RSWM Limited (500350) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the RSWM Limited Q2 and H1 FY '25 Earnings Conference Call. We have with us today from the management Mr. Nitin Tulyani, President and CFO; Mr. Rakesh Jain, General Manager, Corporate Finance; 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. Nitin Tulyani for opening remarks. Thank you, and over to you, sir.

Thank you for the introduction. Good evening, everyone. Thank you for joining us for the RSWM Limited Q2 and H1 FY '25 Earnings Call. I am Nitin Tulyani, newly appointed President and CFO of RSWM Limited, and I'm pleased to walk you through our financial performance for the period. First, we have reviewed the investor presentation and press release we shared yesterday, which are available on stock exchanges and on our website. I'll begin with highlighting some of the key financial highlights for the quarter and the first half of financial year '25, followed by our strategic imperative to navigate the current market landscape and build a stronger foundation for a sustained growth. We are pleased to report the company's positive operational and financial performance for this quarter with solid revenue growth and improvements in operational efficiency despite of ongoing industry challenges. For Q2 FY '25, RSWM achieved a revenue growth of 15.7% year-over-year, reaching INR 1,166 crores. This growth reflects our commitment to continue to optimize the product mix and expand the fabric division, which posted an impressive 22% increase year-over-year. Strong demand in both domestic and international market for our high-quality fabric has supported the momentum. Gross profit grew by 17.8%, thereby contributing INR 65 crores to margins. Our EBITDA rose by 41.7%, achieving a margin of 3.6%, totally driven by effective cost saving measures and operational efficiency. However, our PAT is showing the loss of INR 21 crores, primarily due to the higher depreciation and the finance cost. We are taking an effective measure to reduce the finance costs. We are working on the liquidation of the stock and realization of the debtors that has been increased. For H1 FY '25, we saw revenue increase by 24.4% year-over-year, reaching INR 2,374 crores as of 30th September. This growth was supported by a favorable product mix, although we continue to address the pricing pressures in the yarn division. EBITDA for H1 '25 rose by 75.3%, achieving a margin of 4%. However, PAT reported a loss of INR 35 crores compared to the previous years. Higher finance costs in Q2 FY '25 compared to Q2 FY '24 has led to a INR 17 crore impact on our profit before tax. Additional investments in the 50,000 spindles in the Banswara-Lodha project launched in October 23 and challenges related to the integration of an acquired unit, while we continue to strengthen our operations and expand our product reach. These results will reflect both the opportunities and the challenges associated with our growth strategy. We are confident in our team's capability to navigate these challenges and position RSWM for solid progress in the quarters ahead. So this was about financial highlights. And now coming to the strategic comparatives for the sustainable growth. To drive growth and diversify revenue, RSWM is exploring new markets with strong demand, reducing reliance on specific regions. This expansion not only widens our global presence, but also reinforces our position as a reliable supplier, ready to meet diverse customers need worldwide. RSWM is also scaling its operations to achieve greater economies of scale. Earnest in strategic imperative to enhance production capabilities alongside efficient supply chain, fortify this approach and keep RSWM competitive while delivering increased value to the client. In response to changing market demand, we are expanding our product range with new offerings in sustainability products. At RSWM, we continue to keep focus on ESG and accelerate renewable energy adoption by investing in on-site power generation and utilizing government incentives. Focus on marketing and increasing brand visibility. We started with the latest campaign For All Reasons, For All Seasons, which reflect RSWM commitment to being a trusted partner for our customers year-round. RSWM is working on embracing Industry 4.0 technology to enhance operational efficiencies. AI-driven forecasting will be integral in the commodity procurement such as cotton that will support us in accurately anticipating the right raw material pricing trends and refining our purchasing strategies for the optimum financial management. This proactive approach enables us to adopt the market change with the resilience. With machine learning and agile supply chain tools, will elevate flexibility across the organization. With artificial intelligence, we are focusing on enhancing the demand planning strategies, supply planning and the forecasting techniques with a focus on better inventory management. Thank you all for joining us today. We have covered a lot of ground from our financial performance to strategic imperatives. We want to reiterate our commitment to driving growth and delivering value to our shareholders. We are excited about the opportunities ahead and confident in our abilities to navigate challenges. Thank you once again for our trust and confidence in our company as our valued shareholders. We appreciate your ongoing support, and we look forward to our next meeting, shall be happy to take up specific questions you may have. Thank you.

