Sangam (India) Limited (SANGAMIND.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Sangam India Limited Q2 FY '26 Earnings Conference Call hosted by Go India Advisors LLP. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Garima Singla from Go India Advisors. Please go ahead. Thank you, and over to you, ma'am.

Thank you. Good afternoon, everyone. I'm Garima Singla, and it's my pleasure to welcome you on behalf of Sangam India Limited. Thank you for joining us today for the quarter 2 financial year '26 earnings call. This call is being hosted by Go India Advisors. Please note that today's discussion may include certain forward-looking statements. Therefore, they must be viewed in conjunction with the risks that the company faces. Today on the call, we are joined by Mr. Anurag Soni, the Managing Director. I now invite Mr. Anurag Soni to present the company's business outlook and performance, after which we will open the floor for Q&A. Thank you, and over to you, sir.

Good afternoon, everyone, and a warm welcome to Sangam India Limited's Quarter 2 FY '26 Earnings Call. Thank you for joining us today and for your continued interest in the company. Our results and earnings presentations have been uploaded on the exchanges, and I hope you've had the opportunity to go through them. The second quarter reflects a steady progress and operational discipline as we continue to strengthen Sangam's foundation across all businesses. Even in a mixed external environment, we have seen healthy demand in our key segments, supported by our integrated model and focus on efficiency. In quarter 2, our revenue stood at INR 785 crores, reflecting a 16% year-on-year growth, driven by higher volumes and an improved product mix. EBITDA has increased by 32% year-on-year to INR 76 crores, with margins expanding by 120 basis points to 9.6%, underscoring improved cost control, operational efficiencies and better realizations. Net profit for the quarter was INR 23 crores, reflecting the strength of our operating performance. During the quarter, the Board has also approved a revision in the company's depreciation policy to align the estimated useful lives of assets with the actual economic life and industry benchmarks. This change is supported by an independent technical evaluation and provides a fairer representation of our profitability without any impact on cash flows. Looking ahead, our focus remains on building a stronger, more efficient and profitable business. We are taking measured steps to enhance productivity, reduce costs and maximize the share of high-margin and profitable products across our portfolio. At the same time, we continue to strengthen our sustainability framework by improving energy efficiency, expanding renewable sourcing of energy and increasing the use of recycled materials in manufacturing. These efforts are aimed to -- at improving long-term profitability while ensuring that growth remains responsible and value accretive for all stakeholders. With that, I would like to conclude my remarks and open the floor for your questions. Thank you.

[Operator Instructions] The first question is from the line of [ Raman KV from Sequent Investments ].

Yes. So my first question is, I just want to understand in the opening commentary, you mentioned the 2 things. One was the growth was led by higher volume growth as well as better product mix. Can you elaborate the second part of it, better product mix in terms of how the product mix helped in revenue growth? Second is, can you also throw light on the realization, which during the quarter, which helped in margin expansion?

Thank you for your question. So the company actually gone through extensive CapEx cycle over the last couple of years, and we've kind of completed at the end of that cycle. So all the capacities are up and running as on date. So that has enabled us on the volume growth. And also, if you -- on our presentation, you will see that capacity utilizations have gone up across all our verticals. So that is actually enabling us on the growth for the sales. And as far as the product mix is concerned, that is a continuous process. We are always looking for producing those products, which are yielding higher margins and maybe producing those products lesser, which are not so profitable. So that is a continuous process. There's nothing that I have to add on that, any particular product that is leading to this. It is the overall business and across all the verticals, we are working on the product mix that is enabling these -- the growth.

And sir, with respect to the realizations?

So realizations, I think again, if you see the -- on a quarterly basis, the prices of our key raw materials or even, for example, cotton fiber and the yarn side, they've been on a declining trend for about 8 to 10 quarters now continuously. So we see that, that has bottomed out. And probably there is some uptick on that front. So that's why the realizations are getting better. The -- basically the downward cycle has bottomed out. So that's what is enabling better realizations.

So you're basically saying the yarn prices have bottomed out?

Yes, that is correct.

So if you don't mind, can you just give the yarn prices during the quarter, Q2 versus Q1 and the cotton prices also?

Just one second [Technical Difficulty] yarn prices.

The next question is from the line of Kunjal Agarwal from Arihant Capital.

Sir, I wanted to ask that for this quarter, the PAT is up for 317% and it looks impressive. But how much of this, that is sustainable versus driven by one-offs or base effect?

Thank you very much for your question. So I'll just update on the last question. I was just looking at the data on the yarn prices. So about Q1 to Q2, there's about a 2% to 3% increase in the prices. That is to answer the question earlier, sorry. Your question regarding the PAT margins. So the current quarter reflects the onetime impact of the change in depreciation policy. How sustainable it is going forward? We feel that currently, I think if you see our EBITDA margins are expanding over the last 4 quarters, if you see, we are growing on the EBITDA margin front. I do feel that even going forward, that should continue. So this onetime gain of depreciation may be offset by the growth in EBITDA margin. So we do feel that this is a sustainable number. So in the coming -- at least the second half of the year, I do feel that this PAT should be sustained.

