Filatex India Limited (526227) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Filatex India Limited Q3 FY '24 Earnings Conference Call hosted by Systematix Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pratik Tholiya from Systematix Institutional Equities. Thank you, and over to you, sir.

Thanks, Manan. Good evening, everyone. On behalf of Systematix Institutional Equities, I would like to welcome all the participants who have logged into this conference call of Filatex India for their Q3 and FY '24 earnings conference call. We have with us from the management team, Mr. Madhu Sudhan Bhageria, Chairman and Managing Director; Mr. Madhav Bhageria; CFO and Joint Managing Director; Mr. Ashok Chauhan, Executive Director. At the outset, I would like to thank the management for giving us the opportunity to host this conference call. I would like to now welcome Mr. Madhu Sudhan Bhageria to start the proceedings by giving his opening remarks. Thank you, and over to you, sir.

Thank you, Pratik. Good afternoon, and a warm welcome to all of you attending this conference call. Joining me in this session is Mr. Madhav Bhageria, Joint MD and CFO; and Mr. Ashok Chauhan, our Executive Director. I presume you would have gone through the investors presentation, which has been uploaded on our website and the stock exchanges. Let me quickly take you through the results of this quarter, Q3 FY '24. We achieved a production volume of 1,02,924 metric tonnes as compared to 1,03,306 metric tonnes in Q2 FY '24. The sales volume achieved in Q3 was marginally lower at 1,00,745 metric tonnes as compared to 1,03,677 metric tonnes in the previous quarter. The revenue for this quarter was INR 1,083 crores over INR 1,108 crores in Q2 FY '24. The operating profit EBITDA is around INR 75 crores, a growth of around 39% from INR 53 crores in the last quarter. Profit before tax is INR 48 crores from INR 31.5 crores in the preceding quarter. The net profit PAT has increased to INR 35 crores in this quarter from INR 23 crores in Q2 FY '24. Keeping in view the general trend, with some improvement in EBITDA over the last quarter but still it is well below the double digit we had achieved earlier in FY '22. Before elaborating on this, let me give you a brief observation about global situation. Russian invasion of Ukraine and consequent sanctions are not showing any signs of abatement. Israel and Hamas conflict remains unabated. The effect of interruption in Russia gas supply and overall energy metrics is causing serious concern. Shipping companies are facing challenges in passing through Red Sea. Crude prices are consequently -- petroleum derivatives have been fluctuating almost on a daily basis. These conditions have affected commodity market supply chain, leading to a slowdown in global growth. One of the major risks of this outlook is possibility of high global inflation and tepid growth, a reminder of speculation of the 1970. This is likely to result in sharp tightening of monetary policy in advanced economies, which is likely to lead to financial stress in emerging and developing economy. International agencies are working with U.S., U.K., Europe, et cetera, to create a strong and wide-ranging policy reform to boost growth, reduce financial vulnerabilities and support vulnerable countries. Coming back to textile, the Indian textile is facing challenging time. The current year progress is slower than the previous year as P&A manufacturing declined. Sales volume in yarns and fiber remain weak compared to downstream ready-made and retail segment. In spite of good footfall in retail segment, the market remained cautious and demand was not transferring into volumes in yarns and fiber segment. Overall inflationary development across the globe and volatile geopolitical upheavals impacted the performance of textile markets. Both domestic and international markets have faced strong and chilly headwinds. The performance of Indian polyester industry has been rather challenging this year. The domestic market was flooded with cheaper imports of substandard polyester yarns and fibers. Government of India had made compliance of quality standards, QCO, mandatory for polyester filament yarn effective from 8th October 2021. However, multiple extensions of this order led to multiple increase in the imports. Periodic extension of effective date led to a deluge of imported yarns of substandard quality and ridiculously low price. Indian manufacturer had no option but to sell their material at matching prices leading to huge erosion of margins. So in nutshell, it was a competition against low-priced imports. Appreciating the prolonged sufferings of yarn manufacturers for almost 7 quarters, Government of India finally implemented QCOs on yarn with effect from 5th October 2023. However, taking advantage of several extensions, the trader placed orders for very large quantities. We believe the situation will now improve once the imported material pipeline gets exhausted. Government of India has to be agile in monitoring its trade policies carefully. China has now started dumping fabrics at abnormally low prices, something as low as $1.4 per kg, which is almost equivalent to the cost of yarn. This is causing distress to all the yarn manufacturers, weavers and processors. The government has been appraised of this unfair