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

Sir, if you can highlight how are we planning to reduce the inventory?

Okay. So on the inventory plan, our business team is working consistently on exploring the avenues where we are selling the inventory at a competitive price. So our team is working on it, and you will see the improvement in the upcoming quarter numbers.

Okay. And any plans for the CapEx in the future?

So given the current environment, we are approaching future capital expenditures very cautiously. So we have to revisit our expansion plan once there is a shift in the demand outlook. So we are not exploring any CapEx other than the routine maintenance CapEx.

Understood. And sir, how do you see the sector in second half? Is there any demand revival or green shoots we can see?

See with the so many geopolitical crisis going on, the future is really unpredictable. But still the situations are improving day by day. We have seen the cotton prices getting stable now. So since this is a forward-looking, so we should not be able to comment accurately.

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

My first question is what were the main drivers for the 15.4% increase in total income on a Y-o-Y basis?

Okay. So when we are talking about the revenue increase, it has primarily increased because of the new unit, which went live last year, that is the Kapaas unit at our Lodha location, plus the new acquisition we did at Chhata that has also added the increase in the revenue.

Okay. And sir, next one is, what area would you recommend the company focused on improving to achieve greater profitability?

So with -- like I mentioned in the opening remarks also, we are working on Industry 4.0 technologies. So I am myself leading that project on artificial intelligence and bringing in digital transformation through which we will be able to bring in cost optimization and will improve the demand planning as well as the supply chain process.

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

So I want to ask that if -- you said that AI is being used. So if you can elaborate on that.

Okay. So on the artificial intelligence, I would like to elaborate let's say cotton is the primary raw material for the yarn industry. And we are implementing a cotton forecasting tool, which will help us to be more accurate in terms of the -- at what level and at what price and what quantity of cotton needs to be purchased. So the tool is yet under evaluation phase, and we will be sharing an update later on the same. Through this, we intend to bring in cost optimization with respect to the procurement of raw materials.

Okay. So this can also affect the EBITDA margins in the bottom line also?

Yes, definitely because our margins are going to improve.

The next question is from the line of Rahul from F&O Tatva.

I would like to know about your polyester yarn division. I think from the last 2 years, it's not performing as per the expectations? Is it? Is there any reason behind it?

So you were asking about...

Polyester yarn division.

Polyester yarn division. Yes. Okay. So there is -- and if we talk about the grey and the dyed yarn, we have little bit challenges with respect to the price realization. And in order to overcome this, the recent management restructuring has happened. We have appointed a dedicated Chief Technical Officer, who is working dedicatedly on technological upgradation for improving the quality as well as productivity across all the yarn units. He has been given the target to improve efficiency in the yarn business. So we are working on it.

Okay, sir. And sir, is this polyester yarn division is getting impacted by the overall market scenario or due to some internal...

No, it's primarily because of the geopolitical crisis.

But sir it has been more than 2 years. I think from last 2 years, it's not performing as per the expectations.

We are running on the improving the productivity and the quality part also. So it will -- you will see the improvement.

The next question is from the line of Saket Kapoor from Kapoor & Co.

So when we look at our employee cost line item, we have seen an increase to INR 137 crores for this quarter, and that was the number for the sequential quarter also June. So what has led to this increase?

You're talking about the increase in the employee benefit?

Benefit expenses, yes.

Okay. And what number you are looking at last year versus...

