RSWM Limited (500350) Earnings Call Transcript & Summary

Ladies and gentlemen, and a very warm welcome to the RSWM Limited Q1 FY '23 Earnings Conference Call. We have with us today from the management, Mr. Avinash Bhargava, Chief Financial Officer; Mr. Puneet Anand, CSO; Mr. Surender Gupta, Vice President, Legal and Company Secretary. [Operator Instructions] Before we proceed with this call, I would like to take this opportunity to remind everyone about the disclaimer related to this conference call. Today's discussion may be forward-looking in nature based on management's current beliefs and expectations. It must be viewed in conjunction with the risks that our business faces that could cause our future results, performance or achievements to differ significantly from what it may be expressed or implied by such forward-looking statements. I now hand the conference over to Mr. Avinash Bhargava.

Thank you. Good evening and a very warm welcome to everyone on our Quarter 1, 2023 Earnings Conference Call. We have uploaded the presentation of our results on by stock exchanges in the company's website. And I hope everyone had an opportunity to go through the same. Moving forward, Quarter 1 FY '23 results, sales reported for the quarter stood at INR 1024 crore, up by 38% on year-to-year basis, mainly contributed by higher domestic sales. Other income for the quarter stands INR 31.4 crores. Gross profit up by 44.5% on a year-to-year basis due to resource optimization. EBITDA, excluding other income stood at INR 109 crores, up by 32% EBITDA margin contracted 30 bps on account of higher input costs during the quarter. That increases to INR 67 crores, up by 81.1% on year-to-year basis. Going forward, Q1 FY '23 is generally treated as a lean quarter. However, we could perform during the quarter given the challenges of increased raw material cost since we could pass on the increased input cost to the end consumer without significantly impacting our margins, we saw a peak in cotton prices in June and July, the impact of which we will see in the short term due to the purchase of raw materials at higher prices. Currently, the drop of almost 25% to 30% in cotton prices will positively affect the industry in the second half of the year. When these benefits of reduced purchase cost will be consumed. We see this situation normalizing post the arrival of new cotton crop on the back of good monsoon season. In addition, in India, 20% to 25% area would expand in 10 cotton growing states in the country to cover cotton cultivation in '22, '23 season. About demand scenario, we are optimistic about the domestic demand scenario with a slight plus or minus, and we believe it will remain so on the back of the China Plus One strategy. Improving domestic demand such as seasonal school uniforms, requirements, increased the demand of yarn, while wedding season increased footfalls on the retail end. There are some headwinds on the export side because of fear of recession and geopolitical issues globally in major countries. However, RSWM through decent quarter numbers has demonstrated solid execution of its planning and its inherent strong business model, enabled facing several challenges without a fall in profits. The strong demand, higher realization and better product mix helped us in posting the best ever results in FY '23. We can say that this is the best first quarter of last three, four years. Coming to our segment results. First is yarn division. Currently, higher competition and constant pricing pressures are influencing demand for cotton and PC Melange. Mills predominantly producing cotton and its brands have shifted the cotton to other brands, such as PV, Polyster cotton, Polyster 100% and viscose 100%. Fabric exporters, including those of uniform fabrics, performed relatively better. We believe this is a short term in coming quarters. Our margins on 100% cotton can be affected for short term because of above-mentioned season, which is 1/3 of our total business test will remain the same. During the quarter, yarn division sales stood at INR 887 crores, up by 29% on a year-to-year basis, it saw a drop of 8.2% subsequently. EBITDA for the yarn division contracted by about 80 bps and about 330 bps, respectively, on a year-to-year basis and on a quarter-to-quarter basis. Going forward about Denim. FY '23 Q1, Denim sales touched about 75 lakh meters, amounting to INR 220 crores despite adverse market conditions. We could manage domestic collection overdue in healthy range of 4%. Domestic space remained disturbed due to expected price corrections on the back of softening of cotton prices. We could hold the momentum during the quarter and in the long term. We believe demand to return on the back of the festive season, our focus on high-value specialty yarn businesses like Dyed and Melange Yarn is increasing, which will help us in sustained margins. Next item is Knits. As we announced last year, our initial investment in the Knits business commenced commercial production on 1st of July 2022. Based on our initial introduction, with exporters and domestic brands, we are seeing good progress and good demand in Knit business. About projects in hands 30k spindles yarn capacity at Gulabpura. Denim Fabric Capacity at Banswara undertaken during last year. Have also started, and we expect these will help in future growth in the quarter to come. The commercial production of these two plants have been started from 1st of July itself. I will sum up by saying currently, looking at global situation like fear of recession and higher cotton prices, demand shift will happen for coming quarters or so, but it will pick up soon as the prices will get corrected. Domestic demand continues to be strong. Our view for the long term remains optimistic as we have seen a shift happening and India being the preferred and reliable source might see an upsurge. Also, the government is providing the required support via various schemes. Thank you so much. Now question-and-answer session may be taken up.

