Sportking India Limited (SPORTKING) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Sportking India Limited Q3 FY '25 Earnings Conference Call hosted by Orient Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Devansh Dedhia 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 Q3 and 9M, FY '25 financial results discussion call. Today on the call we have with us, Mr. Munish Avasthi, Chairman and Managing Director of the company; Mr. Sandeep Sachdeva, the Chief Financial Officer; and Mr. Lovlesh Verma who is the company Secretary. With this, I now hand over the call to Mr. Sandeep Sachdeva for the opening remarks. Over to you sir.

Good afternoon, everyone. First of all, I would like -- I will take you through the financial performance of the company for the quarter and 9 months ended 31st December, '24. For quarter 3, FY '25, Sportking India Limited, achieved revenue from operations of INR 610 crores, up 2% Y-o-Y. Share of export in revenue was approximately INR 341 crores for the quarter, representing a 57% contribution from export business to revenue for the quarter. Gross profits stood at INR 148 crores, with an increase of 10% on Y-o-Y basis. Gross profit margin expanded by 183 basis point Y-o-Y. Gross margin for the quarter stood at 24.3%. EBITDA stood at INR 57 crores, increasing by 17% on Y-o-Y basis, EBITDA margin expanded by 123 basis points Y-o-Y to 9.4%. Profit after tax was INR 16 crore, seeing an increase of 18% Y-o-Y. Profit after tax margin were 2.7% experiencing the margin expansion of 37 basis point on yearly basis. For 9 months FY '25, Sportking India Limited achieved revenue from operation of INR 1,895 crores, up 7.3% Y-o-Y. The gross profit stood at INR 441 crores with an increase of 19.1% on Y-o-Y basis. Gross profit margin expanded by 230 basis Y-o-Y. EBITDA for 9 months, FY '25 was INR 189 crores with EBITDA margin of 9.9%. EBITDA increased by 36.6% Y-o-Y. EBITDA margin improved by about 213 basis points Y-o-Y. Profit after tax was INR 73 crores, seeing an increase of 54% Y-o-Y. PAT margin was 3.9% experiencing a margin expansion of 117 basis points on yearly basis. Company had an exceptional quarter on export front with an overall mix of sales from export increased to 57% in Q3 FY '25 from 48% in Q3 FY '24, and 46% in Q2 FY '25. Capacity utilization remains more than 95%. So thank you all. Now I will hand over the call to Mr. Munish Avasthi, the CMD of the company for his remarks on the results and outlook.

Thank you, Sandeep. Good afternoon, ladies and gentlemen. I hope you have an opportunity to go through our press release and the investor deck. The textile industry continues to operate at a steady pace. The exports saw an uptick in demand since last quarter, led by an impressive growth in shipments to Bangladesh. Domestic market saw uneven demand brought by the festive season, but at the same time restricted to some extent by continued imports from China of synthetic fibers and yarns. Cotton prices continue to slide lower, albeit at a slower pace and continue to be higher than the normal differential to the imported cotton due to MSP operations by CCI and the import duties which have been levied since last 2 years. We expect similar conditions prevailing over the next few quarters as margins continue to stay under pressure because of the government policies on cottons. At the same time, we see the overall demand as very satisfactory, and we continue to work on improving our efficiencies and believing all these ongoing efforts will help us in improving margins by 100 to 200 bps going forward. I pass on the call to Devansh and request the moderator to open the floor for question-and-answer session.

[Operator Instructions] The first question is from the line of Madhur Rathi from Counter Cyclical Investments.

Sir I wanted to understand we have acquired 2 businesses in the last quarter. We are going to merge 2 businesses in the last quarter. So how do we plan to pay for that or are we going to do a share swap or are you going to upfront give them money? So if you could help us understand that.

It's still under consideration. So we are still not ready with the proposal. I think in a couple of months as we are ready with the proposal, we'll share the details.

Okay. Got it. Sir, can you please give me the current cotton realization, yarn realization and spread for Q3?

Q3, the spreads were around -- in cotton yarn was about INR 95 to INR 100. It's slightly better right now this quarter, we see a slight improvement this quarter.

So the spread around INR 95 to INR 100?

