RSWM Limited (500350) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to RSWM Limited Q4 and 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 con. 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 businesses face 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.

Yes. Thank you for the introduction. Good afternoon to everyone, and thank you for attending today's RSWM Limited Q4 and FY '24 Earnings Conference Call. I hope you all had the opportunity to go through the earnings presentation and financial results announced on Friday 24 May, which are available on the stock exchange and our website. Let me first begin the economic outlook in textile industry update. I may have some -- where I'm at pause, because I'm not feeling well today. So please excuse me, whenever I'll be taking pause. Around global economy, we find ourselves in dynamic global landscape with elections happening across numerous nations and territories, representing over half of the world population. The global outlook in early 2024 is cautiously optimistic with various factors influencing growth on one side and interest rates on other. Inflation declining steadily from the peak levels, but remains above compared levels. Interest rates remain high and consumption levels remain subdued. While for the easing pace of last 2 years, uptick was seen in economic activity in most of the European countries. However, the Red Sea crisis has caused a rise in shipping costs, making freight rates increase by 2.5x compared to last year. Red Sea crisis throwing fresh supply chain management challenges. And I'm pleased to say that the Indian industry stands out as a bright spot, with strong government support for building infrastructure, increased investment from the private sector and robust domestic consumption are all contributing to its success. The Indian economy continues to show resilience with a projected growth rate of over 7% in FY '25, supported by stable inflation, interest rate, currency and rising ForEx reserves. Our market has consistently outperformed our global counterparts, reflecting the strong fundamentals of our economy and earning potential of companies across the sector. India's strong structural drivers and economic fundamentals remain intact, encouraging investors to continue participating in its growth. Now coming to domestic economy. I would like to share some positive updates about the cotton market. Recently, cotton prices have increased and are now settled around 58,000 to 60,000 per candy from approximately 55,000 per candy earlier this year. Additionally, the China, India cotton spread has remained positive since February '23, highlighting the growing competitiveness of Indian cotton. Although this spread has narrowed slightly in the last 2 months, it still indicates that our cotton is doing well globally. Looking ahead, experts suggest cotton availability to improve in the coming quarters due to healthy crops. In the first half of 2023, export demand for textiles, including cotton, yarn, garment and man-made textiles, experienced a decline of 18% year-on-year. However, the second half of the year saw a significant rebound, with an 8% year-on-year increase. Overall textile exports in 2023 amounted to USD 30 billion, showing a 7% decline compared to the previous year. Encouragingly, the positive trend has continued into the first 2 months of 2024, with exports growing by 7% year-on-year. Additionally, with the stable cotton prices, we anticipate continued improvement in profit margin. The expansion of cotton yarn spread is likely to benefit the spinning mills, providing a positive outlook for the textile industry. In October '23, India implemented BIS certification and quality control measures to address the issue of cheap polyester yarn flooding the market due to a slowdown in the Chinese domestic market, which has already shown positive results, with polyester yarn imports declining significantly from 106,000 tonnes in September 2023 to 13,000 tonnes in November '23. Imports are expected to reduce by 40% to 50% from 455,000 tonnes in 2024 to around 240,000 to 260,000 tonnes in 2025. Although there was a delay in implementing these measures, leading to a buildup of inventory during the festive season, the long-term outlook remains positive. The reduction in cheap polyester yarn imports will benefit Indian manufacturers by supporting better utilization and volumes in the domestic market. Looking ahead to financial year '25, we expect yarn prices to remain stable as the dumping of cheaper polyester yarn in India is likely to decrease. However, there is a potential risk of an increase in the dumping of cheap polyester fabric. Prices for PPAs in energy are expected to decline, which could positively impact production costs. Although capacity utilization in denim production is currently lower in India compared to Bangladesh and Turkey, we anticipate