VTLNSEQ4 FY22May 23, 2022

Vardhman Textiles Limited

10,224words

168turns

15analyst exchanges

5executives

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Management on call

Neeraj Jain

JOINT MD, VARDHMAN TEXTILES LIMITED

Sushil Jhamb

DIRECTOR (RAW MATERIALS), VARDHMAN TEXTILES LIMITED

Mukesh Bansal

EVP (FABRIC MARKETING), VARDHMAN TEXTILES LIMITED

Rajeev Thapar

CFO, VARDHMAN TEXTILES LIMITED

Abhishek Nigam

BATLIVALA & KARANI SECURITIES

Key numbers — 40 extracted

60 crore

o major expenditure which has been booked in this period. So, one is hedging lot of loss of about 60 crores. When we were buying cotton at the starting of the season we felt prices are too high because it

Rs. 100,000

ne of the highest ever prices in the history of cotton whereas existing prices are close to about Rs. 100,000 per candy which was last year about Rs. 46,000, Rs. 47,000 a candy. The international prices also

Rs. 46,000,

cotton whereas existing prices are close to about Rs. 100,000 per candy which was last year about Rs. 46,000, Rs. 47,000 a candy. The international prices also from 70 cents, 75 cents last year today are in t

Rs. 47,000

as existing prices are close to about Rs. 100,000 per candy which was last year about Rs. 46,000, Rs. 47,000 a candy. The international prices also from 70 cents, 75 cents last year today are in the range of

350 lakh

higher compared to international increase because …………… which was estimated earlier in range of 350 lakh to 360 lakh bales it is now revised estimates are coming between 315 lakh to 324 lakh bales as of

360 lakh

pared to international increase because …………… which was estimated earlier in range of 350 lakh to 360 lakh bales it is now revised estimates are coming between 315 lakh to 324 lakh bales as of now.

315 lakh

ted earlier in range of 350 lakh to 360 lakh bales it is now revised estimates are coming between 315 lakh to 324 lakh bales as of now. So, that is one of the reasons where the drop was little

324 lakh

in range of 350 lakh to 360 lakh bales it is now revised estimates are coming between 315 lakh to 324 lakh bales as of now. So, that is one of the reasons where the drop was little low because

100%

imize the operation, some people have reduced the capacity, some have shifted to the synthetic or 100% poly or viscose, etc., so that they can run through operation that the same time they can reduce

35%

al turnover and what is it currently? Neeraj Jain: So, out of the total production we do almost 35% to 40% in the yarn exports and about 30% we consume for the captive and another 30% is for the do

40%

over and what is it currently? Neeraj Jain: So, out of the total production we do almost 35% to 40% in the yarn exports and about 30% we consume for the captive and another 30% is for the domestic

30%

eeraj Jain: So, out of the total production we do almost 35% to 40% in the yarn exports and about 30% we consume for the captive and another 30% is for the domestic market. So, there is not really an

Guidance — 20 items

Neeraj Jain

opening

“So, that is on the raw cotton side, but at the same time the overall crops seems to be the next year perspective looks good because the area is increasing practically everywhere and including India and there could be a possibly and next crop would be quite good since monsoon and things goes well which as of now are okay.”

Neeraj Jain

opening

“In this period the next year crop seems to be quite good as of now.”

Neeraj Jain

opening

“The monsoon as of now looks to be on time and there could be a possibility that the next year crop in India as well as in the world market could be good so there could be a surplus situation next year compared to the situation this year.”

Neeraj Jain

“So, there is not really any major change 2021 versus 2021-22 of course 2021-22 will be a little lower as a percentage in exports because captive consumption was less and we were exporting more in 2021, but if we look at the pre pandemic situation then probably this year is a normalized year and our export percentage would be almost comparable to pre pandemic period.”

Abhijeet Dey

“One question from my side regarding the hedging losses which you mentioned because cotton prices have continued to move up post 31st of March so I just wanted to know you can give in terms of directions whether we will see more hedging losses going forward I mean have we continue to hedge cotton even in this current quarter and what is your strategy going forward?”

Neeraj Jain

“The first that which was already under implementation the two projects one at Budhni second Gore-Tex project at Satlapur they are on schedule and they are likely to be completed by September, October this year there are some small delay and because of the construction or the supply of machinery otherwise it is on schedule.”