trade practice. Steps are being suggested to have a minimum of $3.5 price for customs duty. The dumping on low price imports from China in all forms, yarn fabrics have been the biggest challenge this year. So the domestic demand for synthetic fiber has been good. That volume of low-cost substandard imports have forced Indian manufacturers to reduce their policies in line with imports from China. This reduction of prices has reduced the margins despite high volumes. Polyester industry at global level is dominated by China. Overall, at the global level, the textile fibers are growing at 3% CAGR. Most of the growth is through polyester filament yarn. Despite COVID havoc, China had added a fresh capacity of around 3 million tonnes in 2023. However, further expansion has slowed down. China produced around 40 million tonnes at 80% capacity utilization in 2023. No new investments have been announced in China for '24-'25. Indian capacity utilization is also close to 90% with total capacity around 5 million tonnes per annum. To meet the annual increase in global demand of 3 million tonnes, it is a good opportunity for Indian manufacturers to add new capacity. Though India is second largest producer, it is a distant second as China is around 8x. Pandemic has been a great eye opener for the industry. While the west realized that their dependency on China is a two-edged sword. They are on lookout for another sourcing base. Everyone was talking of China Plus One. India is closer to home compared to others. We are not only self-sufficient to meet our needs, but also have capabilities to fill the vacuum. Be at the right place at right time. However, China being the largest exporter, major global consumers and though complete replacement is practically not possible, significant gains can be achieved by strategic steps. Hence, the Indian polyester and the downstream industry should collectively work towards reaping the maximum benefits of this. A few words about the Indian situation. Government of India has recognized the dominant role of synthetic fiber in global textile trade. The world producers and consumers have shown wide acceptance of synthetic fiber garments and apparels. Government of India has announced PLI scheme for the development and boosting of fabrics and garments of manmade fibers. Clusters of mega textile parks are under planning and execution. These large parks will have the benefit of world-class amenities, which will benefit small, medium-sized companies in ready-made garments and apparel segment. Around 2.2 million tonnes of PPA capacity will be commissioned in the calendar year 2025. These plants are being set up by Indian Oil and the other one is by GAIL. This will reduce the dependence on imports, which have uncertainties like shipping schedules, exchange rate fluctuation. Domestic demand is robust and is growing at 8% CAGR. Domestic production capacity is around 5 million tonnes. The new capacity addition in the next 2 years will be only 450,000 tonnes. No other investment is planned. With robust demand, the margins that had dropped due to imports will gradually improve to a remunerative level adequate to consider fresh capacity addition. All these factors are encouraging and will restore confidence in the future of PET fibers and filaments and improve margins. We continue to be buoyant about the future of our polyester filament business. Polyester is the most widely used fiber worldwide. The growth in world fiber production in the last 13 years has come from synthetic fibers only contributing 93% of the incremental growth. Besides being very versatile, polyester fiber has less impact on the environment. A comprehensive study by Swedish research company has found that it is far less resource intense to produce polyester than conventional cotton from a life cycle perspective. And the durability of polyester further improves its environmental profile. We are adding 70 tonnes per day capacity to produce cationic chips, likely to get commissioned by March 2024. This will have an incremental margin of at least INR 12. Even if 50 tonnes per day utilization, we expect to add around INR 21 crores to our margins next year. We have been working on improving energy and efficiency and energy cost. Investment in renewable energy and usage of captive power is likely to result in savings in power costs. Considering we focus on sustainability of textile industry and the need to shift from linear to circular economy, we have developed through in-house R&D a process to utilize textile waste of polyester in any form. After extensive lab tests, we set up a pilot plant, which is now operating steadily. We are in the process of setting up an upscaled version with capacity of around 75 tonnes per day. This process is called chemical recycling where material produced is of similar quality as virgin material. Global brands to meet their obligation under EPR offer premium ranging from INR 30 to INR 40 per kg for this material. We plan to commission our plant by September 2025. We are evaluating the option of setting up such plants all over the country at places near textile hubs. This is like to be our growth model, which will be in real terms, a part of much desired circular economy and an appropriate testimony to sustainability. Thank you all for your patient hearing. Pratik?

