Sportking India Limited (SPORTKING) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Sportking India Limited Q2 and H1 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. Divyansh Sarda from 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 the participants on the Q2 and H1 FY '25 financial results discussion call. Today on the call, we have with us 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, I will take you through the financial performance of the company for the quarter and half year ended 30 September '24. For quarter 2 FY '25, Sportking India Limited achieved revenue from operations of INR 652 crores, up 3.7% Y-o-Y. Share of the export revenue was approximately INR 300 crores for the quarter. The gross profit stood at INR 139 crores with an increase of 18.3% on Y-o-Y basis. Gross profit margin expanded by 263 basis points Y-o-Y. Gross margin for the quarter stood at 21.4%. Profit after tax was INR 25 crores, seeing an increase of 61.4% Y-o-Y. Tax margins was 3.8%, experiencing a margin expansion of 137 bps on a yearly basis. EBITDA was boosted by lower interest cost on account of prudent debt management and marginal rise in the depreciation. For H1 FY '25, Sportking India Limited achieved revenue from operation of INR 1,286 crores, up 10.1% Y-o-Y. The gross profit stood at INR 293 crores with an increase of 24.2% on Y-o-Y basis. Gross profit margin expanded by 258 basis Y-o-Y. EBITDA for H1 FY '25 was INR 132 crores with an EBITDA margin of 10.2%. EBITDA increased by 47.2% Y-o-Y. EBITDA margin improved by about 257 basis Y-o-Y. Profit after tax was INR 57 crores, seeing an increase of 68.8% Y-o-Y. PAT margins were 4.4%, experiencing a margin expansion of 154 bps on a yearly basis. Company continues to work on reducing the interest outlay going forward as a short-term borrowing reduced by approximately INR 400 crores as of date as compared to March '24. The net debt to equity ratio now stands at 0.51 as opposed to 0.97 as of the March '24. Thank you all. Now I will hand over the call to Mr. Munish Avasthi, the CMD of the company, who will take you through the operational performance as well as outlook.

Thank you, Sandeepji. Good afternoon, ladies and gentlemen. Wishing everyone a very happy Diwali in advance. I hope you all have had an opportunity to go through the investor deck and the press release that we have uploaded on the exchanges. So the current quarter began on a very challenging front with our biggest export market, Bangladesh facing social unrest that turned to political turmoil and momentary shutdown of the garment factories and cotton mills there. We saw some panic selling in local market leading to sharp decline in prices in July due to Bangladesh turmoil as a knee-jerk action, but prices moved up swiftly as the situation in Bangladesh improved. We have not faced any significant delay in orders or any delay in payments from our customers in the last 3 months. We saw some moderation in freight late in the quarter, and we see that trend continuing. Freight, as we have discussed in last couple of con calls have been a drag for us for the last 2, 3 quarters. Domestic market is showing some positivity as the retail sales have picked up lately, and we expect a further uptake in demand in third and fourth quarter. Cotton prices in India have come down sharply as new arrivals start. We started the last quarter at around INR 57,000 per candy, which the prices have come down to around INR 55,000 as we speak. Demand and margins, both are seeing a slight uptick in current quarter, and we believe that it would be a trend going forward with the festivities kicking in. We have seen a bump up in inquiries from local garment exporters and believe some shifting of demand to India is already happening. We believe that cotton prices are going to stay at these levels or slightly lower going forward. We are here with low cotton prices, I think, for a longer period of time. Quality of early arrivals indicate that though the area this year is less by 10% approximately than last year, but we might end up with slightly higher crop aided by much improved yield. World prices continue to be subdued with a muted demand from China, the main culprit. Overall competitiveness of Indian spinning industry is definitely getting better as most of our competing countries are struggling with macro issues. Regarding our operational -- operations in the last quarter, we worked at around 94%, which was lower than our standard utilization of 97% because of extreme bad weather and some debottlenecking that we have undertaken last quarter. But most of that is over, and we expect to be fully -- we expect to be back at 97% utilization in this quarter. An important strategic update for the company is the in-principle approval for amalgamation of manufacturing facilities of the group company, Sobhagia Sales and Marvel Dyers & Processors with the company. Marvel Dyers is engaged in the business of dyeing, printing and finishing of knitted fabric and Sobhagia Sales is engaged in the business of manufacturing and selling of ready-made garments. The primary reason behind the merger is to enable forward integration to open new avenues for growth to the company and cater to customer needs across the textile value chain while leveraging our decades of experience to scale these margin-accretive segments. Rationalization of employee facilities and administrative efforts will further help to bring in operational efficiencies. More details of the merger and subsequent strategic plan going forward will be shared with the wider capital market community once the scheme of merger is approved by the Board. To ensure smooth integration and composition of value creation to the company's shareholders, we have appointed KPMG as an advisor to evaluate the proposal for the merger. We have also proposed an investment of 26% of equity share capital in Mr. M/S Evincea Renewables Private Limited. It's a special purpose vehicle for a cash consideration of INR 12 crores. The SPV plans to set up solar power plant with a capacity of 40 megawatts for the supply of power for the company's plants in Punjab for a period of 25 years. This SPV will help the company to reduce its power cost further by 10% to 12%. This capacity is in addition to the already rooftop solar capacity, which the company has put in the last 2 years of 25 megawatts. And this -- and this is a mark to our steadfast commitment towards sustainable operations. Now I request the moderator to open the floor for question and answer session.

