Sportking India Limited (SPORTKING) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Sportking India Limited Q3 and 9 Months FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Devansh Dedhia. Thank you, and over to you, Mr. Dedhia.

Thank you, Yousef. Good evening, everyone. On behalf of Sportking India Limited, I extend a very warm welcome to all participants on the Q3 and 9 months FY '24 financial results discussion call. Today on the call, we have Mr. Munish Avasthi, Chairman and Managing Director; and Mr. Sandeep Sachdeva, Chief Financial Officer. Short disclaimer before we start this call. This call will contain some of the forward-looking statements, which are completely based upon our belief, opinion and expectation as of today. These statements are not a guarantee of future performance and will involve unforeseen risks and uncertainties. With this, I would hand over to Mr. Munish Avasthi, sir, for his opening remarks. Over to you, sir.

Thank you, Devansh. First of all, good afternoon and Happy New Year to all the participants. Welcome all of you for this earnings call. I hope everyone had an opportunity to go through the investor deck and the press release that we have uploaded on exchange. The last quarter was a quarter of 2 halves. The first 45 days, we saw a very good export demand from our key market, Bangladesh and the other market, China was a little subdued, and domestic demand was in total doldrums. But in the last 45 days of the quarter, the domestic market picked up post-Diwali and demand has been robust. While Bangladesh market became a little subdued because of the impending elections there, and China continued to be subdued. Locally, we saw the segment-wise weaving did pretty well. And denim, after a long time, we saw the demand picking up a little. And knitting continued to be subdued throughout the last quarter. Looking ahead, we have seen -- in the last 15-20 days, we have seen some uptick in demand in key markets of Bangladesh and China as well. Domestic market continues to do well. We have seen some uptick in the demand for knitting yarns also after a long time. The cotton prices are at the lowest level relative to international prices for almost 3-4 years, which is a good development. The outlook, according to us, is much better than it has been for the last 6-7 quarters. The western markets are our key consumers, seem to have -- seem to be done with their stock rationalization. There is double -- because of the Red Sea issue, we have seen some positive effect on some preponement by some buyers because of the amount of time being taken because of the alternate route. Though it has affected us, our freight costs have gone up in some markets, which is a very small portion, that is about 5% in some markets because of this Red Sea issue. So in totality, we see that the last quarter was something -- we could see some progress in long, subdued conditions we have seen, especially in the domestic market. Domestic market -- local market has been down for almost 6, 7 months, and we saw a sharp uptick in post-Diwali, which has been -- which has continued for the last 2 months now. And we saw -- the margins couldn't improve that much because there was a lot of capacity idle going on across the spinning sector in India, which has now started to fill up more than before. So we expect -- the volumes have increased, we expect the margins to start expanding slowly and steadily over the next 2-3 quarters. Another development was that the remaining capacity for our rooftop solar project has been totally operationalized as of now. The company has full 25 megawatts of power available for captive consumption. This has been a very important step to keep power costs in check. Now the company operates at a larger scale than before, and it's also a small step towards sustainability. I will now hand over the call to Mr. Sandeep Sachdeva, who will take you through the financial performances of the company.

Thank you Mr. Avasthi. Good afternoon everyone. For Q3 FY '24, Sportking India Limited achieved revenues from operations of INR 598.7 crores, up 16.7% year-on-year and a minus 4.7% quarter-to-quarter basis. Shares of export to revenue was 48% as compared to 42% in the previous quarter. Exports have grown 46% Y2Y from INR 196 crores to INR 287 crores. The gross profit stood at INR 134.4 crores, up 26.4% on Y2Y basis and 14% on a quarterly basis. EBITDA for the quarter was INR 48.7 crores, with EBITDA margin of 8.1%. The EBITDA margin improved about 32 bps Y2Y and about 183 bps on quarter-to-quarter due to higher gross profits as company benefited from lower input costs as well as controlled rise in employee costs. Profit after tax was INR 13.8 crores, with a margin of 2.3%. PAT declined 11% on quarterly basis on account of higher other income in quarter 2 FY '24 and 23.5% on yearly basis due to rise in depreciation and interest costs. For 9 months FY '24, revenues from operations was INR 1,766 crores. Gross profit was INR 370.6 crores, with a margin of 21%. EBITDA for 9 months was INR 138 crores. Thus EBITDA margin was 7.8%. Profit after taxes was INR 447.5 crores with a PAT margin of 2.7%. I would like to reiterate that even depreciation has jumped up for the current financial year, and it is because of CapEx for increasing spindles as well as addition of rooftop solar was put to use during the start of the current year. Thank you. I request now moderator to open the floor for question-and-answer session.

