RSWM Limited (500350) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to RSWM Limited Q3 and 9M FY '25 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Rik Capital Investor Relations team for the introduction of the management. Thank you, and over to you.

Thank you, Jacob. Good evening, everyone, and welcome to RSWM Q3 and 9 Months Earnings Conference Call. Today from the management, we have Mr. Rajeev Gupta, Joint Managing Director; Mr. Nitin Tulyani, President and CFO; Mr. Rakesh Jain, General Manager, Corporate Finance; Mr. Surender Gupta, VP, Legal and Company Secretary. Before we proceed with this call today, I would like to take the opportunity to remind everyone about the disclaimer related to this conference call. Today's discussion may be forward-looking in nature based on current -- 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. Today, we pleasure to introduce Mr. Rajeev Gupta, our new Joint Managing Director, a distinguished industry leader with over 30 years of strategic leadership experience in textile, home textile, pulp and paper industries. Renowned for his expertise in business transformation, revenue growth and operational excellence, Shri. Gupta has a successful -- led turnaround and driven significant improvement in EBITDA across various leading organizations. A firm believer in efficiency, he has leveraged Lean and 6 Sigma methodologies to improvise operations and reduce cost. Shri Gupta's vast experience in results-driven approach makes him a transformative force in the industry. We welcome you, sir, on board. I now hand over the conference to Mr. Rajeev Gupta, JMD of RSWM Limited for his industrial outlook. Post that, Mr. Nitin Tulyani, President and CFO, will take over the financial overview. Thank you, and over to you, sir.

Thank you for the introduction, Richa. Good evening, everyone, and thank you for joining today's investor call. I hope you had got an opportunity to review our investor presentation, which is available both on stock exchanges and our website. I'd like to highlight the current state of textile industry and the challenges it is facing. Indian textile industry is at pivotal moment at this point of time, poised for the growth despite global economic uncertainties. India's strong heritage, strategic positioning and expertise in specialized segments such as spinning, denim, home textile, man-made fibers are driving this expansion. Domestically, cotton prices have been stabilized in last couple of months, ensuring more predictable input cost, while improving demand environment is expected to enhance profitability and operational efficiencies in the coming quarters as well. Looking ahead for 2025, stable cotton prices, favorable ForEx rates and government initiatives to boost textile manufacturing and export strengthen industry's positive outlook. The Government of India has increased the Ministry of Textiles' budget from INR 3,342 crores for the FY '25 to INR 5,272 crores in FY '26 to support growth and global competitiveness. A 5-year mission on enhanced cotton productivity forced on extra-long staple, ELS cottons, as we say, to reduce import-dependence on these particular cottons, promote cultivation in the suitable regions and introduce advanced farming technologies as well as training our farmers, aligned with 5F vision of our honorable PM, Farm to Fiber, Fiber to Factory, Factory to Fashion and Fashion to Foreign. This initiative aims to improve raw material equality in terms of quality, and this will help in boosting exports. Globally, the trade conditions are improving with the easing of recessionary fears and geopolitical stability that we expect. Supply chain disruptions are gradually resolving and the higher U.S. tariffs on Chinese goods are shifting trade and investment flow towards India, creating new export opportunities for all of us. A structural shift in retailer preference towards integrated sourcing is driving industry consolidation, benefiting larger, more efficient players who are bigger in size. With these positive developments, Indian textile industry is well positioned for sustained growth. We, at RSWM remain committed for leveraging emerging opportunities while maintaining operational excellence and value creation. India is expected to maintain its position as one of the fast-growing major economies with GDP growth for the year 2025 estimated at about 6.5%. India's economic outlook remains positive, supported by strong domestic fundamentals, favorable government policies. Inflation is also showing sign of moderation with RBI actively managing it through effective monetary interventions. India's textile sector is poised to double its contribution to GDP from a level of 2.3% to approximately 5% by the year 2030. To achieve this, we must focus on all discussed last quarter, [ embracing ] ourselves using Industry 4.0 to ensure the efficiency, leveraging on AI-driven forecasting for smarter commodity procurement and optimized financial management. Machine learning and agile supply chain tools will improve flexibility. So RSWM, as has been discussed last quarter, is working on this, while AI-powered demand and supply planning will enhance forecasting, inventory management, showing our regions and dynamic markets. With these industry updates, now I request our CFO, Mr. Nitin Tulyani, who will take over for the financial overview for quarter 3 and 9 months performance of RSWM. Over to you, Nitin.

