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

Ladies and gentlemen, good evening, and welcome to the RSWM Limited Q2 and H1 FY '26 Earnings Conference Call hosted by [ Rip Capital ]. We have with us today from the management, Mr. Rajeev Gupta, Joint Managing Director; Mr. Nitin Tulyani, President and CFO; Mr. Surender Gupta, Chief Compliances Officer, Legal and Company Secretary. [Operator Instructions] Please note that this conference is being recorded. 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. Rajeev Gupta for the industry outlook. Following that, Mr. Nitin Tulyani will take over for the financial overview. Thank you, and over to you, sir.

Thank you. Good evening, everyone. I hope you and your families are in good health. It is a pleasure to welcome you all in quarter 2 and H1 FY '26 earnings conference call. I hope you all had the opportunity to review the financial results and investor presentation, which are available in the stock exchanges uploaded today itself. Now quarter 2 remained challenging for entire textile, mainly in view of imposition of 50% tariff on all textile goods by U.S. government and due to geopolitical situation across the globe. There was panic and also the feeling of uncertainty across industry segments to handle the situations and more importantly, to remain viable financially. Especially the garmenters were under great stress as the shipments got stuck and the buyers were asking for heavy discounts on the already booked orders as well. This impacted the entire supply chain on account of heavy inventories, low orders, tight liquidity position and hence, impacting the viability of the operations. Industry was trying to handle this situation through renegotiation with the buyers of U.S. and also exploring the possibilities of shifting their production basis of the low tariff destinations to Bangladesh, Sri Lanka and many others. But this had significant impact on profitability, especially in Q2 and partially in Q3 as well. There was some anticipation for relief on account of FTA with the countries like U.K., UAE and many more in discussion with the government. But this also is taking a lot of time in implementation. Now further removal of import duty on cotton was supposed to be a welcome step. And eventually, this did not give a positive impact in Q2 at least. The impact on raw material prices was that the cotton prices of Indian cotton fell and because of import duty, international cotton were cheaper. Most of the spinners, including RSWM had stock of cotton, which impacted the profitability negatively. And lower cotton prices pulled down the cotton yarn prices downwards. So there is impact of 5% to 6% of cotton yarn prices during this quarter because of imposition of import duty removal. Now RSWM tried to mitigate the situation through strong focus on internal business processes and other strategic initiatives, which have been implemented partially and will have impact in quarter -- this half year 2 of the financial year '25-'26. The company have invested significantly in 70 megawatts of renewable energy, 10 megawatts behind the meter, which we shared in the previous call also and 60 megawatt round-the-clock power, which Board had cleared a few days back. And today, we approved this further. Now this 70 megawatt of renewable energy, which we are now using will make us a company which has more than 2/3 of its energy consumed from renewable sources. To be precise, 70% of the total consumption will now be from the renewable sources. So we'll be using the green energy to this extent. This will, not only help the company in fulfilling the sustainable objective, but also will give us advantage in terms of power cost. Further, your company is also exploring the possibility of forward integration. Under the initiative, the company has planned to invest almost INR 92 crores in modernization and upgradation of knit division. And this will also give us additional product mix as we are adding printing facility during this expansion. With this investment, our knit capacity will increase from 700 tonnes to 900 tonnes per month, along with the new printing facility. We are driving a number of initiatives across supply chain through RSWM 2.0, the transformative journey with a focus on optimizing the cost, improving product mix and improving overall market mix through brands and new territories that we are exploring. We are very focused on reducing our NPAs, and we are also working to monetize our nonoperating assets to support the investments and improvement initiatives. The major 4 working areas for the strategic initiatives are: #1, we are working on the cash conservation, strong focus on cash flow. You will see the finance cost has reduced in our quarter-to-quarter financial results, which Nitin will share with you after my talk. Second is optimizing the product mix for better profitability margins. This has been done in all the businesses, but special impact of this is seen in synthetic yarn business. Third is moving up the value chain, forward integration of knit and denim. We are adding printing and in denim, we are adding the product mix. Strong focus on operational costs, especially on the power through energy-efficient processes and alternate sources, as we mentioned, of solar and wind. And last is strong CapEx monitoring for productive implementation of the desired outcomes. So these being the few initiatives that we are doing with the outlook remaining concerning and challenging and RSWM committed to take over this challenge. And in the long run, we see outlook as very positive. So now I'll hand over the conference to my colleague, Nitin Tulyani, CFO, for sharing the detailed financial performance. Over to you, Nitin.

