVID, supply chain disruptions, sky-rocketing energy and daily consumption commodity prices and geopolitical tensions. Politically the war between Russia and Ukraine has caused steep increase in oil and food prices improvising the cost of living in all countries, political and economic uncertainties. Along with degradation of natural environment, have brought a series of challenges which have accelerated the competition for survival. The first quarter has been extremely tough for Indian polyester manufactures. The conflict between Russia and Ukraine culminated in a war on 24th Feb. 2022. The general expectation was that it would be a short duration before a peace accord would be signed. However, the war has dragged on leading to sanctions and consequent extreme economic upheaval in global markets. The immediate effect was felt on crude and currency. The extreme volatility of crude prices further aggravated by a falling rupee has led to steep increase in raw material prices mainly the PTA. In the domestic market, the PTA manufacturers supply materials at price is on parity with [Audio Gap] cost of imported material and most of the PTA is sourced from Far East where impact is high on account of high freight which gets added to FOB cost. The rise in raw materials has strained the margins severely as we could not pass through this increase due to low demand. The exports were badly hit due to high freight rates. Uncompetitive prices in the spot market increased the supply in domestic market as plant capacity utilization was high among domestic manufacturers. Excess supply in the domestic market also led to [indiscernible] on the margins. Despite constant adversity, we managed a production volume of 85,449 metric tonnes as against 77,959 metric tonnes in Q1 FY '22. The sale quantity in this quarter is 83,066 metric tonnes as against 67,704 metric tonnes in Q1 FY '22. The sales revenue stands at INR 1,023 crores as against INR 699 crores in Q1 FY '22. The high revenue is on account of rather high input costs. The EBITDA in Q1 FY '23 is INR 74.31 crores as against INR 101.17 crores on year-on-year basis. PBT numbers for this quarter are INR 58.50 crores against INR 76.12 crores in Q1 FY '22. PAT is INR 43.4 crores in this quarter versus INR 52.14 crores in Q1 FY '22. The increase in top line is the effect of higher raw material prices. To give a better picture, the average melt price as an expected -- accepted industry indicator of [indiscernible] prices in this quarter was INR 89 per kg versus INR 68 per kg last year. Collaterally, volatility of prices generally mutes the demand of yarn and textiles. However, the situation in the market can't last for long. The demand has to pick up and the yarn users have only limited stock. They have to start their procurement and it will initially be a shift of inventory piled up at manufacturers' end. As demand firms up, the pricing will also move up. Shipping rates are also coming down though these rates are still higher than the rates of pre-COVID period. In export market, the freight from India was generally lower than that from China. However, due to COVID restriction globally, the freights from China became lower than that from India thereby killing possibilities of exports. Now this differential has come down and likely to be in favor of India, which is obviously logical. Domestic demand in China has also picked up thereby diluting the thrust from exports. Some movement in exports of yarn from India is likely to improve demand and margin in the domestic market. Besides these external phenomenon in our industry, first quarter is generally sluggish and momentum builds up in the second quarter onwards, improving further close to festive season. As I speak to you, the offtake from the plant has improved and inventories are reducing -- [indiscernible] the textile industry in general. The global factors have cast shadows across the textile industry. The high inflation effects are visible across all industry segments, including on daily essential needs of the common man. Government is looking at ways and means to manage the supply chain for all essential items and being by inflation and currency fluctuation for reviving the economy. As you may recall, around 2.5 years ago we had initiated in-house reference work on chemical recycling of polyester waste in all forms. After extensive results and successful lab trials, we moved ahead to set up a pilot plant of capacity of 1.5 tonnes per day. One section of the plant depolymerization was already commissioned. The polymerization part was under testing, which has been completed now. We have started our trial runs to establish the process parameters and quality. While carrying out our trials, we have applied to Global Recycled Standard who through their authorized external agency in India, [ Maxis Control Union ], have watched at every step also of our chemical recycling process and inward and outward system. We have been awarded the GRS certificate for pre-consumer as well as post-consumer needs. We have planned for a trial period of around 6 months before initiating market seeding. The work on our planned project of debottlenecking melt capacity of 50 tonnes per day and manufacturing lines of 120 tonnes per day POY is progressing well. A part of these lines are already commissioned. Some equipment stuck at vendors workshop due to shipping constraints have now been received. As planned, we will complete the installation and commissioning activities by August 2022. At our plant in Dadra, we have scrapped some old spinning lines and new lines have been installed and commissioned. Though this step is more of our innovation towards quality improvement and not towards capacity addition, the improved productivity of new lines will increase the output by around 6 tonnes to 8 tonnes per day and also reduce the operating costs. We have signed up with a reputed renewable power generation company with Fourth Partner for a hybrid wind and power -- wind and solar power plant for a capacity of 10.8 megawatts. Our company will have to invest INR 10.35 crores for a 26% stake in the project to qualify as captive users, which allows waiver of cost subsidy as additional surcharge. The purchase power agreement has been signed for a period of 25 years. The generation company has scheduled commissioning of the plant by March 2023 and has committed to supply around 50 million units annually. The expected benefit will be more than INR 10 crores annually. I'm pleased to share that our credit rating has improved to A+ from A for long-term bank facility term loans and A1+ for short-term bank facilities. We remain optimistic about future prospects of our business. We will continue to focus our work on development of polyester products and strive to attain the goals of environment protection, energy saving and carbon reduction. Our R&D efforts will continue to develop new technologies and products towards attempts to achieve sustainability and a circular economy in synthetic fibers. Thank you. Now we can move on to question and answers.

