RSWM Limited (500350) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the RSWM Limited Q1 FY '25 Earnings Conference Call. We have with us today from the management, Mr. B.M. Sharma, Joint Managing Director; Mr. Nitin Tulyani, President and CFO; Mr. Rakesh Jain, General Manager, Corporate Finance; 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 disclaimers 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. Nitin Tulyani for his opening remarks. Thank you and over to you, sir.

Thank you for the introduction. Good evening to everyone and thank you for attending today's RSWM Q1 FY '25 Earnings conference Call. I hope you all had the opportunity to go through the investor presentation and financial results, which were announced last Friday, which are available on the Stock Exchange and our website. So first let me begin with the economic outlook and the textile industry update. Coming to the economy, the global economy has done better than expected, showing strength despite ongoing geopolitical challenges. The chance of a recession has gone down and the global economy has managed well with the high interest rates. The economic outlook for India remains positive. The Indian economy grew by 8.2% in FY '24, which was higher than the predicted, and the RBI expects a real GDP growth rate of 7.2% for FY '25. Key factors driving this growth include significant government spending on infrastructure, a strong manufacturing sector and solid domestic demand. The recently announced Union Budget supports the vision of a self-reliant Bharat. It focuses on important areas like the MSME sector, agriculture and manufacturing, and gives a strong push to job creation and skill development, which can help the country reach its next level of growth. The emphasis has been on keeping strong fundamentals, supporting areas of opportunity and sticking to the fiscal plan. The budget allocations for the textile sector have been increased by INR 975 crores to INR 4,417 crores in the Union Budget '24-'25. The budget presented by the Honorable Union Finance Minister, Nirmala Sitharaman, raised the allocations for the research and capacity building in the sector to INR 686 crores from existing INR 380 crores. It also proposed reducing the basic custom duty on real down filling material derived from ducks or geese to enhance the competitiveness of Indian leather and textile exports. The current disruptions in Bangladesh have undeniably impacted the textile industry, leading to significant challenges in production and exports. However, this situation also allows India's textile sector to strategically pivot and explore new markets. By capturing the portion of Bangladesh's global textile orders, particularly Europe and the U.S., India could mitigate the immediate challenges faced and position itself for long-term growth. With a concerted effort to adapt and innovate, the Indian textile industry has the potential to emerge stronger from the crisis, turning short-term setbacks into the enduring success. Now coming next to the update with respect to the textile sector. In India, cotton prices are corrected to around INR 55,000 to INR 57,000 per candy as of the last week of June 2024 from INR 58,000 to INR 61,000 per candy observed in period ended March and April '24. India's cotton prices have regained a premium over the U.S. cotton, which could negatively impact cotton yarn exports, if sustained. The average yarn spread decreased by 0.9% quarter over quarter in financial year '25 to INR 100 per kg from 101 per kg in quarter 4 FY '24, reflecting a slight correction in yarn and cotton prices. This reduction in spread could put pressure on our margins if the cotton prices remain at these levels. The cotton yarn spread has remained stable at INR 100 per kg in May-June’ '24, with the 6 months of the current year 2024, the average spread at approximately INR 99 per kg. This is a decline from the higher average spends of INR 120 to INR 130 per kg in FY '21 and INR 111 per kg in FY 2022. The spread’ stability provides some relief, but still indicates a challenging environment compared to previous years. India's textile exports, including cotton, yarn, garments and manmade textiles faced a slight recovery in six months of the current year 2024 with a 5% year over year growth reaching $11 billion. Notably, U.S. imports of Indian home textiles increased by 17% year over year in volume and 10% year over year in value during the same period despite an overall 9% decline in the U.S. home textile import in last year. Key areas to monitor include the revival of export demand, and textile exports continue to face challenges. The stability in cotton prices is a positive factor for inventory management, while the cotton yarn spreads remain a critical measure for the spinners’ profitability. Now coming to the company's operational performance, the company has maintained full production capacity, distinguishing itself from many of its competitors. This achievement shows the company's ability to manage operations effectively even in challenging conditions. The company has also managed its inventory well, reduced aging stock, which has been controlling the cost and improving the overall efficiency. Financially, the company has demonstrated sound management practices with no occurrences of bad debts, major claims, or held up full container loads. These results indicate that the company is in a strong position within the industry and has a solid foundation for future growth and success. The company recently entered into an agreement on 12th of July to sell its thermal power plant, which has become cost inefficient and redundant. The sale is being made to Didwania Trading Company at Bhilwara for a consideration of INR 48 crore plus taxes. At the board meeting held on 9th August, the board approved a capital expenditure of approximately INR 740 crores to establish a Greenfield unit in Jammu. This new facility will produce recycled PET chips and recycled filament yarn with an expected production capacity of 270 metric tons per day. The project will be financed through a combination of term loans and internal accruals with an estimated completion period of two years. The primary goal of this project is to expand the company's existing operations. This move aims to better address growth prospects and provide a focused approach to management, unlocking better valuation for shareholders. Coming next to the company's financial performance. We are pleased to share that the company's financial performance in quarter 1 FY '25 reflects steady progress in key areas. Sales has increased by 3.1% quarter on quarter to INR 1,208 crores with the year-on-year growth of 34% compared to quarter 1 FY '24. This is indicating a sustained demand for our products. Our gross profit rose by 7.8% quarter over quarter and 29.2% year over year growth to INR 434 crores reflecting effective cost management alongside revenue growth. Also, the gross profit margin improved by 155 basis points quarter over quarter to 35.9%, although there was a slight decrease of 135 basis points on a year-on-year basis. EBITDA levels, we reported at INR 54 crores with a year-over-year increase of 2.2x compared to quarter 1 FY 2024. The EBITDA margin saw small decline of 17 basis points quarter over quarter, indicating stable operational efficiency. The quarter ended with the net loss at the PAT level of INR 14 crores. While overall these results suggest that the company remains aligned with its growth plans and is focused on further strengthening its performance, as we move forward, we are committed to maintaining this positive momentum, further improving our financial performance and delivering long-term value to our stakeholders. With this, I conclude my speech and welcome your questions in the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Mithil Bhuva from unlistedindia.com.