Thank you, Mr. Rajeev. Good evening, everyone. Coming to our financial performance for the third quarter of financial year '25, the business continues to demonstrate resilience despite market fluctuations. In quarter 3 financial year '25, we achieved revenue of INR 1,196 crores, reflecting an increase of 2.5% quarter-on-quarter basis compared to INR 1,166 crores in Q2 FY '25. Year-on-year quarter 3 financial year '25, our revenue increased by 22.3% from INR 977 crores in Q3 FY '24. For the 9 months ended December 31, 2024, our revenue stood at INR 3,569 crores, marking an increase of 23.7% compared to INR 2,886 crores in December '23. EBITDA for the quarter reached INR 58 crores compared to INR 42 crores in Q2 FY '25, representing 36.3% quarter-over-quarter increase. Quarterly improvement in EBITDA was mainly on account of the cost control measures that has been taken. Year-on-year quarter 3 financial year '25, our EBITDA increased by 2.6x from INR 22 crores in Q3 FY '24 to INR 58 crores in Q3 FY '25. The 9-month EBITDA stood at INR 154 crores versus INR 76 crores, an increase of nearly 100% over the same period last year. [Technical difficulty] the quarter was 4.8% compared to 2.3% in Q3 FY '24 and 3.6% in Q2 FY '25. The profit after tax for the quarter stood at a reduced loss of INR 8 crores, showing a significant improvement from a loss of INR 21 crores in Q2 FY '25 and INR 32 crores in Q3 FY '24. For the 9 months, PAT reflected a loss of INR 43 crores, a notable reduction from INR 65 crores in the previous year, primarily attributed to the higher finance cost. On a quarter-on-quarter basis, our ongoing efforts to reduce debts are yielding positive results as reflected in the declining finance cost. We remain committed to implementing effective measures to further optimize our financial position. As we reflect on our performance, we are encouraged by the strong recovery in demand on the export side, though we remain mindful of the challenges ahead. While our spinning business continues to face pressure due to elevated raw material costs compared to the international prices, our fabric segment remained resilient and continues to drive positive momentum. With this, I would like to conclude and open the floor for any questions you may have.

The first question is from the line of Aditya Sen from RoboCapital.

Sir, first, can you shed some light on the present demand and pricing scenario of melange yarn, that is the premium one?

Okay. Thank you, Aditya, for the question. This is Rajeev. Melange yarn demand scene has improved little bit in last quarter. Most of the spinners who are producing melange yarn, the capacity was not used exactly on melange production. It was on other products rather than melange. In this quarter, we saw this increase in capacity utilization being better on melange. And, as on today, if you look at demand side, then within India is having some slight improvement trend, whereas in export, it is still having lot of challenge in terms of pricing where we have to compete with other countries with more competitive in terms of pricing. So, to sum up, it is slightly better. And next quarter, which is the quarter starting from January for Q4, I believe melange overall capacity utilization will be better than Q3.

All right. And any revenue and EBITDA guidance for FY '26 and FY '27?

I can only say that the trend is positive. We could reduce our losses and EBITDA has improved quarter-over-quarter. And as a management, we will try to keep this trend on and I expect performance to be slightly better than Q3 and Q4.

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

Sir. As you know, cotton prices remain higher than the international prices due to factors like MSP and import duties. So how is the company managing this cost disadvantage?

Okay. So, first of all, I think this is a very valid question. Indian cotton prices as on today, first time we are experiencing this for last couple of months now. International prices of cotton are operating at highest level of 67, 68. So there is lot of overproduction in international cotton, especially in U.S. and Brazil, reflecting the cotton prices are at the lower level internationally, whereas in India, because of MSP being a reality, the prices are not coming below a level. So, that is a challenge. And with the import duty in cotton other than extra-long staple cotton being in place, so this remains a challenge. This challenge is for -- across industry for all the spinning mills in cotton yarn production area. So we, RSWM to the extent we are present in cotton segment are impacted by this challenge, which we are trying to do, whatever best we can do in terms of internal efficiencies and better placement of our product.

Understood, sir. Sir, next question is on financials that our EBITDA has shown a significant growth of 2.6x Y-o-Y. So what are the key drivers behind this growth? And how sustainable is this trend in the coming quarters?

