RSWM Limited (500350) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the RSWM Limited Q2 and H1 FY '24 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. [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 so much. Good evening, everyone. Thank you for joining this call today. We have released the results today, and I'm sure that you have had a chance to review them. Coming to our business performance in domestic and international market, we continue to face the challenges in our business, especially in the spinning side. The demand for yarn has seen some improvement compared to 2 to 3 quarters back, but we are not back to pre-pandemic levels yet. While spinning operations are running at full capacity, low demand and surplus of yarn in the market impact our margins. In past 9 months, we discussed various issues related to excess stock, brand delaying orders and lower demand globally. However, we see some green shoots in demand recovery. Some brands are now slowly destocking and resuming their normal buying patterns. They are gradually increasing their purchases, which is a positive sign. However, overall demand is still not where it was used to be. Several factors are affecting the textile industry in the last 9 months, such as higher interest rates, increased gas prices due to geopolitical issues and elevated food inflation. These sectors are expecting the discretionary demand as consumers are cautious. Apparel imports in August '23 experienced a notable decline across major markets. In United States, imports amounted to around USD 8 billion, marking a 25% decrease in other -- marking a 25% from August '22. The European Union witnessed a downturn in imports, totaling to $8.2 billion, down by 23% compared to August '22. The United Kingdom recorded apparel imports of USD 1.8 billion, reflecting a 10% decrease from August '22. Japan reported apparel imports of $2.4 billion, showing a 14% decrease from the same period in 2022. Some signs of recovery were seen in September as the United States, apparel store sales for September '23 are projected to be 10% higher than September 2022. However, home furnishing store sales during the same period are anticipated to decline by 13%. Additionally, the Consumer Confidence Index saw a decrease from 107 in September 2022 to 103 in September 2023. In the United Kingdom apparel stores, sales from September 2023 reached $4.3 billion, marking a 2% increase compared to September 2022. In terms of exports, India's spinning industry had seen a significant drop, but it has now recovered to pre-pandemic levels. However, local consumption, particularly among knitters, denim manufacturer, weavers and garment producers is lower, leading to depressed yarn demand with additional economic issues in countries such as Turkey and Egypt adding complexity. Turkey is contending with currency devaluation, while Egypt is grappling with challenges related to availability of USD. Notably, Turkey has imposed an extra 5% duty on imports. In response to these conditions, our strategic approach to exports has become more discerning. We are selectively accepting orders, particularly avoiding those with significantly negative Net Promoter Scores, NPS. Consequently, our export volumes have been constrained to around 2,000 metric tons, a noticeable reduction from usual 3,000 metric tons. Although there is a noticeable movement in the 100% cotton market in regions like Bangladesh, the price points for CC yarns remains unfeasible. The market is currently experiencing an oversupply of affordably priced high-quality cotton yarn. Exporting commodity yarn is proving to be a challenge as our pricing struggles to compete with counterparts from other origins such as Indonesia and Vietnam. These market dynamics necessitate a cautious and strategic approach to navigate the complexities of current export landscape. On the cotton front, the situation has been quite dynamic. Initial estimates of the cotton crop size were lower than expected, and this created concerns about cotton availability. However, the crop size eventually reached around 295 lakhs bales, which is lowest in the past 15 years due to unfavorable weather conditions, potentially reducing the crop sizes. Regarding denim, in the second quarter, the industry saw a continued decline and things got even tougher in July and August '23. However, we managed to perform relatively well compared to others in the same business. Despite low sales, our distribution partners have accumulated a large inventory because their business has slowed down by almost 40%. The unorganized market also faced challenges as everyone was operating at reduced capacity due to sluggish retail activity and cautious behavior from both dealers and brands. We, at LNJ, have maintained our sales volume through strong sales strategy, partnership with our customers