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

Sir, how have the cotton prices been during the quarter? Have they come in line with the international cotton prices, which were alluded by you in the previous call?

So cotton -- of course, the cotton prices have moderated since last quarter as -- like they were at around INR 57,000, INR 57,500 in the 1st -- in September, beginning of September, beginning of July and the international prices were lower. So both have -- the gap has narrowed between the international and the domestic prices. And we think we are very close to being globally competitive on prices in India right now.

Sir, a follow-up would be, like you mentioned in your opening remarks regarding lower acreage of cotton. Recently in September 2024, USDA reduced India's cotton production and projection. There are also reports of excessive rainfall damaging crops in the Central and Southern states. All said and done, how do you think we should look at cotton prices for the upcoming season, given MSP has also been increasing?

Yes. So the Indian crop goes through weather vagaries till October, middle of October, and we are already in middle October. So the latest reports according to our team is that the crop looks good everywhere. The quality -- the initial quality, which is coming is much better than last year everywhere. And we see a very good quality and generally, quality and quantity goes hand in hand. So we expect a sharp increase in yields. So we don't -- we differ from what USDA estimate is. We think our crop will be not less than last year. And as per the prices, yes, of course, MSP is a big bottleneck. But this year, the seed prices have been a little higher because of the oil complex being higher, the edible oils being higher. So this has put pressure on lint. So we are seeing -- I think right now, we are at about INR 5,400, INR 54,500 per candy. And we see maybe another INR 1,000 going down at the most. And upward, we don't see it going above INR 56,000, INR 57,000.

Understood. Sir, another question that I had. As we saw in 2022, is rising cotton price scenario actually good for you in terms of margin as you may pass on since demand is also picking up, so we may not face any issues on that front, right?

So in '22, it was not because of the cotton prices that demand was up. Demand was up and that led to the cotton prices being up. So rising the cotton prices, of course, are never -- they're not good for us as such. And we believe that this year, the prices are going to be in a very narrow band because Brazil has come up to be the new global leader in cotton production and cotton exports, and -- which is a new thing which has happened in last 2, 3 years. And we believe they are going to get bigger and bigger. And we see the -- I think we are -- we don't see very big volatile movements in cotton prices in the next 3, 4 years.

Okay. My next question would be the domestic players in fashion and textile are guiding for much better Q3 on a Y-o-Y basis on the back of festive season. How is the outlook for our company based on the orders received during the month of October?

Yes. We also mentioned briefly in our -- in my opening remarks that we see a much better demand scenario right now. Bangladesh, of course, has stabilized. Other export markets are also inquiring and inquiries are up. China, of course, continues to be very, very slow. But India, of course, is picking up. And we see -- generally, third and fourth quarters are good for textiles anyways. They are bread and butter quarters. So we expect market to be better in the next couple of quarters.

Okay. And for Q2, we were majorly supported by our domestic market. Do we see the trend to move forward in the same manner where exports will be a little bit subdued and we will get growth from growing domestic market demand?

No, I don't think so. I think our quarter 2 exports were one of our highest -- all-time high exports. So we were -- we continue to have that balance between 50-50 between our exports and domestic. So -- and right now, we are seeing a little bit of traction from both the markets. Exports are also picking up and domestic market is also showing some life. So we expect both the markets to do well going forward.

