RSWM Limited (500350) Earnings Call Transcript & Summary

Good day, and welcome to the RSWM Limited Q1 FY '24 Earnings Conference Call. We have with us today from the management Mr. Avinash Bhargava, Chief Financial Officer; and Mr. Surendra Gupta, VP 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 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 for the introduction. Good afternoon to everyone, and thank you for attending today's RSWM Limited Q1 FY '24 earnings conference call. I hope you all had the opportunity to go through the earnings presentation and financial results announced yesterday, which is available on the stock exchanges and our website. Let me first begin with economic outlook and textile industry update. Amid global expectations of interest rate hikes and inflation concerns, India's economy stands out with a promising outlook as one of the fastest-growing economies. It anticipates a robust 6% to 6.5% growth rate, supported by healthy GDP, controlled inflation and stable interest rates. The manufacturing sector exhibits stability through consistent PMIs and heightened capacity utilization, contribution to lower NPAs. A positive credit culture shift is evident in improved repayment intent and rising tax collections. India's focus on infrastructure, digital transformation and sector reform, along with its relying on domestic demand and favorable demographics, underscores its inherent strength. Political stability and progressive reforms further bolster its potential. The adoption of China Plus One strategy enhances the domestic manufacturing sector. In summation, India's economy radiates optimism, points to sustained growth momentum, and embraces a promising future. Now with respect to textile industry, the Indian textile industry has grappled with demand slowdown, but signs of improvement are emerging, primarily characterized by reduction in inventory levels. Notably, cotton prices in India have undergone a significant correction and now rest at stabilized lower level. The recent crop yield has been promising, auguring well for the forthcoming season as well. However, the stabilization of Indian cotton prices slightly above the desired range has left issuers short of their anticipated normal margin, but persistently building demand has consequently exerted downward pressure on yarn prices, further compressing the overall profit margins of the industry. We find ourselves in situations where markets are facing significant pressure due to low demand and downward pressure on prices. This has undoubtedly presented challenges, but within these challenges, there are also opportunities for growth and adaptation. I will talk about current condition of yarn, denim and knits. Cotton. In India, the sowing season commenced in October. First, while the global season starts on August 1, throughout the entire season, there has been a fluctuation in the projected crop arrival figures. Initially, the estimation stood at approximately 330 lakhs bales. However, numerous private agencies later revised it to around 290 lakh bales. As of now, 305 lakh bales have already been received with additional time remaining, leading to an anticipated final settling around 315 lakh to 320 lakh bales. Overall, the current season has witnessed a satisfactory crop arrival. Looking ahead to the subsequent seasons, the sowing situation appears favorable, and the crop size is projected to be within the range of 320 lakh to 340 lakh bales. Concurrently, China has experienced a 10% decrease in cotton crop during this year. The price of Indian cotton has initially declined to approximately INR 55,000 to INR 56,000 per candy, nearing the minimum support price, and has now stabilized around INR 60,000 per candy. With an anticipated improvement in demand, there is a potential for a moderate increase in cotton prices. The cotton yarn sector has shown some promising movement, except cotton blends, which are experiencing their fair value -- fair share of pressures now. Notable development is the extension of BIS registration and deadline for imported yarns, which now stands on October 5. This extension has led to an increase in the dumping of imported yarns in the segment of 100% poly and 100% viscose. This shift in dynamic warrants attention in the strategic thinking to maintain a competitive edge. And with these changes, there is a glimmer of positivity in certain regions like Ludhiana, where knitting capacity utilization is on the rise and production for the upcoming festival and [ builder ] seasons has commenced. This demonstrates the resilience of our industry and the adaptability of our workforce. However, we cannot ignore the fact that some mills are facing challenges. With the decline in the backlog of sold orders for dyed yarns, the situation has led some mills to partially shut down their production lines. Yet adversity often sparks innovation, and this could be a chance for these mills to reevaluate their strategies and seek new avenues for groups. Interestingly, our peers in the industry are carrying long stock positions for synthetic yarns extending even up to 50 days or more. This underlines the cautious optimism prevalent in the market. While July and August historically represents lean months for dyed yarns, there is a ray of hope on the horizon. Improvement in the dyed yarn sector is anticipated around the month of September, paving the way for potential revival. In the broader context of market, we are witnessing promising signs of improvement in the furnishing segment order flow for the domestic market. However, it's important to acknowledge that the export order book for this segment remains relatively thin. As we navigate these mixed signals, it's essential to consider the strategies that balance our domestic and international market presence. Overall, it appears that market has reached the bottom and is poised for