and product innovations. Domestic brands are also grappling with excessive inventory, which are making them take a cautious approach due to the slow retail market. They have placed smaller orders for the next season and the volumes are much lower compared to previous seasons. It's like they are adjusting their existing inventory due to pricing pressures, brands are turning to Tier 2 mills that offer lower prices. Payment delays are another concern in the secondary market with the average payment period stretching to around 180 days for our dealers. However, we have managed to set our own terms and key payment delay in check. With only a few exceptions, we are able to collect more than INR 197 crores in Q2 against sales of INR 194 crores. The aging of overdue payments remained under control with only 6.22% outstanding for more than 90 days. Coming lastly to knits. The current state of market is marked by some uncertainty with yarn prices fluctuating on a daily basis. However, it's worth noting that the domestic market remains robust. And Indian brands are showing strong demand by placing orders with strict delivery schedules. Buyers are now paying close attention to timely deliveries and are enforcing penalties for any delays. As a result, lead times are progressively getting shorter as brands opt for just in time production to minimize inventory buildup. Challenges persist in both the knitting and dyeing processes for poly filament based fabric qualities. To address these issues, we have made strategic acquisitions of imported poly filament yarns and especially the poly filament yarn known as ALICE from Reliance, designed to mitigate the barre' effect. Our team is diligently working on sampling and quality checks, and we have taken the proactive steps of engaging machine technicians to ensure precise settings. We are pleased to share that we have secured nominations from prominent brands like Benetton and PUMA, and we are actively pursuing a nomination from Adidas. In the case of Benetton, we have already begun receiving regular monthly orders ranging from 25 to 30 metric tons to their vendors. With PUMA, they have placed a significant order of 10 metric tons in their standard quality, channeled through their vendor. We are in process of obtaining approval after submitting samples that utilize imported filament. To conclude, overall market scenario. International brands have concerns about inflation, the fear of recession and inventory levels. While the first 2 concerns persist, inventory levels have largely normalized across the supply chain, boosting demand. We are witnessing increasing demand from the U.S., U.K., Europe and Japan. The Indian retail market is also expected to pick up as the festive and marriage season, which was delayed, has now begun. Many brands are adopting a China Plus One strategy due to concerns about sourcing from China, and China is benefiting from the shift. Additionally, sustainability products practices are in focus. And we, at RSWM are integration -- and ready with given capabilities it gives natural advantage. We anticipate that Q3 will show further improvement in capacity utilization compared to Q2, and H2 is expected to be better than H1, especially in the international market. Sequentially, we anticipate posting better numbers in upcoming quarters. Coming to financials. For the September quarter, RSWM reported total sales of INR 1,007 crores, up quarter-on-quarter basis. Net loss for the period stood at INR 15 crores from INR 33 crores last quarter. As last year's financial year '23 was an exceptional year in the history of textile industry, post that we faced a lot of challenges, which we have discussed earlier. So it's better to look at our performance on Q-o-Q basis. Basically, to get clear picture on how we are navigating and overcoming challenges. Our company's current debt-to-equity level 0.5x after the rights issue declared last year. We used it to strengthen our balance sheet. Our cash stands at INR 11 crores. On our expansion plans, we are very selective and at the right time and value. We will take necessary steps which will help the company in long run. So we will be very selective about making those decisions. Our resolve remains steadfast as we pursue our enduring objective, which encompasses expanding our product range, improving our financial stability and discovering more efficient methods to enhance our earnings. We appreciate the dedication and hard work of our team and believe that our positive outlook and commitment will lead to even greater success in the future. We will keep working hard and aiming for the best as we pursue our goals together. We are also thankful to our shareholders for their continued support and commitment to our shared vision. With this, I would like to open the floor for question and answer. Thank you so much.