Neeraj Jain

“The total spinning and vortex taken together it will be about 100,000 spindles equivalent.”

Neeraj Jain

“I think at the same time going forward in these prices continue there could be a possibility of a further drop in the overall spinning activity.”

Hemant Gupta

“My question was regarding export as I understand like we are integrated company in the sense like regarding yarn, fabric and then the garments also what part of the value chain we actually explored the most that is the first question I had, secondly do we intend to focus on exports especially from value added segments of value chain like maybe garments and all?”

Neeraj Jain

“I can give you an idea it is estimated that whatever cotton consumption was happening earlier probably today there would be a drop of at least 25% and it will have both the fact one there will be some capacity utilization which would have come down and maybe partially 5% to 7%, 10% could be the substitution which can happen by way of viscose and poly, but as of now the major is the drop in the overall production.”

Risks & concerns — 15 flagged

As a result of that the spinning industry came under pressure and if you go by the marginal cost of raw cotton and the marginal sale of yarn, there is definitely pressure in terms of these margins and many products virtually there could be possibility that there is no margin available in a commodity products as of now.

— Neeraj Jain

The margin that started becoming normalize, but I think again because of the very high prices of raw cotton since there is a pressure from the retailer or from the final brand to accept this kind of price increase, entire chain is trying to readjust and the entire change in margin have been eroded as of now so the same situation is there for the fabric also.

— Neeraj Jain

So, I do not think that domestic availability will improve by reducing the export, but at the same time I think there could be more stress which could come to the sector.

— Neeraj Jain

It is the question of viability of operation as of now so that is why there is a concern on the demand.

— Neeraj Jain

I mean what is your sense in terms of the demand side because I mean some of the US large retailers I mean they are seeing a slowdown in discretionary consumption and inventory levels are high in the chain it seems so I mean like what is the visibility that you have that while you indicated that you can run at 100% capacity in Q1, how do you think about like your utilization level going to year I mean is there a risk that we see demand also slowing down in second quarter onwards?

— Sonal Gupta

So, I think there is some concern to the people on overall consumption because of that also and third is the supply chain is started improving now.

— Neeraj Jain

And how difficult it would turn from pure cotton let us say mixtures does it take a lot of time or does not have a very long procedure?

— Himani Upadhyay

Some changes are required in the machinery part as well as the layout, but that is not very difficult to do.

— Neeraj Jain

So, I think the likelihood of India to import big quantities n this period with a risk that instead of 30th September cotton which is on 1st of October you pay and you have to pay 11% duty people will not take that kind of a risk.

— Neeraj Jain

Regarding this like yesterday there was this notification from South India Finance Association it was mentioning that they will stop procuring cotton and they will be closing out all the mills so any impact of this on your business I believe it should be positive for you because the availability of yarn will go down in the country, so like any other impact of business of this on your business?

— Nikhil Agrawal

So, there is a pressure on the fabric side also.

— Neeraj Jain

So, entire chain so on one hand the farmer got lots of money available to them so they have made money and after that the entire chain is trying to readjust so the spinning, knitting, weaving or garmenting everyone margins to that extent have come down because there is a final pressure from the retail to accept those margins.

— Neeraj Jain

So, fabric also as of now our margins are under pressure only because the yarn keeps on increasing and it is very difficult for us to pass on those prices to the final consumer.

— Neeraj Jain

For the first half it may be difficult to comment at the moment, but for last three, four weeks we have some capacity utilization issues that we are running at about 85% to 90%, but we expect that it start improving in another two weeks or so because the demand cannot be permanently subdued it will bound to come back.

— Management

There is inertia because the customer does not take a knee-jerk reaction on a shorter period of time because changing the product mix and taking the product to the consumer, convincing the consume of a new product range itself that is the big risk for the retailer.

— Management

Q&A — 15 exchanges

Basically, I just wanted to understand because I have been reading reports media that there are chances or there are suggestions that probably yarn exports should be banned, do you think such a thing is possible or what is your take on that and is that like any move like that could impact us?