[Operator Instructions] First question is from the line of Aniket Kulkarni from BMSPL Capital.

So I have a couple of questions. So is there a slowdown in the China economy affecting the company's operations in any way? Either a direct effect or spill-down effect, if you can explain?

Thank you for the question. Yes, definitely. The Chinese moderate as one of the key markets for our exports historically. Not specifically for our company, but for our country it has been the key market, and the slowdown has affected. But lately we have seen in last 2, 3 months -- last 1 month, we have seen some uptake in demand from China as well. I think the biggest impact has -- from China has been in the synthetic market -- synthetic yarn market than cotton yarn market. So there is some down effect, but it is more pronounced in synthetic yarn than in cotton and cotton blended yarns.

Okay. Okay. And -- so I have a couple of other macro-related questions also. So does the company benefit in any way, if textile capacities are shut down in Bangladesh due to the recent labor unrest, which was going on? So does this [ benefit ] the company or it harms us?

So I think the recent reports of the slowdown or shutdown in Bangladesh was misreported because, for us, Bangladesh is a very key market. Almost 60% of our export is to Bangladesh, and it definitely hurts us more than it benefits, if there is some disruption in Bangladesh. But we have not seen anything of that sort. Of course, there was a slowdown in purchases from Bangladesh vendors because of the impending election and because of the fear of some sanctions. There was a rumor of sanctions being imposed by U.S. and EU, which has since not happened, and the business is back to normal since then. So there were elections on 7 January, and from 15 January, they're back and they were not buying for a month, not that aggressively, but I think they're on the back of the table now. Things are back to normal.

Okay. Okay. And do we stand to benefit from the U.K. free trade agreement, if it materializes, because the textile duties are expected to come down?

Most definitely. See U.K. doesn't import any yarns, but of course the Indian garment sector will benefit hugely. And in turn, we will be supplier to those vendors. Definitely, it will be a big boost in the longer term. In short term, it will be good for confidence. But in longer term, U.K. can be a big market for garment exporters from India. So definitely, it will be a huge benefit for us in the long term.

All right. And one just last question on capacity. So if you operate a full capacity, including the new ones, which have come, so what kind of revenues can you achieve?

So we are fully -- right now, I think this is the top -- so we are looking at revenue of anything between INR 2,400 crores to INR 2,500 crores for the full year at this capacity. So we are working at almost full capacity. This is going to be [indiscernible] prices of yarn. This is going to be our run rate for the time being, about INR 600 crores plus-minus, 5% every quarter.

Next question is from the line of Varun Gajaria from Omkara Capital.

Happy New Year. So what's your sense to cotton prices? It seems like the cotton prices have pretty much cooled down to around INR 55,000 piece per candy. What's your take on it? And what is the valuation of inventory that you have of cotton that you have at your end?

I didn't get your question. Like the second, of course -- I didn't get your question. What are you wanting to know?

Okay. So it seems like cotton prices have cooled down to around INR 55,000 per candy. So how is it going at cotton? How is it going there? And what valuation is the inventory holding of the cotton?

Okay. So the cotton prices are right now oscillating between INR 54,000 and INR 55,000. They have been here for almost a month now. And as I said in my opening remark, these are the lowest prices in relation to International prices for long, maybe 3, 4 year. So we definitely feel there is a lot of value in cotton right now, and this is generally the harvest period, so the arrivals are at peak. So this is generally the time, where most of the mills they stock up. So we are also doing that. About the exact amount of cotton stocked. We don't share that number. So right now I can just tell you that the arrivals are at the peak. And so we are -- this is the time, we generally stock up, and we feel this is right. And relative to -- in relation to international prices, prices are at the lower end.

Okay. So it shouldn't fall from your end for the [indiscernible]?

I don't have a crystal ball. But yes, we feel it's pretty much at the [indiscernible].

Right. So what is the cotton yarn spread this quarter?

So cotton yarn spread [indiscernible] around about INR 121.

Okay. INR 121. Okay. And it seems like on quarter-on-quarter basis, margins -- your EBITDA margins are lower. Is there any particular reason there?

EBITDA margins were a little higher actually, Quarter-to-quarter by 2%, I think. [indiscernible] If you exclude the other income, they were slightly higher, by 2%.

Next question is from the line of Darshit from Robocapital.