an upward trajectory, especially with the festival season on the horizon. The implementation of BIS regulations from October 5 could serve as catalysts for positive changes. These regulatory shifts might discourage importers from bringing in a good beyond -- goods beyond the 25th of September, potentially breathing new life into the domestic market. Now about melange yarn, the melange segment market shares within the textile supply chain has been declining due to subdued demand, particularly evident in the limited portion of orders coming in from international brands. On the other hand, domestic brands are displaying a steady purchasing trend, particularly in segments like innerwear and loungewear, which are gradually gaining momentum. In terms of international trade, the monthly imports of April in key markets have experienced a reduction of about 10% to 11% compared to the previous year. And for the major domestic brands like Jockey, sales have seen a decline from 1.8 crores pieces per month to the range of 1.4 crore to 1.5 crore pieces currently, which paints a comprehensive picture of the evolving dynamics within the textile industry, where market shifts, sustainability and changing consumer preferences are shaping the trajectory of various segments. Going forward, denim segments, the FS '24 orders are facing delays across brands due to sluggish sales in April and May, with a slight improvement in June due to end of season sales. However, trends are grappling with substantial inventory levels. Pricing has emerged as a critical factor now more [ influenced ] by the market. Established mills are aggressively competing with remarkably low prices in both trade and branded segments. While we are diligently monitoring their products and prices, matching their offerings has proven challenging. The market sentiment in the unorganized sector remains subdued as the reduced capacities persist due to slow retail movement and caution attitudes from dealers and brands. The trend of underutilized capacity observed in the outlet sector during '22 to '23 has extended into '23, '24 Q1. Apart from our operations, no other entity achieved an average utilization rate exceeding 65%. Liquidity is a pressing concern in the secondary market, as [ exhibited ] by lengthening average credit period of nearly 180 days. Despite this, we have managed to control overdue accounts, aside from a few customers, achieving collections amounting to over INR 200 crores in Q1, almost on par with [indiscernible]. The aging of accounts receivable remains healthy with only [ 4.81% ] falling within the 90 days or more bucket. This snapshot underscores the challenges and opportunities within the industry, where pricing strategies, market dynamics and financial management play crucial roles in navigating the evolving landscape. Now we take knits segments. I will talk about current Knits market conditions. In recent times, the market has witnessed a positive upswing in anticipation of the new season, with buyers expressing keen interest in innovative blends and functional [ fabric ] [ constructure ]. However, amid this optimistic environment, fabric pricing remains competitive. We have been proactively engaging with prominent garment exporters and brands, consistently focusing on their development and sampling needs. Our efforts have resulted in direct or indirect collaborations with a notable roster of 15 international and domestic brands. Notably, we have recently added esteemed names like Benetton and Puma to our portfolio, from which we anticipate a significant influx of volume orders. RSWM's strategies and promising avenues are maximizing our cotton capacity has been a strategic accomplishment, ensuring optimal resource utilization. Concurrently, we are orchestrating a strategic shift towards polyester fabrics. This decision is underpinned by surging demand for polyester across diverse applications. An example of our strategic [indiscernible] is provision of intelligent fabrics with [indiscernible] attributes such as quick absorbency, UV protection, antiviral, antiodor, antistatic and antibacterial properties, tailored [ for shares ] for renewal for a renowned domestic brand. Another promising avenue is the expansion of our customer-based [indiscernible] fabrics. Our recent initiatives have yielded encouraging outcomes, securing an initial print order of 35 metric tonnes from Antigua. Furthermore, our recognition of the market trajectory towards sustainable fashion positions us advantageously. With a steadfast commitment of ecofriendly practices and materials, we seamlessly align with the surging consumer demand for environmentally conscious products. This positioning presents us with a valuable opportunity to cater to the growing segment of eco-conscious consumers, while contributing positively to the sustainable fashion movement. Lastly, financial results outlook. Coming to our financial numbers during the quarter, our revenue stood at INR 901 crores, down by 5.8% on a Q-o-Q basis. EBITDA stood at INR 25 crores and EBITDA margin stood at [ 2.8% ]. PAT for the quarter at INR 18 crores; gross profit is INR 336 crores with a gross profit margin of 37.3%. In conclusion, while we acknowledge the challenges we face, we must also recognize the opportunities they bring. By staying attuned to market dynamics, embracing innovations and fostering strategic partnerships, we can position ourselves for growth in the months ahead. Our industry resilience has been tested time and again, and every time we have emerged stronger. Demand in India has been somewhat [ constrained ], yet with the upcoming festive season set to commence by the end of August, there is an expectation of [ upticks ] in demand over the next 2 quarters. Now I'm available to answer any questions you may have, please feel free to ask, and I will be more than happy to assist you. Thank you so much.

