RSWM Limited (500350) Earnings Call Transcript & Summary

Ladies and gentlemen, and welcome to the RSWM Limited Q3 and 9 months FY '23 earnings conference call. We have with us today from the management, Mr. Avinash Bhargava, Chief Financial Officer; Mr. Surender Gupta, VP Legal and Company Secretary. As a reminder, all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes. [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. Today’s discussions 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 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.

Good evening, everyone, and thank you for taking the time to join us for our Q3 9 months financial year '23 earnings call. I understand that the results were declared yesterday and I hope that each and every one of you had the opportunity to thoroughly review them. As we proceed with this discussion, I would like to bring your attention to the investor presentation that we will be referencing. Let me start my speech by providing a comprehensive overview of the current state of textile industry and business scenario. This will give you a better understanding of the market trends and challenges faced by the industry and then we will open the floor for your questions. If you have any further questions that remain unanswered. After the earnings call, please do not hesitate to reach out to us. Let me brief you on the industry and business scenario first in terms of the business scenario, as we discussed during the last call also. The Indian textile industry encountered a few bumps in the road in 2022, after a good start during the year. Three main reasons that hit the sector are unpredictable geopolitical events and variable raw material prices. Secondly, the demand from USA and Europe, two of our major convening markets took a hit due to economic trends, and the domestic wasn't immune to global scenario, leading to less optimism for the rest of the fiscal year. Thirdly, the material price difference compared to the international markets, resulting in a competitive disadvantage to most Indian textile players. In the last half in year, the world has been -- has seen a significant increase in the demand for oil and gas. This can be attributed to the restrictions on Russian fuel exports, which resulted steadily of these essential commodities and the subsequent increase in their prices. The ongoing conflict between Russia and Ukraine and the general geopolitical instability.

Mr. Bhargava, we're unable to hear you at this time.