We will now begin the question-and-answer session. [Operator Instructions] We have our first question from the line of Niraj from White Pine Investment.

I have few questions. One is on the capacity utilization. I think you're running at almost 98% -- more than 100% capacity utilization. Is it right?

Yes, we are running almost close to 100% capacity utilization.

And this is just a period of slowdown in the demand in India. So how do you plan to capitalize that when the demand grows in India? So how do you plan to capitalize the demand growth for Indian polyester yarn?

I think once the demand grows, we can change the product mix and also make more products which have more value addition. Right now, we have to make product as per the market requirement. We don't have much choice because whichever one we can sell easily, we make that. So going forward, the product mix only can be changed. Volumes cannot be increased till we add new capacity. We are adding cationic which I said, that will add to some value addition on the product. And once things stabilize, we will add more capacity going forward.

Got it. So whatever is the mix today, how much EBITDA can you add in if there is some improvement in the demand in the market? And can you give some color on that? Like how can your margins change? You said it will give some value addition?

Not too much we can do, but maybe we can add another 100 basis points by changing the product.

Got it. And second, you said cationic chip CapEx, what is the capacity? I couldn't hear that. What is the timeframe you are looking at?

[Audio Gap] tonnes per day -- and in the first year, we might be operating at 50, 60 tonnes. So that's what we have considered 50 tonnes in our budget. So it's a different kind of a polymer. It will not add...

How many tonnes per day?

That's polymer.

How many tonnes per day? I couldn't hear it.

I couldn't get you.

What is the capacity of the cationic chips? Could not hear that.

Okay. That capacity we are putting is 75 tonnes per day.

Okay. Okay. 75 tonnes per day. And this will start by September '25.

No. This will start in March '24 only. September '25 is the recycle project, which we are taking up. That is also for similar capacity. That will start in September '25.

Okay. Got it. Basically I got confused because both were of similar capacity. That's the reason I wanted to know.

Almost similar capacity, but they are different.

So basically, you are having 2 CapEx of cationic chips and recycling projects.

One is already near completion only, which -- it will start in next month. And the second one, we will take it up. So that will be around INR 130 crores to INR 150 crores. That CapEx will happen in FY '25 and being operational in mid FY '26.

And the CapEx for cationic chips is how much, how many crores?

Cationic chips was around INR 40 crores to INR 45 crores.

Can you give some color? Like you said there's not much of capacity being added in India. So then how do you envisage the government -- and do you see anything more coming up? Or is it just a demand supply mismatch?

People will add capacity, but they have to see some profitability there because today, for anybody to put a new capacity, the EBITDAs have to be at least 13%, 15% to make sense because normally, a plant of 2 lakh tonnes cost around INR 1,700 crores. So even if you take like 16%, 17% margin, you need around what, INR 260 crores of EBITDA, which is almost like INR 13 a kg or 13% or something like that. So those kind of EBITDA, we don't count, then who will add the capacity. I don't think anybody would take a decision to add the capacity. So maybe in next year, we see those kind of EBITDA, then there will be people putting up new capacity. And also what I hear is that Reliance is putting up also new PTA plant of 3 million tonnes. So that will make India surplus in PTA. So people would like to match their capacities coming at around when the Reliance plant is coming. So there's no shortage of PTA, which people have to import right now.

Got it. And the last question, how the EBITDA margins for chips POY, DTY and FDY separately from the last quarter?

Chips is hardly any EBITDA, I can say, I mean it depends, it can be not even 1% at times. It's a very competitive thing. It's just we are not selling any chipset. I think our chip sales would be less than 0.5%.

Okay. And what about the other?

POY right now is around INR 4 to INR 5. FDY would be around INR 13, INR 14, and textured would be INR 6, INR 7. Present situation I'm telling.

So in the last 6 months or 9 months, there has been a good improvement in the FDY margins in the industry.

Yes, FDY margins improved significantly in last quarter. But now this quarter, also some problem is coming up because of this MSME issues. So the demand actually gone down. I mean that is a problem for a lot of products, not just listed to our products. But in fabric, the credit period is quite long. So the problem is a little more prominent in our industry. Let's see, people have given representation to the government if they take something and change some days or something, let's see.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Pratik Tholiya for closing comments.

