RSWM Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Best Q1 in years, but margin pressure is real: Sales rose 38% YoY and PAT jumped 81.1% YoY, yet EBITDA margin contracted 30 bps YoY as higher input costs and yarn pricing pressures bit.
• The cotton cycle is the whole story: A 25-30% drop from the June/July peak will only benefit the company when lower-cost inventory is consumed, which management pins on the second half of the year.
• A rights issue is coming to deleverage, not to grow: Management explicitly stated the raise is to pay down high debt and strengthen the balance sheet against cyclical volatility, not to fund expansion.
• New capacity is live but the payoff is back-end loaded: 30K spindles at Gulabpura, expanded denim capacity at Banswara, and the knits business all began commercial production on 1 July 2022; the larger ₹315 Cr Lodha expansion will not contribute until FY24.
• What to watch next quarter: Whether cotton prices actually stabilize when the new crop arrives in October, whether the yarn division’s pricing pressure proves “short lived” as claimed, and the terms of the rights issue once the silent period ends.

The Cotton Cycle: Peak, Correction & Timing

• Peak hit in Q1: Cotton prices reached ₹264/kg in June 2022, up from ₹131/kg in March 2021, forcing the company to purchase raw material at elevated levels that will compress near-term margins.
• Correction underway but not yet helping: Prices fell to ₹253/kg in July, a 25-30% decline from the peak, but the benefit flows through only when that cheaper cotton is consumed, which management expects in the second half of the year.
• New crop is the catalyst: Cotton acreage is expected to expand 20-25% across 10 growing states, and management is holding 45-60 days of inventory only through September, waiting for the new crop to arrive and prices to stabilize before buying again.
• Single 30s cotton contribution is already eroding: Contribution fell from ₹86/kg in March 2022 to ₹84/kg in June to ₹78/kg in July, while PV contribution turned negative in June and July after being ₹75/kg in March.

Avinash Bhargava: "We saw a peak in cotton prices June and July. The impact which we will see in the short term due to the purchase of raw materials at higher prices. Currently, the drop of almost 25% to 30% in cotton prices will positively affect the industry in the second half of the year when these benefits of reduced purchase cost will be consumed."

Yarn Division: Pricing Pressure & Mix Shift

• Topline up YoY, down sequentially: Yarn division sales grew 29% YoY but fell 8.2% QoQ, while EBITDA contracted ~80 bps YoY and ~330 bps QoQ as competition and pricing pressure hit cotton and PC Mélange.
• Industry is shifting blends: Mills that predominantly ran cotton and its blends have moved to PV, polyester-cotton, 100% polyester, and 100% viscose, intensifying competition in RSWM’s core categories.
• Realization divergence: Grey yarn realization was flat QoQ at ₹216/kg, but cotton yarn realization fell sharply from ₹359/kg to ₹319/kg, while dyed yarn improved from ₹244/kg to ₹248/kg.
• Mélange outlook is back-end loaded: Prices are currently stressed, but management expects a good market from October onward once cotton stabilizes.
• Short-term pain framed as temporary: Management called the pressure on cotton and PC Mélange “short lived,” but provided no specific timeline beyond the October cotton stabilization thesis.

Denim & Fabric: Resilient With Caveats

• Denim held up in a tough quarter: Sales touched ~75 lakh meters amounting to ₹220 Cr despite adverse market conditions, with domestic collection overdue in a healthy range of 4%.
• Domestic demand was disturbed by price expectations: Buyers held back expecting price corrections on the back of softening cotton, disrupting the domestic denim space even as uniform fabric exporters performed relatively better.
• Realization improved: Domestic denim realization reached ₹249/meter and export ₹221/meter, though the sustainability of this improvement depends on demand returning during the festive season.
• Long-term demand thesis intact: Management expects denim demand to return on the back of festive seasons, but this is a seasonal bet rather than a structural shift.

The Rights Issue: Deleveraging, Not Expansion

• ₹200 Cr+ raise to pay down debt: Management was explicit that the rights issue is not for expansion; it is to retire high-cost debt and strengthen the balance sheet against cyclical downturns.
• Rationale is cyclical insurance: When pressed on why a rights issue is needed given strong Q1 cash accruals of ~₹122 Cr, management argued the textile business is inherently cyclical and the raise is a safeguard, not a response to a current liquidity crisis.
• Terms are pending: The company is in a silent period and did not disclose the ratio or fixed allotment price, only that shareholders will see how it “rewards them” when details are announced.
• An alternative was proposed and deflected: An analyst suggested replacing high-cost debt with external commercial borrowing at 2% instead of diluting equity; management said they had evaluated all options but could not discuss details during the silent period, and noted that net cost of finance would be around 6%-6.5% and ECB plus spread and premiums would cost more.
• Patel family sold shares: Per an analyst’s math, the Patel family, holding ~12 lakh shares, disposed of 75,000 shares in the open market on 4 August 2022, a data point that sits awkwardly alongside the upcoming rights issue.

Puneet Anand: "So basically, the right issue is not for the expansion. It is more to pay off the high debt which we have right now on our balance sheet."

New Capacity: Live Now, Paying Off Later

• Three projects commenced on 1 July 2022: The knits business, 30K spindles of yarn capacity at Gulabpura, and expanded denim fabric capacity at Banswara all began commercial production at the start of the quarter.
• Incremental FY23 turnover estimated at ₹350-400 Cr from these expansions, though the contribution will ramp through the year.
• The big one is still 18+ months away: The ₹315 Cr Lodha plant expansion adding 50,000 spindles is targeted for completion by March FY24, with estimated turnover of ~₹500 Cr once operational.
• Knits showing early promise: Initial interactions with exporters and domestic brands indicate good demand and progress, though it is too early to quantify.
• Utilization is near-full but not sacred: Machines are running at ~95-96%, but management is willing to stop some spindles for a very short period to avoid building unsold stock if demand softens further.

Avinash Bhargava: "As of now, utilization of machines is ~95%-96% and you can say that these are 100%, but yes, looking at the demand and all will not make unsold stock. If it is required, we may stop some spindles and this will be for a very short-term period."

Margins & Cost Structure

• EBITDA margin contracted 30 bps YoY despite strong revenue growth, as higher input costs were only partially passed through.
• Sustainable margin guided at 10-12%: Management expects EBITDA margins of 11-12% in the current market scenario, with at least 12% achievable if the market improves post-October when cotton stabilizes.
• Power costs are a structural drag: The company is running only 23 MW of its 46 MW thermal plant because coal costs are prohibitive, forcing it to purchase balance power from the grid at ₹5.30-5.75/unit on average.
• Specialty yarn is the margin anchor: The increasing focus on high-value dyed and Mélange yarn is intended to sustain margins as plain cotton and PV contributions erode.

Avinash Bhargava: "The sustainable EBITDA margin will be somewhere around 11% to 12% looking to this current market scenario. Otherwise, this market will get improved in a better way. We can have at least 12%."

Guidance & Commitments

Key Metrics