RSWM Limited (500350) Earnings Call Transcript & Summary

Ladies and gentleman, good day, and welcome to RSWM Limited Q2 and H1 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, VP Legal and Company Secretary. [Operator Instructions] Please note that this conference is being recorded. 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 the achievements to differ significantly from what may be expressed or implied by such forward-looking statements. I now hand the conference over to Mr. Avinash Bhargava for opening remarks. Thank you, and over to you, sir.

Thank you. I'm Avinash Bhargava, CFO, RSWM Limited. Good evening, and thank you for joining us for RSWM Limited's second quarter and half year ended September 30, 2022 results conference call. We have already uploaded the investors presentation on the stock exchange, and I hope everyone had an opportunity to go through the same. I will take you through the current economical conditions, domestic and international which are impacting business and industry. Also update on all the segments of Yarn, Denim, Knits and then financial and business highlights for the quarter that ended 30th September 2022. As I highlighted during Q1 FY '23 earnings call, the spinning industry is going through challenges because of higher cotton prices on account of damaged cotton crops last year. On top of that, customs duty was imposed on cotton due to which imports could not be done well on time. On account of this, Indian cotton prices started increasing and they peaked during Q2 FY '23. The Indian spinners had a tough time since they could not even grab a competitive price advantage compared to international players. However, commodity prices are now stabilizing and cotton prices are easing with the new season arrival of cotton crops in the market. The cotton prices have started a downhill journey, making Indian textile companies stand back against again, in the world market. The Indian economy has been on a steady recovery path with an expected growth between 6.5% to 7% for FY '23. This is mainly on account of timely policy measures taken by Government of India and Reserve Bank of India which has helped Indian companies in managing to deliver quite better. Compared to global market, which is going through a lot of uncertainty. Three major global events, which impacted the industry and witnessed a subdued demand scenario globally and in domestic markets are the pandemic, Russia, Ukraine war and the interest rate increase, which resulted in fear of recession, commodity prices that had peaked but started stabilizing now. The demand scenario for yarn in domestic market has been stable. Due to the steep rise in cotton prices, the product mix was changed from cotton yarn to PV, PC yarn. The export market is severely impacted due to various reasons like lower order booking, a strengthening of dollar rate, delaying European and U.K. FDA continuing conflict between Russia and Ukraine, unpredictable cotton rates, et cetera. Expected this scenario to continue for the next half of the year, unless some improvement is seen in the global market. A lot of major countries are dumping cotton and cotton blends, especially China and Vietnam, in other potential countries. Despite these unprecedented challenges, I'm happy to share that our rating has been upgraded from C to B by Inditex, which shows the unwavering commitment of our colleagues and the resilience of our business during these difficult times. Domestic market, as I said, are stable post Diwali green shoots are visible, which could improve in the coming weeks, but it's very early to comment on anything at this moment. Now I take it forward to Denim. The domestic Denim business in India was equally disturbed throughout the quarter compared to our expectation due to sluggish market and a slowdown in retail segment. Due to the disparity between Indian cotton prices and international cotton prices, some of the major neighboring countries took advantage of aggressive pricing. Most of the brands are deferring the delivery as they fear stress in the market on Y-o-Y basis. We compensate for the drop in export by adding volume in domestic brands, end markets, which impacted our margins during the quarter. We have passed on some of the price hikes, which will be seen with a quarter lag. Weak sentiment disturb the liquidity in the domestic market due to market slowdown, but we could continue to report a better Q2, which was -- higher than our previous quarter and also higher than Q2 of last year. The overdue aging continued to remain healthy in Denim for RSWM. About knits with the commencement of commercial production of knits from 1st of July 2022, we are testing market to launch the products domestically and internationally. We are continuously contact with the exporters and they are doing sampling regularly. But initial challenges are present that every product has to pay, especially in the prevailing scenario. We are getting a good number of inquiries, but conversion is being delayed by big brands. We see better order booking for knits in Q3 compared to Q2. We expect 100% capacity utilization in cotton by Q4. And for knits, polyester, it might take another 5 to 6 months to reach 100% utilization. Coming to our quarter performance now. The last quarter was one of the most challenging quarters, but we still managed to deliver a decent set of numbers in Q2 FY '23. Revenue for the quarter stood at INR 954 crores in line with Q2 of last year same quarter, while our total turnover, putting together yarn, denim and knits remained stable on Y-o-Y basis. Our export turnover dropped by approximately 31% on Y-o-Y basis. However, the domestic market performed well with growth of 18% on Y-o-Y basis. EBITDA, excluding other income, stood at INR 82 crores, down 26.4% on Y-o-Y basis. EBITDA margin contracted by 300 bps on account of higher raw material cost during the quarter, which is now stabilizing. PAT stood at INR 14 crores, down 67.5% on Y-o-Y basis. Our debt to equity and fixed asset coverage ratio remained healthy. Average sales realization in Q2 FY '23 remained subdued on quarter-to-quarter basis for all PV, gray yarn, cotton gray yarn and melange yarn except PV dyed yarn and denim, which is -- which showed a marginal increase of 3.5% on Q-on-Q basis. Cotton gray yarn saw a 22% decline in quarter-on-quarter basis. Our H1 of FY '23 performance looks healthy. Revenue for first half of '23 stood at INR 1,978 crores, up 16% on Y-o-Y basis. EBITDA is stood at INR 222 crores, up 11% on Y-o-Y basis, and EBITDA margin stood at 11.2%. PAT stands at INR 81 crores, up by 1.7% and at a PAT margin of 4.1%. On the balance sheet side, the total debt was actually reduced by 7% from INR 1,103, crores to INR 1,029 crores on -- as on 30th September 2022 as compared to March '22. Also, as you are aware, we have been consistently reducing our debt-to-equity ratio. And currently, it is at 0.8x as on September 2022. On CapEx side, the company has invested around INR 410 crores in expansion of denim, cotton melange and knits business and modernization and balancing equipment across all units. Additional CapEx of INR 315 crores to be invested in the expansion of spinning capacity at Lodha, the machinery -- the delivery of machines will be started in April '23 and the complete -- erection will be completed -- will be done by 30th of September '23. The project is underway and shall be completed in '24. Recently, RSWM has been sanctioned Special Customized Package under RIPS 2019 for expansion of Denim, melange knits, and 51,000 spindles at Lodha, Banswara. With this, I would like to conclude that our long-term view on industry remains favorable. Continuous support of various schemes by the government has helped in enhancing the competitive edge of the textile value chain, which is giving us confidence that things will normalize in the coming quarters. We have been taking all necessary measures to derisk ourselves from supply chain disruptions and expect to see these efforts bear fruit in next fiscal onwards. We continue to invest in the next phase of growth across all verticals. All our projects and plans are on track, and we are confident that current fiscal will be a one-off and will not affect our long-term growth strategy of RSWM. I now leave the house open for question-and-answer session. Thank you so much. Thank you so much for patient listening. Thank you.