Yes. So I had a couple of questions. The first question being when does the management see the EBITDA margins rising back to normal levels? So at 4%, I guess the sustainability is not -- it's not that easy to sustain at 4%. So when does the management see it getting back to at least 10%?

And second question?

Yes. The second question is like, for example, when we compare with our closest competitors, Nitin Spinners, why does Nitin Spinners have a higher EBITDA margin when compared to RSWM?

Okay. Your question number one, when EBITDA margins can be normal? A lot depends actually what the geopolitical situation takes shape. For the last 2 years, a company like RSWM, which was having 35% export volume, and many companies which were having substantial, you can say, export exposure, they got impacted, first due to Ukraine-Russia war and of late due to what is happening in the Middle East. Now, as of now, we started looking for alternate markets. And when I say alternate market, I'm talking about Latin American countries, but the shipping cost is very high and then this disturbance started happening in the Red Sea area. So it all depends actually when things get normalized so far as the war is concerned between Ukraine and Russia and what is happening in the Middle East. The things which are under our control, we are taking care of that. Number two, comparison with Nitin, well, I think it's unfair comparison, because Nitin is predominantly into cotton, whereas our stake in cotton is only 1/3. Okay? And number two, any company which is, let's say, having 7%, 8% employee cost because the key responsibilities of the management are handled by the members of the family, we cannot compete actually with that. I can tell you internally, we compare our results with Sutlej and we have been doing this for the last 8, 9 years because our product basket is same.

Sure. Yeah. So any plans to get into that line, so that our EBITDA margin actually increases?

Like we improved, you know, our cotton capacities. We added 52,000 spindles by adding this Kapaas facility. Kapaas as of now on a standalone basis is doing very good. In fact, we branded the product from that cotton mill. Kapaas is the brand name which is, as of now, commanding a premium. But as I said, like cotton is a very small portion of our product basket. But let's hope, going forward, with cotton prices stabilizing, let's say, at the range of INR 58,000 plus/minus INR 2,000 and all, things should be normal for most of the cotton companies. Synthetic side, there are still challenges, because synthetic a lot depends on Brent and global oil prices, which has been showing a lot of volatility in the last 6, 7 months.

Okay. Sir, just as investors, it becomes very difficult for us with the volatility in the margin to value the company actually. And that's why I was just looking out for some stability in the margins, but which is kind of difficult in a cyclical business, but still that's a key challenge for us. So that's why I was just looking out for like a stable margin kind of scenario, which is...

