Sportking India Limited (SPORTKING) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Sportking India Limited Q1 FY '25 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Devansh Dedhia from the Orient Capital. Thank you, and over to you, sir.

Thank you. On behalf of Sportking India Limited, I extend a very warm welcome to all participants on the Q1 FY '25 Financial Results Discussion Call. Today on the call, we have Mr. Munish Avasthi, Chairman and Managing Director; Mr. Sandeep Sachdeva, Chief Financial Officer; and Mr. Lovlesh Verma, who is the Company Secretary. With this, I will now hand over the call to Mr. Sandeep Sachdeva for his opening remarks. Over to you, sir.

Good afternoon, everyone. First of all, taking the financial performance of the company for the quarter ended for 30 June 2024. For quarter 1 FY '25, Sportking India Limited achieved revenue from operations of INR 634 crores, up 17.7% year-over-year and 3.7% quarter-to-quarter basis. Shared export of revenue was 47% as compared to 41% in the previous quarter. Exports have grown by 16% Y-o-Y from INR 250 crores to INR 290 crores. The gross profit stood at INR 150 crores with an increase of 30.1% on y-o-y basis and 5.1% on quarterly basis. Gross profit margin expanded by 232 basis Y-o-Y and 31 bps Q-to-Q. The company benefited from the lower input cost as well as power cost being relatively unchanged even as production has increased. EBITDA for the quarter was INR 73.8 crores, with an EBITDA margin of 11.6%. EBITDA increased by 48.15% Y-o-Y and 10% Q-o-Q. EBITDA margin improved by about 240 bps Y-o-Y and 66 bps Q-to-Q due to higher gross profit being further aided by moderate increase in employee cost and controlled rise in other expenses. Profit after tax was INR 31.8 crores, listing an increase of 75.1% and 39.2% Q-to-Q. PAT margins were thus 5%, experiencing a margin expansion of 165 bps on a yearly basis and 128 bps sequentially. We are working on reducing the interest outlay going forward as compared short-term borrowing reduced by approximately INR 300 crore as of date as compared to last quarter. The Board has also considered and approved a subdivision split of 1 equity share having face value of INR 10 each into 10 equity shares having face value INR 1 each by alteration of capital clause in the Memorandum of Association of the company, subject to approval of the members of the company in the ensuing General Meeting. Thank you all. Now we'll hand over the call to Mr. Munish Avasthi, CMD of the company who will take you through the operational performance as well as outlook.

Thank you, Sandeep Ji. Good afternoon, ladies and gentlemen. As you can see, I hope you have all had an opportunity to go through the investor deck and the press release that we have uploaded on the exchanges. There is a marked improvement in the results vis-a-vis last quarter and last year. We had a pretty stable environment of cotton prices in the last 3 months and slight improvement in the yarn demand, both in exports and domestic market, which led to some improvement in the margins as we could increase price slightly. As all of our expanded capacities have been integrated, so there was some improvement in the operational efficiencies, leading to the improvement in margins. Going ahead, there are uncertainties and opportunities, which are presenting us going forward. Let me take care of the uncertainties first. The biggest uncertainty right now is the increased MSP, which is a big challenge going forward as world prices being lower can make Indian cotton less competitive. Another big uncertainty right now is which actually hurt us in this last quarter also was volatile freights, which has been a cause of concern. So there -- so looking at these uncertainties, but I think the opportunities are more than uncertainties. The tailwinds we are anticipating is first, the import is less positive, with RoDTEP been extended to advanced authorization. So now we can plan our raw material and inventory management can be much better. We see a sustained demand recovery going forward as sales to inventory with index rate of most of the western countries is at a 3-year low. So we expect the orders to sustain and the upcoming festive season and then orders to get more traction. Exports are doing well, and we expect one of the key markets to do even better with incentives to use local yarn in Bangladesh coming down sharply. We see a lot of consolidation happening across -- in the spinning sector across the world with inefficient capacity getting permanent shut. The unofficial number itself is close to 4 million to 5 million spindles in last 2 years, which will benefit the strong players once the demand comes at full throttle. Another macro thing is that easing of interest rates in the Western country is also anticipated to happen, and it has already started happening in Europe, which can lead to a better demand going forward. Outlook on the spinning sector remains cautiously optimistic with buyers rewarding the suppliers who ensure consistent and quality suppliers. So now I request the moderator to open the floor for question-and-answer session.

[Operator Instructions] The first question is from the line of Gunit Singh from Counter Cyclical PMS.

So can you please give me the trend of raw cotton prices in the last quarter and currently and as compared to last year?

