Filatex India Limited (526227) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Filatex India Limited Q2 and H1 FY '25 Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aditya Vora. Thank you, and over to you, sir.

Good afternoon, everyone. On behalf of Share India Securities, I would like to welcome all the participants for the second quarter and 1H FY '25 Earnings Conference Call of Filatex Limited. We are pleased to have with us the management team represented by Mr. Madhu Sudhan Bhageria, Chairman and MD; Mr. Madhav Bhageria, Joint MD; and Mr. Ashok Chauhan, Chief Visionary Officer. We will have opening remarks from Mr. Madhu Sudhan Bhageria to give an overview on the company's performance. This will be followed by the question and answer. Thank you, and over to you, Madhu jee.

Thank you so much. Good afternoon. A warm welcome to all attending this conference call for the quarter and half year ended September 2024. Joining me in this session are Mr. Madhav Bhageria, Mr. Ashok Chauhan and Mr. Nitin Agarwal. 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 stand-alone results of the quarter Q2 FY '25 over Q2 FY '24. Revenue was INR 1,049 crores against INR 1,108 crores. EBITDA stands at INR 45.7 crores against INR 54.2 crores. Net profit is at INR 13.5 crores against INR 23.1 crores. And half year H1 '25 versus H1 '24, the revenue was INR 2,103 crores against INR 2,177 crores. EBITDA was INR 106.6 crores against INR 99.1 crores. Net profit is INR 45.7 crores against INR 40.7 crores. The performance year-on-year basis is almost the same in H1 '25 as was in H1 '24. Just a few points better in comparison, but it is still not normal as the margins continue to be under severe pressure. On quarterly performance, we would say that Q2 '25, we had a stable performance amid strong headwinds like steep fall in raw material prices leading to rather erratic and subdued offtake in the months of July, August. Due to falling crude prices, the buyer sentiments have been wait and watch. The gradual fall in crude prices has been across the whole quarter. In a gradual falling input price regime, the buyers defer their decision looking for the bottom, and buying is limited to daily requirements. The demand for yarn in the domestic market has been reasonable, but there were frequent lumps in buying. Overall, in the segment of textiles, the domestic demand was subdued. The consumer sentiment is weak due to higher inflationary pressures. The rural demand is showing some signs of recovery and effect is visible in Textile segment. We observed an encouraging uptick in both demand and margins across our operations since beginning of October. The growth trajectory in the last 3 years in India has been flat as several successive waves of turmoil have rippled across the globe, which have affected Indian manufacturers. Crude prices and consequently, petroleum derivatives are still not stable, and fluctuations are visible almost on a daily basis. Geopolitical tensions have marked many aspects be it inflation rate or exchange rate or international prices of raw material and commodities and shipping rates. However, the long-term outlook remains buoyant due to strong fundamentals. Polyester continues to be the most widely used worldwide fiber. With an annual production of around 71 million tonnes, polyester market share was around 57.2% of the global fiber production. India's share in global supply is not growing at the same pace. Paucity of key raw materials and some policy issues have restricted growth. Continuous pressure on the margins has been -- also been a deterrent. Some long pending policy connections like inverted duty structures in GST on polyester input materials will give impetus to the domestic industry. Another request under consideration is shifting these materials under -- from chemical and fertilizer to Textile Ministry. It would help them to take a holistic view of the global competitive scenario. For textile yarn export, it is equally difficult to compete in international market against lower Chinese prices worldwide. Global textile industry has been identified as one of the major polluters. The footprint of pollutions are everywhere, be it lakes or ground water, air, soil, biodiversity, marine life. Textile industry is in scrutiny for identifying processes and practices that cause pollution. And remedial measures are moving from the suggestive stage to the enforcement stage. Norms are being defined to phase out all the hazardous chemicals. International brands and their consumers are increasingly demanding traceability in offering of sustainable products. And regulations are tightening to ensure ethical and environmental practices throughout the supply chain. We strongly believe that this is the time for textile transformation. To ensure sustainability and reduce environmental impact from the textiles and apparel industry, utilizing a sustainable circular economy model is of primary importance. It is one of our top most priorities to be contributor to this model. Sustainability is a survival mantra for our planet. To carry on business, imbibing this is not as a mere compliance of stipulated key parameters, but also a way forward to grow business. As mentioned earlier, we have been carrying out R&D for textile to textile recycling. We have developed and patented a process based on molecular regeneration of polyester, which can be recirculated infinitely. We are running a pilot plant to use miscellaneous types of textile garment forming [ waste ]. Simultaneously, we are in advanced stage of discussion with equipment suppliers for a 26,250 tonnes per annum capacity plant. We have procured the lands, are in the process of seeking permissions to set our recycle facility as a greenfield project. In our assessment, we should be completing this project by end of first quarter of 2026. Meanwhile, the process parameters of the pilot plant are being tested for a larger scale of [ washing ]. It is a time-consuming process as there are no ready-made equipment. Several field trials at vendors plants are underway for efficient use of energy and waste heat recovery. Our future path for growth is likely to be through recycling of polyester, and we are in touch with leading brands. To certify recycling, there are several accredited international organization. Their representatives are visiting our pilot plant to carry out life cycle assessments. Textile Exchange, the global leading organization has chosen our plant to review and assess how to standardize accreditation and certification contained for recycling across all the continents. One of the key elements of recycling certification will be traceability of all inputs, which means that our -- all sources of supply for all imports would also have to be compliant to a uniformity -- uniformly-stated procedure. Several companies all over the world are experimenting to develop commercially viable technologies. We are of firm belief that though sustainability in textile may sound difficult, it pulls the way forward. And it may pave way for Indian company to set up plants on foreign soil. In the existing plant, we are consolidating operations and taking steps towards compliances to sustainability standards. We have sourced around 30% of our energy from wind and solar power sources thereby reducing our carbon footprint. Thank you.

