Sportking India Limited (SPORTKING) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Sportking India Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prathmesh Parab from MUFG Intime India Private Limited. Thank you, and over to you, Mr. Prathmesh.

Thank you. Good afternoon, everyone. Welcome to the Sports King India Limited Q1 FY '27 Earnings Conference Call. Today on the call, we have Mr. Munish Avasthi, Chairman and Director; Mr. Sandeep Sachdeva, Chief Financial Officer; and Mr. Lovlesh Verma, the Company Secretary. I hope you have gone through our press releases and the investor deck. As a short reminder -- as a short disclaimer before we start with this call, the call will contain some forward-looking statements, which may be based upon our beliefs, opinion and expectations of the company as of today. These statements are not a guarantee of future performance and will involve unforeseen risks and uncertainties. With that, I would now like to hand over the call to the management for their remarks. Thank you, and over to you, sir.

Thank you. Thank you so much. Good afternoon, ladies and gentlemen. I hope all of you had the opportunity to go through our investor presentation and earnings release. We are pleased with the strong start to financial year '27. During the quarter, we delivered healthy revenue growth, along with a significant improvement in profitability. The quarter was particularly encouraging as the growth in earnings was driven by a combination of better yarn realizations, strong export demand and disciplined raw material procurement. Despite some increases in raw material prices during this period, our strategic buying approach enabled us to effectively manage input costs and protect margins. Market conditions remained favorable during the quarter. We witnessed better realization across our product portfolio, particularly in cotton yarns, which supported the strong improvement in margins. Demand from all the markets continued to remain healthy, and we are also encouraged by the outlook going into the second quarter. On the domestic front, we expect demand to remain supportive in the coming quarters, aided by the festive season and improving consumption trends. From an industry perspective, the global textile and apparel sector is gradually recovering after a prolonged period of demand moderation and a lot of consolidation has happened in last few years. Over the last few years, the industry experienced challenges arising from inflationary pressures, inventory corrections across large retailers and weaker discretionary consumption in key markets. However, with inventories largely normalized and demand conditions stabilizing, the business environment has become more constructive for textile manufacturing. We are also witnessing a continued shift in global sourcing patterns as India is emerging as a preferred sourcing destination for yarns. The country's strong cotton ecosystem, large manufacturing base, proven execution capabilities and growing compliance is standard position favorably in the evolving global supply chain landscape. We believe companies with scale, quality and reliability such as us are well placed to benefit from the structural opportunity. On the policy front, developments remain encouraging. The recently concluded India-U.K. free trade agreement and the progress towards a comprehensive India PAU trade agreement has the potential to significantly improve India's competitiveness going forward in key export markets over the medium term. We believe such initiatives will support growth, create new market opportunities and strengthen the long-term prospects of the Indian textile industry. Coming to cotton, one of the positive developments for the industry has been the alignment of Indian cotton prices with international markets after prolonged period, during which the domestic cotton traded at a meaningful premium. This has improved the competitiveness of Indian spinners and created a more balanced operating environment. While global cotton prices have shown some turbulence in recent months, we remain focused on prudent procurement and efficient inventory management. Our outlook on the new crop is getting better every day. There were initially some scares with the monsoon, but things have gotten better, and we expect same or better crop next year. Another encouraging trend has been the improvement in global cotton yarn demand. Supply chain realignment healthy export demand and increased sourcing diversification by international customers, which has supported the yarn realizations and profitability. These factors contributed meaningfully to our performance during the quarter and remain the same as we speak. On the strategic front, I'm pleased to share that our solar power projects have successfully commenced commercial operations. This marks an important milestone in our journey towards sustainable and cost-efficient operations. The project is expected to reduce our annual power cost by approximately 12% to 15%, while simultaneously increasing the share of renewable energy in our overall power consumption. In addition to the cost benefits, this initiative reinforces our commitment to responsible and sustainable growth. Our 150,000-spindle greenfield expansion project in Odisha is also progressing as planned. We are very excited with that. Construction activities is underway and the first phase of production is expected to commence during the third quarter of the current financial year and we intend to finish our own project within this financial year. This expansion will provide the necessary headroom to support future growth, strengthen our market position and cater to increasing customer demand and newer geographies. We expect the project to start contributing progressively as we move ahead. Looking ahead, we remain optimistic about the medium to long-term outlook for the Indian textile industry. Structural shifts in global sourcing, improving trade relations, a supportive policy environment and growing opportunities for Indian exporters -- big Indian exporters provide a favorable backdrop for future growth. At Sportking, our focus remains to drive operational excellence, strengthen cutomer relationships, relationships, invest in future-ready capabilities and create sustainable long-term value for all our stakeholders. Thank you very much. With this, we could be happy to take you questions.

