Sportking India Limited (SPORTKING.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Sportking India Limited Q2 and H1 FY '26 Earnings Conference Call hosted by MUFG Intime [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Darshi Jain. Thank you, and over to you, ma'am.

Thank you. Good afternoon, everyone. Welcome to the Sportking India Limited Q2 and H1 FY '26 Earnings Conference Call. Today on the call, we have Mr. Munish Avasthi, Chairman and Managing Director; Mr. Sandeep Sachdeva, Chief Financial Officer; and Mr. Lovlesh Verma, the Company Secretary. A short disclaimer before we start this call. This call will contain some forward-looking statements, which may be based upon our belief, opinion and expectations of the company as of today. These statements are not a guarantee of future performance and will involve unforeseen risks and uncertainties. With that, I would now like to hand over the conference call to Mr. Sandeep Sachdeva, the Chief Financial Officer, for his opening remarks. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone. To begin, I will walk you through the company's financial performance for the quarter and half year ended 30 September '25. For Q2 FY '26, Sportking India achieved revenue from operation of INR 627.4 crores and gross profit stood at INR 151.3 crores, an increase of 4.8% on Y-o-Y basis. Gross profit margin stood at 24.1%, expanded by 197 basis points over year-to-year. For the first half of FY '26, gross profit stood at INR 307.4 crores in H1 FY '26 from INR 295.9 crores in H1 FY '25, an increase of 3.9% Y-o-Y. Gross profit margins increased by 233 basis points to 25.3%. The gross profit margin expansion was mainly due to the stable raw material prices Y-o-Y, enabling optimization of inventory stocking and better purchase management. Operational EBITDA for the Q2 FY '26 stood at INR 65.4 crores as against INR 62.6 crores in Q2 FY '25, a 4.5% Y-o-Y basis. EBITDA margin was at 10.4%, expanded by 80 basis points on year-to-year. EBITDA for H1 FY '26 was INR 134.9 crores with an EBITDA margin of 11.1%, an increase of 70 basis points Y-o-Y. As of Q2 FY '26, we stand at capacity utilization at 96% among the highest in the industry. PAT for the Q2 FY '26 was INR 28.3 crores. Profit after tax for H1 FY '26 stood at INR 62.4 crores, increase of 5.1% Y-o-Y. Profit after tax margin was also 5.1%, experiencing a margin expansion of 53 basis points on a yearly basis. Coming to our export contribution for this quarter. Shares of export in the revenue is approximately INR 334.2 crores, delivering a growth of 11% in export front for the quarter with the share of export sales rising to 53% in Q2 FY '26 from 46% in Q2 FY '25. The export contribution increased from [ INR 589.5 crores ] in H1 FY '25 to INR 675 crores in H1 FY '26, an increase of 15% Y-o-Y. Both cotton production and cotton yarn sales remain marginally higher in quarter 2 FY '26 coming in 21,294 metric tonne and 20,949 metric tonne, respectively. Company continues to work on reducing the interest outlay going forward as short-term borrowing reduced by approximately INR 50 crores as on date as compared to March '25. The gross debt to equity now stands at 0.48 as opposed to 0.58 as of March. Thank you all. Now I will hand over the call to Mr. Munish Avasthi, CMD of the company for his remarks on the results and the outlook.

Thank you, Sandeepji, and good afternoon, ladies and gentlemen. I hope you have an opportunity to go through our press release and investor deck. It's been a tough quarter for textile industry. Domestic demand was muted because of higher U.S. tariffs and uncertainty about the global macro situation. Export demand held up in the last quarter, but at the cost of lower margins. But still, we maintained our trajectory of margin growth at the gross profit and EBITDA level. On the business front, exports remained buoyant as we experienced relative normalcy returning around the world. There was a welcome step by the government to remove the import duty on cotton, which has been a big relief. As a result of this, Indian prices have also come down and the disparity between international and Indian prices have significantly lowered. Another positive step by the government was lowering of GST on garments. We are expecting this to give a boost to the demand for garments in the coming future. We can already see the retail sales slightly up vis-a-vis last year at the counter. We see a lot of consolidation happening in the industry as we speak as many old spinning mills are shutting down and creating a space for recovery of... [Technical Difficulty]

Management, we can't hear you. Ladies and gentlemen, please hold on a second while we reconnect the management. Ladies and gentlemen, the line for management has been reconnected.