[Operator Instructions] The first question comes from the line of Saurabh Gupta from RS Investment.

So sir, I had a couple of questions. One is, what is the capacity utilization and outlook for the near term? Since, do we still see price in yarn and denim sales given the weak demand in the international and domestic market?

Yes. The capacity -- there are the challenges in capacity utilization front. But we are keeping these spindles shut for off and on and not continuously. And like others, our capacity utilization is around 90%, 80% to 90%. It varies from 80% to 90%.

Okay. Okay. And do we still see pressure in the yarn and the denim sales given the weak demand in the international and domestic market?

Yes, there are pressures in yarn and denim as well. And like others, we have the pressure on demand.

Okay. Okay. And on the industry front, Indian cotton prices are now -- they have adjusted to the same level as the international prices or...

There is a delta of around INR 4,000 per candy. Imported cotton is around INR 72,000 per candy. And Indian cotton is available at INR 68,000, INR 69,000 per candy.

The next question comes from the line of Swapnil Hirpara from Solis.

Sir how -- you can -- how many times you judge in margin pressure or you can -- ideally how many time -- can I speak in Hindi?

Yes, you can.

Okay. [Foreign Language]

[Foreign Language] Yes, I will take the example of this 130 as cotton and 230 as PV, right? I will take 130 as cotton first and then 230 as PV as a standard.

[Foreign Language]

Because of reduction in prices in cotton and pressure on demand, there is a reduction of about INR 100 [Foreign Language]

[Foreign Language]

[Foreign Language] So there are pressure and we can't say that how long it will go on. We are with the market. We have to face.

Can I ask next question, sir?

So it comes to contribution per kg. [Foreign Language] There was no option. [Foreign Language] Anything else about related to realization or contribution side?

Can I ask next question, sir?

Yes, please, sure.