[Operator Instructions] We'll take the first question from the line of [ Ashish Singhal from ASK Investments. ]

Actually I just wanted to know the outlook for next 12 months how the industry will perform and how our company will perform? And secondly, like there was an income tax raid so what is the status of the same? It is resolved or the matter is still going on?

Yes. So see, the first question like outlook for this full year. First quarter results are already out, second quarter I think we should be maybe similar or slightly better than the first quarter, then third and fourth quarter we should do quite significantly better than these 2 quarters. So overall things should improve. The demand is picking up. And traditionally also third, fourth quarter are very good and the demand picks up from second quarter. So we can see demand picking up as the inventories have started reducing and material is moving. Also exports has also started picking up now, which was very slow in the first quarter. So that will help reduce the pressure in the local market. Regarding the IT, it's still going on, it has not been concluded. One assessment was done and for that we have gone in the pink. Rest will happen -- I think by the year-end, most of the assessments will happen. And then whatever be the things we have to go and appeal and then further on. So it's a long process.

[Operator Instructions] The next question is from the line of Vikrant Kashyap from K.R. Choksey Shares & Securities.

Definitely a tough quarter, a lot of adverse things happened. You did highlight that it seems scenarios are improving in quarter 3 and 4 are our best quarter. So we managed to maintain our volume. Just trying to understand while we took in a hit on margins so badly, still we managed to maintain our volumes. What was the rationale behind that?

Even by reducing the volumes, the margins are going to get hit because the overall everybody in the industry is not reducing the volume. And so if you are -- the volumes are more than the demand in any commodity, then the margins come under pressure very fast. And similarly on the other side if the demand is slightly more than the supply, the margins improve also. This is a phenomena of commodity. So by reducing the volume, we would have added on the cost of production. We didn't reduce the volumes. Just by reducing our volume will not help the market. The overall industry if they reduce volumes, which is not in our hand, then might have helped little bit.

Okay. Got your point. Sir, since we have seen the war in Ukraine still continues in this quarter also and supply chains, as we understand from our sources also, has not been resolved to the previous levels because of the new COVID variant that came into China. So do you think this quarter will largely be impacted since...?

This quarter things have started improving because the demand in this quarter is generally better than first quarter. First quarter lot of labor goes back to [indiscernible] so the productivity in the fabric and garment side is also low. Now for the festive and winter season, the production in garments and fabric side increases from this quarter onwards. So I don't think it should be going down. We should be able to do slightly better than the first quarter I think.

Okay. So barring second quarter since we are into the fabric sales after this, can we expect the similar volume and margins that we had earlier for quarter 3, 4?

Volume-wise still we are quite okay in this quarter also, but going forward volumes will improve. And from third and fourth quarter the extra production, which we have added in this quarter, will also be fully operational and would be utilized in third and fourth quarter. The 120 tonnes per day of capacity for which a part has already started half of it and half of it will start in this month.

Okay. Another thing that has been impacting our performance is high fuel cost and we understand that coal prices is quite above the agreed level more than 130%. and our plant I understand it's still not up and running. So how we are managing this cost because the new agreement will be...

Is a problem, but that is a problem with most of the people because coal prices have not come down. As and when they come down, then only we'll be able to operate the power plant. But we are trying to find other ways to do it like we have entered into an agreement with Fourth Partner so that from next year onwards, they will be giving us renewable energy of 50 million units, INR 5 crores worth. So there we have a saving of around INR 2, INR 2.5, INR 3 per unit. And we are also exploring from one more company to go into solar agreement so that we can have these kind of things where the cost of energy will never go up and we have a fixed price agreement system which is not priced to the energy cost. We're trying whatever is possible to reduce costs so next year hopefully we should get the benefits of this.