Okay. And sir, gross margin, when we see that has also expanded sharply. So how much comes from the lower raw material cost versus operating leverage versus the product mix?

See, it's a mix of everything. Gross margin, it's difficult to actually point out that it is due to a particular cost coming down or -- because, see, we are consolidating 3 or 4 verticals. That's the denim business, the cotton yarn business, PV yarn business, synthetic fabric business. So I would say that the margin expansion is an effort of all the factors that the company is working on and majorly the CapEx cycle being completed. So today, our -- the capacity utilization is higher and also all the new machines that we have -- the new CapEx that is coming in the company, I think that is more cost efficient compared to the older plant and machinery. So all that is factoring the margin expansion.

Okay. And my last question would be, sir, that the textile division margin has been volatile. So how do you see the spread between cotton and blended yarn trending in H2?

I think it has been stable for some time now. As I said that the prices on the downward cycle have bottomed out. So I do feel that the margins that we are reporting today, I think that is a sustainable number. I think we should see a couple of points going up from here in the coming quarters again.

The next question is from the line of Deepesh Sancheti from Manya Finance.

Yes. Are you seeing any pricing pressure from the Chinese or the Bangladesh suppliers in your key export markets?

No, I don't think so. There's -- see, Bangladesh is actually a big market for us. So no, to answer your question, on the competition front, no, we don't face any pricing pressure from Bangladesh. So we are actually exporting a lot of yarn to -- yarn and our denim fabrics to Bangladesh. That's actually one of our customers, not the competitor.

Okay. And what about the American market? How much is your exposure on the American market for the total sales?

So American market is probably, I think, about less than 1% of our total sales comes from the U.S. market. So -- and we've also put up a slide on our presentation, the investor presentation showcasing that we are not -- as a company, we're not very affected by any kind of the tariffs from the U.S. markets.

No, not even indirectly because in your clientele, you have Walmart as well as a lot of American clients also. So I mean, even the customers whom we are supplying in India and they are giving to America, I mean, they are exporting, even that is not affected?

So -- for a lot of these clients, actually goods get shipped via Bangladesh or via a couple of African nations. So there, the tariffs are pretty competitive. So to answer your question, for our business, we are not really affected by the American market directly or indirectly.

And given the volatile raw cotton scenario, how are you securing consistent quality and pricing?

Well, that is the nature of the business with regards to the cotton pricing movements. So we do from time to time when we do feel that the cotton prices are probably low, there is some stocking that we do or there's also always some kind of order book always in place. So at best, any kind of cycle affects us for maybe a month or 2. Any kind of further movement gets factored in either yarn prices or on the raw material side. So at best, I think 30 to 45 days risk is something that we may carry. Otherwise, the prices on the either side take care of themselves.

And what is the cost of debt right now?

So the cost of debt it's roughly around 6.75%, below 7%.

Below 7%. Now I was going through your ROE. So ROE is below your cost of debt also. Now how do you actually -- because -- so I mean, if you say -- I mean, the ROE is significantly below the cost of debt also. So how are we managing the entire aspect? And how -- where do you see going forward, what is your target for the ROE to come?

See, the ROE is low because the PAT margins have been low for a period of time now. However, last couple of quarters, there's an uptick on the absolute EBITDA number. And subsequently, PAT has started going up. And we do see that margin to sustain going forward. So I think ROE will take care of itself. I don't -- I'm not much worried about the low ROE today. I think that is in the past now.

Because even the kind of PAT margins and PAT you have shown is mainly because of the depreciation policy being changed. Now going forward, we see the same depreciation policy, so your PAT numbers will be similar to what you have shown?

In the current quarter, there is a onetime impact of about, I think, INR 9 crores on the PAT from the previous quarter. But we -- as I mentioned earlier on the call, I think we do have -- see expansion of about up to a couple of points on the EBITDA margins over the next -- in the current quarter and then probably the March quarter. So I think the PAT margin will not go down from [ there ].

Because historically, your depreciation was always in the range of around INR 28 crores to INR 30 crores, okay. This time, the depreciation has come to around INR 10 crores. Your PAT, net profit I see is INR 23 crores. So if I just do the simple math of INR 20 crores being saved on your depreciation and that shifting to the PAT to the net profit margin. I mean, then it leaves me around at INR 3 crores of net profit. Would that be a fair assessment that INR 20 crores out of the INR 23 crores, INR 20 crores has actually come from the depreciation?