improvement in this area moving forward, enhancing the overall competitiveness of the Indian textile industry. Now I'm coming to company's operational performance. Our company has demonstrated exceptional operational resilience by operating at full production capacity, a feat that distinguishes us from many of our peers. We have effectively managed our operations to ensure continuity and efficiency. Moreover, we have successfully controlled our finished goods inventory and significantly reduced aging stock. Our financial health is robust, with no instances of bad debt, major claims or [indiscernible] FCL, reflecting our strong financial management practices. Currently, most of the mills are facing labor shortage, making facilities extended in turns, making business inviable. Despite challenging market conditions, we have sustained consistent sales of our retention products. Our premium cotton product, Kapaas, has achieved remarkable success, commanding a higher price point of INR 6 to 8 more per kg compared to our competitors. We have effectively attracted and retained quality customers with repeat orders, underscoring their satisfaction and loyalty, highlighting our competitive strength and strategic capability. Financial year '24 was tough for the entire denim [ community ]. However, if we consider the organized corporate sector, except [indiscernible] denim, which is at 96%, no one else was able to achieve good utilization in terms of sales against installed capacity. Our knits plant has collectively manufacturing capacity of 780 tonnes per month, which is spread at 2 locations, which is Chhata, district Mathura, UP, with 350 tonnes; and Mordi, Banswara, with 430 tonnes. There is a positive flow of inquiry for export sales. However, at the same time, the conversion rate to bulk is very low due to extreme challenges in terms of pricing. A major milestone for us this year was acquiring the spinning, knitting and processing undertaking at Chhata in Mathura, UP, from Ginni Filaments Limited. In this quarter, we have completed the acquisition of the spinning, knitting and processing, undertaking of Ginni Filaments Limited, which will enhance the company's production capacity. Yarn output is expected to increase by 55 tonnes per day, including combed, carded, PC and open-ended yarn production. The acquisition enlarges RSWM's footprint, cementing its standing in the spinning and fabric industry by incorporating substantial capacity, 80,016 [indiscernible] spindles, 720 rotors, 12 tonnes per day of knitted fabric and its processing. The acquisition of -- acquisitions strategy boost EBITDA, ensuring financial stability with anticipated earnings growth, promising an improved EPS for RSWM Limited. The RSWM management is pleased to inform the investors about the value creation on its investment in equity shares of Bhilwara Energy Limited, through unrealized mark-to-market gain of INR 138 crores on fair valuation. This move aims to better address growth prospects and provide a focused approach to management unlocking better valuation for shareholders. Company's financial performance, discussing our financial performance for Q4 and financial year 2024. We are pleased to share that our revenue in Q4 financial year '24 reached an impressive INR 1,171 crores showing a solid quarter-on-quarter growth of 19.9% and an impressive year-on-year increase of 22.5%. Those reflect our team's hard work and the success of our sales strategy. Next, our gross profit for Q4 financial year '24 was INR 403 crores, a notable [ 16.3% ] increase from INR 346 crores in financial -- in Q3 financial year '24 and an 18.1% rise from the previous year. Our gross profit margin for the quarter was 34.4%, highlighting our profitability. In terms of EBITDA, which measures our operational efficiency, we saw an impressive rise from INR 22 crores in Q3 financial year '24 to INR 54 crores in Q4 financial year '24, with an EBITDA margin of 4.6%. Additionally, our profit before depreciation impact was INR 24 crores, bolstered by an exceptional income of INR 138 crores from an unrealized gain on fair valuation of our investment in Bhilwara Energy Limited shares. Consequently, our profit before tax was INR 121 crores and profit after tax was for Q4 financial year '24 was INR 100 crores. For the full financial year '23, '24, net sales reached INR 4,057 crores, an increase from INR 3,789 crores in financial year '23. Our gross profit for financial year '24 was INR 1,448 crores, with gross profit margin of 35.7%. For the year, EBITDA stood at INR 132 crores with an EBITDA margin of 3.2%. As we move forward, we are committed to maintaining this positive momentum, further improve our financial performance, delivering long-term value to our stakeholders. With this, I conclude my speech and welcome your questions in question-and-answer session. Thank you very much for patient listening. Thank you so much.