[Foreign Language]

[Foreign Language] Let me explain you. [Foreign Language]

[Foreign Language]

RSWM Limited is very good. As of now [Foreign Language] till September. But because of increased stock in October, the working capital utilization is around 55% only. Still we have the cushion of 45%. There is sufficient working capital with RSWM Limited. There is no issue at all. RSWM [Foreign Language] Its backbone is very strong.

Thank you very much sir for clear figures.

The next question comes from the line of Marcel an individual investor. [Operator Instructions]

My question is what was the stock of cotton as of 30th September? And what was the price and -- Hello, am I audible?

Yes. Yes, yes, yes.

Yes. So what was the stock of cotton as of 30th September and what was the price? And what is the prevailing price of cotton now? This is my first -- like this -- and then what was the capacity utilization for the need for which we spent, how much capacity we did in September quarter?

Right. The cotton stock with RSWM was equal to their 45 days needs only. And since the crop has come now, we are building up it first 2 months and then by the end of December, it will be 3 months and maximum our cushion is of 5 months. So we keep around 4, 4.5 months stock. And if you talk about average price of cotton, average price of cotton stock, it is around INR 70,000 per candy.

As of September 30 and what the prevailing price now?

[Foreign Language]

[Foreign Language]

[Foreign Language]

So that impact will be coming to this quarter also realization.

Yes, in the realization. Let me tell you, with blending of low-cost cotton and high-cost cotton. There the quantum of stock loss will not be there.

Okay. Very good. Good news. And about the capacity of, how much capacity utilized in September? And what is the target of...

I discussed -- as I have already discussed that knit is having its initial issues in stabilizing their products and market demand also, orders from exporters. There are challenges of capacity utilization. But we feel that by end of this third quarter, 100% capacity utilization for knits will be there.

[Foreign Language]

[Foreign Language]

In terms of percentage?

[Foreign Language]

And how much is the produce? How much tonne did you produce against 400 capacity?

[Foreign Language]

Again, sir, like we have just gone through the recently result declare of two renowned companies, Raymond and Siyaram Silk very happy to know that they have been -- they have reported a very good result, like EPS of INR 17, INR 18 or INR 18, something like this INR 80 crore profit reported by Siyaram Silk since they are also in the yarn fabric, everything. And I was just going through the are saying that like we are using poly viscose. So viscose, they are saying that they are away from the volatility of cotton. So what like -- sorry, go ahead.

I beg your pardon. But this call is related to RSWM results. We are not sitting here to discuss the results of other.

No, no, no. We are not discussing. We are just taking some lessons learned because our profitability is down. I just giving you just number as feedback. Like they are using more poly viscose, or they are like reporting, they are saying that we are away from the cotton volatility. So why don't we do this one? We think this is there. We are not discussing their results. We are just taking good things, good things we should also take. We should always learn from others. Every day we should learn, sir.

[Foreign Language]

[Foreign Language] We are #1 in poly viscose yarn and we are using more poly viscose, which is acceptable to market also, and poly viscose is away from the volatility of cotton prices. [Foreign Language] We are just saying that why don't we also use more a portion of our spindles for poly viscose yarn [Foreign Language].

[Foreign Language] We are doing the same thing since pressures are there in cotton. We used our capacity. We diverted our capacity from cotton melange to polyester viscose yarn. Otherwise, [Foreign Language] from cotton to polyester viscose [Foreign Language] it is being used for polyester viscose dyed yarn. And in the same way wherever we are -- we can convert from cotton to PV, we have converted that at a particular location. [Foreign Language] We are -- we all are doing that. In RSWM [Foreign Language].

Thank you. Mr. Marcel we request that you return to the question queue for follow-up questions. Next question comes from the line of Aman Madrecha from Augmenta Research Private Limited.

I actually wanted to understand some scenarios. Like for example, currently, if we are talking about that international market, the prices of cotton, if you talk about specifically the New York Futures and so they are quoting at around some INR 56,000 to INR 57,000 per candy convert into Indian price. Whereas if you look at the Indian price, they are hovering in the range of INR 63,000, INR 67,000, INR 8,000 per candy. And with the commentaries of other spinners and textile companies, everyone is of the view that as and when the prices will converge, the international prices and the domestic prices will converge then there could be some signs of hope for recovery in demand. So like could you please highlight on the same?

Yes. The prices of cotton are getting stabilized. as per our expectation, it will be somewhere -- it should be somewhere around 70, 75 maximum, both type of cotton, whether imported or other cotton. Let's see, we can -- we are not astrologer. Let's see what will happen.