No, that will not be a fair assessment because we have to factor in the tax impact also on that. So if we see this, that see that we have -- I see the tax impact also, then also it will be around INR 15 crores. So as I mentioned again, that because of the depreciation onetime gain of about INR 9 crores from the previous quarter, that will not come in the current quarter now. But I do see -- we'll add something on the EBITDA, and that will take care of the onetime gain that has come in the quarter. So let us say, if our EBITDA is improving by 1%, that adds about INR 8 crores to the margins again. So we do see at least an expansion possibility of 1% to 2% in the current quarter and the next quarter coming in.

Now just my last question actually. What is the reason of changing the depreciation policy? Effectively, you're paying more tax. okay? And your cash profit, I mean, it's affecting your cash profit rather than keeping it as a depreciation and having more cash into the company, we are actually giving that extra cash to the tax department. Just wanted your views on it.

No, as I mentioned in my opening statements, it is just a fairer representation of our profitability, and it has 0 cash flow impact because tax calculation from an income tax point of view, depreciation calculation is a different calculation versus the calculation on the books of accounts. So that difference will remain. So there is no cash outflow on the tax front.

So currently, there is no additional cash outflow on the tax front?

No, there is nothing on the front.

[Operator Instructions] The next question is from the line with [ Disha ] from Sapphire Capital.

So sir, you mentioned that all our flexible [indiscernible] now all our capacities are up and running. So how much revenue growth do you forecast for this year?

Yes. I think we have on a run rate of about 16% revenue growth for the half year ended September, and that should continue for the full year. And we expect to grow anywhere between 12% to 15% on the revenue lines.

Sorry, sir, couldn't get you.

We do expect to grow about 12% to 15% on the revenue front.

And sir, your export share is currently, this quarter is around [ to be higher ]. So we expect this percentage of revenue like or this percentage of exports to continue or [indiscernible] some.

See -- if you see our historical data, our exports actually range anywhere between 35% to 40%. That is where we have been historically. I think that is the number that will remain in the future. I don't see any significant change on that front.

Yes. So like around 40% is something that we can expect.

Yes, yes. Absolutely. Yes.

The next question is from the line of Nikhil Porwal from Perpetual Capital.

My first question is on, so the gross block has -- I mean, you've done an extensive CapEx moving from INR 900 crores odd in gross block to almost INR 1,800 crores closing FY '25. So in general, in terms of capital allocation, what kind of payback do you all expect on this CapEx?

What kind of payback do we expect on the...

Expecting yours. When I'm asking that in terms of years in how many years do you all expect to recoup this CapEx?

So normally, in our industry, whatever CapEx we do is planned around anywhere between 5 to 7 years of payback.

And in the current presentation, you are reporting 4 divisions. The capacity utilization for 3 of them is almost at optimal level or close to full capacity, while garment is the one, where the utilization is lower. So how do you plan to scale this up? And are there any further levers for these other divisions, where the growth can come maybe via additional CapEx or a change in product mix?

Right. Thank you. See, our yarn division is basically about 90% plus. I think there is another scope of 4%, 5% capacity utilization there. On the fabric front, both denim and the PV fabric division, I think there is still scope of about 10%, 15% addition in capacity utilization. On the garment front, if you see the capacity utilization was actually falling prior to this quarter, continuously over 4 quarters. This is actually the first quarter, where we have increased our utilization. So from 25%, we've gone up to 35%. I think there's a substantial scope of improving the utilization here. And we have a decent order book in place today that we have worked upon over the last 6 months. And I do feel that these capacity utilization should touch about 60%, 65% maybe by next quarter.

Just a general observation. So while the capacity utilization has improved on a Q-on-Q basis, it doesn't reflect in the top line.

So on the top line, if you see, I think what might change is on the capacity utilization front, in our results, I think that there is a purchase of stock and trade. So last quarter, there is a trading income of about close to INR 70 crores, and there's a difference of INR 50 crores there on the trading income in the current quarter. So that does not reflect on the capacity utilization in the previous quarter. That's why we see the capacity utilization getting better, but does not reflect on the overall revenue.

So the like-to-like comparison is probably at INR 720-odd crores in Q1 [indiscernible] anticipates.

Yes. That is correct. Right.

One question is also, can you explain a bit about the difference in margin profile of these 4 divisions and also the asset turn and working capital cycle in all these 4 businesses? Just want to understand how can that change over the next few years with higher utilization.

Right. See, I think as far as the margin is concerned, the overall company margin is about 9.5%, 10% for the quarter, so close to 10%. The range between the different businesses would be anywhere between 8% to 12% so on the EBITDA margins. As far as the working capital question is concerned, on the yarn side, the working capital involvement is lower. As you move up the chain, both on the inventory side and the receivable side, the working capital requirement gets more than the raw material side. So I would say that I think about 30 to 45 days of additional working capital is required for the fabric division compared to the yarn division.

And so the assumption is you are talking about 12% margin, which is primarily in the garment division because the rest of them are like a feedstock to it.