Filatex India Limited (526227) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Filatex India Limited's Q4 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Khushbu Gandhi from Share India Securities. Thank you, and over to you, ma'am.

Thank you. Good evening, everyone. On behalf of Share India Securities, I would like to welcome all the participants to the Q4 and FY '24 Earnings Conference Call of Filatex India Limited. We have with us from the management team, Mr. Madhu Sudhan Bhageria, Chairman and MD; Mr. Madhav Bhageria, CFO and joint MD; and other senior management team. We would commence the call with the opening remarks from Mr. Madhu Sudhan Bhageria to give an overview on the company's performance. This will be followed by the question and answers. Sir, you can take over the call.

Thank you, Khushbu. Good afternoon. A warm welcome to all of you attending this conference call for the quarter Q4 ended March 2024. Joining me in this session are Mr. Madhav Bhageria, Mr. Ashok Chauhan and Stuti Bhageria. I presume you would have gone through the investor presentation, which has been uploaded on our website, as well as on the stock exchanges. Let me quickly take you through the results of this quarter Q4 FY '24 over Q3 FY 2024. Revenue of INR 1,026 crores against INR 1,083 crores. EBITDA stands at INR 64.8 crores against [ INR 74.3 crores ]. Profit before tax stands at INR 47.2 crores against INR 47.7 crores. Net profit is at INR 34.8 crores against INR 35.1 crores. Production was 97,000 against 103,000 and sales quantity was 96,500 against 101,000. And year-on-year, FY '24 versus FY '23, the revenue was INR 4,286 crores against INR 4,304 crores, EBITDA was INR 239 crores against INR 232 crores. PBT, INR 150.4 crores against INR 122.1 crores. Net profit at INR 110.7 crores against INR 89.9 crores. Production is 406,000 metric tonnes against 380,000 metric tonnes; and sales 401,000 against 382,000. Before elaborating on the business environment, let me give you a brief observation about the global situation over the last 5 years, which will help in understanding their impact on economy and business. The occurrence of 2 significant global events, namely the COVID-19 and the Russia-Ukraine conflict happening one after the other, has had a profound impact on the textile fibers market. These unprecedented events have introduced a complex set of factors that have reshaped the market trajectory in unforeseen ways. The onset of the pandemic brought about substantial changes in consumer behavior and business operations, lockdowns, travel restrictions and the prevalence of remote work became the new normal, prompting business to pivot towards digital platforms. This abrupt transition heightened the importance of online presence and visibility, leading to an increased demand for effective utilization. Companies rushed to expand their online reach, resulting in a noticeable upswing in the textile fibers market as businesses sought to optimize their online content for greater visibility and engagement. Simultaneously, the Russia-Ukraine conflict introduced an additional spectrum of uncertainty and volatility into the global economic landscapes. Geopolitical tensions and economic sanctions have ripple effects across various industries, affecting consumer sentiment and purchasing behaviors. As businesses navigated these geopolitical challenges, the textile fibers market adapted to their evolving environment with brands reevaluating their marketing strategies to align with shifting consumer sentiment. Textile industry in each country evolved its own policies and recipes to mitigate the uncertainties to save lives and jobs. Overall inflationary development across the globe and volatile geopolitical upheavals impacted the performance of textile businesses. Indian businesses have faced a rough weather in both domestic and international markets for more than 2 years. This year too, the performance of Indian polyester industry has been extremely challenging. It was a battle against Chinese imports in all forms, yarn, fabric and made-ups. The domestic market was flooded with cheaper imports of substandard polyester yarn and fibers. Industry captains bought together and fought for policy changes with facts and figures. The tidal flow of yarn stemmed only after QCO on yarn was enforced. After the yarn issue, there was a sudden spur in fabric imports at ridiculously low prices. This too was brought to the notice of government officials to acknowledge the unsecular [indiscernible] imports of fabrics at unheard-of prices and put a cap of $3.50 per kg as the minimum value. Textile industry needs a level playing fee at the global level. At present, Indian polyester industry is still at a significant disadvantage in competing against China. Indian manufacturers pay around $70 per metric tonne more for PTA, which is short supply domestically. This being the key element, of course, it is difficult to compete with Chinese prices in domestic market and same goes for exports. Thus, dumping on low price imports from China in all forms, yarns, fabrics has been the biggest challenge this year. Though the domestic demand for synthetic fiber had been got, a large volume of low-cost substandard import forced Indian manufacturers to manage their price in line with import from China, a reduction of INR 4 to INR 5 per kg has eroded the margin despite high volume of sales. Adding to the woes is the huge drop in exports from