So another positive step by the government was the lowering of GST on garments. We are expecting this to give a big boost to the demand for garments in the domestic industry. We see a lot of consolidation happening in industry as we speak as many old sitting manufacturers are shutting down around the world and the stage is being set for recovery of margins for the competitive mills once the macro factors get resolved. The cotton situation in India, this year, we are starting with a pretty sizeable opening stock, which is putting pressure on cotton prices, which is a big relief for spinning mills. The crop, though there was a lot of rains around, but still I -- by our estimate will be -- crop will be lower by 2% to 3% vis-a-vis last year. We see the consumption overall in the country going down by 3%, 4% and imports being higher by at least 30% vis-a-vis last year. And we are expecting a good closing stock of about 80 lakh to 85 lakh days, which will be a historic high barring the COVID year. So grounded in strong fundamentals, a resilient export base and a commitment to innovation, we are well positioned to capitalize on emerging trends and deliver sustained value to all stakeholders. Now talking about our CapEx, we announced CapEx in Odisha in the last call, and it is going as per schedule. We have got the possession of land, and we have applied for all the requisite permissions and we expect to break ground in the next 30 to 40 days. Our solar CapEx is also going as per schedule, and we expect to start getting 40-megawatt power from 1st March onwards. With that, I now hand over the call to the moderator to open the floor for the question-and-answer session.

[Operator Instructions] The first question comes from Madhur Rathi from Counter Cyclical Invest.

Sir, I wanted to understand, sir, what was the realization decline? Sir, it seems that there has been a realization decline during the quarter because our volumes have gone up, our exports have gone up, but our revenues have declined. So can you just comment on that? And where do we see our realization for the next half of the year?

Under pressure like in last quarter, there was a slight decline of -- in the realized value, the cotton yarn spreads were down by about 1%, INR 2 to INR 3. And that's why the margins came down, and we had to compromise a little because of the uncertainty regarding the U.S. tariffs and the panel which was set in once they were there. And so we had to generate sales from somewhere from exports. So we -- but now we see the things have settled down. And with the import duty also going down and the raw material prices also coming down and now yarn prices are not going down, rather they have gone up by INR 1 or INR 2 in the last 15 days. So we expect the margins to be slightly better in this quarter.

Sir, for the whole year, what kind of revenue and margins can we expect considering the improvement we see on the spreads?

So we expect to -- the revenue we expect to be the same as it was in this half -- in first half. We don't see any incremental revenue coming in because most of our -- we are working at full capacity and most of the debottlenecking exercise, which we undertook has already taken place. And about the margins, we expect similar or slightly better margins in the next 6 months.

Got it. Sir, you mentioned that there are a lot of old spinning mills are shutting down in India and globally. So on an average, sir, what is the life of a spindle before it becomes obsolete or the cost of production on that spindle becomes very high. And so if you could just help us understand on that? And maybe over the next 1 or 2 years, how much additional spindles we expect to go out of capacity either in India or globally?

So these are all unofficial numbers. So this is what we have -- we hear from the market, from the machine manufacturers and from people who work through our agents and all that. In India in last 2, 2.5 years, about 10 million spindles have shut down. And -- so any spindle which is not maintained properly, the maintenance schedule is not being kept. I think the life is around 20 years. And if you do a proper maintenance and if you keep proper schedules, I think the life of the machine will be 25 years. So anyone who's not maintained well and who have not been taking care of the machines, I think those units, small units, they are getting shut. And the average size, what we see is around 10,000 to 15,000 spindle mills are getting shut. So this is happening around the world. I think because of the tough environment for last 2.5 years, the margins have been pretty less. So it has been difficult for those mills to survive. So I think this has put pressure, and we see most of those mills not coming back even when the margins improve, maybe 20%, 30% will come back. But we expect this -- and we expect anybody who is more than 25 years old shutting down eventually in the next couple of years.

Got it. And sir, this -- sir, what would be the capacity for -- on an India level, how much will be this 10 million contribute on a market share basis?

Percentage-wise, I think it will be almost 15%.

Got it. Sir, I wanted to understand in H2, we have a similar guidance as H1. So with better crop coming in as well as the import duty gone, don't we think that we could do a better margin than what we did like 9%, 10% that we did in H1?

See we think the biggest damper right now is the tariff from India, which are at 50%. So we are giving this guidance based on that it remains like that. But if the tariffs go, then things will definitely improve.

Got it. Sir, just a final question from my end. Sir, on the Odisha CapEx, sir, you mentioned last time that Odisha is a cotton surplus state. And sir, so what kind of gross margin improvement can we expect with the additional 40% incremental spindle capacity that we are adding?

So we expect that Odisha to be more competitive by 4% to 5% at the EBITDA level.

Got it. And sir, on the fabric scale up, sir, where are we on that front? And sir, our competitor, Nitin Spinners, sir, they mentioned that for them, the fabric is the 8% to 10% higher margin business. So can we expect that to be for Sportking as well?

Sorry, I didn't get you. We don't make fabrics.

But sir, we are moving the fabric and garmenting, right?

Yes, yes. But that is not a very significant part of our business. But definitely, margins there are definitely better. But that is at a very small scale right now. It would be like 6%, 7% of our top line once -- by the end of the year, I think when we own those companies.

The next question comes from the line of Viraj Shah from [ RJ Investments ].

So I have a couple of questions. So firstly, what is the update in terms of time line of integration for Marvel Dyers and Sobhagia sales? Could you throw some light on that?