[Operator Instructions] The first question is from the line of Saket Kapoor from Kapoor Co.

Thank you for an elaborate and a conclusive opening remark that covers many aspects. Just to conclude from your thought is that currently for the textile industry, still there are strong headwinds. And it will take further time for things to first normalize and then move towards the path of growth. So this understanding is correct, sir?

Which understanding is?

That is what I am understanding, is this understanding correct, still there are headwinds for the sector. These Q1 numbers for us are not that we have bottomed out. These factors are still prevailing in the system and it will take time for the market to first hit a bottom and then start moving up. So it is going to be a long time now. It is not that -- this one-off quarter is not that that [Foreign Language] depending upon your recurrent [indiscernible].

Yes. Because of low demand, low prices, overstocking, electricity and gas prices, a slowdown in economy has reduced the demand of ready-made garments, and average loss of -- per kg of yarn is around INR 56, and there is a fall in orders by 35% because of sluggish demand in the international and domestic markets.

Sir, out of our total capacity, how much have we [indiscernible]?

It may continue for 1 or 2 months. But again, we are very hopeful that with this festival season, and then demand by knitting players in Ludhiana market and other markets, the business will improve within a month or 2. It is what we expect. [indiscernible] not expect very good H1, but H2 we will certainly be a good -- and better than this H1. It will take time. Everyone is facing low demand, low prices, overstocking, everyone.

Sir, if you could provide that, out of the revenue from operations, how much is the domestic market and what portion is attributed towards exports?

Actually, the allocation of our export and domestic were used to be around 65%-35%. Now this export has came down to around 25% only. Export market is not responding. Because of any reason you can say European market low demand, low prices, pressure on demand, you can say anything. But fact is that the export is 25% only in case of RSWM, and other -- other players are also facing the same kind of problem.

Correct, sir. And sir -- and then we have also come up with new capacity augmentation again. And so how long will it take for the new capacity to get commercialized? And what are we expecting? You have mentioned the figure, I think?

I could not hear properly.

Sir, even in the midst of this slowdown, we are augmenting fresh capacity expansion [Foreign Language], so by when this capacity will come into stream, sir? And what are the reasons why are we going ahead with capacity expansion now?

This capacity expansion was admitted years back, [ a ] year back, right? And for stabilizing this 11,072 spindles unit, takes around 1 month or 1.5 month or 2 [indiscernible]. And we are doing that altogether separate blending or this -- yield of this plant -- or production of this plant.

Separate? Sorry, I didn't get your point. Separate blending?

These will be specialty products -- these will be specialty products only.

Correct, sir. Can you give more color, sir, specialty [indiscernible], these are better by what percentage?

What you told, please, can you repeat this?