Yes, around INR 95 to INR 100.

Sir, in last quarter, our spreads were very low around INR 60, but still we did kind of -- so it's a 50% increase, but margins were almost on the similar range. So why is that?

No. I think right now, the spreads I'm giving you is between the raw material cost and the sale price, that INR 60 must have been about the clean cotton. There is a difference between the 2 sets of numbers.

Okay. Got it. I have another question. Sir, what is the steady-state spread that we can expect going forward?

Sorry?

Steady-state spread that we can expect going forward over the next maybe 2 to 3 years?

I don't know about 2 to 3 years because see, first of all, the government policies which are making Indian cotton are a little expensive than what is available to other countries is putting a pressure on margins -- but the government policy can change any time. So if it changes in our favor which we expect, then you know, the margins can go up by 300 to 400 points. So other than that, we expect the margins to stay where they are, maybe from improved by a couple of 100 to 200 points by the ongoing efforts we are making in making debottlenecking and modernization. So otherwise, until the government doesn't change the policy, I think there will be some pressure on the margin, and it will stay at these levels or maybe 100, 200 points plus/minus.

Okay, got it. Sir, also a few quarters back, we had mentioned that with a slight uptick in this business, we can easily achieve 15%, 16% kind of margin. And it seems like one of our competitors has said that because of Indian cotton prices being higher than the international market, the yarn prices will be under pressure. What kind of cotton prices can we expect to reach these 15% to 16% margins?

So the demand scenario is not bad. Demand scenario is pretty good right now. The only problem is the prices -- the Indian cotton prices are higher than usual. They are -- generally, Indian cotton prices are at 500 to 700 points higher than the near futures, which are right now prevailing at about 1,000 to 1,100 points higher. So there is a clear difference of 3% to 4% or 5% in the international prices and the potential Indian prices where they should be. So that continues. So I won't say -- I think the demand side is very good. These anomalies till it goes, then of course, it will keep on putting the pressure on the potential margins, which this industry deserves or which we can have.

So 3% to 4% correction would initially like improve our margin to 15%, 16% or maybe 1%, 2% higher?

See, if the dividend policy go this anomaly goes away, I don't see any reason for our margins to go up to 15%. But I of course, I can see the margins going up to 12%, 12.5% with all the efforts we are doing on cost rationalization and the other measures. But to really get beyond 15%, I think then this anomaly has to go.

Sir, so we have taken a merged entity into our consideration and their margins, at present, are margin accretive to our current business. So we have highlighted that due to that 12%, 13% margin from there and our like 9%, 10% margin currently what we are doing, it's margin accretive. But when I look at what we are saying that we would like -- with internal efficiencies, our margin will improve to 12%, 12.5% over the next 3, 4 quarters. So can we expect the merged entity to make even higher margins like maybe 1% or 2% higher as we scale up this capacity?

We are not scaling up any capacity. As I told you that the margins right now, we are at about 10% for the whole first 9 months. So we can expect the margins to improve to 11% or 12% and if the demand and the scenario which is right now if it prevails for the next couple of quarters. Other than that going beyond that, it all depends on the demand and the differential and how to get even better, it depends on the government policy as I reiterate.

[Operator Instructions] The next question is from the line of Saransh Gupta from Svan Investments.

Yes. Sir, my first question is that the SPV that we are commissioning in Bhatinda for the solar power plant, how much will it be captive after this capacity is...

I think it will be -- we are still in the process of getting the approvals from the government. But once it happens, I think right now, we are at about 12% to -- 13% to 14%. And I think it will be another 13%, 14%. So I think in totality, this will be 1/3 of our capacity will be dependent on solar -- we get from our own solar.

Sir, post this commissioning of the power plant, what will be the cost that we'll be saving compared to the power cost that we are incurring currently?

I think it will be around INR 20 crores per year.

And sir, one more question. What is the current capacity for fabrics and garments?

We don't make any impact on garment in this company.

Sir, currently, we are operating at almost 95% of the utilization. So just wanted to understand what will be the revenue growth drivers for our company 2 or 3 years down the line?

