RSWM Limited (RSWM.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the RSWM Limited Q1 FY 2026 Earnings Call. We have with us today from the management, Mr. Rajeev Gupta, Joint Managing Director; Mr. Nitin Tulyani, President and CFO; Mr. Surender Gupta, VP, Legal and Company Secretary. [Operator Instructions] Please note, before we proceed this call, I would like to take this opportunity to remind everyone about the disclaimer related to the 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. Rajeev Gupta for the industry outlook. Post that, Mr. Nitin Tulyani will take over for the financial overview. Thank you, and over to you, Rajeev, sir.

Hi. Good evening. I hope you and your families are having good health. It is my pleasure to welcome you to this Q1 call for the year FY '25-'26. This is earnings and conference call for the first quarter. I hope you all had the opportunity to review our financial results and the investor presentation, which is available both on stock exchanges as well as on the website of the company. Now if we talk about the industry, these are very, very uncertain times. If you look at both internal and external because of 2 major developments external, which has happened. First being the FTA between U.K. and India. So that was a very, very positive development, and we understand, this was a game-changing shift in the global textile trade, opening substantial opportunities for Indian exporters with the removal of import duties, simplification of trade for Indian exporters, particularly in value-added and sustainability-driven products. Categories are now better positioned and the U.K. import, which is nearly $20 billion from India worth of garment annually. This is including India. So this agreement which removes 9% to 12% duties across various products of garments and textiles to 0. So that level playing field with the Bangladesh, Pakistan and other countries is with India as well. So this reflects a growing trust in India's manufacturing capability, and definitely, this will be a very strong ground for further growth in especially finished garments for supply to U.K. The second element, which is not so good and has been shutting the entire industry is 25% tariff imposed by U.S. This comes as a very strong temporary setback to all of us because we were expecting something around 15% to 20% as a tariff. So this additional 5% to 10% tariff against our expectation has given us an emotional setback for the time being. We personally feel that this is a short-term slowdown, and it will not be very long-lasting disruption for the industry as a whole. Our Free Trade Agreement with U.K. and the opportunities across within domestic and others will prevail. More importantly, duty structure of tariff of U.S. on China is still to be decided, and the competitive advantages and disadvantages will be fully reflected thereon. The serious concern is about the penalty that the U.S. President talked about Russia trade. So that is creating more uncertainty at this point of time. So this environment of uncertainty definitely is there for the textile as a whole. If I talk about the domestic, RSWM is predominantly a domestic company having around 70% of revenue coming from within India. So impact of international disruptions will be limited on us as we do not have that finished product sales to the U.S. or to other countries, rather our customers, in turn, are exporting. So if I share the outlook of raw material, blister remains as very competitive for us because China having a better blister prices. So international prices of blister definitely give us a disadvantage as a country, and we continue to face the challenge of the export of blister-dominated yarns. Cotton has been more or less the same level ever since we talked about in last investors call. But the disadvantage of Indian cotton over international cotton continues as such. So both the synthetic and cotton areas raw materials remains not very competitive strength for the Indian spinners or the textile manufacturers at this point of time. So otherwise, if we share the business-wise outlook in yarn, synthetic and cotton I shared already, mélange has been doing reasonably okay, but this land route disruption by closing of land route exports to Bangladesh has created an issue because most of the mélange exports are the smaller lots and go from the road route. So that impact is there for the industry as a whole. Otherwise, domestic and international demand for yarn has been more or less stable. So there is not very strong pull. At the same time, there is not a decline in demand. So quarter observed reasonably okay demand for yarn as such. Denim, overall, the sentiment has been reasonably good. Garments have been looking for lightweight, more comfort wears garments, which is having stretched and also giving a fashion outlook. So denim has been reasonably okay. Overall, India capacity utilization for denim has been in 70%s, whereas RSWM is able to clock better and around 90%s is utilization levels we have been doing denim. Outlook for denim also continues to be good in the next quarter. For knit, there's a lot of growth is likely to happen. In India, a lot of new investments are targeted in knit as worldwide, knit is a focus area and most of the growth is likely to happen in knit area. So RSWM has gone with the stabilization phase, and we are reasonably placed in this segment now, and the utilization levels are also okay for this to work on. Overall, the focus, as we discussed last time on operational efficiencies and the market position continues to be the key area for RSWM, and we continue to work on that. Future growth in RSWM, we are considering by way of consolidation in our yarn operations. And largely, the focus is on the value-added products like knit and denim sector. So sustainability continues to be another area of a very close focus, and RSWM, living its philosophy of giving back to society. So we live by that area. So overrun the sentiments, and if I talk about, it is having a lot of challenges. But still we have maintained a positive outlook and see the next quarter's performance going to be in the same range or slightly better range of operations that we are having in terms of utilization and overall market placement of the product. So we'll take up questions towards end of this. Now I hand over to Nitin, our CFO, for a financial overview and strategic highlights. Nitin?