[Operator Instructions] First question comes from the line of Rehan Syed with Trinetra Asset Managers.

Sir, my first question is around your Europe side business. So Europe has shown now improving demand, while the India-U.K. FDA expect...

Your voice is echoing. I really can't hear you what you're saying.

Now it's clear...

Better. Can you just speak slowly?

Yes. So sir, my first question is around your Europe business. Right now, Europe has shown improving demand, while the India-U.K. FDA is expected to benefit Indian textile exporters. So have you already started receiving incremental inquiries or orders from U.K. customers? Or do you expect the benefits to materialize only after FY '28 onwards?

Okay. I think you're talking about the incremental demand coming out of the U.K. FDA, right? No, I think these things take time to play out. I think it has just happened last month, and we have not received any orders really which has been coming out of this U.K. FDA right now. But we expect because it's a long-term and medium-term phenomena. I think once the people start doing sampling and they start getting orders, it will take 6 to 9 months for it to really show it on our order books.

Okay. Sir, my second question is around your Odisha Phase 1. So Odisha Phase 1 is expected to commence production in quarter 3 FY '27. So could you provide the expected spindle addition in Phase 1 plus the utilization ramp-up time line and the EBITDA margin profile once the plant receives optimal utilization?

So we plan to start commissioning the plant somewhere in the next quarter. And we expect to ramp up the whole plant. It takes -- it's a long -- it's a big plant. So it will take us around 5 to 6 months to fully ramp up. And I think by March end, we should be working -- we should be at about 90% capacity utilization for the whole plant. So around about EBITDA accretion, this plant has many incentives which are embedded. So we expect the margins coming out of that plant to be at least 300 to 400 basis points or even more than what we do in our old plants.

Okay, sir. Okay. And sir, last one question from my side. Sir, just wanted to understand regarding the export market scenario. So has the competitive intensity from Bangladesh, Vietnam and China changed in your key export markets over the last 6 months? And are you seeing any market share gain because of supply chain diversification?

So see, China has been the tipping point for what has happened in the last 8, 9 months. Chinese market was very subdued for last 4, 5 years. And we have seen an increased demand. So most of the incremental demand, which has come into India for yarn export is from China. Bangladesh continues to be steady as they were. And China, we continue to see every month, we see them as a buyer. And we think that this is going to go on because there the cotton crop is also getting a little smaller. And there -- right now, the cotton prices in China for the last 6, 7 months and what is expected in the next 6 months also are going to be much higher than the international prices. So there's a lot of arbitrage they have to incentive to import yarn. So we feel this competitiveness is going to stay. And a lot of consolidation has also happened. So I think there are -- we can feel this is supposed to be the worst quarter, which we are going through. And we still see a lot of demand in these times, which is pretty extraordinary. So we expect whatever has happened in the last 3, 4 years, all the consolidation, which has happened, the spindle which have shut down across the world, I think this is what is propelling this cycle.

Next question comes from the line of Abhishek Shankar with ICICI Direct.

Congrats on the good set of results. So I just had a question on the inventory part. See, we've seen some uptick in the cotton prices over the past 4 to 5 months. So how do we look at...