[Operator Instructions] The first question is from the line of A.M. Lodha from Sanmati Consultants.

I require sir two clarifications. One is about expansion. As for the presentation, I think in first phase, you have completed expansion of INR 400 crores on full capacity utilization, it will give us a sales of INR 700 crores. Am I -- is my reading is all right, sir?

It's perfect. It's perfect.

Now second phase, again, regarding expansion, the INR 315 crores we have taken, this will be completed by FY '24. And how much turnover this can give sir, on full capacity utilization. Estimated approximately?

Second expansion?

Yes, sir.

It will be around INR 500 crores.

Okay, sir. Now second question is relating to last Board meeting. Last Board meeting, we have -- Board has decided to consider a right issue at an appropriate time of INR 200 crore plus. Sir, our contents and in our view is when the company's earning is quite good, then the INR 200 crore way of pricing the equity, I think the INR 200 crore by way of the right issue, is a very detrimental to the minority shareholder. You must have observed that you're one of the biggest shareholder of [indiscernible] holding the 12 lakh shares in your company, they have already disposed of 75,000 shares in the open market on the fourth of August '22, is for the filing with the stock exchange. What we think on our past experience and we have a holding in so many companies, the companies that was having the huge exports are one of my holding company made money organic, they are having 80% exports. By the [ listings ] of the world, your company is also having export of more than INR 1,200 crores or approximately INR 1,000 crore plus exports. So what they have done, made money organic, they have taken the external commercial borrowing at a rate of 1.5% to 2%, without hedging the position because your receivable will be -- receivable will be automatically held against your borrowing. So that INR 200 crores or INR 300 crores whatever you require for the expansion that can be our request is that, that can be taken at external commercial borrowing instead of proposing the right issue which is a not only detrimental share prices, plus also our investor like us will have to pay additional investor digital money in the [indiscernible]. Please, kindly put some light on it.

Right. As far as this raising the funds through right issue, we have with us Mr. Puneet Anand with us. He is our Chief Strategy Officer. He will throw some light on this. I think he will be able to satisfy your queries. And as far as ECB is concerned, we take your suggestion, and we'll see that how it can be worked out. Mr. Puneet Anand.

My last question will be there. Let Mr. Puneet Anand to explain that. I'm holding sir.

Sir. Basically, the right issue is not for the per se for the IRS capital expansion. It is more to pay off the high debt, which we have right now in our balance sheet. The company has a significant growth plan and it involves a substantial capital expenditures and enhanced working requirements, the option which you have put right now, we will be utilizing that option too for our expansion plans. But, we believe that the right issue will bring and strengthen our company finances and balance sheet for sustainable growth and also encountering any cyclic volatility. The management has recommended and Board has considered the proposed rights issue, for this purpose. And after giving a due consideration with an opportunity to all the shareholders so that everyone can participate in the potential growth of the group and the company. And there is no dilution per se to any shareholder interest.

Sir, Anand, sir, what is our average rate of interest on the existing loan, sir? Short term and long-term average will do sir, whether working capital or long term, anything will do, average will do,.

Average, it is around 8% to 9%.

So when we are saying 8% to 9% of the bank and when getting the commercial [indiscernible] commercial growing 2%. Why to dilute the equity? I don't -- we fail to understand sir. This is our earnest request to the management, top management can you please [indiscernible] given sales for this is due to the management that we did not want this right issue. Company should raise the external commercial rate borrowing available at 2% and meet the return of this long-term loans, which have interest of 8% and 9% that's my suggestion sir, humble request.

Can I answer Lodha saab about this?

Yes sir, sure sir.

This 8% to 9% are term loans, interest rate as well as this working capital interest rate, before subsidy. And it will -- we'll reduce that subsidy part. Net cost of finance would be around 6% and 6.5%, right? ECBs and all plus spreads and premiums would cost us more. That's what we want to say from an interest point of view. Now I give a handle to Mr. Puneet Anand to take it forward.