Yes. Let me repeat. Geopolitical instability in the region only added fuel to the fire and heightened the already soaring prices, leading to inflationary pressures, not just locally but globally as well. This further reduced the demand for these commodities in the export market. The situation wasn't helped by the concerns surrounding the spread of the new variant of COVID-19, which led to a further decline in market sentiment in international markets. However, in recent weeks, there has been a noticeable resurgence in inquiries for these commodities across all segments like yarn, melange yarn, denim, knits and all, indicating a potential for recovery. In light of the aforementioned challenges, the arrival of new cotton crops has led to a decline in prices, both domestically and globally. Despite this, the prices remain higher than what is considered to be ideal. The correction of domestic cotton prices has reached around 40% from the previous peak and the difference between domestic and international cotton prices has diminished. As a result, the spinning industry has returned to a more normal level of utilization compared to the second quarter of financial year '23. Additionally, the demand has begun to improve due to increased retail consumption and a decrease in downstream inventory levels. Overall, there has been a noticeable improvement in that situation over the past few weeks. Despite the difficult economic environment, the total textile and apparel exports of India declined by only around 12% during the period from April to December ’22. The share of textile and economy for the total merchandise exports from India dropped to 8% during that period from 10% in the previous year. Prices of cotton yarn have increased from their peak level in May ’22, but still remain around 15% to 20% higher than the past several years average. This moderation in prices has led to a decrease in profitability and revenue for the spinners, impacting their performance in quarter third. However, RSWM remains confident that these temporary disruptions will eventually be resolved and the long-term outlook remains positive. The Union Budget '23, '24, put forth by Finance Minister, Nirmala Sitharaman has taken into consideration the needs of India’s textile sector with a particular focus on extra-long staple cotton. Five new HSN codes were introduced for more precise policy, support for the segments that are dependent on imports or other incentives. Additionally, higher allocation to RoDTEP, RoSCTL and ATP are expected to provide some relief. To further encourage the productivity of ELS cotton, a cluster-based value chain approach through public-private partnership was suggested. This involves collaboration between farmers, the state, and industry for input supplies, extension services, and market linkages. The textile industry awaits further details of the policy to move forward. The easing of restrictions in China and return of demand from one of the world's largest economy is indeed a positive sign for the spinning industry. The pent-up demand is likely to further drive the growth of the industry as more people start to return to their normal routines and businesses. Additionally, China's growing middle class and increased consumer spending power are expected to drive demand for textiles and clothing, which will further benefit the spinning industry. However, it's important to note that the global economy is still recovering from the impact of COVID-19 pandemic and there may still be some uncertainty and challenges in the short term. It will be important for the spinning industry to closely monitor developments and adjust its strategies as needed to remain competitive and take advantage of new opportunities as these arise. With regard to the company's recent quarter performance, it’s evident that utilization levels have rebounded to their usual state. The spinning division saw an average utilization rate of 80% during the quarter, a marked improvement from 65% recorded in preceding quarters. The yarn market experienced a drastic drop in prices as the industry eagerly awaited a reduction in raw material cost. Despite this, the margins have remained under pressure due to ongoing volatility and weak export demand. However, the company is proud to report that domestic demand remains robust. Unfortunately, the market has yet to see a resurgence in demand for knitted fabric and related yarns. Despite this, the company is steadfast in its commitment to expanding its share in the value-added segment and further penetrating the domestic market. The recent quarter was a test for the company, but RSWM remained focused on what it does best: operational efficiency and cost control. By maintaining a strict expenses, the company has the resources it needs to support its growth. Although the commodity and freight markets have shown improvement, global consumer demand will remain sluggish due to inflation and high inventory cost in key markets. Nonetheless, the company remains optimistic and confident that demand will eventually pick up as the effects of price normalization and a brighter economic outlook becomes evident. Coming to our quarter performance now, average sales realizations in quarter third remained subdue on a quarter-to-quarter basis for all PV, greige yarn, cotton greige yarn, melange yarn, PV dyed yarn, and denim. Coming to our Q3 performance revenue, it stood at INR 855 crores, down by 15% on year-on-year basis and EBITDA for the quarter stood at INR 28 crores down by 77%. At the net profit level, the company reported a loss of INR 14 crores for quarter three as against a profit of INR 50 crores to corresponding previous quarter. For the nine months of financial year ’'23, performance revenue stood at INR 2800 crores plus, up 5% on a year-on-year basis, EBITDA stood at INR 251 crores, down 22% on a year-on-year basis, which translates into EBITDA margin of 9%. PAT stands at INR 67 crores, down by 48% and PAT margin of 2.4%. On the balance sheet side, we have been consistently reducing our debt-to-equity ratio. And currently, our debt equity and fixed asset coverage ratio remains healthy. On the 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. Additionally, CapEx of INR 315 crores is to be invested in the expansion of its spinning capacity at Lodha. The delivery of machinery will be started in April '23, and the complete erection will be done by somewhere around 31st July '23. The project is underway and shall be completed by '24. Recently, RSWM has been sanctioned a special customized package by Government of Rajasthan under RIPS 2019 for the expansion of denim, melange units and 51,000 spindles at Lodha, Banswara. This special customized package has also been notified. Our team has been steadfast in delivering exceptional quality and customer service, and we are proud of our ability to outperform in this challenging environment. We would like to extend our gratitude to all of our stakeholders who have supported us through these difficulties. The long-term prospects for textile look promising. To protect ourselves from supply chain disruptions, we are taking proactive steps and I expect to see the benefits in the near future. In the light of current uncertainty, we don't think it's wise to provide earnings guidance at this time, but we are confident that our projects and plans remain on track and that the current fiscal year will be just a blip on the radar, not a hindrance to our long-term growth strategy and anticipate a return to normalcy in the demand for our products and services in the next 2, 3 quarters. Now I am happy to take any questions you may have. Thank you so much and over to you.

[Operator Instructions] Our first question is from the line of Tanush Mehta from JM Financial. Please go ahead.

I have a few questions. The first one is that, sir, can you give your segment-wise demand scenario for maybe your yarn and denim? And followed by the gross debt position of the company and along with the CapEx requirements, if any, for the next year?