[Operator Instructions] Our first question is from the line of Abhijeet Waghmare from Value Growth Advisors.

Sir, congratulations on the good numbers. Sir, I have a couple of questions. What are the opportunities that opened for us in the [ UAE ] and Australia, FTAs essentially. So any thoughts on that?

FTA recently, the Government of India has completed 13 FTAs. And recent FTA with U.K. is going to benefit India as far as textile is concerned.

Okay. So looking at the current scenario of challenges, what are management thoughts for next 3 to 4 quarters? And how we can manage to bring growth in the company?

Actually what we feel that textile sector will grow exponentially in the second half of financial year '24. Trends will be driven by changing consumer preferences, government initiatives, technological advances -- advancements and global trends. Increased export opportunities because of Make in India and Atmanirbhar Bharat will also give a boost to rising demand for sustainable textile, because everybody is asking for sustainable textile like cotton and linen and you can say fabric manufacturer from recycling polyester staple fiber. Digital transformation is coming, AI and all are now not stories, they are converting into results. E-commerce boom, government support and lastly, focus on value-added products by RSWM will certainly lead to a good growth in H2.

Understood, sir. What is the current situation of mix? And how are the order inflows? And how are you planning to scale up?

Our production capacity is around 85% utilized. And we have good orders like we have already communicated that there are good orders from Benetton, PUMA and Adidas.

And how are we planning to scale up?

How we are trying to scale up? In terms of top line or bottom line?

In terms of order.

Okay. We are pushing towards export orders, which is recently not -- in the recent past, which is not happening recently because of this Egypt and Turkey issue. And secondly, recent Israel and Hamas issue also. We are pushing towards export orders that we should get more and more orders from overseas countries and for that, we are strengthening our export team.

Okay. And what is the current CapEx requirement for FY '24?

As such, there are no projects in the pipeline. Yes, we have deferred for some time, except these modernization CapEx, which we need on case-to-case basis or plan-to-plan basis.

[Operator Instructions] Our next question is from the line of Saket Kapoor from Kapoor and Co.

[Foreign Language] Thank you for a very detailed introduction there. It gives us an understanding of the scenario -- current scenario business trends and a lot of aspects in a very detailed fashion. So please continue with this exercise. And we have observed this in the LNJ group itself and in HEG. Also, we find the same about the sector and all. So thank you firstly for that. Sir, if you could give us some color on how our profitability is going to shape up this now. We are in the month of November. So how are the first month of this quarter being and how are the orders in the deliverables currently for Q3 and onwards? What is the visibility? As you have already mentioned that plants are running at highest utilization levels, but the margins have been squeezed. So if you could give some more color, that would suffice.

So frankly speaking, October month is not very good. But we expect good orders or good dispatches in the month of November and December because of festive season and winter season.

Sir, but as you were mentioning that utilization levels are higher and the demand is there? When you said utilization levels can only be higher if there is a...

No, utilization of the plant is at optimum level. But as we have already mentioned that there is a 33% downfall from 3,000 metric tons to 2,000 metric tons. We have the export. And therefore, there is 33% -- exports are down by 33% in case of RSWM. And it is not happening only with RSWM, it is happening with everyone.

Okay. Sir, for the first half, what is our export number, sir? Out of the total sale, what is the export mix?

It was around -- just for a moment.

[Foreign Language]

For export for RSWM, give me one minute.

And sir, going forward for the export order booking, what is the visibility there also, sir?

Export order booking for Q4 should be good. But as far as Q3 is concerned, it will more or less -- it will be more or less same as it was in Q2.

Okay. And what number, if you have, sir?

I will give you a breakup of this export in Q1 and Q2.

Yes, sir. Please.

One minute.

And sir, also you provide me with the debt number, sir, also. What is our current net debt number and the cost of fund?

Please repeat your question.

Sir, I was looking for the net debt number. What is the net debt number and cost of borrowing? And also for this for H2, what is the...

Net cost of borrowing is around 7%. Net cost of borrowing is somewhere around 7% after taking into these government incentives.

Right. And sir, the government incentive part, it is through the RoDTEP route only that we are able to realize the same?

Pardon I could not hear you.

Sir, I was seeking an answer for the government incentives. They are realizable through the RoDTEP route?

Government incentive, I mean to say, this is [indiscernible] by state government.

So that is lying receivable in our account? Or it is a net charge only at the lower rate? So there is no receivable as such?

The amount which was receivable from government has been realized for the period up to 30th June '23. So there is no outstanding.

And the net debt number in absolute numbers?

Whatever eligible claim was there, it has been realized for the period till 30th of June '23.

Okay, sir. Correct. And the net debt number, sir?

Net debt number is somewhere around INR 600 crores.

And for the next half, sir, what is the maturity? Current maturity, the amount payable?

Next year, it will be around INR 100 crores.

INR 100 crores is payable next year. And for the next half, sir, or for the financial year 31st March '24, how much is the receivables? What is the current maturity payable?

I can share you year-wise repayable amount. Please give -- for 1 year, it is around INR 100 crores. For next year, I mean to say, next 12 months.