Okay. And sir, could you just help me with the mix of like what percentage of our revenue comes from cotton yarn and poly viscose and melange and other varieties.

I could not hear you properly. Can you please repeat your question?

Yes. Sir, actually was asking what percentage of our revenue comes from the cotton yarn, poly viscose yarn, melange yarn and et cetera.

Okay. This revenue percentage is about 60% of polyester viscose blended yarn, 20% from denim, and 20% from this melange yarn.

20% denim and 20% melange yarn?

Yes, approximately.

And sir, like how are you going about this programming strategy? Like are you following your general approach of procuring cotton because the new season has -- the arrivals are coming in or we are delaying or going step by step about the procuring process of cotton?

We are watching the market, and we are sure that we will not involve into any kind of speculation in cotton.

Okay. And generally, sir, when the new cotton season starts, so up till when we attribute the full inventory like in the general scenario? And how many months do we take to accumulate the full year inventory?

Internally in RSWM, we have the cotton purchase policy. wherein we can build up the stock at the time of drop up to -- gradually up to 4, 4.5 months, maximum 5 months, but...

Since the March, you are occupied for the whole year of cotton inventory?

Pardon?

If you are saying that the procurement policy is 4 to 4.5 months, we can say that till March, we'll be acquiring the full cotton that will require.

Maximum 4 months of stock and then it will get reduced gradually from April.

And sir, also, can you highlight on the -- how has been arrival in terms of quality, in terms of size and everything of the new cotton?

Quality, this time, quality of cotton, people are reporting that quality of cotton is good. Production -- as far as production, quantity of production is concerned, some people were saying that the cotton crop has been damaged because of rains and all, but there is -- we feel and understand that in Telangana, there is some hit on quantity side. But otherwise, in India, the production of cotton is around 20% up from last year.

Next question comes from the line of Niraj Mansingka from White Pine Investment Management.

A few questions. One, what was the utilization of denim and the PV yarn in this quarter?

PV yarn it's doing these are at full capacity. On some days, we remain the facility shut, but average utilization is around 90%, 85%, 90%.

And in denim?

In denim it depends on order position. But otherwise, there is some capacity underutilization of some capacity.

But what was last quarter utilization in number as a number, if you could give?

Capacity utilization [Foreign Language] for September. Otherwise, if you see other manufacturers of denim, the capacity utilization is around maximum 65%, 70%. I will not name out the manufacturers of denim, but maximum capacity utilization of other denim manufacturers is 65%, 70%. And some of the good denim manufacturers, the capacity utilization is 53%, 55%. Our capacity in RSWM -- our capacity utilization in RSWM is 93% for September '22.

And for the quarter of September, the quarter 2 of September?

I'm talking about quarter 2 of September only.

Okay. Okay. And sir, two, three things more. One, our knitting revenues we reported in which segment, the yarn segment or the denim and fabric segment?

Yes. This for knitting -- knitting is putting together a segment with denim fabric also. Because knitting has been [indiscernible] knitted fabric only.

Got it. Got it. And sir, when we are putting up the CapEx of knitting, we were of the view that you have presold the capacity and you see a lot of demand, but you will scale up the capacity later on. But then when it started, so are we...

Please repeat your question, please repeat your question.

Sir, what I was telling is that when we did the CapEx for the knitting segment, we were stating that we had a lot of demand from the buyers and we would -- and our returns on the investment would be very good. So can you share -- and now we have started the knitting capacity, and we have written about some teething issues. So are there some teething issues still in the plant? Or is it over?

No. Let me explain to you. When we set up the machine -- stabilizing the machine operation is the teething challenge. That kind of issue -- these kind of issues were there, but now these are streamlined. There is no issue as far as technical aspect is concerned. Going forward, about demand, we were expecting in last quarter that there will be a good demand, but this segment since this segment is new. Initially, we faced some problems in order booking, but now the order booking is good. And we expect that there will be a good business or 100% capacity utilization by 31st of December. And by end of this '22, '23, this segment or this facility will be operating in its full capacity and then with good profitability.

What can be the average realization of this segment, the knitting segment in rupees per kg?

Pardon?

What may be the average realization of knitting for garments for you?

This has to be stabilized first...

Because I'm asking is that after it stabilizes, I'm asking...

We are going towards polyester-dominant products. So once it is stabilized, we will certainly communicate to you next quarter.