Mr. Shankar, sorry for interrupting. Your voice is breaking. Your voice is breaking, Mr. Shankar. Can you please come in the range and talk?

Yes. Is it audible now?

Yes.

So my question was regarding the inventory. So in the past 3 to 4 months, we've seen that cotton prices have moved up a bit. There has been some spike. So I just wanted to ask, sir, if I'm right, you might be procuring cotton in the cycle of about, say, 5 to 6 months. So if you had procured a cotton, say, about October last time during the crop, so now there will be a new inventory that should come in, right? So will there be any impact on the cost of materials?

So see, the cotton -- generally, we procure cotton for the whole season by February, March. So that's our normal procurement cycle and which we did this year as well. And prices generally go up in this period of time, almost every year because of the end of the season. So we don't have a problem right now. We are covered for like 4, 5 months. And we expect the new crop to come early this year because of less rain predicted. So we expect by October, we shall start seeing moderation in cotton prices because right now, these prices are just because there's not much crop left. So I don't see much impact of cotton. I think the major -- the most important thing is how competitive we are to the world, which is actually prices can be higher or lower. And we see Indian prices being competitive going forward because there's a lot of tightness happening in Chinese balance sheet and in U.S. balance sheet. And while Indian, I think we will end up this year with formidable stocks, and we are expecting a good crop next year. So I think this competitive pricing should stay. So I think that is more important for us to maintain our margins.

Yes. Sir, just one more follow-up question to that. So considering the cotton prices will be favorable ahead, and you also highlighted in your comments that demand continues to remain strong. So we can expect the cotton and spreads -- your spreads to move further from here in Q2 and Q3?

See, again, in this macro environment, we really can't comment too much going forward. But yes, the current quarter looks to be similar or even better than what we have delivered this last quarter.

Next question comes from the line of Manoj Yeddanapuri with Infinite Financial Services.

Good set of numbers. And I just have a few questions. So as of last quarter, you had roughly around 90 days of export and sales book and 2 quarters of spread visibility, if I'm not wrong. So rolling that to today, so what does your current book visibility look like? And are you still seeing that order strength or any early signs of buyers pausing for now as of the spreads are nearly around already 3 years of high?

So we continue to see this is generally our strategy. We have an order book ranging from 70 to 90 days in any year, whether it is this year or even the last year or whichever year because this is our policy we work to manage our risk of having higher inventory. And we continue to do that. We still have the similar kind of order book as we had end of the last quarter.

And second question is on the solar power plant, which recently got commissioned. So how much of the guided annual savings has actually like flow through this quarter, if you could elaborate on that on the operating expenditure side?

Sorry, what -- I didn't get it about solar power, what do you want to know?

Yes. Basically, how much have you guided annual savings, right, previous quarter?

Previous quarter, the saving was very, very marginal because it was operational only for 10 days.

And this quarter?

So this quarter, it shall be much more, yes.

And my last question. So what's your visibility on the recent cotton import duty? Is it like do you expect it to be a very long period? Or do you seem to already price in with your FY '27 guidance? Like what do you expect about it?

So right now, this import duty is the resumption is still October -- 31st October. And so we have planned accordingly. And we are talking to the government to extend it. So those talks are still going on and government is listening to us. And hopefully, we'll get a favorable solution to that.

So could we like expect any fresh incremental upside from here?

Not in the medium term because we already have the inventory for next 2 quarters. So anything -- so this is -- we are telling the government to remove the import duty because that solves this hanging sword all the time. So anything if government does that, it will help us in sourcing competitive cotton going forward, and we can choose from wherever we want to buy.

Next question comes from the line of Gunit with Counter Cyclical PMS.

Sir, what was the cost of procurement of cotton in Q1 and the realizations that we had for our products?

So I can share you with you the spreads actually. We don't share the cost and all these specific numbers. So spreads were -- the overall spread was INR 133 vis-a-vis INR 107 last quarter.