Next 12 months is INR 100 crores? Okay. And then the recourse after that, you have the entire data with you?

We have, but it will not make any sense...

Yes, sir. It is -- okay, INR 100 crores is the current maturity, right, sir?

We are talking about current maturity only.

Okay, sir. When you see the export number breakup, you kindly share. I'll again join the queue, sir.

Our next question is from the line of Nitin Gandhi from Inquest.

Can you share some thoughts on margin, specifically because if utilization still remains at 85% for next half, where do we see margin then? Is there any scope of improvement?

We can take the example of -- we can take the contribution of yarn prices, whatever you like. Whether I should explain the yarn price or contribution, whatever you like.

As you please, sir.

So I will take yarn prices. For 130 cotton yarn and 230 PV yarn, right? Yes. So in case of 130 cotton yarn, the price in June '22, it was INR 360 per kg, and it is reducing continuously. Yarn price as of now is around INR 250 per kg, 130 cotton. And if we will to go for 230 PV yarn, it was INR 233 per kg in June '22, which is now around INR 190 per kg. So there is the price realization of yarn at 130 cotton yarn or 230 PV yarn is continuously reducing. There is some slight improvement in the month of October, but we have to witness for October -- in October, November and December together. And if we will go for contribution, at 130 cotton yarn, yes, it has been improved from June '22 to October '23 or September '23. In June '22, at 130 cotton, the contribution was negative by around INR 15, which has improved in September '23 to INR 36 per kg. And in October, again, it has reduced to INR 28 per kg. If we will go for 230 PV yarn, the contribution was positive in June '22 at INR 78, which is now INR 57 in October '23. So if we will see all figures together, there is an improvement in 130 cotton yarn as far as contribution is concerned, but as far as 230 PV yarn is concerned, there is deterioration in prices, deterioration in contribution from -- by around INR 20, from INR 78 to INR 57, it is INR 21.

Next question is from the line of Navneet Paya from -- who is an investor.

Sir, I just wanted to know your utilization, is it 85% across all the 3 segments, fabric, denim, knits as well as yarn or is it different across the segments?

Please repeat your question.

Your plant utilization, is it 85% across all your divisions, which is fabric, denim and knits?

No, no, no. It is -- I have explained the 85% for knits only. Otherwise, other plants are being -- other plant utilization is full.

It's 100%. So yarn and denim is at 100%?

These are working at their optimum capacity.

All right. And this includes your newly commissioned yarn capacity -- cotton yarn capacity, which you commissioned in September?

Give me one minute for some other work, please. I will take your question.

So your yarn capacity utilization of 100%, does it include your newly commissioned capacity in cotton yarn, which got commissioned in September?

Yes. This newly commissioned, this 52,000 spindles Kapaas has been started in September only and it has started working on 25th September only, and it is being used at its full capacity.

Okay. So yarn, including that, you are at full capacity, 100%?

Yes, yes. Mr. Saket, are you there? I'm just communicating this export and domestic breakup. Total turnover is INR 1,908 crores for H1 '23-'24, out of which INR 500 crores is export and rest, INR 1,400 crores is domestic. This is the breakup of export and domestic, both.

Yes, sir, Mr. Saket Kapoor is in the queue. One moment, please.

Yes. Mr. Saket, you had inquired about total revenue of export and domestic. So total revenue for H1 is INR 1,908, our of which, exports was INR 507 crores and domestic was INR 1,402 crores.

Okay, sir. And sir, when we look at H2, in terms of the order booking for export, what -- how are the exports shaping up? Do we have visibility for our quarters in terms of our export revenue? And also in terms of margin, how are the EBITDA margin for the export segment? What are our EBITDA margin?

EBITDA margins for export. You know that export is not working well as of now. So EBITDA margin for domestic and export, we will compare the EBITDA margin for domestic and export. In domestic market, the EBITDA margins are better.

Okay, sir. So can you provide the comparison?

No one can say that when order booking for Christmas and all will be there, it will be better.

Sir, in percentage current terms, can you differentiate what is the percentage for export and for domestic?

No. Right now, I don't have that breakup.