Sir, I'm looking at the last quarter number was also INR 138 crores. This quarter also INR 138 crores, whereas last year, it was INR 118. So what has led to currently this 15%, 18% increase, the markets have not improved. Have we increased our staff strength? Or what has led to this increase? Because as a percentage of sales, that is more than 11%, 12% today with depressed margin or with lower margins?

Okay. So the one increase is because of the addition of the manpower to run the 2 new acquired limits. One is the Kapaas unit as I mentioned earlier and the another is the Chhata unit. So the manpower is primarily increased because of that only.

Okay. What has been the contribution from the newly acquired asset from Ginni filament I think which you just referred to as the Chhata, how has that contributed? What are the utilization levels?

Okay. So we are tracking it as a part of our yarn business. So as a part of our strategy, it is being clubbed in the yarn business only.

Correct, sir. But only to understand how have things dealt with our existing unit? How is the new unit performing?

So we are working on bringing in the synergies across the spinning unit. In the mid unit, we have been able to bring in the synergies. But we are working on the spinning unit. Primarily, we are focusing on the cost optimization via raw material engineering.

What we remember earlier was we were informed that we need to change some machines also and some capital investment was needed to bring the efficiency, which you are just speaking about. So what kind of CapEx is in the pipeline or we have done...

It is in pipeline, and we are working on it.

How much are we going to spend, sir?

That is still under management discussion.

Okay. And sir, what is our net debt number, our long-term debt and the working capital requirement?

I believe we have shared that in the presentation.

Can you just spell it out, sir, for the benefit?

You're looking for the overall debt -- total debt?

Yes, total debt number and the split up between long term and short term, I see the long-term borrowing at -- on a consol level at INR 683 crores. And our short-term borrowing at INR 1,000 crores at consol number.

Okay. Rakesh, would you be able to answer this question about the split between the long-term and the short-term debt?

Yes, sir. As on 30th September, the long-term debt is at INR 596 crores and short-term debt at INR 1,025 crores.

Right, sir. What is the cost of fund currently, blended cost of funds? And what are our current maturities?

Our current maturities are around INR 157 crores for next 12 months, starting from 1st October to 30th September.

Okay, sir. And the cost of funds?

Costs of fund [Foreign Language]

[Foreign Language] And next question is about the current utilization levels for our yarn business and how is the fabric division performance going to be for H2, if you could throw some more light?

Benefit -- considering the benefit of incentive on expansions the interest rate on long-term debt is 5.75%. And on short term, there is no incentive -- such incentive and the overall rate is 8.60% around.

Correct. And sir, now on the fabric division performance, Q-on-Q, we have seen improvement. So what factors has firstly led to it? what are our utilization levels for the fabric division?

Okay. So the fabric division primarily includes our Denim business, and we have been able to reform this business now. And it is expected to deliver profit in Q3 as well as Q4. It has given profit in Q2 also. And in Q3 and Q4 also, the profitability is going to improve.

So this is the Denim market improvement that has led to the same. And if you could give some color on how the prices have behaved, what has led to this improvement?

So it's primarily that we are getting more orders, and we are fulfilling those orders with the quality standards, and we are adding more and more brands to our portfolio. When I say -- so we are getting orders from more brands, which is going to add to the more profitability.

Post our September quarter exit, can you give some color on how the business environment is shaping up for the current quarter in terms of the demand and the price trend for yarn prices, if some color on the same?

The price realization is still the challenges. We are expecting the Bangladesh market to improve upon. And then hopefully, there are chances of business being revived.

And so utilization levels that I missed your point, what are our current utilization levels for our yarn in the fabric business?

No. When you're saying utilization, you are talking about efficiency utilization or you are talking about....

Come again sir, I'm talking about capacity. What else utilization you can provide, sir?

You're talking about the existing capacity level?

Yes, yes.

I would like to park this question and our Investor Relations team will be in touch with you for this answer, yes.

For the capacity utilization level?