Well, I don't know how many of you are keeping track of the polyester pricing scenario. If you know, last year, Government of India came out with QCO, and this QCO was designed around the fiber prices. Now what is the impact of this? The impact of this is that there is 17% to 18% gap between international polyester prices and the prices which are available from the domestic manufacturers. The thing is, it has been taken up with the ministry also in case you see your order was to come, it should have come actually on the final product. Now China is dumping yarn which is made of cheaper polyester, which is available to them in China. But I cannot use the same fiber, because import of that is not allowed, because it does not meet QCO norms and all. And I don't have access to this. So I am in a very unfair situation sitting here and competing with China. In last 12 months, fabric import from China was around 400 tons per day. It is now 1100 tons. And with a market like Ludhiana, which was a key market for us also like, for jerseys and for, you can say, knitted fabric and all, where normally 8 count and 16 count used to go, we have been completely outpriced by China. So these are the challenges, but we have found out alternate market. We are not getting the price that we were getting in Ludhiana market, but still for survival, one has to find out ways. That's what we have been doing.

The next question is from the line of Tanush Mehta from JM Financial. Please go ahead.

So my first question is regarding greenfield project in the state of Jammu. So what subsidies are we expected to receive for setting up the greenfield project?

Okay. And second question?

And what revenue can we expect from this unit once it became fully operational?

Okay. Question number one, what subsidy are we expecting? Okay, Jammu and Kashmir Investment Promotion Scheme says that whatever is your investment in plant and machinery, 3x of that will be given to you as subsidy over a period of 10 years subject to limiting this to the GST applicable on the product that you produce there. So as of now, if I say I am investing INR 700 crores. Out of 700 crores, 400-something is, let's say, in plant and machinery, the subsidy will be 400 multiplied by 3, INR 1200 crores over a period of 10 years, which is INR 120 crores every year. And number 2, the revenue generation. Well, the product basket that we have identified actually for Jammu project, the turnover to investment ratio is anything between 1.25x to 1.3x.

And my next question is, could you provide an update on the recent situation in Bangladesh? Is it expected to impact our operations?

Okay. It has already impacted operations of most of the textile companies which were having, let's say, exposure to Bangladesh. Now for some companies which were totally dependent on Bangladesh, yes, it may be pretty deep. For us, it's not so significant. But yes, there has been delays in exporting of goods, orders. Some orders have been put on hold on the request of the buyer based out of Bangladesh. There may be some delays in getting our payment and all. So all those things are there, but I believe, as of now, when I am speaking with you, the things are getting normal. The factories have reopened. They have started actually production. May probably take another two weeks when things get absolutely normal.

[Operator Instructions] The next question is from the line of Madhu Sharma from SK Capital.

My question is what are the capital allocation plans for upcoming quarters in terms of investment?

You're talking about CapEx plans?

Yes, yes, sir.

Okay. Good evening, Madhu ji. As we discussed before, the plan as of now is around INR 700 crores something will be invested in Jammu and Kashmir. Other than that, as of now, we do not have any other plan going for substantially, you can say, capital expenditure.

Okay sir. And the next one is what steps did we take to decrease expenses in the recent quarter?

Well, what can be done for decreasing expenditure, that's one exercise which goes on 365 days a year. Some internal steps we have taken is like optimizing the strength at the top level and all. And the focus is actually on optimizing manpower strength. We engaged external agencies like NITRA and all for carrying out study on the engagement of workers in different manufacturing processes. Their report is being implemented. I think the results will be felt and seen after one quarter because that exercise is still on. They carried out exercises at 4 plants and their recommendations are under implementation.

Okay, sir. And what is the current debt position?

Current debt position. I think term loans are to the extent of outstanding term loans around INR 900 crores. But this INR 900-something crores I have been seeing in this company for the last 14 years. And in these 14 years, if you see the volume has gone up from INR 2000 crores to this year like, in Q1, we have done INR 1200 crores. I think, at this rate, we should be touching around INR 5000 crores. So a lot of CapEx has gone into these 12 years or so, but the term loans have remained static.

[Operator Instructions] The next question is from the line of Sujit Agrawal, an Investor.

My question was regard to Turkey. How do you see things in Turkey right now? I understand we export a lot of yarn to that country.

Well, the team has returned just four days back from Turkey and the feedback that we have got is that things are improving there in Turkey, things are becoming normal. Two or three things which impacted Turkey negatively, like the currency devaluation, like the position after the earthquake and all, and then the supply chain getting impacted because of Ukraine war, the latest info that we have is, and our understanding as of now is that things are coming up pretty well actually in Turkey and you can see lot more vibrancy going forward in Turkey market.