So right now, there are no revenue drivers for next 1 year. But we are, of course, now as for the last couple of years, we are working at 95% and all our new capacities which have been put 2 years back are upstream and that's doing well. So we are in the process of looking at further expansions and which way to go. So I think we'll be able to share the details maybe in the next 2 to 3 months. So we are right now working hard on that to what product and what line of business in textile we want to grow in. So we'll share it once we are confirmed with it. So those will be the drivers for next 2, 3 years.

Sure, sir. I appreciate that. But sir, in your presentation on the Slide 20, since you mentioned the setting foundation for the forward integration that we have got an in-principle approval for the merger. So just wanted to understand, I mean, how is the fabric and the garment business out there and what are the sorts of facilities that we will be merging into our business?

So these are 2 companies which we are proposing to merge with our company. One is a purely garment company, which right now makes around 10,000 garments a day -- 15,000 garments a day with a revenue of around INR 120 crores, INR 130 crores. Another one is a fabric finishing company, which has a revenue of around INR 70 crores, INR 80 crores. So once this proposal is done, we have the plans to, with a very minimal investment, almost triple these capacities. So yes, once the merger is formalized, then we can start looking at those numbers.

So till the time we announce the next phase of expansion, that means post the merger gets approved, there will be an incremental revenue of INR 200 crores with a minimum of investments, right?

Yes, of course. So it will take some time because these mergers -- I think the period is almost 12 to 18 months it takes from the NCLT and all. So I think it will all come into effect from '26, '27.

For the next 1.5 years or 2 years because we have not yet finalized it and even this merger will take some time. So in terms of the profitability or the cost efficiency, how do one look at in terms of the improvement in the operating efficiency or the improvement in the margin from here onwards? What are the steps taken by the company to improve it?

Yes, definitely. We have implemented some modernization plans, a lot of debottlenecking plants where we are increasing our capacity by 4% to 5% without really increasing our capacity. So then there are small changes we are doing like we are putting up a small solar plant right now. It will be operational by next month, 4 to 5 megawatts. So these are incremental changes which we have made in the last couple of years, which now the things are settled and the markets are settled because we grew by 40%. So we are more confident and our demand for our product is more widespread. So we get some incremental gain and better marketing of those products. So all these, I think, will help us in improving our margins going forward if the market stays as it is.

Sure, sir. Got it. So sir, last question. So with the current capacity, it is fair to assume that the peak revenue, if we assume the current situation in terms of pricing and costing prevails, the peak revenue will be INR 2,500 crores for us. And with a margin of 11%, we can do INR 275 crores, INR 280 crores of peak EBITDA on the current capacity?

Yes that's about right.

The next question is from the line of Sahil Vohra from M&S Associates.

My first question is regarding the export. The export contribution has come to the highest level at 57%. So just wanted to know which were the key countries that led to such massive growth?

So the major -- our major market continues to be Bangladesh, and the demand in Bangladesh has been pretty robust for the last 3, 4 months. Every month -- I mean, last 4 months, every month has been a record month for Indian yarn exports to Bangladesh. So there, Bangladesh, of course, has been the key driver for us for the last 3, 4 months for this.

Okay. Contribution be attributed to dealers stocking up their inventory after a slowdown phase or has the export demand market [indiscernible] in general? And also, you could elaborate about the current situation in Bangladesh, how that market is picking up? And do we see any near-term challenges on the export front?

No, we don't see any challenges in export front actually. Bangladesh, there was a slight hesitancy by buyers and everybody in last July and August, but it continues to grow. And I think they are already achieving numbers which are higher than the export numbers to USA and Europe...

The line for the management has been disconnected. Please wait while we reconnect them back. [Technical Difficulty]

Yes. So as I was saying that Bangladesh market we don't see any challenges up there. It's working as it used to and we don't see any challenges there.

Okay, sir. And sir, on the financial front, while depreciation has remained relatively stable as guided, both employee cost and finance cost have jumped on both quarter-to-quarter and year-to-year basis. Can you share reasons for both of these changes?

So the finance cost actually has been impacted because of -- I would request Mr. Sandeep to elaborate on that.