Manan, there are a couple of people in the queue, please take them for the questions.

Okay. We have a follow-up question from the line of Niraj from White Pine Investments.

Yes. You give some understanding of how you can increase your margins when the demand picks up. So how much FDY can you go up to like your margins in FDY is quite high. And how much can we move to...

I think FDY denier is also very low denier. So the margins can improve by INR 3 to INR 4 in all the products at least.

Okay. INR 3 to INR 4 it can increase?

Yes, yes.

Okay. So that will actually take your -- okay, it is still not much because you told us...

Yes, healthy margin would be at least overall, a double-digit margin, then only people will think about investment.

So what you're saying is until your run rate of EBITDA goes up to a run rate of say double from your -- or maybe [ INR 20 crores, INR 30 crores ] a quarter, it is difficult for others to justify a new CapEx in this industry?

I think to justify CapEx in the industry, people should get at least -- on a kg basis, at least INR 12 to INR 14 or -- otherwise you cannot justify.

Got it. And other thing is on your polyester recycling projects. Can you give some color on what you are making money right now and what is the experience on the recycling in the last quarter?

Right now, we are not making much money. We hardly produce. We are just producing trial quantities. So that's not very significant. We hardly produce 10, 15 tonnes in a month. But going forward, once we put up the plant, that will be of trade say, around 25,000 tonnes annually. That could give us EBITDA of at least minimum around INR 50 crores on an investment of, let's say, around INR 130 crores to INR 150 crores.

And which will correspond to how much rupees per kg?

I have taken a very low around INR 20, INR 22 per kg. That is I'm talking on the chip stage because what we are putting right now will be only till the chip stage, then that chips we can use in-house and make the yarn, so whatever we make on the yarn would be additional, but the technology is only till the chip stage.

But is there a demand in India, like you said, if there's an opportunity to set up either textile park...

There is good demand in India and worldwide also.

And you are talking about which margin because of the sustainability reasons also a lot of companies are buying. Is it right?

I couldn't get you.

You're talking of this margins remaining high because of the sustainability related product...

Yes, yes, sustainability ESR in the Europe and America, they want to have that extended producer responsibility has been fixed in the Europe. So they need to have around 25% or 50% of their material to be recycled in the garments which they sell. Right now, the availability is not there. So they are forced to buy non-recycled or mechanically recycled product. But they are always looking for a chemically recycled, which can give a better quality. And there's a good demand -- like there's one perpetual in India, which makes -- so he is able to sell at around -- yarn around INR 40 to INR 50 premium.

Got it. And last question is your interest income is also running at a run rate of INR 11 crores a quarter. With cash in the books, shouldn't this be lower -- much lower on your P&L?

You're talking about interest expense or income?

Interest expense.

Expense, this time has been notional because there's a spot in the dollar -- sorry, euro to the rupee, and we have a lot of ECBs in euro, that's why it is there. Maybe like now in December, I think it was INR 92. Again, it's come back to INR 89. So maybe this quarter, if it remains in this way, we will have a very low interest.

But what is your total debt right now? And what...

Right now, it is INR 250 crores, which is around INR 75 crores is rupee loan and balance INR 175 is euro loan.

Euro, right?

Yes.

Okay. Any repayment plan for that?

No. Normal repayment is there. So we would pay another INR 14 crores, INR 15 crores in this quarter. We prepaid in this year around INR 15 crores of rupee loan.

Got it. Okay. That's all from my side. I think you have given a good understanding of the industry.

We have our next question from the line of [ Rahul ] from Vista Wealth.

Sir, my question is, again, regarding this recycled polyester. So do you give like a timeline on when exactly the main plant could be commissioned?

The recycle plant, we're likely to commission by September 2025.

Right, sir. And sir, I was reading about recycled yarn and yarn abroad. And it seems that the demand is still there, but there are a lot of new technologies coming up for putting this recycled yarn and different technologies to produce yarn at a different cost. So is that one of the reasons why you have taken the price of your recycled yarn on the lower end just to be conservative?