Okay. Understood. And sir, lastly, when do you see the export recovery to finally kick in?

Export recovery is already there. We -- as a country, we exported about 100,000 tons in last -- in September, the latest month, which went by, and we expect this number to be there and thereabout for the next quarter average. So I think overall, things are getting better and things are picking up. So the only thing is that China is not buying. So China used to be our second biggest market, and China has not been in the market for last almost 1 year. And we don't expect it to come. So we don't see a euphoric demand, but we see a steady uptick in the demand going forward.

The next question is from the line of Saloni Shah from SK Investments.

Sir, I wanted to ask, our production and the sales volume for Q2 were lower Y-o-Y, but we still reported revenue growth, which means we had higher ASPs during the quarter. So can you highlight on the same what factors led to rising ASP? And do we expect better realizations for our products to continue?

That's a good question actually because we had -- in our -- from January to April, we store a lot of cotton for the off-season. So this year, we have offloaded some of the cotton. So it's not -- there's a lot of cotton sales there, which were not margin accretive. So those -- that's why the turnover is a little up than year-on-year, though we had the debottlenecking and all going on. So if you take it out, our EBITDA margins are may be higher by another 150 basis points. And that makes sense -- if that makes sense to you.

Okay, sir. And sir, can you provide the average realization for yarns in this quarter?

The average realization of yarns in this quarter. So, I'll just get back to you on that, actually.

No worries, sir. And, sir, my last question is...

Okay. I have that figure. So the average realization per kilo for quarter 2 was around INR 286 for cotton yarn.

Okay. Sir, my last question is, sir, why were production volumes muted for this quarter? Was it a factor of lower export demand?

So this quarter, I briefly mentioned in my opening remarks that generally, July -- this last quarter, the weather in North India was very, very warm and hot. So there were some absenteeism. So that's why our productive utilization level went down to 94% from 97% was. It was unprecedentedly hot. So that is one of the reasons. And the other reason was, of course, one of our plant was taken for maintenance and the debottlenecking, which is now up and about. So these are the two main reasons.

[Operator Instructions] The next question is from the line of Yash Madan from Mainstream Technologies Private Limited.

You mentioned about merging two companies with...

There is a little disturbance in your voice. I can't hear it properly.

I'm traveling, sorry. I'm saying you mentioned about you merging two group companies. So can you give some idea, are these operational? These are profit-making companies? What kind of impact it can have on profitability and EPS of the company post-merger?

So yes, these are profitable companies. These are with a combined turnover of around INR 200 crores, INR 250 crores, and with an EBITDA of around -- last 3 years, average EBITDA is around 15%. So these are profitable and functional companies.

And you're going -- you're already providing yarn to these companies internally?

We are providing some yarn, but a lot of reengineering and restructuring is happening. So we would wait for things to -- so a lot of work is being done to make it where we can use more of our yarn in these companies.

So then what's your long-term vision? Do you want to be a garment company, you want to be a yarn company as you have been doing? So where the company is heading, let's say, next 3 years, 5 years, how we should see a long-term trajectory?

So we have always been into garments. This is not something new to us. The only thing is that, that was another company we were doing the business in. But looking at the opportunities which are coming our way in terms of China Plus One and now Bangladesh plus One, and a lot of focus of Indian government on garment industry. So we wanted to leverage this opportunity and because we have a better -- bigger bandwidth. So we wanted to avail this opportunity and merge these companies. And our vision is, of course, to be a very big spinning company, of course. And -- but we believe that most of our upcoming -- any future expansions will be commiserating with as much in garment as in yarn.

Do you have any more companies also where you are into garments? Do you have more entity? Will there be any conflict of interest?

No, this is it. So whatever manufacturing capacities we have in yarn in garments, we are all -- we are merging all of them into this. And now there's no conflict of interest.

It will become a fully integrated company basically from yarn to garment.

Yes, yes.

The next question is from the line of Varun Gajaria from Boring AMC.

First, congratulations on the merger approval. Just wanted to get some clarity on the numbers. So going forward, what is the capacity -- what is the garmenting capacity at the unit -- at the merging unit now?