The finance cost increases has come mainly due to the differences in exchange fluctuation to the extent it pertains to the saving in interest cost of foreign currency term loan as rupee term loan as per Indian Accounting Standards, if you know so rightly. This includes around INR 5 crores of debt.

So what we mean to say is that our actual interest cost stays around 10.5% to 11%, but because of Ind AS regulations, we have to consider some M2M differences. So it is higher by INR 5 crores because of that. And our depreciation has been pretty steady for last 7, 8 quarters, and it stays the same.

[Operator Instructions] The next question is from the line of Sakshi Trivedi from NV Capital.

On the same lines as asked by Sahil previously, I would like to know how do you feel on Bangladesh Plus One tailwind for the Indian textile industry given it is a substantial market for you?

Bangladesh Plus One, I think, is pretty over weighted concept. People just jump to the bandwagon, but I -- we don't see people shifting from Bangladesh. I think that we see the customers all our customers are reporting a pretty hefty order book going forward. And yes, we saw some orders coming from India from -- in the last 2 quarters. But we don't see a huge shift paradigm shift in to really look for Bangladesh Plus One kind of a strategy. But overall, yes, the market, the buyer keeps their search on for good vendors. So the big vendors in India who are they are getting some positive orders and they are -- there is some positive traction here, not only because of Bangladesh Plus One, but I think China Plus One is still continues to be the main theme. And China still is exporting almost $200 billion against what we do like about $15 billion and Bangladesh is $40 billion. So I think before getting into Bangladesh, I think Chinese share is what we are what we are getting right now. Bangladesh, I don't see -- I don't see Bangladesh going down. I see Bangladesh steadily improving from here and keep on growing by 10% to 15% going forward for the next 2, 3 years.

Right, sir. Now my next question would be what is the mix of cotton yarns and synthetic yarn for the 9-month FY '25? And how do you see the share of value-added yarns evolving in your portfolio?

So value-added yarn proportion remains the same as it has been for the last couple of years. So we are working on it to increase it by 3%, 4% maybe next year. So we are working on some debottlenecking and capacity -- small capacity issues. But the composition amongst cotton and synthetic cotton, 100% cotton is around, you can say around 60%, say 62%, and cotton blended is about 30% and synthetic 100% -- synthetic is about 3% to 4%.

Okay, sir, noted. Just another last question. It would be what are the triggers of margin improvement for you? I understand the parity of domestic and international prices is one of the factors. By when do you feel that the prices will converge? And is there any government policy and subsidies that helps with this?

No, actually. This is the major trigger and the differential what used to be pre-COVID prices, as I told you that Indian prices used to be about 500 to 600 basis points up in NY futures, which have been now consistently above 1,000 points. So this is the major trigger. And we see some ray of hope as CCI -- CCI accumulated a lot of costs this year, which are like, I would say, right now, they are sitting at about 8.5 million base. And by the season -- by the time the season ends, the procurement season ends, it might go up by another to INR 20 lakhs, INR 30 lakhs. So the government has to take that decision, whether they want to support the industry and provide us the cotton at reasonable rates or they want to -- not because they will be taking a loss if they sell at a price which is low, which they have actually sold this year also. So we have -- we feel that the government this year will have to sell lower going forward. But ultimately, this is again until they don't address this elephant in the room of import duty and direct subsidy to the farmers, then this will remain a challenge. It is a long-term challenge for sure the industry.

The next question is from the line of Kailash Samarthya from Diplomacy Investments.

Sir, my first question is related to one scheme that is by revision of duties and taxes on exported products. Since the scheme has got over as of December, will we -- are we hoping it gets extended? And what will be the financial impact of the scheme currently? And also, how much benefit do we receive from the same?

So I think your information is wrong. That scheme is not ended. It is valid until 30th September, 2025.

Okay. And sir, how much benefit do we receive from the same?

It is about 3% of our exports -- FOB prices of our exports.

Okay. Sir, second question would be on demand. So in my opinion, the third quarter is marked with high domestic demand in lieu of the festival season. What was your experience of the demand during Q3? And how has demand seems shaped up during the end of the quarter now that January is almost over? Are we seeing any slowdown in orders from fabric or apparel manufacturers?