Thank you, sir. So I will now share our RSWM financial and strategic highlights for Q1 FY '26, and how they are preparing us for the upcoming quarters. So coming to the financial performance and talking in terms of the revenue, RSWM reported a revenue of INR 1,169 crores in Q1 FY '26, a slight decline of 3.2% year-over-year, which is primarily on account of the subdued export demand. Coming to the gross profit, it stood at INR 440 crores, improving by 1.3% year-over-year. Our gross profit margin strengthened to 37.3%, up by 152 basis points year-over-year and 307 bps on a quarter-over-quarter basis. It's primarily driven by the better cost optimizations and the product mix improvement. Our EBITDA reached INR 81 crores. It's a robust 50.6% year-over-year growth. And the EBITDA margin expanded to 6.9%, up to 43 bps year-over-year and 63 bps quarter-over-quarter. This was supported by better operational efficiency and focusing on low-profit products to improve customer mix, product mix and market mix. Most notably, our PAT came in at INR 7 crores compared to a loss of INR 13.7 crores in Q1 FY '25, which is reflecting our stronger turnaround. PAT margin improved to 0.6%, marking an upward movement of 46 bps on a quarter-over-quarter basis and a swing from negative territory last year. Additionally, I would like to share the key outcomes from the yesterday's Board meeting, particularly around our capital investment strategy and operational optimizing initiative. As a part of our ongoing commitment to sustainable growth and operational excellence, the Board has approved a total CapEx of INR 92 crores to modernize and enhance our knitting operations at Mordi and the Chhata unit. This will result in a 20% increase in the knitting capacity from existing 750 metric tons to 900 metric tons per month, translating into an estimated annual upside revenue of roughly INR 220 crores. The project is targeted to be completed over the next 9 months and will be funded through a mix of internal accruals and debt. In addition, we are moving decisively on our sustainability road map. We have placed our order for a 10-megawatt renewable energy product for captive use, and we are in advanced discussion to expand this to 50-megawatt in total capacity. With this, our green energy footprint will rise from 74 megawatt to 124 megawatt, helping us significantly offset our power costs and reduce our carbon footprint. The total investment is estimated at around INR 50 crores, and the project will be commissioned over the next 8 months. Lastly, we have initiated a rationalization of the spinning operations of our Chhata unit, where the old machines, which are no longer viable, usable splinters will be transferred to the other plants for the modernization, and the remaining assets will be onetime. Importantly, the knitting operations at Chhata will continue, and we will continue to get the benefit from the plant upgrades. We have made significant strides in advancing our innovation agenda and integrating sustainability more deeply into our operation. Despite ongoing challenges, we continue to uncover promising long-term opportunities. Our transition towards premium synthetic fiber, a more focused product range and the exit from the negative and the lower contribution product is helping us in improving our operational efficiency and strengthening the supply chain resilience. Under the RSWM 2.0 initiative, we are repositioning towards the high-yield segment with a stronger export potential. We are sharpening our manufacturing focus to maximize resource utilization, while maintaining the fiscal discipline. Our emphasis on the specialty yarn with the advanced technical attributes and a broader high-value product offering aligned with the global demand trends. There are certain few key initiatives we are adopting towards the digitalization to strengthen our processes further and enhancing the working capital management. We are also focusing on reducing the debt and cutting energy costs by expanding renewable energy usage across the production hubs through proper inventory falling with the responsive production model to support the lean operations. Backed by the multi-pronged strategy, we are well positioned to generate the long-term value. Our focus on value creation, resource efficiency and disciplined execution keep us aligned with our vision for the scalable and responsible growth. These strategic investments underscore our confidence in the growth of the value-added segment, our disciplined capital allocation and our focus on delivering long-term stakeholder value. With this, I would like to conclude and open the floor for any questions you may have. We shall be happy to take up your questions.

[Operator Instructions] We have a first question from the line of [ Majid Ahmed ] from Pinpoint Capital.