Sir, we have noted your pointers and your comments on that. We have currently evaluated these options. And let us please give us some time because we are right now in the silent period. I'm alluding that.

Okay sir. Just my humble request because. Yes, Anand saab it was our humble request on the -- behalf of all our minority shareholder that when we are getting money at 2%, why should we not utilize the money at 2%. Why to -- we paid some premium on the equity issue and we paid the money. One sided we are taking the dividend from the company, other side, we are reinvesting that money on that dividend, we have to pay the tax. Then again, the money is to be reinvested in the company. That is our humble request and some reasons if the management considers and finds it appropriate, it can be considered sir.

[Operator Instructions] The next question is a follow-up from the line of A.M. Lodha from Sanmati Consultants.

Sir, thank you very much sir for this. One point I left, that can you tell me, sir, how much megawatt of the power we're having coal based and how much megawatt of power is company having a green power on solar?

We have around 30-megawatt power on solar. We have 46 megawatts thermal power plant also, but it is not working as of now. So we are procuring the power from State Electricity Boards.

Because we -- because why we are worried because coal cost is very prohibited nowadays. And it is not at all viable to purchase the coal at this price and the producer. So we have done the right thing.

[Operator Instructions] The next question is from the line of Hemang Kotadia from Anvil.

Just wanted to ask what kind of volume are we expecting this year?

Can you please speak a little loudly?

Am I audible now?

Yes, better.

Okay. Sir I just wanted to ask with the new capacity addition, what kind of volume growth we are expecting in the current year, FY '23?

FY '23, it will be -- from these expansions, it will be around INR 350 crores to INR 400 crores.

Okay. Incremental turnover?

Incremental turnover.

Okay. Okay. And sir, how the demand looks like for Melange Yarn, value-added yarn? Though you mentioned in opening remarks, but just if you elaborate more on that line it would be...

As of now, the prices in Melange Yarn are stressed. But from October onwards, we hope for a good market in Melange.

Okay. Okay. And can you give me the VSF prices for the last quarter?

Pardon?

VSF prices. VSF.

Viscose Yarn or?

Raw materials.

Just for a minute, just give me just a moment. Viscose prices for last quarter was INR 185 to INR 188 per kg.

Okay. Okay. And sir, last question, what is the sustainable EBITDA margin once we will get new crop from October? So is this kind of margin sustainable?

The sustainable EBITDA margin will be somewhere around 11% to 12%, looking to this current market scenario. Otherwise, if we will market will get improved in a better way, we can have at least 12%.

The next question is from the line of Akhilesh Kumar from AdPro Technologies.

I think my question partially has been answered, but I would still like to just know about the raw material trend in this quarter. And cotton is the major raw material cost for us or because we produce different -- all different types of yarns. So I want to like -- what is the cost pressure right now right on the raw material side?

You're welcome. Actually price trend in cotton, polyester and Viscose. We'll discuss all these price trend from '21 to -- March 2021 to this July '22. In March '21, the cotton prices were INR 131 a kg, right? And then in March '22, it was INR 259. Now in June, it was INR 264, and in July INR 253 and the downward trend is there. But recently, the cotton prices are up by INR 15. So we can expect around 70,000 a candy in September, October, 70,000, 75,000 a candy, so prices should be stable in cotton side. And in polyester side, the prices in March '21 was INR 100 a kg. And then in March '22, it was INR 120 a kg. Now current prices are INR 170 a kg. After this rise of INR 128 in June '22. And as far as this viscose prices are concerned, this is ranging in between INR 185 to INR 188. Since June, July, the prices are stable in case of viscose.

[Operator Instructions] The next question is from the line of Manas Singh from Value and Growth Advisors.

Sir, what is your strategy for next two, three years given the current situation?

Our next strategy is still implement this Lodha plant of INR 315 crores, 50,000 spindles. This will be operational by March '24. And there are a few other plants also -- organic and inorganic growth, which are under evolution. We may invest a few crores in these new expansions -- organic or inorganic growth.

The next question is from the line of Saket Kapoor from Kapoor & Company. As there is no response, we move on to the next question from the line of Abhilasha Satale from Quantum Asset Management.

So sir, just wanted to know what has been a realization in Q4? And what is it now? And what has been your gross spreads? How your gross spreads have moved on quarter-on-quarter basis?