Thank you, sir. Good evening, everyone. Myself, Nitin Tulyani, and I will now present RSWM financial and strategic highlights for the second quarter and first half of financial year '26, and share how these results are positioning us for continued improvement in the upcoming quarters. Now coming to the quarterly performance. So during current quarter, RSWM maintained its positive momentum with sustained profitability and improved operating metrics despite the global economic uncertainty environment. Our revenue from operations stood at INR 1,150 crores compared to INR 1,166 crores in Q2 FY '25 and INR 1,169 crores in Q1 FY '26, a decline of 1.4% year-over-year and 1.6% quarter-over-quarter, primarily due to lower capacity utilization in the melange and the knit business. Our gross profit has increased to INR 445 crores, up 4.1% year-over-year with the gross margin expanding to 38.4%, a 195 basis point improvement year-over-year and 116 basis point quarter-over-quarter improvement, primarily led by lower raw material costs and a more profitable product mix. EBITDA came in at INR 79 crores, rising 85.6% year-over-year with the EBITDA margin improving sharply to 6.8% compared to 3.6% last year, a 318 bps expansion, primarily driven by the operational efficiency, disciplined cost management and other cost-saving initiatives, which have been the key contributors. Our profit before depreciation and tax rose to INR 48 crores, up 6.2x year-over-year with PBT margin improving by 349 basis points year-over-year to 4.1%. Profit after tax stood at INR 6.3 crores, a turnaround from a loss of INR 21 crores in Q2 FY '25. PAT margin remained stable at 0.5%, marking consistent profitability for the second consecutive quarter in FY 2026. Now coming to the half yearly performance for the half year, which ended on 30 September 2025, RSWM demonstrated resilience and solid improvement in all profitability parameters. Our revenue stands at INR 2,319 crores compared to INR 2,374 crores in H1 FY '25, marginally lower by 2.3% year-over-year, primarily being contributed to the lower efficiency utilization in the melange business. Gross profit stands at INR 885 crores, an increase of 2.7% year-over-year with a 173 bps improvement in gross margin to 37.8%. EBITDA stands at INR 160 crores, up 66% year-over-year with margin improving 280 bps year-over-year to 6.8%. PBT stands at INR 95 crores, a 3.4x rise from INR 28 crores last year. PBT margin improved 290 basis points year-over-year to 4.1%. Profit after tax stood at INR 13.2 crores versus a loss of INR 34.9 crores in half year, which ended last year. This shows a clear turnaround to profitability. During the quarter, we took several focused steps to strengthen our financial position, improve cash flow and enhance overall efficiency. A few of the key initiatives include coming to the first one, which is purely reflected in our P&L also, that's the lower finance cost. We brought down our total finance cost to INR 30.6 crores, a reduction of 8.9% quarter-over-quarter and 11.5% year-over-year through careful financial planning, reduction in the interest cost and tighter control on the borrowing cost, creating a positive impact on current quarter profitability by approximately INR 3 crores. The second initiative revolved around stringent controls around managing the working capital. Our average working capital utilization reduced by 10% in Q2 FY '26, supported by efficient inventory management, faster customer connections and better supply chain coordination. We have reduced overall inventory by approximately 16%, contributing to approximately INR 121 crores if we compare with the balance sheet, which we reported in the financial year ended March 2025. Similarly, our total receivable reduced by INR 51 crores in comparison to the financial year which ended 31 March 2025. Coming to the another initiative which we are taking to strengthen our financial position. We have increased the use of the invoice discounting. We have a tie-up with various invoice discounting platform, and we are making greater use of the invoice discounting facilities due to better interest arbitrage in compared to our working capital cost, which is helping us to improve the cash flow expenses, and we are also managing our receivables more efficiently. We have reduced certain low-margin activities to improve EBITDA margins. We are focusing on stringent profitable products only, enhancing the capacity utilization, and these are the direct efforts towards the high-value core products. Our term loan has reduced further during the quarter, and we plan additional repayments, reinforcing our commitment to debt reduction and a stronger balance sheet in the time to follow. These actions have helped us improve our liquidity, lower finance costs and build a more efficient and resilient financial structure. We remain focused on sustainable growth, prudent capital management and creating a long-term value for our stakeholders. With this, I would like to conclude and open the floor for any questions you may have. Thank you.