[Operator Instructions] We'll take a first question from the line of Amit Vora from Ginar Consultant.

Just extending from the opening -- on the remarks that you mentioned in the presentation that you are witnessing a turnaround in the industry, if you can just give some color on that?

Yes. Industry is turnaround because the demand has increased and we can see the margin improving. And whatever stocks people were carrying more in the last quarter, that have also reduced significantly. And going forward, if the demand continues like this, I don't think there will be enough material to give because previously, we had some stocks of the first quarter and beginning of the second quarter, which got sold in the end of the second quarter and also in October. But from November, I don't think there'll be so much of availability of material if the demand continues to be buoyant, which I feel should remain buoyant.

Okay. Understood. Sir, 1 question is on your Ester Industries, which is one of the companies which have announced a tie-up with Loop for a recycling plant. In comparison to that, how are we different? If you can just give some broad outlook on that, sir?

So what they are doing is they are tied up with Loop Industries. Loop has been doing in research for a long time. Their cost of production, whatever they have claimed in the presentation by Loop is also very high. And also, they are going back to the raw material, they would be making DMT and MEG. Then they further need to polymerize it to make [ granules ] or there, I think, polyester -- Ester is in [ film ] business. So they would use that to make film. In our business, we would be not going to raw material stage, we will bring it very close to that, purify it and then make directly the polymer. So there's a difference in that. Also, the cost of production, what they have declared, the total CapEx so they would be almost more than 60% more capital intense than us. And I don't think Loop ex has tested this in a big way in their pilot plants or anywhere. There are no such records on that, that they have perfected this technology.

Okay. Understood. Sir, just 1 more question on the recycling plants here. Once we are having the plant up and running, and it starts contributing to the revenues, at full utilization, is there a ballpark number that what we can achieve in terms of sales and return ratios on the plants sir?

I think the top line would be close to INR 270 crores to INR 300 crores, and we should get an EBITDA of 35% to 40% on that.

35% to 40%.

