RSWM Ltd Q1 FY2024 Concall Summary

Key Takeaways

• A brutal quarter, called a bottom: Revenue fell 5.8% QoQ to ₹901 Cr. and the company posted a net loss of ₹18 Cr., driven by a collapse in yarn demand and pricing. Management insists the market has bottomed and H2 will improve.
• The yarn business is bleeding: An average loss of ₹56 per kg and a 35% drop in orders crushed the top line, as sluggish global and domestic demand met stabilized but still-unfavorable cotton prices.
• Denim is in a price war: Brands are delaying orders and sitting on high inventory, while established mills compete aggressively on price, keeping industry utilization below 65%.
• A contrarian capacity bet: The company is adding 51,072 spindles for specialty products, betting that stabilized cotton and a demand recovery will justify the expansion, even as current demand remains weak.
• What to watch next quarter: Whether the promised H2 demand recovery materializes, the pace of the new spindle ramp-up, and any relief from BIS import regulations after October 5th.

Demand & Market Conditions

• Yarn segment in freefall: A 35% drop in orders and an average loss of ₹56 per kg reflect a dual hit from sluggish international and domestic demand, compounded by low prices and overstocking across the value chain.
• Export mix collapsed: Exports have fallen to around 25% of revenue from a prior 65:35 domestic:export split, as the European market offers low demand and intense price pressure.
• Denim orders delayed: Brands are grappling with substantial inventory levels after sluggish April and May sales, pushing out orders and forcing mills into a fierce price war where no competitor exceeded 65% utilization.
• Mélange losing share: The segment's share within the textile supply chain is declining due to subdued demand, with limited orders from international brands, though domestic innerwear and loungewear brands are buying steadily.
• A few green shoots: The knits segment saw a positive upswing in anticipation of the new season, with buyer interest in innovative blends. The furnishing segment is seeing improved domestic order flow, though export order books remain thin.
• Ludhiana knitting utilization rising: Production for the upcoming festival and winter season has commenced, signaling some near-term domestic demand.

Bhargava: "No one as of now in textile can say when we will revive because we can excel in our operation but market-driven conditions will always prevail."

Financial Performance

• Top-line contraction: Revenue of ₹901 Cr. was down 5.8% QoQ, driven by low demand, low prices, overstocking, and elevated electricity and gas costs, all against a broader economic slowdown reducing readymade garment demand.
• Profitability wiped out: EBITDA stood at just ₹25 Cr. with margins of 2.8%, and the company reported a net loss of ₹18 Cr. Gross profit was ₹336 Cr. with a gross margin of 37.3%.
• Collections held up: The company collected over ₹200 Cr. in Q1, nearly matching sales, and the ageing of accounts receivables remains healthy with only 4.81% in the 90-days-plus bracket.

Operational & Competitive Dynamics

• Spinning at full tilt despite losses: The company is running spinning plants at 100% utilization with 88-89% efficiency, a level matched by other players, meaning supply discipline is absent industry-wide.
• Imported yarn dumping: The extension of the BIS registration deadline to October 5th led to increased dumping of imported yarn in the 100% polyester and 100% viscose segments, adding pressure on domestic prices.
• Synthetic peers overstocked: Competitors in synthetic yarn are carrying long stock positions extending to 50 days or more, signaling deep demand weakness across the category.
• Dyed yarns in seasonal trough: July and August are historically lean months, with some mills facing a decline in sold-order backlogs and resorting to partial production-line shutdowns; improvement is anticipated around September.
• International context: China overtook India as the top buyer of Egyptian cotton in 2022, its yarn exports to India doubled in Q1, while Bangladesh's garment exports grew 8% in May and Turkey's apparel exports declined 6.5% from January to April.

Strategic Moves & Capacity Expansion

• Specialty spindle expansion: The company strategically expanded its Lodha unit with 51,072 spindles, formally inaugurated on August 2nd, which will take one to two months to operationalize and will produce only specialty products.
• The rationale is a recovery bet: Management believes that with cotton prices now stabilized, demand will improve, and the new plant's quality will be superior to current production, positioning it to capture better margins when the cycle turns.
• Polyester shift underway: The company is orchestrating a strategic shift toward polyester fabrics, citing surging demand for polyester across diverse applications.
• Brand additions and innovations: New names like Benetton and Puma have been added to the portfolio, with significant volume orders anticipated. The company is also supplying intelligent fabrics with attributes like UV protection and anti-bacterial properties to a renewed domestic brand.
• Print fabrics export win: An initial sales order of 25 metric tonnes was secured from Antigua, marking an early export foothold in this category.
• Renewable energy build-out: The company now has 29 MW of solar capacity and has added a further 20 MW through solar power plants, though it did not disclose the proportion of renewables in its total power mix.

Bhargava: "What I personally feel that whatever was bad we have seen it. Now, the cotton prices are stabilized, definitely, the demand will improve, and the quality of production in this new plant will be much better than the quality which we are producing as of now."

Segment-Level Trends

Guidance & Commitments

Key Metrics