Okay. Got it. Got it. And sir, last question. See, the cotton price is not correcting. So when you -- despite the production being so high in India, so what do you think is the reason for not correcting till now? Because we have already been 15 days of the season, right?

Niraj ji, what I would say that it was -- it came down to around INR 63,000, INR 64,000 candy. Again, it has gone up at INR 68,000 pr candy. So with the crop coming in, this price again shoot up by INR 5,000 per candy. So let's wait for next 15, 20 days. I feel that it would be stabilized in somewhere around INR 65,000, INR 70,000 per candy.

Next question comes from the line of Saket Kapoor from Kapoor & Co.

[Foreign Language] Hello. Sir, firstly, sir, what is our current utilization levels. I mean if we take the average for H1 and average for the first quarter to the second quarter, how was the utilization level shape up? And what is the inventory level in the system?

First quarter was 100% utilization of machines. And in second quarter, there are some challenges, but with a low magnitude, very low magnitude. And as far as denim is concerned, our utilization is 93% with handsome order booking position.

Sir, if we take the denim aside also and take the average of other aspects, what should be the average for the September quarter?

You can take it at 90% capacity utilization.

Okay.

But the other manufacturers, their stock is around -- they are holding stock of around 45 to 60 days.

Okay. So currently, sir, what is the inventory in the system? Because of this fall in the cotton prices and also the realization in yarn going down, what should be the inventory in the system currently?

It is of about 40, 45 days.

Okay. And taking into aspect the fillers that the exporters would be having on ground, mainly on account of home textile and also the conversion from the yarn to the other products, what sense are we making going ahead? When will this situation normalize?

Right. Your question is valid. But as of now, everyone is waiting for good time. And what I can say is that there are pressures on liquidity, home textile side, fancy products, production are on hold. Capacity utilization is again a challenge. Let's wait and -- we are hopeful that Q4 will be good. There are pressures as of now. There is nothing with us except to wait for a good time.

So sir, we are already half to the third quarter [Foreign Language] So the fillers which we have for this quarter is that we are having realization is lower than what the September exit was. This is a correct understanding as of now?

As far as pressure on prices are concerned, I have discussed in terms of contribution per kg and realization per kg, right? Realization per kg in 230 PV is around INR 193, which is lower down by INR 50, which was there in June and July '22. And again, in single 30s cotton, there is a reduction of about INR 100 per kg in single 30 cotton. So there are pressure on prices. Since this manufacturer of this fabric are coming up for their new order. In recent 10, 15 days, the order booking is good for RSWM and we feel that whatever stock we have, it will be liquidated by 31st of December.

Okay. Sir, taking other than this the cotton part of it, other raw material aspects like power and fuel, then the packaging cost or the other expense line item, power, how...

[indiscernible] Because we depend on -- we are dependent on this state electricity board and Energy Exchange. there is a recent increase in power cost, about INR 0.22 per unit, which will impact to us -- which will have impact on us also. And as far as this raw material is concerned, polyester viscose, it is [indiscernible] per kg. Viscose is almost more or less same, down by INR 5 to INR 7 per kg. And the cotton prices are at INR 220 per kg. It is also down. So the advantage of lower price of cotton, we should have in next quarter or in the month of December. And the days will not remain same. The demand will be there, and we will be able to sell it out in the market.

Sir, on the rights issue front, sir, would you like to have any further thoughts or where are we in terms of the fundraising exercise of INR 200 crores?

It is in process, and you can expect this rights issue news, maximum in second fortnight of December or first fortnight of January maximum.

Okay. And we will be closing the issue before March?

It will be -- yes, we will be closing that issue before March...

Your voice is not clear. Hello?

Yes, please.

Yes, I missed as point, you have seen some clarification or you were mentioning something.

Yes please, Mr. Raj.

Sorry, sir, I'm not getting your last answer, sir. You told that you are seeking some clarification from exchanges regarding the rights issue.

No clarification, no clarification from any side. We are sure that this rights issue chapter will be closed by March '23. And you will have a communication in second fortnight of December or first fortnight of January at max.

Ladies and gentlemen, that was the last question for today. We have reached the end of question-and-answer session. I would now like to hand the conference over to Mr. Avinash Bhargava for closing comments.

Thank you so much. Thank you so much for listening to this investor call of RSWM Limited and being with us for 1 hour. Thank you so much.

Thank you. On behalf of RSWM Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.