Yes. So you can say we should get an EBITDA of more than -- almost INR 100 crores.

Okay. Understood. Understood. Sir, I have a question on your cash flow, sir. So this first half, our cash flow from operation post taxes and working capital stood at INR 45 crores. This number last full year was INR 168 crores. And taking this back a further, in FY '23, we were doing almost INR 325 crores of cash flow from operations. So what is the reason for this deteriorating cash flow? Sir, if you can just explain then I'll have a question on that, sir.

The deterioration is because of the margins. The margins have deteriorated so the profitability has gone down. Cash flows have gone down. Also, we had in FY '22, we had paid a lot of -- repaid the loans. This year also, we have paid almost INR 52 crores repayment of the loans.

Okay. Okay. So sir, if we were to assume from what has been presented and what your commentary has been that the turnaround is visible. So can we see that in FY '26, we would be doing INR 300 crores plus cash flow from operations with this working capital improvement and margin improvement that we are foreseeing. Is that a fair assumption?

Yes, yes. We will do much better than INR 300 crores in FY '26.

Great, sir. Sir, 1 question to extend on that is current, our net debt is around INR 160 crores, about INR 300 crores is our planned CapEx, which will happen. With this kind of cash flows that are going to happen, we would be approximately a debt-free company by FY '26. Is that the right way where I'm pointing towards?

Yes, we should be very close to that because we are also planning one more small CapEx to increase our capacity of yarn like we had added cationic plant of making polyester chips. To utilize that we are planning to put almost 75 tonnes of new yarn capacity, which will be 50% FDY, 50% [ POY ]. So that will need a CapEx of INR 120 crores, which is yet to be given to the Board. But yes, maybe -- I'm just watching the market. If I see the market very good in this, what I'm hoping it should be, then we'll go ahead with that project. So still after that also, we should be very close to debt free in end of FY '26.

That would be a significant improvement in terms of cash flow, sir.

With an investment of INR 120 crores in that.

Okay. Okay, sir. Okay, sir. One last question, if I may squeeze through, and then I'll get back in the queue. Our ROCEs were about 14% in FY '24. With this entire working and the turnaround that we are seeing in the industry. my calculations suggest that we should be upwards of 22% ROCE by FY '26. Is that a fair working?

Yes, I have not calculated ROCE. I can tell you the EBITDAs will be more than double digit in FY '26, for sure. That's what I can give you the guideline.

[Operator Instructions] Next question is from the line of Aditya Vora from Share India.

Madhu jee, I had a couple of questions. One is with regards to our margin. I think in FY '21 and '22, we were doing 14%, 15% margin. I understand those were the best years. And currently, we are like a 5%-odd EBITDA margin. Strategically and going forward, what needs to change over the next 6 to 9 months so that we can get back to a margin of, say, 8% to 10%. So can you just highlight that?

A lot of things have already changed. First of all, demand is growing. No new capacity has come in so much. Second is that there were a lot of imports of fabric in India at very low ridiculous prices from China. The government has put a minimum import price on the fabric. So that has also stopped. These are the main reasons. The demand has increased. And because of the demand increase, the margins have to come to a level where people can put more capacity, and that is almost 14%, 15%. If we don't make 14%, 15%, I don't think new capacities will come in India. Government wants to grow textile and textile growth can only happen through polyester that has been seen in the last 10, 15 years. The major share of the growth in textile has always been polyester. India did not focus on that. That's why India has not grown in textile so much. China has been growing. Now the focus has come back. So I see the margins improving. And at least, we should be more than -- I mean, in some middle double-digit numbers, then only new plants can come in because the new plant costs around INR 1,600 crores, INR 1,700 crores for a 2 lakh tonne plant. So the margins are not that way, nobody is going to put the plant.

And so you highlighted on demand. You were saying that demand was fairly robust in the past 1 or 2 months. Maybe July, August was a bit slow. But how do you see demand going forward? Because from what I understand, demand has not been much of a problem. It is only the pricing and the cheap imports from China, which has led to low realizations for this.