Okay, sir. Sir, as our earlier participant was mentioning about the new capacity, is this any differentiating capacity in terms of -- as it is mentioned that the 51,000 spindle at Lodha, Banswara has commenced. So does it have any differentiating factor in terms of the -- any value-added yarn? Or how is it different from our existing capacity? As you have mentioned that this is a premium product. So in any higher margins or value-add pricing, it has differentiating pricing than the existing yarn?

Yes. This has been branded as Kapaas and the quality of this yarn, we claim that it is better based there. We are getting higher prices than normal yarn produced by us or being produced by other competitors. We are getting better price.

Okay. Sir, when you are mentioning that our plants are running at optimum level. And this, for production side, we are at full then sir -- that means there is -- there is no problem with consumption? It is only the pricing part that is...

We are not -- we are not getting the value addition because of sluggish demand in the market, or you can say the prices -- the cost is not being transferred or we are not able to transfer the cost to the consumer. If you will see that our business is B2B, not B2C. And the manufacturers, which has -- which are having the B2C sales, they are getting good profits. But since we are at B2B, we are not able to transfer the prices to the market because after this reduction in raw material cost and all, which businesses are asking for reduction in prices. Whereas in case of B2C, they have not reduced the prices and we have to reduce the prices in the current scenario.

Okay, sir. Sir, so can you throw some more light on how the raw material price trends have been? And for the raw material basket, sir, the cost of material consumed stands at INR 582 crores for the quarter. So what are the key component, cotton percentage and other -- any other component also, sir?

Our ratio is 60:40, in PV -- cotton -- 60% is PV yarn and 40% is cotton yarn. If we will -- you have asked about fiber prices trend. The PSF price is more or less same from September '22 to September '23. And if it will go by VSF prices, it was INR 185 per kg in the month of September '22, which is -- which is currently at INR 156 per kg. And if we will take cotton, for September '22, the prices of cotton were INR 282 per kg, which is now INR 176 per kg. And if we'll take the per candy price, it was running around INR 80,000, INR 85,000 per candy in September '22, and now it has reduced to around INR 56,000, INR 57,000 per candy.

And sir, what is the likely trend for the availability of the cotton crop and the price change going ahead? What is the understanding?

My understanding for that is that whatever price was to be used in case of cotton, it has been reduced. Now after November, it should go up.

It is in terms of the inventory that you are coming to a conclusion, that lower inventory...

No, no, no, I'm talking about -- I'm talking about prices of cotton per candy or per kg or whatever. It will go up.

Okay. What factors will enable the prices to go up?

I think that -- the government will try to not let it go below the MSP. That's the only reason. And you know that it's my own perception, no one can anticipate about cotton. Cotton behavior in last year, you have seen that where it was and where it is now.

Correct, sir. And lastly, on the power and fuel front, sir. If you could comment, sir, how are these variables behaving and the trends here because I think the power and fuel higher prices, but the line of -- line item has remained on the higher side only. So how will this line item behave going ahead? And what steps are we taking to improve the power and fuel cost impact on our P&L.

You know that power is not in our control because we have to be dependent on either on DISCOMS, the state electricity board or solar or thermal plants. The cost of coal prices or regulatory conditions are not allowing us to run these plants on coal -- coal-based thermal power plants. Cost-wise, per unit cost in case of thermal is very high. And power cuts in Rajasthan is frequent. So power cost is not in our control. And it is also a reason, the power cost in case of Rajasthan, remains to be very high. Power cost is around 12%. Totally, if you will analyze the cost structure, the material cost remains to be around 64% and the manpower cost, power and fuel, both are around 12%. And again, other expenses are around 10%. So power cost is not in our control.

Ladies and gentlemen, that was the last question of our question-and-answer session. I now hand the conference over to the management for closing comments.

Thank you, everyone, for joining the call today. We continue to navigate ourselves from headwinds of domestic and international economic conditions. The outlook for the long term will remain intact, giving us the high visibility for growth. I would like to take this opportunity to wish you all a happy Diwali and prosperous new year. We look forward to interacting once again next quarter. Thank you so much.

On behalf of RSWM Limited, we would like to formally conclude this Q2 and H1 FY '24 Earnings Conference Call. We extend our warm wishes for a very joyful Diwali and a prosperous new year. We sincerely appreciate your participation in this event, and we finally request that you now disconnect your lines. Thank you for your time and engagement.