India, which also keep dampened margins low. Overall, at the global level, the textile fibers are growing at the rate 3% CAGR. Most of the growth at the global level for the last 15 years is through for polyester yarns. Polyester industry at global level is dominated by China. Last year, China produced around 40 million tonnes of filaments at 90% capacity utilization. China had added a such net capacity of around 3.8 million tonnes in 2023. Our further expansion has slowed down. No new investments have been announced in China for 2024 and 2025 to meet this annual increase in global demand of 3 million tonnes. It is a good opportunity for Indian manufacturers to add new capacity. Indian capacity utilization is already close to 90% and new capacity can be added. Lack of margin has been biggest deterrent for capacity expansion. Polyester units are capital intensive. A typical melt spinning complex of 600 tonnes per day or 2 lakh tonnes annually would cost a minimum of INR 1,500 crores. A simple calculation for a 5-year payback would mean that at the yarn state, the margins have to be at least INR 15 per kg. Government of India has recognized the dominant role of synthetic fiber in the global textile trade. The world producers and consumers have shown wide acceptance of synthetic fibers, garments and apparel. Government of India has announced a PLI scheme for development of -- and boosting of fabric and garment of man-made 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 and medium-sized companies and readymade garments and apparel segments. Indian government and industries must evaluate and recalibrate their import strategies fostering more diversified and resilient supply chain. Growth in imports from China has been much faster than India's overall growth -- overall import growth as per a well-researched report by Global Trade Research Initiative, GTRI. Many products imported from China, such as textiles, shoes and glassware, et cetera are from categories dominated by MSME and most of these items could be produced local easily. Around 2.2 million tonnes of PTA capacity will be commissioned at the end of calendar year 2025. These plants have been -- are being set up by IOCL and another one is by GAIL. This will reduce the dependence on imports, which have uncertainties like shipping schedules, exchange rate fluctuation. Also, Reliance Industries is putting up a 3 million tonne capacity plant for PTA, which is likely to be commissioned by 2026 calendar year end. All these factors are encouraging and will restore confidence in future of PET fibers and filament and boost domestic production. We are adding 70 tonnes per day capacity to produce cationic chips, which are -- which is likely to get commissioned by May 2024, in this month. We will have an incremental margin of at least INR 10 per kg over the regular chips. Even at 50 tonnes per day capacity utilization, we expect to add around INR 15 crores to our margin this year. Domestic demand is robust and is growing at 8% CAGR. Domestic production capacity is around 5 million tonnes. The new capacity addition in next 2 years will be 450,000 tonnes only. No other major investment is planned. With robust domestic demand, the margin that had dropped due to imports, will gradually improve to our enumerative level adequate to consider fresh capacity addition. We remain warrant about the future of polyester filament business. Polyester is the most widely used fiber worldwide. The growth in world fiber production in the last 15 years has come from synthetic fibers only, contributing 93% of the incremental growth. Besides being very versatile, polyester fiber has a less adverse impact on environment. A comprehensive study by Swedish research company, [ Nestra ] has found that it is far less resource intent to produce polyester than conventional cotton from a life cycle perspective and the durability of polyester further improved in its environmental profile. The fashion industry is labeled as the second most polluting in the world after oil industry. The environmental footprint of a manufactured garment comprise a trail of multiple toxics processes from cotton planting, passing through processing and dyeing and transportation to the points of sale and finally, disposal after use. Fast fashion premised on low cost and low durability has widened this footprint by accelerating waste pool fraction consumption. The danger of polyester clothing is going to landfill is an issue being discussed globally as polyester is not biodegradable. Considering the focus on sustainability of textile industry and the need to shift from linear to circular economy, we have developed [indiscernible] in-house R&D process to utilize textile waste in any form. After extensive lab test, we set up a pilot plant, which is now operating steadily. We are in the process of setting up a scaled commission with capacity around 75 tonnes per day. This process is called chemical recycling or molecular regeneration. We have material produced is of similar quality as virgin material. Global brands to meet their obligation and our EPR extended producer responsibility are willing to pay premiums ranging from INR 40 crores to INR 45 kg for recycled products. We plan to commission our plan by December 2025. Going forward, we plan to set 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 in part of the much desired circular economy and an appropriate testimony to sustainability. Thank you.