In the commodity, a small disruption can lead to losing the margins, no. So we were getting almost like 900 tonnes of material every day in the form of fabrics from China. So that has stopped. So that will make a huge difference. So 900 tonne is almost, I would say, we make around 15,000 tonnes. So 900, you can say is around more than 6%. So that has stopped. So that will increase the demand for the local fabric and in turn for the yarn.

[Operator Instructions] We'll take our next question from the line of Sandeep Raj from Oculus Capital Growth Fund.

My question is regarding the new recyclable plant. I just wanted to know what is the time line, what is happening there? When will it be commissioned. Do we still stand that it will commission by the end of calendar year 2025?

Yes, I don't think so. Maybe we will go to first quarter '26. But there is a probability we might complete in end of '25 but definitely by first quarter '26.

And what's the project there...

It's a greenfield project and also it's a new technology. To identify the machine to track them and then buy them is a very tedious and long process. But still, I feel we should be commissioned in the first quarter in '26.

Okay. So Quarter 1 FY '26 will be the latest by then...

Yes, yes, yes. That's what I think.

Okay. And where are we on it right now? Like are we on the approval stage, the land acquisition...

The land, we have got it. [ NA ] we have applied, that should We get it in end of November. And then we have to submit plans for the building. So that we are already trying to finalize. Machinery suppliers were in advanced talks to finalize those machines. So we are testing those machines in a smaller way, whether they'll work for us or not. So all that is going on.

We'll take our next question from the line of Rahul Rama from Vista.

Sir, can you hear me.

Can you use your handset mode please.

How about now.

I'm sorry. We lost you again.

Okay. Okay. So I'll just try again. Sir, my question is pertaining to this recycled polyester. So I think -- I am not sure, but it was maybe 2 or 3 years ago when you first mentioned it. And I've been just tracking your progress on it sir. So what I wanted to know is that when you first -- I asked you what are the margins we expected. You said 35%. And even on this call, you maintained that it would be around 30%, 35%. So I'm just trying to understand because -- I'm trying to understand for you the industry dynamics a bit better, I guess. Because usually, when you see these kind of margins, it attracts competition and people want to come in, but even after 3 years, you are still maintaining that 30%, 35% margins. So sir, what is like the [ holder ], what is like preventing other players to come up with capacity, sir?

Last 3 years also no new capacity in this has come up. Everybody is in this research stage of putting up a plant. So the margin would remain that level only till the time there is too much of capacity in this coming up. The demand is much higher than what the people are producing. I think the demand would be today, maybe 8x to 10x what the production is happening. The production is very, very low and also to what people are producing is mostly out of PET bottles. Nobody is producing after textile waste. And now in Europe, there is an extended producer responsibility, which has been -- which will come in force from 1st of January 2025. India also is putting a lot of producer responsibility for bottle to bottle. So availability of the bottle will also go down. And whatever technology we are using, our cost of production is that, that we will be producing the polyester at a much cheaper price than the virgin polyester. So that will also give us some margin and plus the premium, what you get on the virgin, that will grow. So the margins would remain. If you go and see the presentation of Loop and all, they are claiming 40%, 45%. I'm not claiming that. And their investment is almost double than what we are doing. Still they are claiming such a high profitability.

So sir, I have done my fair bit of research on these Loop and other players as and I'm aware of what you say. And I also remember you saying that all of these players, they are not from the textile industry, are mostly start-ups with science background. And you would have a distinct advantage versus them because you're one of the few players who's actually a textile producer, I mean, what do you call, polyester producer, who is venturing into recycled polyester. So over the last 3 years, sir, what have you been learning? Is it like actually materializing to you having a cost advantage as you just mentioned? And if so, like what can you tell us about it? Like how has that translated into you carving a cost?