[Operator Instructions] The first question is from the line [ Rishabh Sharma of SK Capital ].

Sir, my question is on the green energy investment. As it is a good step on reducing the carbon footprint, I want to understand the cost structure. What impact do the green investment would have on the cost structure and the margins which we can expect?

Yes. So thank you, Rishabh, for analyzing our data at shorter notice. And I fully agree with you this investment of enhancing our green power to 70% of our total consumption by addition of this 60 megawatts round-the-clock power is a step which will help RSWM to achieve more than 2/3 of our green energy. Now this we are doing through our tie-up with Adani Green Energy Solutions, which will provide us round-the-clock power, which is used for the generation of solar power and wind power. This is a combination of both. So we'll be getting power from Adani Grid, and it will be transmitted through this DISCOM transportation, energy transportation and through grid only, we'll be using this. Now this will have 2 advantages to us. One as a sustainable thing, the theme of sustainability, the customers are giving advantage. And as a management also, we want sustainable theme of energy to be used. Second, the tariff increases continuously for power. Rajasthan tariff is also increasing. So this will give us advantage in terms of power being supplied at a lower cost. So we intend to get savings on each unit that we do. And that saving on per unit will vary on the level of consumption and the level of unit is [ diffing ]. Each unit structure is different. But overall, this will definitely reduce our energy cost per unit to the extent of almost INR 1.

Okay, sir. Understood, sir. And sir, next question is on the import duty on the cotton. So I have -- the import duty is free, I think. So what will be your strategy to this import free duty?

So India was having duty on any cotton which is imported other than the long staple cotton, which is now removed and Indian spinners are free to import duty, import cotton from any country. Now largely Indian mills were using Indian cotton and Indian cotton normally is cheaper than the international cotton. But for last 2 years, the trend was reversed. International cottons were cheaper. And because of duty, Indian cotton was looking at cheaper this. Now with this removal of import duty, imported cotton used in Indian industry will increase. Imported cotton has 2 advantages. One, you have long staple and short staple and medium staple all cotton availability in abundant. And second, these cottons also have less or no contamination. So contamination-free yarn can be made from these cottons. In the longer run, this decision will make Indian spinning industry more competitive and the sources will be that way more for sourcing cotton for industry as a whole. But particularly for cotton under review, this has impacted negatively twofold. One, because imported cotton were cheaper and thereby Indian cotton prices went down, the mills which had stock of cotton, so their M2M on cotton is negative and the competitive disadvantage is there. Second, because of cheaper cotton available, cotton yarn prices reduced. And this was further impacted by U.S. tariff because many of the spinners, which were integrated also making forward garments or finished products. So their spinning capacity were idle and they pushed the material to Indian market. So as a result of that also, the yarn prices got impacted negatively. So this loss because of imported cotton -- import duty removal on cotton has impacted negatively in this quarter and maybe this will also continue in third quarter. But in the longer run, this is a welcome and good step.

Okay, sir. Understood, sir. And sir, the inventory is reduced from INR 730 crores to INR 608 crores. So this is a significant reduction in the inventory. So how much more improvement is possible in the next 2 to 3 quarters?

I would agree with you. We always want the lowest stock. This journey will continue. And there is always scope till the time inventories are hand-to-mouth. So I will not be able to give any number. But I assure you the focus and the control on inventories will continue, and there will be possibility of further reduction from here on also.

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

Sir, firstly, with respect to the savings on account of 70% now being integrated through the renewable source, what should be our annual savings, sir, if you could just quantify?

So I think we will have these figures to be exactly firmed up. But I must say that we will have savings varying somewhere on when we have full utilization. This year, it will not be full. We will have impact of almost 4 months during this financial year. But next year, it will be full. Now the saving will depend on the DISCOM tariff. If DISCOM tariff remains same, the saving will be to the tune of INR 30 crores to INR 40 crores at this. If DISCOM tariff increases further, the saving will increase. If it reduces, the saving will decrease. So this is directly proportionate to the DISCOM tariff that we have from Rajasthan.