Got it. So we generally have around 90 days of inventory. So now that you mentioned that the cost of procurement is going up, can we expect the spreads to go down? I mean, even though you mentioned that this quarter is even stronger than the last quarter, I mean, the coming quarter. So I mean, how is...

So thing is we always have an order book of 90 days, and the prices have gone up in the last 90 days. So even the raw material might have shifted up a little because we keep on -- most of our purchasing was done 3 months back. So the spread because the order book, what we had last quarter was at a lower price than what we have right now. So that will increase the spread because the prices have gone up by about 10%, 11% in the last quarter.

Got it. Sir, in terms of annual cost saving of the solar project, so can you quantify the number for an annual run rate?

It should be around INR 15 crores with this new -- with this solar park, yes.

Got it. And in terms of the new CapEx, which we are guiding to add to our production in Q3. So if we can get a range of how much additional production can we expect from that project -- that new greenfield project in Q3 and onwards?

So right now, we are not considering anything for Q3, but whatever we get will be bonus. But in Q4, we expect almost 30% to 40% of the revenues of the total potential to kick in.

Got it, sir. And my last question would be in terms of our product mix. So has there been any change in the product mix if we compare year-on-year? And what is the percentage of value-added products in our total volumes in Q1?

So the definition of value add is very different for everyone. So we are -- so there has been a slight shift in -- not in the product mix, but maybe different blends. We are running more blends. We are running different counts. So -- but otherwise, there's not been much different in what we do, what we did last year other than we are doing it more efficiently. That's it.

Got it. So most of the delta is just because of higher price realizations rather than any change in product mix?

No, it's a little bit of product mix and a little bit of better conditions because last 2, 3 years were pretty dismal from the demand point of view. So yes, most of it has to do with the spreads and better efficient -- efficiencies. We have worked a lot on our efficiencies. Our number of people we employ has come down, making the similar amount of -- with the same production and better cheaper power. And so there are many things which have cumulatively helped in these margins.

Got it. And sir, do you believe that these higher realizations are sustainable for the coming year? And have we also added any new clients to our -- I mean, existing clients? And have we also, I mean, started exporting to China where you mentioned that we are witnessing higher prices?

So China is not like -- it's not that we are getting higher prices in China. It's just that China has come as a big buyer for the country as a whole. So it has made the whole complex go higher. The demand has been more, so the prices have moved up. Talking about the new additions of clients, which is ongoing. We keep on adding and subtracting the clients. This is an everyday phenomena. So there's not much change to it. What was your other question?

Got it, sir. So basically, I mean, most of the higher prices is due to the better demand in China. So tomorrow, say, for some reason, the demand environment in China again depreciates. So I mean, is it likely that the prices would fall back again to the normal levels considering that is the only catalyst right now?

No, it is not the only catalyst. It is just -- it has given an impetus to it. And out of -- we make almost 400,000 tonnes every month, and China is just buying 20,000 tonnes. So it's not even -- it's a very small miniscule portion of Indian textile basket. So we -- this -- China can be -- so we don't expect China to go out of the system because there are some inherent advantages. Chinese have to import in India. But we see a lot of other factors coming in that Bangladesh is struggling with the spinning lately because of gas prices and capital prices. And then we see from next couple of quarters, we see the traction coming out of these FTAs, and we expect Indian demand to go up significantly. So these things will keep on playing part. So some things will go bad and some things will do good. So we can't really predict what's going to happen. But overall, things look good.

Got it. And now with the U.S. tariff thing past us, -- did we see a jump in our exports to the U.S. in this quarter? And what is the outlook, I mean, for the financial year?

So we don't export anything to U.S. directly. But we have seen a lot of our vendors who export to U.S., they have been -- their lifting has gone up in the last 6 months. So we see a clear trend of those customers who were not buying initially or buying very less quantity from us have almost doubled their offtake. So yes, I think that has, of course, helped in the last 6 months.

Next question comes from the line of [ Pratik Srivastava ] with [ Nivesh Wisdom ].