Am I audible, sir? Hello?

Yes, Majid. We can hear you.

Very good results. My first question, sir, is that can you give me the numbers of the capacity that you have and the utilization numbers?

So you were talking about some particular business? Which is the area you -- of interest to you?

Like of denim and fabric, like can you give me the breakup of the denim's total metric ton capacity and utilization and for fabric?

Okay. Sure. So let me share with you. In case of denim, we have a capacity of 30 lakh meters of knitted fabric per month. And against that, we are clocking in this quarter an average of around 26.8 lakh meter capacity. So which works out to be almost around 90% in terms of capacity for denim. And if I share with you the knit numbers, knit number, my capacity is around 750 metric tons. And we have clocked, during this quarter, 625 metric tons as of our capacity per month, for knitted, the process fabric. So I'm expecting this was the question you were looking for answer?

Can you give me the numbers, like the revenue breakup between the numbers of revenue in the denim and fabric? Actually that will be helpful.

So as a part of our segment reporting, we are reporting the fabric division numbers. And it's clear in our segment results.

No, in segment, you have only mentioned yarn and fabric, but what about denim? Denim, is it included in which part?

Yes, it's part of fabric.

So -- yes, the denim is a part of our fabric business. So our fabric business includes both denim and knit.

But can you give me a breakup, so that I can understand the realization that you are making across segment? So that I have clear ideas of what's happening. Because your margins are also...

So denim we get around INR 200 crores.

Okay. Denim is the most part.

This quarter. Yes.

Yes. My second question -- Yes, sir. Yes, sir, denim is INR 200 crores, right, for this first quarter? Hello?

You're right.

Yes, INR 200 crores.

Yes, sir. So of that, how much is EBITDA you're able to generate, sir of that INR 200 crores? The EBIT margin. In EBIT, you have mentioned around INR 15.9 crores in segment reporting. Out of that, how much is fabric and denim, sir?

So in denim business, we are generating, in Q1 EBITDA of 12%.

INR 12 crores, sir? How many, sir? What's the number?

12%.

12%. I'm unable to hear you clearly, sir. Can you repeat once again? Am I audible, sir? Hello.

[indiscernible]

Yes, sir. What I'm asking...

As per segment reporting, we are segregating yarn and fabric. So within that, we do not make separate balance sheet for denim and knit as such. But broad indicators that we have shared in the industry numbers. So I think that is applicable here also.

Okay, sir. Yes, sir. Sir, secondly, sir, my next question is that, sir, now we are looking to break even, and we are now the cusp of profitability. So are we looking to improve the profit, especially like -- because I'm seeing the COGS as a percentage of revenue decreased significantly like to a material level from 64% to 62%. And your power and fuel cost as a percentage of revenue has also -- it is the 100 bps. Like can we increase -- like can we see margins going up either through fixed cost rationalization or the per unit realization improvement. How does that work for this year?

So it is a combination of both the things. Realization also in different businesses haven't had behaved differently. The cost prices have improved a little bit. So some amount of realization has also improved. And there is a conscious effort in terms of improving our cost structure, and thereby reducing the fixed cost and better utilization of assets. So as we use our group assets, part of our assets better, your cost per unit goes down, and thereby help you in improving your overall numbers.

Okay. Like this quarter, we have power and fuel cost of INR 120 crores, like what will be the going forward quarterly run rate? Would it be the same or would it reduce going forward? The power and fuel costs. Like from a metric ton perspective, like cannot be exempt, but as we increase utilization could change.

So we are consciously investing in the renewable energy, and our power cost is expected to reduce with the profitability coming from the low power costs. So our power -- will reduce.

So we are working on renewal cost, as Nitin mentioned in his brief. And secondly, also, we are modernizing the machine path and taking action wherever the energy efficient machines are there. So thereby, per unit, it will be going down. Overall figures may be similar or maybe go slightly better in case we are able to clock better machine utilization. But per unit consumption, definitely, it will be lower.

So that I can assume that as a percentage of revenue, would it reduce right? It now it is at 10%. So it can go between 8% to 9% kind of thing? Can improve at that level, sir?

It will be difficult to comment percentage, but it be lower.

Okay, it will be lower. Like on an overall basis, it will be definitely lower.

Should be, yes.

Yes, sir. And secondly, sir, like currently, like as of now, how much is the borrowing, sir, as of Q1, if you can give the number?