So right now, we have a capacity -- right now, the capacity is around 20 lakh pieces per annum. So with a marginal investment of INR 10 crores to INR 20 crores, as we said, we believe that we can increase it -- we can double it because we have a lot of -- because right now, if you see, we mainly supply to our own brands, and it doesn't give us a lot of operational freedom, which we are looking for. And we are doing a lot of reengineering of all our facilities. And we expect this facility to go up to 30 lakh, 35 lakh pieces per annum in the next 6 to 8 months.

Okay. Okay. So once that comes online, what will be the margin profile like? Because I presume the margin profile in garmenting is relatively better. So what is the margin profile look like at the garmenting unit?

The average -- so there are two units. The one is the dyeing unit and one is the garment unit. So both of them are working at an EBITDA of around -- so in the garment unit, the average EBITDA for the last 3 years was about 15% to 17%, and for the dyeing unit was about 8% to 9%. So we expect to add these into whatever the capacity. So let's assume we do about 10% or 15% of our... [Technical Difficulty]

Ladies and gentlemen, we have lost the management connection. Please stay connected while we reconnect them.

So we expect a bump up of around 1% to 2%. So it's really very early for me to comment on these, but we expect marginal accretion for the whole company definitely.

Okay. So what kind of revenues do these merging entities make currently?

Revenue is around -- the average last 3 years is about INR 200 crores, both of them put together.

Okay. And the margin profile should be around 12%, if I'm not wrong, because 15% to 17% plus the dyeing at 8% to 9%. So I'm assuming it should be around 12%.

It should be somewhere around there for last 3 years combined average.

Okay. So currently, what is the cotton yarn spread like?

Currently, the clean cotton -- right now, if we speak, the clean cotton is around -- for us is around INR 190, INR 92, and the yarn next mill price is for 30 CHC is around INR 250. So they are about, you can say INR 60, INR 65. About INR 65.

Sir, margins?

Margins are around $0.80 right now.

Okay, $0.80. Okay. And have these -- sir, what was the cotton yarn spread relatively last year then?

So these spreads are better than what they were last quarter. And I think $0.80, I think for the last, you can say, 5, 6 quarters, these -- like first quarter was definitely around here. And the second quarter was a little down because of the Bangladesh problem. And I think they have bounced back to first quarter levels -- close to first quarter levels.

Okay. Okay. So currently, the prices are at around INR 56,000 per candy, if I'm not wrong. You're expecting this price to go strong for the coming year currently considering that the harvesting will commence from now on, right?

So right now, the prices are at around INR 55,000, not INR 56,000. And we expect the prices to stay in the range of INR 53,000 to INR 57,000 for the foreseeable future.

The next question is from the line of Naitik Mohata from Sequent Investments.

I'm new to the company. I have a couple of questions. So sir, my first question is regarding our capacity utilization, they are almost at 95% levels now. So where -- how do the company envisage the next leg of growth will come for us?

Okay. So we are looking at these options very aggressively. So hopefully, in next couple of months, we'll be announcing some expansion in our spinning business. And for the garment business, for the next growth -- major growth we are looking at in the garment business. So there we've already announced a merger. So these are the two phases we are looking at in the short term.

Yes, sir, regarding the merger, I believe the manufacturing facility is in Sobhagia Sales Private Limited. So if you could throw some light on how big is this capacity? What kind of top line can we expect from this facility?

So right now, these facilities give us around INR 200 crores of top line. And we believe that if we -- with the reengineering we are undergoing after the merger, we can easily scale it up with the minimal investment by at least 50%. So we expect in maybe 15 to 18 months, the top line to grow to about INR 300 crores, INR 350 crores with almost negligible, no investments.

Okay. And sir, what kind of margins do you expect from that business?

So we expect these companies to give us a margin of like -- so they are already operating at 12% to 13% EBITDA level, which I think will go further up once we reengineer the capacities.

All right. Sir, a couple of bookkeeping questions. So I think in September, our short-term debt has reduced from INR 480 crores to INR 110 crores as well as our inventories have reduced from INR 640 crores to INR 340 crores by almost 50%. So is this a seasonal trend for us? Or is there something to read into it?

So this is definitely a seasonal trend, which generally when the new crop comes in, in October. So we consume most of our inventories in the last 6 months. So we hold the highest inventories in March. So this is something seasonal. But this year, we don't envisage a very high buildup of inventories in March because of ample stocks in India and a lot of CCI intervention and a lot of CCI holding a lot of cotton stocks. So we expect these short-term debts to not go up to the level we had last September -- last March.