[Operator Instructions] The first question is from the line of Umesh Jain from Kotak.

Congratulations on a good set of numbers in a challenging environment. My question is on fabric and yarn import while there has been an antidumping duty which has been levied. Just wanted to understand how is the domestic business environment? You did highlight it there has been some weakness in export given raw material costs in India for PTA, especially slightly higher than China and which is expected to come down as the domestic PTA capacity does come in. But specifically on the domestic side, are we seeing some improvement in the margin? And sequentially, can we expect improvement in the margin as we progress towards FY '25?

Yes. See, regarding antidumping duty, there's no antidumping duty. Fabrics -- yarns, the government had put a QCO. So China cannot export to India because China has not been given the QCOs. And fabric, what the government has done, the prices which was coming at very ridiculously low prices. Now the government has said that if you import, you have to pay duty at $3.5 minimum. So the actual value of the fabric is around that only. But -- they were dumping at very ridiculously low prices. So now the government has put a cap that you have to pay duty at $3.5 minimum or at what price we have imported, whichever is higher. So that is what they have done. And this is until September. After September -- before September, I think the budget will come. So they will correct it in the budget. This is a stopgap arrangement they have done. And as far as export is concerned, it's very difficult to compete in the export market with China because they have advantage of almost $70 in PTA, which amounts to around $60 per tonne in the yarn. So wherever the freight portion is lower from India as compared to China, we are able to do it. But where the freights are similar, it's very difficult to export. So once the new plant of PTA will come in, then the difference of $70 will go away, then we will be able to compete with them. As far as local is concerned, domestic sales, yes, the margins have started improving slightly. And going forward, after first quarter, I think it will improve more because in the first quarter, there is a lot of labor shortage. And the production side -- fabric side, the productivity is also low. So the demand is low for the yarn. Even though in spite of all this, there is a very slight improvement in the margin. So first quarter, I can't say if we'll do something better than last year. But yes, going forward, as a year as a whole, we would significantly have better margins in the year. Umesh, anything else?

Yes. When I look at interest costs in quarter 4, there has been a significant dip in interest cost. The interest cost has reduced to INR 3.2 crores versus INR 11 crores last quarter. Any reason for this decline?

Yes. We have some ECBs and which are on health. So sometimes because of the currency loss, last quarter was more. And this year, there was rather some currency gains, so that's why it is lower. The ECBs are in euro because of that, it happens.

Sure. And lastly, on the capacity expansion, we have announced 70 tonne capacity per day. What will be the CapEx for this capacity?

Yes, CapEx has been around INR 40 crores, INR 42 crores.

INR 42 crores. And this is expected to commercialize by when?

Yes, in this month only it will get started.

The next question is from the line of [ Basanth Pandey ], who is an individual investor.

Yes. Sir, this is regarding our recycling plant expansion. If I remember correctly, your 30th October filing -- exchange filing, take the cost at INR 150 crores for a 20,000 metric tonne per annum plant. And now it is, I think, 26,000 metric tonnes per annum implant and the cost is expected to double, that is INR 300 crores. So any particular reason for this escalation in cost?

Yes. See, first, when we had envisaged this project, we were thinking that we'll be using pet bottles and yarn waste. But now during the period, we have been able to develop a technology to use even the fabric waste like very small cutting of the fabric, so that we can convert to now the chips. So that is evolving some more machinery, which is quite costly. That is why it is there. And the cost of the raw material at that stage, previously used to be like INR 40, INR 45 a kg, and would now go down to INR 50 a kg. So...

That will offset the...

Also, we'll be able to use the color fabric now. Previously, we were not had the technology to use color fabric. Now we have developed and being successfully able to convert color fabrics also back to the polyester. So that is why the cost has gone up because some machines which we have used to do this are quite costly.

Okay. And other thing, sir, we are going to invest INR 50 crores into textiles, right? So that would be in the form of equity, I suppose?

Yes, INR 50 crores at the moment, we have taken from the Board approval for equity and up to INR 100 crores as a loan. And balance, we will see either we'll take bank loans or if need be we sufficient, maybe -- more will be invested by the company as we go forward. See, it's a very new project. It's one of its own kind. So is very difficult to predict exact cost. This INR 300 crores is a very ballpark number, plus/minus can happen a little bit. It's not a technology which is already established.

Right, sir. Another thing, the polyester chips, the recycled chips, which we will be manufacturing, do we plan to convert them into yarn at the Dadra plant? Or will you selling the chips?

No. First, we will sell chips also and we'll convert it to yarn right now at Dahej and Dadra plant as per the requirement. And then we would also have the possibility to set a more yarn unit at the same location for converting it directly to yarn at the same location. So initially, we don't want to put money in putting up yarn facility because that we already have at a different location.

Right, sir. And any plans of tying up with any big global manufacturer for captive sale of yarn...

We started talks with few brands for tying up. So we already are in talks with them.

[Operator Instructions] Next question is from the line of [ Prateek Bhandari ] from Aart Ventures.

Sir, can you let me know as to the acquisition cost of this Texfil acquisition?

Yes, INR 20,000.

Sorry?

INR 20,000.

INR 20,000. Okay. And how do you see the top line in the next financial year, FY '25?

I think top line, we should be doing maybe around 5% to 7% more than what we have done because we are not adding new capacity much. This new capacity, which we are adding is only at the chips stage. So this will improve our margins, the cationic chips will not add much to the top line.

So the margins would be in the same range as they would improve?