Last quarter, the prices in India started at around, I think, INR 65,000 last year around September, October. And slowly and steadily they came down, and bottomed out in January -- January to March quarter at around INR 55,000. So in last quarter, the prices were rate bound. They were between I think, INR 55,000 to INR 58,000 only. And right now, they are at the same price. So we have seen them highly stabilized in last 8 to 9 months. There was a brief uptick in March -- February, March. But other than that, they have been in a price range of INR 55,000 to INR 60,000. And right now, they are -- the cotton prices are around INR 57,000. And going ahead, we think these prices will come down as the international prices just started coming down. And in the last 10, 15 days, they've come down very sharply. So we expect the Indian prices to also correct once the new crop starts coming in, and we see a good crop. So yes, the outlook is for stable to lower prices.

Alright, sir. Can you also share a similar trend for our average realizations for a yarn?

The realization for the yarn -- for the spread. Let me talk about the spread. The spread of the -- for all, the total basket has increased. The last year in this quarter, it was around INR 98. And last quarter was around INR 105 and this quarter, it has gone up to INR 110. This is a consistent uptick in the spreads in the last 4 quarters.

Alright, sir. So, will we be able to maintain these prices, considering that international cotton prices are going down?

So international prices are going down, definitely, which is actually a good thing because lower prices are always good and Indian prices, I think, will also follow suit, but the international prices, which have gone down for the quarter, which can be consumed only after December, November because we're getting shipments for only October shipments or November shipments. So for the next 4 to 5 months, we don't expect Indian prices to -- and even the prices, the cotton with our competitors across the world to be much lesser than what it is right now.

Alright, so sir, will we be able to maintain the spreads? Or do you think that with lower prices of cotton will we be able to improve the spreads going forward?

So we expect the demand -- the spreads right now, what they are, we expect them to be stabilized right there or to be around here for the quarter we are in. But we expect definitely, if the demand improves, which we really expect it to improve, then margins, the spreads to improve further from next second half. It all depends on the demand.

The next question is from the line of Jatin Damania from Svan Investments.

Just wanted to understand the revenue growth that was reported, how much it is attributed to the volume growth?

So almost nothing -- so the volume growth was from year to year, it is -- yes, I think we have stated it's about 20% -- so it's about -- the sale volume has gone up by almost 15%. 15% is attributed to the volume growth.

15% year-on-year, right?

Yes, yes.

Sir, I mean, continuing with the previous participant's question regarding the decline in the international cotton prices...

You are not fully audible. I can't hear. It's very blurred.

I just wanted to continue on the previous participant's question. Now with the international prices are almost 10% discount to the domestic prices, do we think that the spread going ahead will come under pressure?

Yes, see, right now, we have an option to import as well. So -- when it comes to India, we are pretty much -- the competition from other countries almost minimal when it comes to exports. So -- and domestic market anyway is dependent on local players. So we feel that as the prices go lower and now import not as big a deterrent as it used to be -- and so I personally believe that spread can be maintained or even improved with the demand as we expect it to get better from the second half, then there is a possibility they can even get better because these are the prices, which are -- these are 4-, 5-year low prices. And there's a lot of demand, which is waiting on the sidelines, which is low because if you look at -- it's mainly the function of demand. The spreads will be maintained or improved or deteriorated only because of the demand. I think cotton prices will play a very small part of that.

So sir, if the spreads improve from current level in the second half -- and in the opening remarks, you indicated that there were about 400 or 5,000 spindles are almost shut in the industry. So is it temporary out of system or with the improvement in the stretch we can see that capacity coming back into the industry?

So yes. So there are some which can, of course, come back. But we see this time around, there are many spindles which are being shut permanently. So this is a phenomenon which is new, and there are many spindles, which -- which will not come back.

Can you approximately name -- I mean, quantify in terms of the numbers of spindles or in terms of the tonnage, how many spindles has gone out of the system for good?

These are all unofficial numbers, the news we get from our machinery manufactures and all. So it cannot be authenticated. So I wouldn't like to elaborate on that.

[Operator Instructions] The next question is from the line of Sahil Vohra from M&S Associates.

Sir, as you mentioned in the previous call, finance cost was higher and is expected to come down as and when you reduce the short-term rate. So in the quarter, the finance cost has reduced to INR 15 crores from INR 17 crores, correct? So how is the amount of debt company has paid off in the current quarter? And what are the expected repayment scheduled in the financial year. Also, if you can tell us the cost of debt for both short term and long term, that would be great.

Okay. So the debt -- the short-term debt has come down from a level of almost INR 400 crores -- INR 450 crores as on 31st March 2024, to around INR 100 crores as of today. So we have repaid almost INR 350 crores of short-term debt and the long-term debt, we have paid around INR 40 crores -- INR 20 crores during the quarter. And we have a quarterly rescheduled -- quarterly schedule payment of around INR 17 crores -- INR 15 crores to INR 16 crores, which we are paying. So that's the outlook for our debt. What was your second question?