Okay. So INR 30 crores should be the base as of now for an annualized basis. That will be the directly going to the bottom.

Yes. That is something which prompted us to do this investment at the earliest. You're right.

Okay. So in that case, our INR 92 crores investment, we will have a 3, 3.5 -- 4 years and 3 years payback period also if that math works out. So that is how...

This INR 92 crores -- yes, INR 92 crores which you are talking about, this is for the net expansion. For power, we have invested INR 60 crores as group captive investment with Adani Power Solutions, which is part of the equity participation, which we have to do if you have to become a group captive member for any power plant.

Okay. So sir, for the knitted invest, the CapEx which we are doing for INR 92 crores, how will the integration, the benefits of the same flow to the P&L in terms of the incremental margins? I think so it will be the forward integration that we have done with our yarn which we have.

Yes, you're absolutely right. In fact, the company is now from fiber to fabric. We have our own recycled fiber. We have our own spinning capacity in almost all sort of yarns. And then we have fabric, which is denim fabric and knitted fabric. Now with this expansion, we will be adding our knitted fabric capacity from 700 to 900. So this 200 additional metric tonne per month is the capacity that we are adding, but that is not the real advantage or the aim for this investment. The real advantage and aim for this investment is adding printing as one of the product. As on today, we are doing around 700 metric tonnes of capacity for knitting, but not even 1 kg of printing capacity we have. So our product basket is more or less skewed towards nonprinted. And there is equally good demand of printed fabric as on today. So with this investment, we will broaden our product mix and give more options for the customer and complete our package for any customer who want to buy knitted fabric. So we expect this to add. At this point of time, because of U.S. tariffs, a lot of challenges there, both for knitted and woven garments. So that challenge is there. But this investment has been done for the longer term. And we expect by the time we are able to make this investment functional, this challenge will be taken care of.

Okay. As you mentioned about the printing part of it, so that has to be -- the entire amount is INR 92 crores or for the printing, we are spending something -- we are putting further CapEx? You mentioned about printing as a new category. That means that used to be the job work we used to do earlier. Through job work we used to do the printing part and that will be now...

So job work on printing is not something which is functionally possible in the longer run because quality is something which major customers look. And the quality of printing from organized player like RSWM and from the job work, which we get from open market, you can never be sure about the quality. So considering that, we have decided to go for our own this investment. And second major impact is the lead time. When you go for job work, your lead times are never comparable to the people who have printing with them. So these are the 2 major things which force us to consider putting printing in-house. Now this INR 92 crores is a combination of debottlenecking, modernization and printing. So we will not say this entire is printing, we are adding 200 metric tonnes additional capacity, and we are also modernizing a few of our machines. So this is a combination of all. But 120 metric tonnes out of the additional capacity would be a printed fabric.

Okay. And everything will be margin accretive for us. All these steps are -- will lead to the improvement in margin.

Yes, that's what we believe. That's why we are investing, right. Absolutely right.

Right, sir. And sir, also, our CFO, sir, was mentioning about the finance cost, the trend has been lower. Now Q-on-Q also, there is -- the trend is from 33.6 -- a 10% impact revision. So how should this line item be shaping up for the next half? And if you could just provide us what steps are we taking to lower its impact going ahead as a percentage of sales or on an absolute number?

So thank you very much. Nitin probably was mentioning about the last quarter and next quarter also, we are making plan. I'll request Nitin to explain the steps we are taking.

So Saket, what we are trying to do is, let's say, we are trying to negotiate with the bankers to reset our interest rate, which is ongoing for the outstanding term loans. This is one step we are taking. Second, what we are doing, we are trying to focus more on the vendor financing. Let's say, the regular raw material payments, which we are doing it for the regular purchases from -- for our domestic vendors, those bill discounting give us lower finance costs in comparison to what banks are offering. So we are trying to take benefit of the interest arbitrage. Plus another step which we are planning is the domestic factoring for some of our receivables and because that also come at a cheaper price when compared to the cost of taking the funds from banks. Plus fourth, what we are doing is effective working capital management so that the funds are turning around at a quicker pace, which ultimately lead to the lower interest cost. So I believe I've been able to explain you.

Yes, sir. So if this worked out the way this...

[Operator Instructions] The next question is from the line of [ Navneet from Navneet Bhaiya ].