No, the margins would be, as I said, this year, we expect to have a INR 15 crore extra margin because of this new capacity.

Okay. INR 15 crores during the year?

Yes, during this year.

Okay. And that is out of the CapEx made for?

CapEx is around INR 40 crores, INR 42 crores.

So what would be the capacity expansion -- annual capacity expansion?

Annual would be around 25,000 tonnes.

25,000 tonnes?

Yes.

So out of 25,000 tonnes of capacity expansion, we are expecting INR 15 crores added up in our margins.

Correct.

[Operator Instructions] The next question is from the line of Gaurav Agrawal from Nine One Capital.

Sir, in terms of your EBITDA per metric tonne, suppose whatever you are expecting in the upcoming budget, if that happens. So what kind of EBITDA margin or EBITDA per metric tonne do you expect to do on a full year basis between FY '25 and in FY '26 maybe?

Yes, FY '25, we expect our EBITDA to improve by at least 40% to 50%...

40% to 50%?

Yes.

Okay. And the next year?

Next year another 40% over and above the FY '25.

Okay. So basically, sir, revenue is not growing that much as you just replied to the previous participant's question. which means our EBITDA-ish margin should be, it should move from 6% to 9%, and then from 9% to let's say, 13.5% to 14%. Is the understanding correct?

Yes, approximately. Yes.

Okay. And sir, what would go wrong in the industry or, sir, yourself that you might miss this guidance? What might go wrong?

Sorry, I couldn't get you properly.

No. I think we are guiding for a very healthy increase in margins. So obviously, we must be taking certain assumptions. So I just wanted to understand what are the assumptions that you are currently taking to drive this kind of expansion?

Correct. So the main, see, in the world, the total production of filament yarn is roughly 50 million tonnes. And every year, China was adding around 3 million tonnes, which for next 2 years, China is not adding anything. So that will create a global demand and China already in this year is over 92% capacity utilization. The margins have to be improved to a level where new investment coming, until and unless there is a 13%, 14% return on -- percentage return on the turnover, it doesn't justify putting up new capacities. As I said, it takes around INR 1,500 crores to INR 1,600 crores to put up a capacity of 2 lakh tonnes. So if you don't get even INR 300 crores or INR 325 crores in EBITDA, nobody would put up a new capacity. So it has to come to those levels. And in India also, there is no big -- there are only 2 plants which are coming up, which would add to around 9% of the capacity in next 2 years, whereas the demand is growing around 8% to 9% every year. So all these assumptions -- because of these assumptions, I am saying that the margin will improve to those levels. And the -- even after this, they will come to a level where one can think of putting a new capacity. Before that, it was very difficult for anybody to put up a new capacity.

Understood. So sir, as you said, if you have to put a 2 lakh metric tonne kind of capacity, it would entail somebody to spend INR 1,500 crores to INR 1,600 crores. What's the CapEx spend -- like is it 1x or is it like 1.5x? What's the CapEx spend here, sir? .

Turnover would be around 1.5x.

1.5x. Okay. So we expect INR 325 crores EBITDA to 14%, 14.5% is what you are also guiding. Okay, got it.

Like I said, INR 2,200 crores, INR 2,300 crores turnover, you need EBITDA between INR 300 crores and INR 320 crores to justify a INR 1,500 crore investment. So based on that I'm giving you these numbers -- persons who are already in this business, would think of putting it. A new person can't even -- he will not do it even at these numbers.

Right. Right. And sir, how much time does it take to add a brownfield line here or for a greenfield or how does the time...

Minimum 2, 2.5 years.

Okay. That is for the brownfield is it?

No, for a greenfield.

Okay. And for brownfield sir, if you were to add a line...

At least like 18 to 20, 24 months.

18 to 24 months. And that is it because the machine that you import from outside, these vendors take a lot of time? Or is it -- is the environmental process that takes a lot of time, which is that part which takes a lot of time here to put a new capacity?

Everything, taking environmental clearances, land problem, then ordering the machine, machine deliveries are 12 to 15 months and making building. Everything would take 18, 24 months.

Okay. Okay. And sir, if I may squeeze the last question. We are doing this recycled CapEx of 26,000 metric tonnes and you said that it will be operational, let's say by December 2025. On a full year basis, let's say, FY '26 is anyway, it will be only there for 1 quarter. So more specifically for FY '27, what kind of revenue can one expect from there? And what kind of margins will we be envisaging over there?

See, the margins there, we are envisaging around 40% EBITDA. And the turnover in a full year would be around INR 275 crores, INR 280 crores. First year, maybe the capacity utilization because it's a new thing, it could be around 60% to 70%. But if we take a full year, it will be INR 275 crores with a margin of 40% EBITDA, so INR 105 crores to INR 110 crores EBITDA.

On a total investment of INR 300 crores?