Okay, I'll request Nitin to respond to this.

Okay. So, the key drivers behind increase in the EBITDA is primarily the capacity utilization, the better product mix and management of our costs. So we have been monitoring the costs very effectively. Through this, we have been able to reach to this EBITDA levels, which you are seeing in the financials.

Okay, sir. And sir, the company has reported a PAT loss of INR 8 crores in Q3 this quarter. So when do you expect to return to profitability? And what measures are being taken?

Okay. So, if you would have seen the investor presentation, we have created a trend for the PAT. And if you would see this PAT has reduced from INR 32 crores to INR 8 crores. Now to return to the profitability, we are targeting to cover up our -- the cost of depreciation, which is nearly INR 38 crores for a quarter. So, our target is to turn EBITDA positive soon -- to turn PAT positive soon at least for the coming quarter, we are targeting that we will be PAT positive.

Sure, sir. And sir, given the increasing finance cost, as I can see, what is the current debt position? And are there any plans to reduce debt?

Okay. So, as of December '24, our balance sheet has a debt of around INR 1,600 crores, out of which primarily INR 700 crores is for the term loan and we have a repayment plan. So what we are doing, as a strategy is, we are not focusing on the capital expenditure. We are doing only normal CapEx. And the CapEx that has been done in the recent past, we are trying to leverage those -- leverage the ROI being generated through those capital expansion. Through this, we are targeting to control our finance cost.

Okay, sir. And sir, can you share what our normal CapEx is?

The normal CapEx are basically for maintaining the machine health so that we can get the required level of efficiency and productivity. So, at this moment with that [indiscernible], we are not going for any major modernization plan, but the routine CapEx to make machine health effective and continue to produce good quality product. So, that normal CapEx we are ensuring that all plants are sustained.

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

Sir, of late we also acquired an asset from Ginni Filaments. So, how has that acquisition gone through, and where are we in terms of -- we were trying to put some CapEx to set in new machines and remove the older one to improve the yields. So if you could just throw light on how the Ginni Filament asset has been contributing to the top line and bottom line?

Okay. So, you must have observed increase in revenue for the 9 months. One of the major contributor to that is additional revenue we have generated because of this acquisition of Ginni, our [ South ] operations. So, that being said, in fact, this acquisition had 2 portions. One was spinning and other was knitting. Fortunately, in knitting operations, we have been able to stabilize significantly and certain new customers are also added, and the capacity utilization of knitting side of this acquisition is improving on day-to-day basis. In spinning, being cotton, particularly, as such, there is a challenge of margins as we discuss cotton prices and overall geopolitical situation, and Vietnam and China being competitive sources for the supply of cotton yarn. So that still remains under stress. And Ginni Filaments operations to the extent of spinning are impacted by that.

Okay sir. So, can you give some color on -- in terms of utilization levels from -- especially from these 2 assets of Ginni? Where are we in terms of spinning and knitting?

In terms of knitting, we have improved. So today, we are having to the tune of 70%, 75% utilization for knitting. Spinning, that varies whenever it makes sense, in terms of running, considering the profitability and the cotton prices. Spinning is something which you can improve or reduce depending upon the count and depending upon the availability of orders and making sense. So that, we are more or less at the same level. There is no significant change in terms of operations for spinning division of Ginni in this quarter.

Right. And sir, you have mentioned [Foreign Language]. So, if you could just outline to us and Gupta ji what are the key tasks which you have taken on board in terms of your implementation and we congratulate you. Also, this is the maiden call for you, if I'm not wrong. So what are your thought process on the same?

Okay. First, let Nitin respond to your first question, and then I'll take on the second.

Okay. So, as you mentioned that we are working on multiple cost optimization initiatives, and we are also targeting on the production improvement initiatives. The first thing is focusing on our order book and ensuring our capacity utilization percent is more than 90%. So, this is what we are targeting as a first step. Thus, we have a very strong annual business plan being prepared and approved by the Board yesterday. And there are certain strategies which we have captured in that ABP, our Annual Business Plan. And when we will be coming to the next quarter, we'll be definitely working along with those strategies, and we'll also be sharing what are the steps we are taking to be more profitable and improve our losses which are coming at present.