No, the demand -- the demand actually -- in export demand was very good last quarter. And domestically also, the demand was okay. But as I said in my opening remarks that the Indian domestic demand has been constrained by a lot of flooding of Chinese cheap imports because of Chinese market not doing that well. So there's a lot of clam down which has happened recently on Chinese illegal imports. So we see a certain small bit of improvement in domestic demand actually since last 1 month, in exports generally well this quarter. So we continue to see a good order book in our export orders for this quarter as well.

Okay. And sir, how much cotton inventory do we typically carry? And is your fresh procurement ongoing at the moment?

Yes. Right now, we are in the middle of the harvesting season of cotton in India, and we continue to buy cotton as we speak. So this year, of course, we are still working at slightly lower stocks than what we have generally at this time of the year because of higher Indian prices as compared to international prices and a lot of stocks, which are there with the government, which will come into sale post March. So we are taking a little bit of conservative view this year and stocking a little less than normal.

Okay. And then sir, in the previous quarter, you had mentioned that the cotton prices have started to correct from the high of INR 58,000 to INR 54,000, INR 55,000; so cotton futures also indicated that price fell in November, December. However, with this recently high MSP on cotton, CCI buying an outlook of Cotton Association of India of 7% lower production, where do you see the cotton prices for you? And what's the likely impact for you in terms of inventory you are carrying?

So most of the inventory we are carrying, it is presold because we all -- we generally have an order book of 2 to 3 months also. So there is not major impact on that. Of course, beyond that, of course, there is a couple of months cotton we have, which is always unlock priced. Going forward, we see actually Indian cotton prices have come down even further. So from INR 54,000 we have come down, slipped down to around INR 52,500 now as we speak. And they continue to be under pressure in spite there is a huge operation by the CCI. And about the cotton crop, we actually see the cotton crop higher than last year. We don't -- we don't agree with the numbers CCI has put on. So we see the cotton crop slightly higher than last year. So we expect -- we think that last year, the crop was around 325. So we expect the cotton crop to be more closer to 340 this year than you know, 300, 500. So we see cotton prices continuing to be under pressure going forward for the next 6 months.

Okay. And sir, with that, do we foresee any inventory gains in the future given current procurement is at lower level?

No, because we don't see prices going up, so there won't be any inventory gains. I don't foresee that. Only if there are some black swan events, but as the condition is today, we don't see cotton prices going up in a hurry.

Okay. And sir, just lastly, one more. Like since this Maharashtra election got concluded, and we have seen that this Ladli Behna Yojana have created a labor shortage. And due to that, the production has dipped in the Maharashtra last year also. So do you see currently, the harvesting season is going on. So are you seeing any impact on the sales?

Impact on what? On harvesting of cotton?

Yes.

No. I think the cotton arrivals are pretty robust. And we don't -- there were, of course, Maharashtra arrivals were a little late to come because of the election and everything. But since last 1 month, the arrivals have been very robust, and we don't see any -- any slowdown in the arrivals right now.

[Operator Instructions] The next question is from the line of Gaurav Parekh, an individual investor.

My question is regarding the -- in the last con call, we talked about Marvel Dyers about entering into the knitted fabric, and we have some growth plans regarding that. If you can throw some more light on how you plan to do more about it and how are we entering into the knitted garment fabric thing. So that would be helpful.

Yes. This is -- I mentioned in an earlier question that it is -- the merger has still not been formalized, and we have certain plans in our place. So once it has happened, we'll surely share all the details with you. But right now, we are still under process to get the merger formalized.

So sir, just to add to that, are we looking into domestic segment here or we are looking for exports and targeting exports into?

We are looking at both the segments. So we are looking at export segments, which is something which we already do. We are in touch with all the brands who we nominated to buy and we already supply them yarns. And of course, Indian domestic market now is being more and more dominated by organized players. So we are in touch with them also. So it will be both double prong, so we go for domestic as well as the exports.

The next question is from the line of Mausam Agarwal, an individual investor.

So I would like to know we have been running on average at 94% to 95% of capacity utilization, which I'm assuming is the highest as to where utilization level can be achieved. So with no capacity expansion announcement currently, where does the revenue growth come for the company now?