So my first question is, why have the margins dipped so significantly, like going from 13%, to say, 8%, if I'm saying correctly? What would be the reason for that? And if in case like if you're saying that the prices have hit rock bottom, and if I suppose the margins improve from here, by what, like, within what time line would we go back to the long term 11%, 12% EBITDA margins?

So margins have been pretty subdued for the last 3, 4 quarters. So it's not some phenomenon has not happened like now. So margins have been in the range of 10% to 8% from last 4 quarters now. And there are many reasons behind it. First of all, of course, the huge slump in demand across the world, the Western market, bring their stock, rationalization, many other factors. But now, getting back to the normal levels, which were 12% to 13% for us, I see some road map going towards it. I believe we should be getting into -- it's not in a very distant future. We see something, which we haven't seen for the last 4 quarters, that there is very low prices and good demand. So I believe that in 2, 3 months, we should start seeing some uptick in margins also and getting -- inching towards the normalcy.

Okay. Okay. But like any kind very ballpark timeline, say, a year or 2, as you go to these margins, 11%, 12%?

I think -- it looks like that it might happen, in 3 to 4 months.

Okay. Okay. Great. And secondly do we have any CapEx plan going forward?

Not as of now, we don't have any major CapEx plan, just normal upgradation and modernization, that's it.

Okay. And debt scenario? The debt will remain or are we planning to repay that back?

We are continuously repaying our long term debt. And the debt, which had peaked at around INR 430 crores, so it is down to INR 380 crores now. So we will be paying it as it comes due. So we are in no hurry to repay it.

Okay. Okay. Great. And finally, just last question. Any kind of, not specifically guidance, but overview over the next, say, 2 years. What do you think the revenues might go to? Margins, you have talked about it, but what do you think about the revenues?

The revenues, as I told you, for next 1 year and 18 -- for at least next 1 year, we expect revenues between INR 2,400 crores, plus-minus 5% because we are not adding any capacity in the next 1 year, and that's -- and then definitely be in that ballpark. If the prices go up, yes, they can go up by 10% -- 7%, 8% [indiscernible] how the prices move. But the quantity wise, we will be sticking to this quantity for next 12 months, at least, as we are not adding anything more.

Okay. So like we're running at peak capacities, and we won't be doing CapEx. So it will be in that range.

Yes. Exactly.

Okay. Okay. So we are relying on realization to improve and then we'll probably think on doing CapEx?

Yes. Yes.

Next question is from the line of Keshav Garg from Counter Cyclical PMS?

Sir, I'm trying to understand that on our 25-megawatt rooftop solar power plant that you have setup, sir, what was the CapEx that we have incurred, and what is the expected IRR on this? And sir, our quarterly power and fuel cost is around INR 40 crores. So by how much will it come down going forward due to this?

So our total outlay was around INR 85 crores on this 25-megawatt. And the IRR, I think, my team can get back to you separately. We don't have the numbers offhand. And we will be saving almost, you can say, around 1 lakh [indiscernible]. So our cost, which is -- see, some major portion of this was operationalized in last 6 months also. So the saving what we are from where we were, the saving is almost of [indiscernible].

Sir, also, I wanted to understand that...

About INR 4 crores a quarter, but it grows up in the summer month and it comes down in the winter months.

Great, sir. Sir, I'm trying to understand that we have capability to manufacture cotton yarn as well as blended and synthetic yarn from our facilities. Sir, so I'm trying to understand like how fungible is our capacity, that depending about the realization and spread in different segments can we -- by what extent can we basically alter our output from cotton yarn to let's say blended or synthetic yarn?

So synthetic yarn, once you have cotton yarn spindles, you can spin anything on them. No, it is very difficult to -- going from polyester to cotton. It is rather impossible. You have to incur a lot of CapEx, but from -- going from cotton yarn to synthetic yarn is not that difficult. So I think if -- we don't do it because we don't go by monthly outlooks or quarterly outlooks, we go by what -- because we don't want to disrupt our market and our market shares in the segments we are and our expertise in the segments we are. So that's why we have distributed our spindles according to our market, customers. So we don't take these decisions monthly or quarterly. So if we see a long-term requirement to get into a certain segment, only then we do that. So, and for us it's not that much difficult because most -- our biggest capacity is in cotton and from cotton to get into blended or synthetic is not a very big investment or a very big change.

Sir so basically out of the roughly INR 600 crores revenue last quarter, sir, what percentage was non-cotton yarn?

So the cotton, just 1 second, 60% was 100% cotton yarn and 36% -- 35% was polyester -- cotton blended, rest was synthetic or waste.

sir, also sir, Q-on-Q our revenues have come down marginally, so is this due to the fall in realization?