Okay. Great, sir. Sir, also the recyclable trial plant is up and running and just started. And since our last plant, we've seen the quality and it was up to the mark. So when we have our plans for a big plant to come in and what are our updates on land acquisitions that you're looking at?

Land acquisition we're already trying. There's been land available in Maharashtra so we already applied. That's been a long time so hopefully we should get that. This will take another 6 months for us to improve our quality parameters and the process conditions. Then once that is done, then only we will commit ourselves for a big plant. Till then we will do this field work like acquiring land and doing -- I mean talking to the machinery suppliers, their deliveries and other things. But the firm commitment will only happen once we are sure about the process and the quality from this yarn plant, this one plant.

Okay. So our plan for FY '24 end is it still intact or it will be?

I think by '24 end, we should have the plant running.

Okay. And this POY line that we have commissioned and the part is still in the process I understand. So this will be good enough to care of our growth till then?

Yes, that will be able to take care of growth and maybe we'll do some small other additions. We are looking at other ways to do some debottlenecking and increase our production. So that is still going on. Major project we are taking as and when we market and the world stabilizes. See, today world is also in a lot of turmoil. We want to wait to see how the world stabilizes, then only commit some funds for bigger projects. So we don't want to commit any big project in such kind of world environment.

Sure, sir, I got your point and you're very right on your strategy. Just trying to understand what best we can do to do value addition further from here since we have done a lot of value addition, our value mix has gone up.

So we are exploring some possibility. There is one more quality of yarn, which is called catonic yarn. So we are exploring to add some polymerization to make the catonic chips and make catonic yarn out of that. Also to add some more winder in the existing system to increase some productivity. So small small things wherever we feel by spending like INR 20 crore, INR 30 crores, INR 40 crores, INR 50 crores kind of a thing and we can add productivity and increase value addition, that we will do till the world stabilizes and we see that we can commit some bigger projects because bigger projects would now mean other than this recycle, if we go for more polymerization at least INR 1,000 crores, INR 1,200 crores of projects. So I don't want to commit such huge fund if the world doesn't look to be streamlining.

Okay. Sir, can you throw some light of catonic yarn? I think the industry size what are the market we are looking at if we're going on with new value addition?

Today total industry size of polyester filament yarn is roughly 4.5 million tonnes in India and overall in the world, it would be close to 50 million tonnes. And the growth rate worldwide is -- I mean barring these 2, 3 years of disturbance has been around 5%, 6%. So every year you need around 2.5 million tonnes to 3 million tonnes of extra filament yarn in the world, which is the driver of the textile growth because around 70%, 80% of the textile requirement is made through polyester filament yarn. There is no growth in natural fibers as per the volumes are there.

I'm just trying to bring your focus on catonic yarn. Can you scale up the size of this particular area?

It's a small size so we would maybe add around 60 tonnes per day of production of this. That we are still exploring and we're talking to the suppliers. So once we take it up, it will take another maybe -- I mean it will be operational by end of first quarter next financial year so June '23.

Okay. And do we have the level of domestic demand for this yarn?

Yes, there's a lot of domestic demand for this yarn. Global I don't think much, but domestic demand is quite good. There is a lot of luster and ability to the yarn and the dye which are used in this penetrate inside the yarn so they don't get faded. The high quality fabrics require these kind of yarns and embroidery thread also we look into.

[Operator Instructions] We take the next question from the line of [ Samrah Siddiqi ] from Revolve Advisory Private Limited.

I just read that the company has commission planned for recycling of polyester waste for 1,500 kg per day for recycled polyester at Dahej unit. So I just want to know how it's going to help in improving the numbers? Are we going in a different product category? And the second question is what would -- what is the geographical split this year in terms of revenue like India and outside India?

See, this is a test plant. This is not going to improve any numbers. This is just going to validate our technology and we will be able to improve the quality, which we want to make it a bigger plant. So this is not a commercial plant. Although yes, we can sell some product in the market, but that stage will come later on once we have improved the quality and it is a marketable kind. So this is mostly a test plant. Right through our product mix, mostly I think more than 90% we have sold locally in this quarter because the export potential was very low I think.

And sir, any new product category this year -- I mean you're going forward for improving the revenues?

No. We're just adding more volume this year as of now, no new category of products.

[Operator Instructions] We'll take our next question from the line of [ Aziz Jain ], an individual investor.