Okay. So, to add on, Nitin, first of all, thank you very much for your wishes. So, I take a lot of pride in taking this role as a Board member for RSWM, one of -- the big legacy of more than 6 decades, which is inherited. And this company has been performing in terms of introducing new products and being predominantly value-added company over the years. The challenges that I have with me is the financial performance at this point of time and last 2 years. So as a team, my first priority would be to come to PAT positive and then ensure that we are running this unit efficiently, both internal as well as product placement and this raw material sourcing and converting efficiently. So I think like all prudent management, we would like to focus on all areas of business and ensure that we do our business effectively and deliver to our shareholders as expected.

Sir, 2 points, sir. Firstly, what portion of our sales is export oriented? How much of the total sales are we diverted towards -- is towards export?

Okay. And second?

And secondly, sir, how are these -- we are into the value-added yarn in terms of melange. But when we look at the entire textile chain, yarn is the most commoditized product and the lowest yielding, if we say. So, what -- where are -- what can we do as organization to shield ourselves from this commoditized part of the story. We have been long in this business and a very successful story. But again, it is all about the commodity play specification in -- especially for yarn.

I got your question. Reacting to first question, our current percentage of revenue, which comes from export, it is around 30.5% of total revenue that comes from export. Now coming to yarn being at the lowest step of value chain in textile, absolutely. And realizing that only, as on today, RSWM have 2 other businesses, which is denim and knitting, which are on downstream in terms of value addition. And we have our own yarn, which is produced and then shared with these 2 divisions for value creation. Now second, within the gamut of yarn, we have this melange and other value-added yarns, so which we try to work on. And this is the total plan we have. One, continue growing in the areas which are on the downstream. And second, within the yarn framework, we try to work on rather than less commodity yarns and try to see that we generate value there rather than eroding value there.

Right sir. And lastly, sir, on the power and fuel part, I think so -- some more efficiency in terms of sourcing of more renewable power and thereby lowering the input cost. What are our investment plans in terms of lowering the power and fuel expenses as a percentage of sales? If you could just highlight? And also on the cost optimization on the employee benefit expenses also, if you could just explain how these 2 line items…

So, coming to the first question on the power cost, there has been the reduction in the power cost. If you see quarter 2 numbers versus quarter 3, there has been a substantial reduction in the power cost, and we've been able to drive the saving. And as far as the employee cost, we have been monitoring the employee cost aggressively and the increments also we are doing is just equivalent to the normal inflation rate and not more than that. And our CHRO is working aggressively to control this employee cost from the past 5 years. And if you see the overall cost of the company, it has been constant in terms of the employee payroll cost.

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

Sir, my question is, with the Bangladesh facing economic and politically -- challenges, so do you see export opportunity shifting towards Indian textile players?

Madhu, you are absolutely right. With uncertainties around Bangladesh, Indian garmenters, especially the apparel manufacturers have got an opportunity, Bangladesh being very strong in those areas. So I agree with you. some amount of business definitely will be shifted to India. And as Indian textile, we expect better orders as a result of that.

[Operator Instructions] The next question is from the line of Rohit Ohri from Progressive Share PMS.

A couple of questions from my side and heartening to see that the losses are reducing. Hope you continue with this trajectory. Rajeev ji, a few questions for you. First one, I know it is early days for you, but what are the immediate short-term and long-term goals, which you intend to focus, and the focus being more towards making the system more lean or maybe having more positivity on the bottom line?

Thank you, Rohit, first of all, for your wishes. I do need that. And second, coming on the priority areas, first and foremost is to clock full capacity utilization. That is the one priority that we have. Second is working on the product mix and try to see that if we are working on certain articles which are not yielding the required value generation to shift that to the products which are able to generate some profit. And third, making an organization which is agile, effective and able to live on the modern day of speed. One area which I'm personally driving is sustainability initiatives, which includes working on the products which are for sustainability. And we, as an organization, have decided to move on from the traditional coal-based boilers to the bio-based fuel boilers and then energy generation from the solar and other green sources is another area which we are working on. So, overall, the thought of the organization is, focus on sustainability and also generate sustainably results in terms of financial performance. So this will sum up most of the areas that we want to cover on.

Rajeev ji, 2 parts to the statement that you made. First one being, you've been known for having lean organizations and 6 Sigma or maybe TPM or TQM which are slightly Japanese kind of culture. How much of, do you think that these kind of productivity enhancement projects can be taken in RSWM currently?