We have been able to, first of all, check each in every process in-house what we'll be doing. And also, first, we also started from PET and yarn waste. Now we have been able to use even the fabric waste pre-consumer because we need to know what is inside that fabric. So we are using pre-consumer waste of the fabric, which is like the small cut [ runs ], which you get from the people who are making fabric or the process houses or the government producers. So that we have been successfully been able to use and convert it back. Now we are just trying to fine-tune the process and also trying to get the machines, which will be suitable for such a large production comparatively so that the ease of operation is also there.

I'm sorry, Rahul, we lost you again.

Yes. Sir, also, I do understand that because this is also like a novel project for you guys, it has -- the commissioning of the plant has taken a lot longer than you initially had envisaged, and that's understandable. But sir, like all that is fine. On your side, you have done everything right, let's say, right? And you have perfected the recipe for producing this virgin polyester. What does it take from the client side? Because I'm guessing there must be some hesitance even from the client side to make sure that the quality is up to mark and there will be some trial runs. So even if you, say, you get the plant commissioned, so how do you see the offtake happening here? Will it be like a slow process or clients just actually hungry for this virgin polyester?

See, we are already in talks with the clients. And in case they want some trials, we can do it from our pilot plant. So hopefully, by the end, when the plant -- when the big plant is running, we should have the clients in place, maybe not 100%, maybe 50%. And then within the next 3 to 6 months when the client can see the operation, they might do it faster. So yes, first 3 to 6 months, the productivity could be lower. But definitely, it should come to almost full capacity within 6 months because we'll be doing the client feeding from -- now only we are in talks with them, what are their requirements? What are the environmental requirement they would need in the new plant, we should take care. So all that we are taking care.

Perfect, sir. Sir, just 1 last request from my side, the only request actually. Like whenever you do commission this plant and let's say you get your first maiden customer, it would be really helpful for us investors, if you could notify the exchanges once you bag your first customer, sir.

Sure. I would do that once I have some positive approval from one customer, and notify the name also if they allow.

We'll take our next question from the line of Amit Vora from Ginar Consultant.

Sir, one question is on the EBITDA that you mentioned that you would be at double digit. How far have we come on that, sir? And what is the near-term understanding on the EBITDA margin that we can look at?

I think we should be very close to 8% in this quarter, and we should do approximately double digit in the next quarter. And then going forward, it should improve.

Okay. So every quarter from here on, we should see some improvement on a quarterly basis and then probably double digit is where we should stabilize?

Correct.

And one more thing, sir. Our interest costs has gone up quarter-on-quarter to around INR 8 crores from INR 5 crores, I think. So what is the reason for this, sir?

This quarter, we had a mark-to-market loss on long-term borrowings. We have long-term borrowings in Europe, which we don't hedge as a policy. Overall, we have gained quite a bit because of that. So this quarter, I think on 30th September, the rate was almost close to 93-point something, which has come down below 90 now. So this quarter, it will get negative. That's not a cash loss. It's just a notional loss which we had.

[Operator Instructions] Next question is from the line of Harsh Patel from Share India.

Can you let me know what's the festive demand for this year? And can you throw some light on CapEx for coming quarters?

Coming quarters, there is no CapEx planned. The main CapEx, which we are doing is on the recycling. So that will be very low in the first 1 or 2 quarters. It will pick up, I think, by end of second half of next financial year.

Okay. So what would be the amount of CapEx total we are planning?

We are doing on recycling is INR 300 crore, and one project, which we are planning to do would be INR 120 crores to enhance the yarn capacity in the existing plant.

Okay. And can you show -- so throw some light on festive demand?

The festive demand is good. That's why what I said, the demand has been good in October. So that's a festive season. The demand has been pretty good. And I think it should continue what we see from the offtake of the fabric happening with the people. Every fabric guy had a lot of stocks, all stocks have been almost wiped out in the October month.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management team for closing comments. Over to you, sir.

Yes. I thank all the participants for sparing their time in joining us and hope to see them in the earnings call of the next quarter and end of third quarter. Thank you so much.

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