RSWM Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Worst quarter behind, recovery underway: EBITDA fell 77% YoY and the company posted a ₹14 Cr net loss, but management called Q3 the trough and guided for better Q4 profitability.
• Utilization snapped back to full: Yarn and denim hit 100% capacity utilization from early February after running ~18% short, a sharp reversal from the 65% spinning utilization in Q2.
• Power costs stayed sticky on the way down: Power and fuel expense barely budged (₹99.84 Cr vs ₹103.61 Cr) despite a ~₹100 Cr revenue drop, because underutilization, small-lot PV dyed production, and forced private-power purchases kept per-kg costs elevated.
• Inventory overhang is clearing: Yarn inventory was 30–33% above normal at ~8,000 metric tonnes; the company aims to bring it down to ~7,000-plus by end-February as demand picks up.
• What to watch next quarter: Whether the guided Q4 top-line and profitability recovery materializes, the pace of inventory liquidation, and any relief in power costs as utilization normalizes.

Demand & Volume Recovery

• Utilization turned the corner: Spinning division utilization rebounded to 80% in Q3 from 65% in Q2, and from the first week of February yarn reached 100% capacity utilization and denim looms reached 100% as the market picked up and order booking improved.
• Knits still lagging: The knits business is facing teething problems that are preventing full utilization, with a target to reach 100% by end-March.
• PV dyed yarn hit by geopolitics: Demand scaled down after the Turkey earthquake added to the existing Ukraine-Russia war disruption, though domestic demand in Ludhiana and other markets is picking up for the next season with good order bookings.
• China reopening tailwind: Management flagged the easing of restrictions in China and the return of demand as a positive sign, with pent-up demand and a growing middle class expected to drive industry growth.
• Knitted fabric demand still absent: Demand for knitted fabric and related yarns has not yet seen a resurgence.

Bhargava: "It increased from the first week of February. Earlier, we were not able to use our capacity that we were having with yarn and denim... Now we have 100% capacity utilization and in denim, we were able to use only 63%. Now the capacity utilization of 178 looms is 100%..."

Margins & Cost Structure

• Revenue and profitability collapsed together: Q3 revenue fell 15% YoY because average sales realization remained subdued QoQ across all segments (PV, Greige yarn, Cotton Greige yarn, Melange yarns, PV dyed yarns, denim), and EBITDA dropped 77% YoY.
• Power cost rigidity, explained: Power and fuel expenses stayed nearly flat QoQ (₹99.84 Cr vs ₹103.61 Cr) despite a ~₹100 Cr turnover drop for three reasons: Rajasthan power cuts forced purchase of expensive private power from IEX at up to ₹12/unit vs the ₹7.92/unit grid rate; when spindles are underutilized or stopped, per-kg power consumption rises; and in PV dyed, small-lot production on a single ring frame forces the machine to run fully while output is low due to color contamination and quality issues, keeping power cost high during underutilization.
• Employee cost discipline: The company has a policy of not recruiting at higher positions and elevating internally; staff employee cost has been maintained at the same level for three years despite increments, and post-expansion only shop-floor staff (supervisors, sectional heads) will be added, not managerial or administrative staff.
• Inventory valuation losses were accounting-only: Inventory is always marked to market, and the valuation losses booked were only accounting losses; management expects substantial improvement as prices improve.
• Cost control infrastructure: A campus project requires every cost owner to present weekly, fortnightly, or monthly contributions, with operational and commercial heads reviewed weekly at the director level.

Bhargava: "In some of the cases in PV dyed, let me tell you technical things. Let us take one ring frame of 1,000 spindles right and if the lot is of small size, we cannot produce the different colors of yarn on a single machine because of contamination and all quality issues. In that case, the machine will run fully and the production will be low, so the power cost in case of underutilization of capacity will always remain high."

Inventory & Working Capital

• Yarn inventory elevated: Inventory stood at ~8,000 metric tonnes, up 30–33% versus December 2021, due to demand challenges; the company is pushing to penetrate stock into the market.
• Reduction target set: Management plans to reduce yarn inventory to ~7,000 or 7,000-plus metric tonnes by end-February.
• Inventory control policies: Internal policies mandate 15 days of stock for polyester, 15 days for viscose and other raw materials, with consumables and store consumption reviewed weekly, fortnightly, or monthly.
• Cotton risk management: A Cotton Purchase Committee (purchase team, Operations, Business, CFO, JMD, MD) reviews purchases fortnightly or monthly; the company does not speculate on cotton prices and incurred no trading losses on cotton in the nine months.
• Debt repayment: Approximately ₹200 Cr is to be repaid this year.

Capex & Strategic Initiatives

• Lodha spinning expansion: Machinery delivery to start April 2023, with complete erection by approximately 31st July 2023 and the project to be completed by 2024; the expansion covers denim, mélange units, and 51,000 spindles at Lodha, Banswara.
• Rajasthan government package: RSWM sanctioned a special customized package under RIPS 2019 for the Lodha expansion, which has been notified.
• Solar capacity addition: Additional solar panel and solar plant capacities are in the pipeline, with management stating that "whenever the next results will come, you will find that some additional capacities of solar panels and solar plants have been added."
• Cheslind asset sale complete: Assets of the Cheslind textiles unit near Bangalore have been sold and the money realized.
• Union Budget tailwinds: Five new HSN codes introduced for precise policy support, higher allocation to RoDTEP, RoSCTL, and ATP, and a cluster-based value chain approach through PPP suggested for ELS cotton productivity.

Segment & Product Dynamics

• PV dyed yarn: holding the line: Management is not reducing PV spindle exposure and is using 100% capacity; domestic demand in Ludhiana and other markets is picking up for the next season with good order bookings, even as export demand faces pressure from the Turkey earthquake and the Ukraine-Russia war.
• Value-added commitment intact: The company remains steadfast in its commitment to expanding share in the value-added segment and further penetrating the domestic market.
• Knits: work in progress: The knits business is facing teething problems preventing full utilization, with a target to reach 100% by end-March.

Bhargava: "We are not reducing the PV spindle exposure; we are using our 100% capacity as of now and since the demand is good in Ludhiana and other domestic market and that demand is picking up for this next season. There are good order bookings from Ludhiana market."

Guidance & Commitments

Key Metrics