So we have businesses, say knit and denim, which can go to the lean management way of working, the pull system and then ensuring that we produce as per the demand from the market and ensure that you deliver in time, working on time in full concept. And then for my other businesses, which are traditional businesses within yarn, so taking the implementation of 6 Sigma and creating a culture of going to the grass and doing the why-why analysis in some of the areas which we are targeting to improve overall efficiency and create an environment of business excellence in the organization.

Sir. Our ROCE, that is somewhere in the range of 3.5% to 4%. By when do you think you'll be reaching somewhere around 10% or 12% ROCE?

Nitin?

So, Nitin this side. So coming to the return on capital employed, we understand that last year it was nearly 4%. But if you see the past year trend, they were definitely around 8.5% and 16.3%. So, as we are working on reducing our debt, we are also working on many off-balance sheet financing nowadays. We are moving towards factoring, we are moving towards channel financing, vendor financing. With these kind of initiatives, we intend to reduce our finance cost, which will ultimately add to the return on capital employed. So, if you're looking for an exact timeline, it will be difficult to comment now, but the coming quarters will definitely show the results.

Nitin, that range of 8% to 14% ROCE, that was somewhere during the pandemic time wherein everybody had a glorious time. But you did also mention that there are certain off-balance sheet changes which you are looking at. So, are you looking at probably consolidating some of the businesses of the 12 manufacturing facilities? Do you think that there is scope for...

So, let me just explain you. So in terms of financing, what we are doing, there is a platform called as TReDS. So, that basically is for MSME vendor financing. So it's just primarily reducing our overall finance cost. So, we want to just get benefit out of interest arbitrage.

Okay. But there is no scope for probably shutting down some of the manufacturing units and consolidating them at one place and improving the capacity utilization, because Rajeev ji also said that we want to achieve somewhere like 90% capacity utilization.

So doing a consolidation of multiple units, we are not targeting in near to -- in the short to medium term. But definitely, in the long term, we can think over, as doing this activity will again involve a huge amount of capital expenditure which we want to avoid considering the past few quarter events. As we mentioned that we are focusing only on the normal CapEx as of now.

You don't see any scope of reduction of fixed cost or maybe variable cost by doing this exercise, is it?

We have to evaluate and work on this. But saying that in immediate quarter, we are not targeting this. And it will be premature to comment on any such point at this point of time.

Rajeev ji, looking at a higher horizon, maybe 2, 3 years or maybe 5 years from here. So that was the thing. You also did mention about biofuels. We had invested somewhere around INR 35 crores or INR 36 crores in this initiative. So, what sort of benefits are already coming in, in this quarter or maybe the next quarter or maybe the next year? Do you see those things already?

There are 2-way gains on this. One is in terms of lower operational cost and less steam cost. That is one which we -- wherever we have implemented this initiative, that is already -- we are getting that benefit, which you saw in this quarter results. Now, around 50% of that will be implemented in current quarter, and we'll see results in the first quarter of next year. The second benefit is more that many of our customers now from the social compliance point of view, sustainability initiatives put this as a condition. So to fulfill them and serve to those customers, you need to have fuel which is sustainability driven. So I think the investment was targeted to serve both the needs, which I'm sure we'll get advantage in coming quarters.

[Operator Instructions] The last question is from the line of Reuben Mathews from Equity Intelligence India Private Limited.

Congrats Rajeev on your appointment as the CEO. It's I think exciting times coming ahead with you on board and a great set of numbers this quarter, very strong performance. I just had just one question for you. We're seeing that RSWM is undervalued at this point. Are there any plans to raise funds to maybe reduce that debt? That's the one question.

So if I repeat your question, you are asking about whether we have any plan to raise funds. This is what you're saying?

Yes, yes.

No, we do not have any plan to raise the funds. We are cannibalizing our existing businesses, turning them profitable, and we are focusing on the very stringent cash flows to maintain the working capital. So there is no such plan to raise the funds.

As there are no further questions, I would now like to hand the conference over to Mr. Nitin Tulyani for closing comments.

So, in closing, I would like to thank our employees, stakeholders and partners for their continued support. Together, we will drive innovation, expand our reach and create long-term value for all stakeholders. The journey ahead is promising, and I'm confident that we will continue to grow and excel in the coming years. Thank you.

Thank you. On behalf of RSWM Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.