Got it. So there's no dollar shortage or any kind of issue like that right now because of the financial strain that the country is in?

No, not as of now. In fact, I can tell you, in last nine months, all payments have come as scheduled. No risk at all.

That's very good to know, sir. And thank you so much for your time.

The next question from the line of Ashok Shah from LFC Securities.

Sir, regarding this Jammu and Kashmir plan, do we have any CapEx to be done to save on the power cost like a solar project or something like that or wind project to save on the power cost, because becoming cost efficient is most important in a weak situation which we are currently passing through.

Okay. To my knowledge, they are offering power at the rate of INR 5, which is very, very competitive. In Rajasthan where it is INR 7.85, that advantage is there by way of power subsidy. So in addition to that, any new plant we are going to be adding now or in future will have solar facility or wind power facility at all locations. Even existing locations, in last 3.5 years or so, we have set up almost 23 megawatt solar capacity. In addition to that, we have 40 megawatt wind power also. So in Jammu and Kashmir, there will be rooftop solar facility.

Secondly, sir, regarding the cotton price situation, do you expect to again go up, or it will remain at low level during the current season?

For that matter, any agriculture commodity which is impacted by the performance of the monsoon, this risk is always there. As of now whatever is coming in public domain, it's there. Sowing as of now is 10% less than the previous year and the prices in Brazil and U.S. are going to be soft. So going forward, what impact it will make, I think we have to wait for one month more. The new arrivals start by the end September and then you will have a fair idea about the size of the crop. Two years back, if you remember, what happened, we were very bullish about that good crop, and then because of floods and all and the pink worm, the crop was affected to the extent of 20% or so. So all depends, very critical time, you can say August 15th to September 15th. If all goes well, we can see sort of a normal crop, though production may be less than last year, and let's see. In case floods and all affected, the prices may start going up after 15th of September. The first lot, I think, which is in the range of 200 tons and all will come after 15th of September only.

So there is no clear view on the cotton price currently?

No. As of now, it's pretty soft you see. Going forward, well, we expect that should be in the same range, which is INR 58,000 plus/minus INR 2,000 per candy. But it all depends how the U.S. market and the Brazilian market behave going forward. The U.S. market you may be knowing is soft and is below $0.67 as of now.

[Operator Instructions] The next question is from the line of Mithil Bhuva from unlistedindia.com.

Sir, in future, in the long term, how much do you see knitting and garmenting as a percentage of the wholesale when compared to spinning currently?

Okay. Garmenting, we are not into garmenting at all.

Yes. So any future plans to get into the retailing part also?

Okay. Future plan, as of now, no. Knitting, like in 16 months, we have come up with a facility of 600 tons per month, which is a very sizable, you can say, commodity size. So going forward, you can say, probably after 18 or 24 months, we can think of adding something there. As of now, no further expansion. Only thing which can go up is that a part of total installation has yet to get operationalized, which probably may take around 3 months or so. Team is working on that, so another 100 tons can be added by the end of this calendar year.

And what are the expected gross margins on knitting?

As of now, I can tell you, gross margins are pretty comfortable. Business-wise, it's better than yarn. I think out of 4 products that we have in our basket, yarn side, we still have challenges, but denim and knits and mélanges, they're bleeding as a stock.

Sir, given our huge experience within the textile industry, we don't want to get into branding and retail. Any reason why we are not into that?

Retailing, no. We are not into B2C segment at all, it's all B2B. Branding, like whatever we are selling, whatever product we are making, we already have a brand called Ultima, which is very well known in the market, which is synthetic yarn made from SJ-11. And so far as cotton is concerned, we have set up similar facility and we are branding the output of that mill as Kapaas. Kapaas is the brand name.

But not on the fabric knitting...

No. Okay, knitting fabric we are making. But are we going to give a brand name to it? As of now, the answer is no. It's being picked up actually by all the big global brands, so firms like Shahi and Gokuldas and all the big garmenters, they are buying from us, they are our customers, like PVH, Jockey and all, they all are buying fabric from us.

Thank you. As there are no further questions. On behalf of RSWM Limited, we would like to formally conclude this Q1 FY '25 earnings conference call. We sincerely appreciate your participation in this event and we kindly request that you may now disconnect your lines. Thank you for your time and engagement. We look forward to seeing you in the next quarter. Thank you.

Thank you. Thanks, everybody.

Thank you.