I would like to answer your question. In terms of capacity utilization. It increased from the first week of February, Earlier, we were not able to use our capacity. We were having this yarn and denim and knits. Earlier, the capacity utilization was short by 18% -- around 18% till December. Now we have 100% capacity utilization. And in denim, we were able to use only 63%. Now the capacity utilization of 178 looms, it is 100% and next in the capacity utilization, there are challenges, there are teething problems with us and we hope that by end of March, we will be able to use 100% capacity of our knits business. So, we have the capacity of 400 metric tonnes in knit business. And in denim business, it is around 27 lakh meters and then around 7000 to 8000 metric tonnes in yarn business. We have good order booking now and the market now is picking up.

Okay. And sir, something on the gross debt position?

Gross debt position will be around INR 900 crores, INR 950 crores that's it. Because we have paid our loans to some extent around INR 200 crores are going to be repaid this year. And it will be around INR 950 crores only by the end of the year which includes working capital and term loans.

Okay. So we're taking all into account, the demand scenario is something which is not clear to all as of now. What would our inventory levels be? And how are we managing it as of now?

We are managing — -- We have the inventory levels with us. Just for a minute. We have the inventory of around 8,000 metric tonnes of yarn, it was used to be 6,000 metric tonnes, we are up by 2,000 metric tonnes, but we have a certain plan to reduce it and we are going to reduce it to the level of 700 or 700 plus metric tonnes by the end of February. And this was —used to -- earlier this was used to — -- last year, it was around 5,000 metric tonnes of yarn. In case of melange yarn, the inventory levels in December, '21, it was 400 metric tonnes and now in melange yarn, it is 900 metric tonnes as of now we have. So it’s not great, it's just double, but not very much. There is a current demand we are pushing lots to penetrate our stock into the market. As far as denim is concerned, we are at normal inventory level of around 6 to 7 lakh metric meters at the end of December '22. Earlier it was, 6 lakh meters and in December '22, it was 8 lakh meters, not very much inventory wise, we are managing good. But inventory level in the case of yarn, these are high by around 30% to 33% with regards to last year December ’'22.

[Operator Instructions] Our next question is from the line of Amit Goela from Rare Enterprises.

So I just had a basic question regarding PV dyed. Again, the recent earthquakes in Turkey, how do you think that will impact the demand scenario going ahead?

Your voice is vibrating, Amit.

Your Mr. Goela, if you are on speaker phone, can you please use your handset because there's a lot of background sound coming through.

Yes. Is it better now?

Yes, slightly better. Go ahead.

Yes, yes. Okay. So I just wanted to understand how exactly is the recent earthquake in Turkey going to impact the demand scenario going ahead specifically for PV dyed, which is a new segment for us?

Yes. [indiscernible] Sorry, there is a voice behind you.

Sir, I will mute Mr. Goela's line when you're answering the question and unmute when you're done. So please proceed.

Okay. There is a pressure on PV dyed yarn since Turkey earthquake, is there, apart from this Ukraine and Russia war this has added to our problem and certainly there is a pressure because of this earthquake. Demand has scaled down.

Mr. Goela, do you have any other questions?

So how as a company, are we like proceeding to handle this situation? Are we reducing the spindle exposure on PV dyed?

No, no, no. We are not reducing the PV spindle exposure. We are using our 100% capacity as of now. And since the demand is good in Ludhiana market and the demand is picking up for this next season -- the next season of winter. There are orders -- good order bookings from Ludhiana market.

[Operator Instructions] The next question is from the line of Amol Kankariya from Startez Technologies Private Limited.

Congratulations on a good set of numbers in a difficult situation. I have a query regarding your power and fuel expenses. Regarding to the last quarter, the power and fuel expenses were INR 99 crores. The power and fuel expenses INR 103 crores and this time it is INR 99.84 crores while this turnover has dropped down 15%. I consider power and fuel as a variable cost. So why is— the cost not coming down in that ratio?

Please repeat your question. What you want to say?

Sir, I want to say that the last time, the power and fuel cost last quarter was INR 103.61 crores. this time, it's INR 99.84 crores and your -- the turnover has reduced by INR 100 crores. But it has reduced a much higher percentage. The power and fuel cost has not reduced. The cost should have come down. So I just wanted to know what is the reason? And the other thing I wanted to know is our 9-monthly performance remains robust comparatively to the last two quarters. So can't you be -- is the management thinking of paying an interim dividend? If it is a practice, it would be great.