[Foreign Language]

Specialty product in textile is a specialty product, right? You can get anything. If your product is different, your quality is different...

But what you have mentioned is, in response to the increasing demand for cotton and cotton blended yarn, we have strategically expanded our operation at Lodhra unit; the expansion of 51,072 spindles, and its formal elaboration took place on second [indiscernible]. So one side, we are speaking about lower demand and here we are mentioning increased demand, so if you could make me understand it, what are we trying to convey?

What I personally feel that whatever was the bad, we have seen it. Now the cotton prices are stabilized. Definitely the demand will improve, the quality -- the quality of this -- production of this new plant will be much better than the quality which we are producing as of now and which others are manufacturing as of now.

Okay. Correct, sir. Sir, last 2 points. Firstly, on the net debt number, sir, and our cost of funds.

My cost of -- you are asking for cost of funds?

Yes, the cost of fund and the net debt number.

My net debt number is around INR 750 crores for term loan and approximately same amount, INR 600 crores to INR 650 crores is for working capital. It is around INR 1,350 crores only. And the average cost of finance is around 8% to 9%.

This includes the tax advantage, the interest -- subvention we get from the government?

Okay. After subvention, after subvention, the net cost of finance is around 6% to 7%.

And sir, what steps are we taking to rationalize the power and fuel [ company ] investment in the renewables segment [indiscernible], anything going ahead? And what portion is towards the renewal space, a weaker total requirement?

[Foreign Language]

[Foreign Language]

[Foreign Language] and we have added 20 megawatts also through solar power plant.

[Foreign Language]

[Foreign Language] the acquisition of [ BG Wind ], which we have declared on the website also. The BG Wind Power Company Limited, it is 100% subsidiary company of RSWM. So we have acquired 20 megawatt [ capacity ].

The total portfolio is 29 megawatt of wind and hydro and 20 of solar?

So total -- in case of -- so in case of RSWM, hydro capacity is not there.

So 29 megawatt is just towards wind.

Which category?

I didn't get that point.

Solar only.

And the majority of our sales is towards B2B or B2C segment?

Our majority of products are B2B.

The next question is from the line of Vasanth Singh from Growth and Value Investment Advisory.

So how long will it take before we see any revival happening? Now as we have entered the second quarter, do you see any green shoots in demand from global and domestic market?

No one in textile -- no one as of now in textile can say that when we will revive, because we can expect -- we can excel in our operations, but market-driven conditions will always prevail. And we hope that in H2, the conditions will be much better than the H1. That's what we can say as of now.

Okay. Okay. And sir, what are our current utilization levels?

My current utilization level in [indiscernible]. The plant utilization is 100% -- efficiency of plant may be around 88%, 89% as other players are all running at same efficiency, but utilization is 100%. [Foreign Language], otherwise plants are running at 100% capacity.

Okay. And sir, can you throw some more light on the global market? How is it different from last 2 quarters, especially U.S. and Europe?

If you will talk about the international market, China has overtaken India to become top buyer. For Egyptian cotton in '22, extra long, since this -- extra long fibers and smooth yarns, smooth yarn feature is available with Egyptian yarn. The China has overtaken the India, and there is -- China's yarn export to India doubled in first quarter, and it is around $349 million, and -- and in terms of the [indiscernible] up by 33%. Bangladesh export garment growth in May [indiscernible] 8%. If we talk about Turkey, which is major player, in case of April, Turkey export April declined by 6.5% in January to April. But [indiscernible] predicts that decline in revenue of Indian fashion retailers in FY '24.

Ladies and gentlemen, that is the last question. I now hand the conference over to the management for their closing comments.

Thank you so much. I think it was the last question from your side?

Yes, sir.

Thank you so much. Thank you so much for your time and patient support.

Thank you, members of the management team. Ladies and...

Thank you from Mr. Surender Gupta also, he's sitting with me. He is company secretary of RSWM Limited. Thank you so much.

Thank you, sir. Ladies and gentlemen, on behalf of RSWM Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.