So we are working on the full capacity. We have not shut down any spindles. This is what I'm saying. We have 630,000 spindles for the yarn business and they are running at the full capacity.

And sir...

The next question is from the line of Rohit Ohri from Progressive Shares. PMS.

I'm new to the company. So there are a couple of questions which I have. The first one being, you did touch up a little bit on the total debt. So my question is what efforts are made to reduce the same? And if we see that we are running at somewhere around INR 35 crores, INR 36 crores kind of a run rate, how do you intend to optimize the same and reduce the same, so that the profitability of the company and the bottom line increases.

Okay. So what we are doing is we are working on the off-balance sheet financing, primarily the vendor supply chain financing as well as the TReDS financing, which has been approved by RBI. So we are planning to shift some of our vendors to the off balance sheet debt financing so that our borrowings will be shown as reduced and our working capital stress will reduce a little bit.

Sir, when we say that you're trying to improve your margins maybe on the EBITDA margin front. Sir, what are these factors that you are slightly confident about that you say that the margins will improve going forward?

Okay. Like I talked about optimization of the cost? And second, what we are doing is we are focusing on reducing the finished good stock level. So that it will have a direct impact on our finance cost.

Sir, any guidance on the margins profile you would like to share as a range, if you would like to share maybe like 5% to 6% is your ambitious target to achieve that EBITDA margin level?

As of now, it is very difficult to comment, but we are working on the strategy to turn around the EBITDA.

Not an issue, sir. Sir, so we grew at somewhere around 15%, 16% this quarter around if we do Y-o-Y, year-on-year basis. Sir, is it possible that going forward we'll be able to sustain this growth rate?

Yes, definitely, we have a plan. Like I mentioned that we are getting export orders, and we are also adding new customers as well as the new products in our portfolio.

Sir, since you mentioned the export orders that brings the Tirpur association into the picture, sir how are they faring? And any issues or any positive triggers that you are seeing from Tirpur association and the others?

Not as such.

Okay. So we have this -- we were looking at this growth avenues, which are related to Jammu and we have this land and you were looking at some INR 740 crores kind of an investment, sir, any information that you'd like to share on the same?

So that project is still under discussion, and we are working on it.

Sir, any thoughts or any rough work that you've done with that, how would you fund this investment? Are you looking at rights issue or some sort of placement or some QIP or something like that?

No, nothing as such now. So we are working on a profitable financial model.

Sir, by when do you think maybe in next quarter or maybe 2, 3 quarters, how much time will you take to kind of plan it out?

So we'll do it after 31st March 2025 only, not before that. Considering the current quarter, we would like to do it in the upcoming financial year only.

Okay. Okay. Sir, my last question is, when you speak about Industry 4.0 as well as AI-related processes. Sir, what sort of employee count are you looking at? Are you looking at reducing these employees, maybe the ones which are permanent or the ones which are on wages basis?

We are focusing on increasing the bandwidth of the employees to handle a particular task by bringing in the technology. But like I mentioned earlier, one area is cotton forecasting and the cotton trading where artificial intelligence is going to be very fruitful because it has a direct impact on the cost of raw material procurement.

So these employees that we had somewhere around 18,600 for the entire consolidated business. Do you think that the headcount would reduce going forward? So probably will get some more profitability?

No, there is no plan to reduce the headcount.

Okay, sir. Sir, one last question. I know you don't have a crystal ball with you, but do you anticipate that the current year, the current financial here for us would end in black? Or do you think that there will be some redness in the bottom line?

Definitely, there will be improvement in the bottom line. Let's wait for 2 more months to market to perform.

Okay. So because last year, we had some exceptional items, we saved the bottom line to a greater, greater extent, so we're just trying to gauge if we have some exceptional item or something that can probably bring the bottom line in black color?

As of now, there is no.

Thank you. Ladies and gentlemen, on behalf of RSWM Limited, we would like to formally conclude this Q2 and H1 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.