So our total borrowing stands at INR 1,600 crores.

INR 1,600 crores. Sir, how are we looking to deleverage our plan...

So we are trying to leverage our internal accruals. And through this, we are planning to go with the further expansion. And whatever the new debt we will be taking for the loans, the same amount of repayments will be done during the year. So there will be no impact on the debt ratios also. We are not going with any additional debt. Our repayments will be equal to the additional debt we will be taking.

What is -- so what you mean is that there will be no net change, but incremental debt will be then again used for debt repayment? For growth?

Yes, right. You're right.

Okay. Like what's the CapEx requirement, sir, for FY '26? What's the guidance that you can give? How much revenue?

There are the 3 things we are doing during this year. 1 is the expansion in our knit business, where we were having a major shortfall in our product mix. We were not having printing as a product in knitting. So to address that and also to balance our capability in terms of cotton knitted sub-rate, so we are going for an expansion, which will add around 250 metric ton actual production capability and INR 220 crores of additional revenue as a result of that. So when the full project is on, we will have these numbers in place. So that's the one CapEx which we are doing, this will be to the range of INR 90 crores to INR 95 crores overall project for this. The second thing we are doing is as a theme of sustainability and with the change in the law that now you can go up to 200% of your [indiscernible] loans as renewable energy. So we are going for 50 megawatts of additional round-the-clock energy through 2 routes. One 10 megawatt, we are doing for our solar installation. And the balance we are going with around-the-clock captive -- group captive scheme of open access power. So that investment in both areas would be somewhere around INR 50 crores. So I think these are the 2 major things which we are doing, which are immediately the need for the balancing and for our cost structure optimization we are doing. In addition to this, it's a normal capital expenditure that we're doing for maintenance and making us as efficient in terms of cost. So we are very conservative for doing any CapEx for this year. Last year, we stand ourselves. And again, this has helped us to be more strong financially and this progress of going very slow on CapEx will continue for a couple of more quarters.

Okay. Sir, so that CapEx would be in the range of INR 150 crores, INR 150 crores to INR 200 crores in total, including your operation...

Absolutely, absolutely.

Okay. Sir, finally, sir, in regards to working capital. This year, you have done extremely well in managing your working capital and then generating the strong operating cash flows. Would that remain same? Or how do you see this, sir?

Yes, we target to maintain the same momentum, and we are consistently keeping our track on the inventory levels, specifically the raw material as well as the finished good inventory. And on the data side also, we are strongly governing the receivables as well as the credit limits.

So I can assume that it will remain same for the year, at least?

Yes. Yes.

[Operator Instructions] We have our next question from the line of [ Rishab Sharma ] from [ BP Advisory ].

First of all, congratulations on the good set of numbers. Sir, what return do you expect from the INR 92 crores knitting upgrade and when it will start to add in to the profit?

Okay. So thank you very much, first of all, for studying the numbers and appreciating the performance in the quarter. This upcoming investment of INR 90 crores to INR 95 crores in our knitting modernization as well as the enhancement and adding the new products, which is printed into this. We expect this to clock around 18% to 20% of ROI. And as a result, we'll be having payback around the 5-years for this. If you see that the implementation period mentioned by Nitin is almost 9 months. So I expect to have a partial revenue for the year '26-'27 and full revenue thereafter.

Okay. And sir, what cost savings are expected from the Chhata unit, that spinning division closure. And was there any onetime shutdown costs?

Spinning division in Chhata came as a part of parcel of the overall deals from the acquisition, which has 2 businesses, that was knitting and spinning. Fortunately, knitting, we have been able to stabilize and it is performing. We are able to utilize it nicely, and it is contributing to both revenue and EBITDA for the company. Spinning, being the old and inefficient machinery part, we were bleeding continuously ever since we acquired this. We tried to improve on the various interest. But eventually, it was not making much of a contribution, and thereby no financial sense in carrying it forward. So we have now decided to move out of spinning in Chhata, but continue to operate Chhata location and business in our knitting division. Rather, we are modernizing and adding certain more machines for the balancing in our knitting division. So there may be a limited onetime cost, but there is no major challenge for the stopping our spinning operations in Chhata.

[Operator Instructions] We have our next question from the line of Madhu Sharma from [ SK ] Capital.

Am I audible?

Yes, Madhu ji. You are audible.

Sir, my first question is, do you plan to -- plan to raise more debt? And how will this plan impact your current debt level?