[Operator Instructions] The next follow-up question is from the line of Yash Madan from Mainstream Technologies Private Limited.

Basically, [indiscernible] evaluating. Your best year has been '21, '22. So can you throw some light how come you could have these kind of high profits? What was the reason? Was it COVID effect, one? And second, in what circumstances you can see you can come back to that kind of profitability in the future if you look at even cyclical nature of the commodity. So do you see possibility in next 2 years, 3 years same trends coming?

So '22 was an aberration. I think those kind of years, they were perfect storm. Because of the COVID, cotton prices have fallen very sharply because demand was uneven across the world. Some countries are working fully, some were not. And we were, you can say, at the right time at the right place because CCI was holding a lot of cotton. So there were some cotton inventory profits and there was a lot of demand because people were staying home, and there were a lot of supply chain disruptions, which led to a lot of duplication of orders. So we don't expect such a thing to happen. And those kind of margins are anyway unsustainable in our industry. But we expect the margins to get better going forward because we see a lot of consolidation happening, and we see India as a spinning country doing much better than our competitors, which are getting weaker. So once the demand comes back to normal, which is -- I think it's still 80%, 85% of what it used to be before COVID. So then we expect the margins to get better from these levels, maybe go in middle teens, 16, 17. So that's what we are working on because if you compare us, in 2022, we have worked a lot on our operations, our power costs, we have worked a lot on that. So any uptick in demand, of course, we can do much better than what we are doing right now.

Right. . In normal circumstances, this kind of profitability can't be expected.

Sorry?

What you earned in '21, '22, so those kind of profitability can't be expected until and unless some major global event happens.

So it can be expected on the -- maybe not in percentage, but in total terms, yes, because we have expanded by 40% since then. So yes, total numbers can be closer to that, the things turned to even normal what it used to be before COVID because we are 40% bigger than what we were in those times.

Definitely, your turnover is increasing, but profitability is much lower than what you were then.

Let's see. We can't predict such things.

[Operator Instructions] The next question is from the line of Devangh Mehra from SKB Associates.

So I have a couple of questions. So in the current quarter, we can see our export contribution has declined by 700 bps from 53% to 46%. So was this because of Bangladesh issue? Or have any other international market has been affected too?

No, I think the total quantum was higher than last year and last quarter. The only difference was because there was a little bit of component of cotton sales this year -- in this quarter, which is showing less in percentage terms. But if you see the quantity of cotton yarn was almost same or a little higher than last quarter.

Okay. Okay, sir. Got it. So has the company -- like I have another question. So has the company planned out any CapEx as the company is at maximum utilization levels. So what would be the company new levers for the growth expect for the margin expansion, which post a certain level will not grow as well?

So as we mentioned that we are undertaking an investment in an SPV for our 40-megawatt solar plant, which will bump up our EBITDA margins by 0.7%. And then we are also working on forward integration for margin accretion. So these are the first -- these are the two things which we are doing right now, which don't need a lot of CapEx. And about more CapEx, yes, we are looking at different opportunities in different geographies and aggressively, and we'll be informing you as we see something.

Okay. Okay. Sir, just a follow-up question. So what are the rationale for the consolidation of the two companies? So is the company planning out on putting any -- like yes, any CapEx on these two company and growing the garment and the dyeing segment of the business?

So right now, these are -- you can say the -- these are two companies which we are planning to take over and merge in us. And this is something we want to do it on a small scale for the next 1 year. And then, of course, we have bigger plans once we stabilize and we learn from this action. And yes, we are -- we plan to go bigger and bigger in garments going forward.

Okay, sir. Got it. And sir, last question. As seen earlier, like company has been using the solar power to a great use -- to reduce the power and the fuel cost of the company. But particularly in this quarter, where we have seen our production levels are also declining, but the power cost has not reduced in line with the production volumes. So what are the major factors that have affected the power cost in this current quarter?

So, we use solar power -- solar panels power around 15% of our total use. So 85% is from the grid. And in summer months, the tariffs in Punjab go up, which have now from 15th October have gone down again. So this bump up was solely because of the higher power tariffs in summer months in Punjab.

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

Thank you, everyone, for being a part of this call. And we appreciate, and if you have any questions or any queries, you can direct it towards the Company Secretary or Orient Capital. Wishing you a happy Diwali once again. See you all next quarter. Thank you.

Thank you. On behalf of Sportking India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.