We have taken very conservative number. In our technology, we will be able to produce the recycled yarn at a similar or a lower price than the virgin. So then we can always have the margin which the virgin will improve and plus the premium over and above. The new technologies which you will hear from other companies like Loop Industries and there are some other companies in the world who are doing it. So their cost of production is very high. What I heard that their cost will be at least INR 20, INR 30 more than the virgin material once they produce it.

Do you think the reason why the cost of production was so high because most of the companies are technology companies trying to get into fabrics versus you guys who are...

No, that technology which they are adopting has a high cost of production. So they have a different technology which they are adopting. We are adopting a different technology.

And sir, your technology that you have, I know you can't discuss that at length because it might be proprietary for whatever reason.

They have developed their own. So -- but whatever is available on the public domain and whatever we come to know and we had been in touch with one -- Ambercycle in U.S., they have also declared their technology now. So we were in touch with them and what we had to talk with them that they were -- cost was very high. So their recycling cost was almost like close to $1 only the cost of production. Whereas for us, it will be maybe a little lower than $0.50, raw material.

Any idea why that is, sir? Like I mean could you...

No. I have some idea but I can't discuss that.

[Operator Instructions] We have a next question from the line of Yogeeta from Systematix Institutional Equities.

Congratulations on a good set of numbers. I have 2 questions. One is you mentioned about this cationic chip plant at Dahej. So what would be the revenue potential let's say one year -- in the one-year time?

You're talking about the recycle, I understand.

No, the cationic chip plant.

Cationic chips, the revenues will not go up, only the profitability will go up because we will be replacing like semi-dull and bright which we are producing now because we have not added yarn capacity. We are only making the polymers and then yarn, we will make on the existing machines. Maybe in the future, we can add more yarn, then the top line will go up. Only the bottom line, I think, would go up at least by INR 20 crores, INR 21 crores in next financial year because of this.

Okay. Okay. I understand. And sir, this recycled project?

Recycled projects would be commissioned in September 2025. And in the first year, we expect a top line of around INR 250 crores with an EBITDA of around INR 50 crores.

Okay. Understood. Sir, can you throw some light on the after effects of this quality control order that has been implemented? In November, you have mentioned, as of November, your imports got substantially reduced but currently how is the situation?

I couldn't get you. Are you talking about the QCOs?

Yes. The quality control order that has been implemented.

Yes, the quality control order has been implemented from 5th of October 2023. But there were huge imports, which were in the pipeline, which got cleared, anything dispatched before that was cleared. So that's why we had some problem in the third quarter would have been much better. In fourth quarter, the problem of this MSME has come in otherwise initially it started on a good note. But then by end of Jan, this problem has highlighted a lot. And that's why the demand has been affected going forward. And I -- if no relief is coming from the government, then I don't think the third quarter will be any better than the -- sorry, fourth quarter would be any better than the third quarter. It would be like similar to the third quarter. Otherwise, I was expecting it to be better than the third quarter.

Okay. Okay. I understand. Sir, just one last question. How do you see the domestic demand from the downstream industry to improve and when do you expect that to increase?

I couldn't get you. Please, can you repeat?

Domestic demand from downstream industry, when do you expect it to improve?

Downstream industry domestic demand will also increase from April. They are also facing this kind of problem because of MSME payments which the government has done. A lot of people, even if they are traders, they have registered in MSME to get interest advantage from the bank. So this issue is throughout the chain. Right from the retailer till the manufacturer of fabric, this issue is there. So the buying has stopped and slowed down considerably because of this problem. Nobody wants to buy a product where they cannot pay within 45 days. So while this problem gets resolved, I think there is a demand -- pent-up demand would be there and then huge demand should come from April. If this gets resolved within next week, then, of course, demand will again pick up.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Pratik Tholiya for closing comments.

Thanks, Manan. On behalf of Systematix Institutional Equities, I'd like to thank all the participants who logged into -- to this conference call and thank the management once again for giving us the opportunity to host this call. Sir, would you like to make any closing comments?

I would just like to thank everybody for taking out time and participating in this, and we hope to meet again in the next conference call for the year ending Q4. And thank you Pratik for hosting us.

Thank you so much, sir. Thank you.

Thank you. On behalf of Systematix Institutional Equities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.