Yes. Just allow me to brief about this power situation. In Rajasthan, you know that there are certain power cuts during this quarter. There were power cuts. Now the situation has improved. Right? And in case of IEX Power. If we —bought the power from IEX, it was as high as around INR12 rupees per unit against the electricity board power rate of INR 7.92 per unit, right. And secondly, whenever there is a situation of this spindle stoppage and all, you will find that per kg —unit power consumption will remain high. If we are reducing —our spindles. In some of the cases in PV dyed, let me tell you, technical —things. Let us —take one ring frame of 1,000 spindles, right and if the lot is of small size, we cannot produce the different color of yarn —in case of different color of yarn on a single machine because of contamination and all quality issues. In that case, the machine will run fully and the production will be low. So the power costs in case of under-utilization of capacity will always remain high.

Got it. Sir. Got it. Sir, but the suggestion is what, I don’t know, currently, we have raised funds. Our debt-equity ratio is good. Why don't we go for the solar power plants or other power sources where we can reduce the cost and not depend on the uncertain power from the government department?

You are right. We -- there are certain things into our pipeline in our plants, and we are thinking on that. And whenever the next results will come, you will find that some additional capacities of solar panels and solar plants have been added to it.

Enhanced quarter, you have already done it.

Yes. We have around 27 megawatt solar plant -- solar capacity with us, and we are adding the others also.

So how much in our total requirement, sir, of the power?

In terms of megawatts?

Yes, sir. In terms of megawatts.

I have to check it technically, and I can...

In terms of -- I just wanted to understand in terms of percentage, how much percentage are we covered in terms of the solar power plants or whatever the other sources, our own sources?

I would love to reply you separately. And you can drop down a mail to me. I will reply you certainly with all data and all -- because this information is not ready with me to...

I understand. Okay. I will do that needful. Sir, also, I wanted to know about the employee benefit expenses, considering that we don't have a variable source of an employees where -- or we have all the permanent employees where if our work goes down in spite of that, but on the piecemeal basis, there are no employees which are working?

Actually, as far as this employee part is concerned, we have all permanent employees with us. This is not on a daily wages basis.

What happens is generally in many large companies have come to us contractual workers. Contractual workers, yes, yes, on piecemeal basis or something of that sort.

These are very less. But in case of capacity underutilization, we have to pay a certain amount to them, not full amount, we have to pay a certain amount to them. We can reduce the manpower cost for -- when we underutilize the capacities, but yes, we have to pay a certain amount to them. We cannot neutralize entire employee cost if we underutilize the capacity.

In the last 2 annual reports, we have been hearing from the management, including the Chairman that we are planning to rationalize the manpower and we are not going to hire new people and we are going to use the old people. But we can't see any decrease in the employee benefit expenses. In terms of your peers, what I've seen as a percentage of sales, yours is the highest, sir?

I will reply you. We have our internal policy that we will not recruit the persons at higher position. We are elevating internally, and we are to maintain the same employee -- same cost of employees for -- as far as the staff is concerned, even after considering these increments and all. Since we are talking about this thing since last 3 years, but if we are maintaining same employee cost, it's good for us.

Okay. One last question.

Whenever new positions in senior level or middle level are arrived, we try to fill it up internally. But as far as supervisors and production workers are concerned, we can't control it.

Can I assume that even after the expansion, the employee cost will not increase?

Even after expansion, this production workers and production staff have to be recruited. Supervisor -- let me take an example. If we are having a staff load of around 20,000 spindles and we need 3 supervisors for -- in 3 shifts, we will have to recruit them. But otherwise, we don't recruit managers, general managers or Chief Operating Officers or you can say plant head or commercial head like these administrative staff is not being recruited.

Got it, sir. Got it. Absolutely. Got it, there will be a proportion will be missed, but the one after the expansion considering the production our employee cost will not increase in the same proportion.