[Operator Instructions] The first question is from the line of Tanush Mehta from JM Financial.

And congratulations on good set of numbers. My question is that total sales for Q4 FY '24 were INR 1,171 crores, reflecting a 19.9% quarter-on-quarter and 22.5% year-on-year growth. So what were the primary drivers behind the significant sale increase? And which segment contributed most to this growth?

You know that the entire textile industry was facing pressure in Q1 FY '23, '24. H2 was a little bit better. You know that this Q4 every year release better than the 3 quarters of the year. We chose to liquidate the stock level. We chose to realize our current assets to make better financial results. That was the whole story behind this better result. Secondly, all the plants were using their fullest production capacity utilization. The stock level was around 12,000 metric tonnes, which came to around 5,200 metric tonnes in Q4, '23, '24. That was the reason for this increase, even after the stressed prices of yarn or any other product or textile.

Understood. Next question is that RSWM recently completed the acquisition of spinning, knitting and processing undertakings at Chhata unit from Ginni Filaments Limited. So how was this acquisition? Or what are the expected long-term benefits from this acquisition?

Okay. You know that knitting business has good business potential and this place is very near to Jewar Airport in Greater Noida, which this plant has proximity from Jewar Airport. So in future, foreign buyers or domestic buyers will remain comfortable while they will visit this Chhata unit for purchase of knitting fabrics. This is also applicable for yarn also because both the units are in NCR, very near Punjab, betting in a big way, Panipat market and the Ludhiana market. With some amount of investment, this unit will be -- come at par with our existing units. That was the rationale behind acquiring this unit.

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

Sir, you firstly alluded to the fact about the fair valuation part of the Bhilwara Energy investment that we have completed as RSWM earlier. So is this regarding the restructuring or the carving out of 2 separate entities done by the -- by our promoter group HEG, that has all presented in this fair valuation part of the story? Or what led to this fair valuation currently?

You are right that the restructuring of [indiscernible] Bhilwara Energy has led to this fair valuation and it resulted into the fair valuation mark-to-market gain to RSWM also, since it has around 7.56% shareholding in BEL.

In Bhilwara Energy, since RSWM holds 7.56% in Bhilwara?

RSWM has a 7.56% shareholding in Bhilwara Energy Limited.

Right. Okay. And now this valuation will be -- we will get an opportunity as the sale would get listed going ahead. So that is a positive also that we need to factor for our investment there.

Future value, I cannot comment on that.

No. That proposal has been -- has been elaborated in the HEG presentation, where it has been explained that what will lead to what going ahead. So that is what my understanding was there.

The company, they may have that presentation there. But I have not listened to that presentation at that time. I have not seen that presentation. But there may be chances of listing of this company, but I can't comment on that.

Sir, coming to our Ginni Filaments acquisition. So for this current year, for FY '24, '25, we will be running this plant at optimum level and what would be its contribution to the turnover? And if you could just elaborate, its contribution towards you?

It's a very good question. Entire 80,016, the spindles, are being run at full capacity. But you know that since the machinery is 25, 30 years old, it has -- the product of this has quality issues, which will be -- which will be addressed after some investments, which will come in due course.

Okay. Have you worked out the number? Yes. Sorry.

After Board -- after our Board approval.

Okay, sir, and have you worked out...

This investment is under consideration, proposals have been made, but we are evaluating these proposals. And then once that is approved by the Board, we will be going for some additional investment for modernization of machines, for balancing of the plant.

Okay. So sir, this activity will happen...

Otherwise, the entire plant is running at full capacity. There are no issues at all. It's a running plant.

Right. So what would be contribution? Without the additional expenditure or the modernization exercise, what would be the running at optimum level contribution to [ RSWM ]?

Since we have acquired very recently, we are doing micro study for that. It has just -- it has just completed 3 months. Within 3 months, it is difficult to comment on that. But definitely, after this June quarter, we will sum up something.

Okay. Sir, 1 more point about our CapEx that we have done. I'm alluding to our Slide 21, yes, 21, where we have spoken about our growth drivers. So if you could explain in detail on the investment we have done in the, in the Banswara, the Lodha? And how is that investment going to contribute going ahead? And what is the contribution for the current financial year?

You know that we have just started this plant in -- practically in October '23, so that's 8 to 9 months have gone. This plant is running well, with best quality, with best efficiency of production, with good profitability, with better value addition compared to our peers, compared to other units within our company. It is about INR 6 to INR 8 per kg plus.

Right, sir.

So you can expect a good amount of profit. But it all depends on -- only this project execution is not sufficient. We have to see the current cotton rate also, the current political, I mean elections also. And this election, we were not able to run with our labor losses. In April and May, there were some labor losses. But definitely, you can evidence good profit, good quantum of profit and good quality of yarn in this Kapaas project in Lodha, Banswara.

So you are commenting on the fact that this quarter is also affected by the ongoing election that has resulted into lower production days for RSWM?

So we were running at full capacity, but with labor shortage and all, this resulted into lower production. Capacity utilization is full, but then the workers will not come due to elections or due to this crop, it remains difficult to run the plant fully. But after this election in Rajasthan, everything is addressed and now there is no issue at all.

Okay. And currently, our units are running at higher 90s? Or what is our utilization level across all the units?

Higher 90s.

Sir, please repeat closer to the mic, I didn't heard you.

It is at higher 90s.