Yes. Yes, the cost of debt?

Yes, the cost of debt, our long-term debt are around 8%. And the short-term debt is around about 6.5%.

Next question was regarding the power cost. It has paid the same even when our production has increased. So what were the reasons for the same? And lastly, are there any changes in the Punjab Government policy regarding electricity assets?

Electricity cost year-on-year has come down because we have implemented a new solar plant, a rooftop solar plant. So we are generating almost 15% of our power in-house. So that has basically helped us in not -- in maintaining the power cost. About Punjab, Punjab has increased the prices by around -- very marginally by 1% -- 2% in this year.

The next question is from the line of with Hitanshi Agarwal, an Individual Investor.

So my question is, what is the current cotton inventory the company holding? And what is the average price of the cotton inventory that we are holding like? Is it lower than the market price or higher. And what quality do we adapt for resizing the inventory level?

Ma'am, right now, so I cannot tell you the exact quantity we are holding, but whatever quantity we are holding is below the market price as of today. And about the holding period, it all depends on years, every year, how the crop is, what the outlook is. And it is based on quality and economic -- quality and economically, how prudent it is. So it keeps on changing. So we don't have a policy -- fixed policy. But in general, in normal years, our policy is to stock for the season in March and then start buying as the new harvest comes.

Okay. Okay. Sir, I have a second question that is, can you just give a mix between cotton yarn and blended yarn in our total revenue?

Yes. So in volume-wise, it's almost 65% is cotton yarn, and about 30%, 32% is polyester cotton yarn and rest is synthetic yarn, 2%-3%. Other than the waste, which are not included in this.

Just a follow-up. How do you see the market to value added yarns, especially acrylic yarn?

Acrylic yarn -- see all synthetic yarns are suffering right now because of a huge dumping by China in last 6 to 8 quarters. So the synthetic yarns, our own portfolio of synthetic yarn has been under pressure for the last 6 to 8 quarters. So I don't see a very rosy future right now for next 2, 3 quarters, still the China total demand gets better.

[Operator Instructions] The next question is from the line of Rahul from Aksa Capital.

Our channel checks suggest that we've been -- the industry has been going through extremely tough times. You alluded in your call -- earlier in your call, suggesting that there has been some form of stress on the several spindles across the industry that is lying idle. Now -- and however, at the same point in time, you are suggesting that there is demand that is coming back. In your assessment, given the kind of utilization, which is at -- would have been at all-time low, how would you suggest when the demand comes back, will there not be a scramble for the demand given that people will like to take it at any price given that they are going through a very tough time. We have been through some of these industries in the South, which suggest that work is only happening at about 10 days in a month and the rest of the time they are lying idle. So it seems like whenever the demand comes back, taking the pricing back will be an extremely tough task. What is your thought on this?

I think that's what I said that there is -- we see consolidation happening across the sector. And if you see our margins have expanded to 12%. And in peak, other than 2020 to 15% to 17% is supposed to be a good margin for our industry. What we are seeing is the inefficiency is playing out. There are players who are old. The power cost is high and demand -- see we expanded by 40% in last 1 year. And we have been able to absorb it and sell it. So it's -- I think it's -- that's what consolidation is. I think the people who are efficient and who are keeping their costs lower, the operational efficiencies are better. So if they have an extra margin of 5%, 6%, 7%, and that is making those units which are not efficient close down. So this is a natural process, I think in any industry, which is playing out in our industry right now because of a very bad 6 to 8 quarters. And maybe if the margins expand very -- the demand comes and the margin expand to maybe 20-plus percent, maybe they come back. But you see a majority of them not coming back.

So sir, in light of that, what is the kind of sales growth that you were anticipating for FY '25 and FY '26?

We don't anticipate any same growth this year because yes, a little bit like we are doing some debottlenecking and volume from next quarter will increase by this quarter by 4% to 5% to 6%. But other than that, because we are already running at 95%, which is 95% to 97% is the highest you can run at, and so that's the only thing we are looking at from the volume point of view. Yes, if the prices go up, then of course, the turnover can go up. But otherwise, for next 6 to 8 months, we don't see anything major spurting our volumes because it can only come if we undertake new expansion and new projects.

The next question is from the line of Bhuvan from Tiger Assets.

My first question is, in 2021, '22, we were making an EBITDA of 25% on an average and it has reduced drastically because of rise in 40%, 50% of the material costs. So is the company not able to pass on the cost to your clients?