That will be formalized by -- before the end of the year -- this financial year.

Financial year. Okay. All right. And secondly, sir, how do you see your margin trajectory over the next 12 months given the scale of CapEx that you're undertaking and perhaps the higher depreciation and interest cost will continue to weigh down the bottom line. So in your existing capacities and setup, is there any lever for improving the top line and margin as well? Or do you see that?

So top line, we don't see any much improvement other than maybe if the prices go up. So we see a flattish top line for next 12 months other than any bump up in the price. So -- and about margins, yes, we definitely -- we are very hopeful that once these macro factors play out, like the tariffs and on India, the higher tariffs on India from U.S. and the FDAs EU FDA, which is also the deadline is December end. So if all these factors play out favorably, we definitely expect them to help increasing our margins.

Understood, sir. Understood. And also given quarter 3 is already halfway completed, so what is your read on domestic and export demand up until now? And have you seen any higher festive spending in this domestic market? If you could throw some light on that?

So yes, so demand has been pretty flat, I would say, like we generally see a lot of bump up in demand in these times, but the demand has been pretty flat. We see a small bump up in domestic demand in last 15, 20 days, which generally happens after Diwali. And we are seeing that play out. But export demand is slightly sluggish than what it was a month back. So I would say on average, the demand is pretty similar to what it was in the last quarter.

Understood, sir. Understood. And finally, how do you see the impact of these tariffs that are imposed on India in terms of demand and competitiveness compared to other Asian peers? If you could throw some light on that? Additionally, how have your discussions with customers evolved over the quarter? If you could help us with that?

So yes, definitely, the U.S. tariffs has been a big dampener. So most of our big customers in India, they are still maintaining their order books and by giving discounts to the customers. But the smaller players are definitely struggling to do that. And we see more than demand, it is the sentiment which has been hurt very badly. So yes, so we expect everybody -- everybody is keeping their fingers crossed that these tariffs will go in very near future. And till then, I think the sentiments are going to be like they are.

[Operator Instructions] The next question comes from the line of Chirag from [ 350 ] Investments.

Am I audible?

Yes. Yes, please.

So sir, yarn sales volume, they increased by 12% year-on-year and revenue from operations declined by 4%. So can you share some color on the realization trend during the quarter in terms of both yarn pricing and cotton yarn spreads?

So cotton yarn spread year-on-year, I think it has gone down by almost INR 7 a kg, the spread. And the overall spread -- cotton yarn spread has gone down by about INR 7 and overall spread has gone down by about INR 4. So there will be some changes in the product mix and all that. So I think all put together, difference is because of that.

Okay. Okay. So sir, sequentially, revenue from operations increased by 7%, right? So however, the gross profit margins declined. So like did we see cost pressures despite better realization? How is the dynamics of raw material cost and spreads played out?

So actually, there were a few notable entries, which -- because of which the profit has come down. One of them was like we had to take a provision for some old insurance loss, which we did in this quarter. So profits were down because of -- by INR 5 crores because of that. And then there was some cotton which was sold in the market. So that increased the revenue, but it affected the EBITDA on the operations. So overall, our margins was pretty similar to what it was in the last quarter, if you take these 2 anomalies out.

Okay. Okay. So sir, our interest cost has increased despite fall in the short-term borrowings. So can you explain on the same also this is a steady state basis we can expect to continue for the year?

So yes, you're right, but that was mainly because of the ForEx fluctuation. So our actual outflow was less than last quarter. It was about INR 9 crores, but INR 3 crores was the ForEx fluctuation, which was put into this account because of the Ind AS entry. If the ForEx is stabilized and it will be -- the entry will be reversed in the next quarter.

The next question comes from the line of [ Viral Jain from SMG Finance ]. [Operator Instructions]

So a few questions from my side. The first one was regarding the power side. So can you give us more clear picture on the rise of the power cost, both year-on-year and sequentially?

Yes. The power cost, see, in Punjab, we have 2 benefits. Our power cost is different in -- from October to May, and the prices are different from June to September. So those we pay about I think INR 0.50 -- the overall impact is about -- about 10% for these 2 quarters. So main reason for higher power bill, I think, is because of that. The night tariff, which is withdrawn during these times and peak hour is more because of that, power is slightly higher by 7%, 8% in this quarter. I think we will come back to the normal level in this quarter.

Okay. That's great news. And what is the benefit that we are getting in terms of cross-selling from both rooftop solar and from SPV?

So SPV has not started yet. The SPV will start -- that power we will start getting from 1st March, as I stated in my opening comments. And the saving from the rooftop, which we already have is around about 1% of the revenue.

Okay. Got it. My next question was can you share your realization amount and the yarn spread for Q2 FY '26 and for the half year?

So yarn spread -- the cotton yarn spread for this quarter was about INR 120 vis-a-vis INR 125 in the last quarter.

Okay, sir. And about the realization amount?