Ma'am, we -- because textile is a very capital extensive business. So we had invested a lot of capital 2 years, 3 years back, which was almost the tune of 40%. So now we are feeling settled with our increased capacity. And right now, we are all our team is on the drawing board looking at what to do next. And I think very shortly, we'll be sharing some future plans with all our investors.

Okay. And also, I would like to know that this quarter, the competitors have announced large CapEx on yarn and fabric front. So which indicates that the industry is getting ready for a demand uptick for both domestic and international regions. So what is the time it takes for you from planning to production?

So I think the more time we take is in planning. You know, once we declare it, I think we'll be able to deliver within 1 year.

So like what are your criteria for evaluating CapEx requirements? Is there any criteria?

We have different criteria. We look at right now what we are into yarn segment, what areas geographically we want to expand and the kind of yarn we don't make, and our customers want that yarn from us. So there are different criteria. We're exploring where we can get the best return on capital. So it's just a matter of couple of months. So we are evaluating because this new announcement will be -- pave ways for our next series of investments. So we just want to be sure on what we want to do.

But I would also like to know is there any area for brownfield expansion or in our existing facilities? Or will new expansion be necessarily from greenfield initiatives? So could you throw some light on this?

We have enough space for a brownfield expansion, but we might go for greenfield. So that is what the evaluation is happening right now because we are -- all of our plants are in Punjab. So geographically, we might like to diversify and get out of Punjab, and go closer to the port and closer to the more abundant regions in cotton. So all these things take some time to evaluate. So this is brownfield, we would have just planned on brownfield would have started by now. So this is a new challenge, and we want to be 100% sure where we want to go.

Okay, sir. Also, one more question. So you have highlighted to price difference between domestic and international prices. Can you throw some light on current price difference between synthetic yarn and cotton yarn? I read somewhere synthetic is lower than the cotton yarn. So I just wanted to understand the basically price parity between 2 given you manufacture for both?

No. Look, synthetic yarn is always cheaper than cotton yarn. It has always been cheaper. And the price disparity, which we were talking about was the cotton prices -- cotton prices in international markets and in India. So about the yarn, I think yarn generally is sold at the same price as it is sold internationally because we are in an internationally competitive market where we are competing with different countries like Vietnam, Indonesia, Turkey. So the export prices and domestic prices are almost similar everywhere where there are no duties, of course, like in a country like Pakistan and Bangladesh prices are a little higher there domestic. But synthetic -- synthetic fibers are slightly more expensive in India than other countries because of certain duties and BIS restrictions. But that's a very small part of our business. But of course, it is being hurt a lot recently by dumping of fabric yarn and fibers by China, which is really suffering domestically across the world.

[Operator Instructions] The next question is a follow-up question. It's from the line of Madhur Rathi from Counter Cyclical Investments.

Sir, our margins in the export as well as the domestic yarn would be similar or because of the U.S. and other country discouraging Chinese cotton, the Indian yarn would be at a better pricing?

The prices -- the difference in the prices...

Hello?

[Operator Instructions] Yes, sir, please go ahead.

Yes, I think I finished answering the last question about the prices across the world being almost the same.

Okay. Sir, because the low margin differential that we can get from export versus the domestic will be similar only?

Yes, it's almost similar level. Yes.

Got it. And sir, just a clarification. Sir, the cotton prices are, I think, from INR 54,000 to INR 52,500 to 2.5% to 3% kind of a reduction. Sir, even after that, there is a 5%, 6% margin differential to the international prices that was apart from whatever internationally 5%, 6% in general difference, right? That is the differentials are reduced.

Sir, your voice is not traceable. I cannot really understand what you're trying to ask.

Okay. Okay. I'll ask my question again. Sir, the cotton prices declined to INR 52,500, so I think about 2.5% to 3% reduction. So when we compare it with international parity, is it still a 5%, 6% differential that was there or this 2.5% has reduced or even international prices are reduced...

So the international prices in last 6 months in last 3 to 4 months, the differential has stayed the same. If the Indian prices have come down, so have the international prices at a similar pace. So there's not much change in the differential in last 3, 4 months.

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

Thank you, Devansh. 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. See you all next quarter. Thank you. Thank you.

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