Neeraj Jain

Ultimately it is the judgment of comment what they want to do, but as of now the exports have already come down because the prices are so high that customer outside is not willing to pay those kind of prices and we understand as of now the production cuts have already happening by this spinning mills on the cotton spinning. So, if any measure is taken where the exports are reduced or cut down or calibrated probably it will have some impact more on the prices in domestic market because already the demand is poor I will not say the demand is poor already prices are so high that is why the demand

One question from my side regarding the hedging losses which you mentioned because cotton prices have continued to move up post 31st of March so I just wanted to know you can give in terms of directions whether we will see more hedging losses going forward I mean have we continue to hedge cotton even in this current quarter and what is your strategy going forward?

Neeraj Jain

Yes we still feel the prices are on a very high side so we are not taking any further hedging as of now, but whatever we have done I think that still continues as of now and we will have to decide at some stage when do we wind it up, but as of now it is continuing. So, you are not entering into any new hedging contracts that is what you are saying? As of now no. And secondly sir on the CAPEX the first phase of expansion in the yarn side is expected to come up by September and then also post that you have announced series of CAPEX so all that is basically on schedule or is there any change in t

Just wanted to understand your view that like you mentioned that you are expecting cotton prices to move down and at these prices there are no demand and mills are shutting down, so then who is buying this cotton and why our cotton prices sustaining at these levels and if cotton prices do come down as you are predicting then will we face some inventory loss?

Neeraj Jain

So, first of all the cotton prices have increased in the entire world so I think it is more than physical demand, there are lots of demand who have taken a position because of easy money policy. So, they have invested into various commodities including cotton. So, that is one of the reasons the prices have been going up otherwise on fundamental we not feel or find any reason why the cotton should be double compared to the last year when there is not kind of demand increase happening in the raw cotton prices. The Indian prices are in sympathy have increased in India which is the line to the wor

My question was regarding export as I understand like we are integrated company in the sense like regarding yarn, fabric and then the garments also what part of the value chain we actually explored the most that is the first question I had, secondly do we intend to focus on exports especially from value added segments of value chain like maybe garments and all?

Neeraj Jain

So, both yarn and fabric. Garment is a very small composition of our overall business may be less than 1% may be at best 1% or so. So, both yarn and fabric we are exporting almost 40% of our production directly exports.

Just a quick question on the global yarn prices I mean the previous high of 2008-2009 was close to about $160, $170 so what is the view that those kinds of levels can be seen and obviously converted to Indian multiplied by the Indian rupee and converted to the Indian price would be much higher that is one and the second being that at that high prices what are the chances of polyester increasing its share in the entire textile value chain vis-a-vis cotton?

Neeraj Jain

So, the previous high 2010 for a small period of time the cotton touched almost $2 per candy also. So, as of now it is close to about 145 cents, 150 cents as of now, but if you look at the Indian prices the previous high of Indian cotton price was about Rs. 65,000 a candy which as of now is Rs. 100,000 plus per candy. So, I mean it is anyone guess if the price continues to go up nobody had thought that the prices will go to these levels so if it continue to go up it can happen anyone guess to that extent. So, yes there is lot of substitution happening both with the 100% probably and as well vi

I have one question regarding the underlying demand so I understand the prices of cotton have gone up and there is stock price increase of yarn, there is a resistant among customers, but the underlying demand for yarns I mean given this if you remove this extraordinary situation how do you see the demand in terms of for an Indian player given the China plus one and things like that so if you can just give some sense on that?

Neeraj Jain

The momentum of the demand from India still continues to be good. The China plus one factor where most of the European or the Western world started looking at they are still go on the same, they still want the India to deliver them to both yarn, fabric and the garment whatever we can do. So, I think on fundamentals I do not think there is any change happened in last three to four months’ time, but since our prices have increased over a point so that is where their resistance is coming to buy at these levels, but in terms of their thought process or fundamentals I do not think there is any big

Just a small follow up on that hedging question so as compared to where the contracts would have closed on 31st March I understand we have carried forward those contracts and we have not entered into new contract, but then as on date where would the prices be? If it were to be calculated today should they be staring at more mark-to-market losses on the contract that we are carrying forward?

Neeraj Jain

So, the first quarter thee will be some amount of further mark-to-market so what I mentioned earlier that we are not inching into any further new contracts, but yes whatever is carried on that is carried on. So, first question will also have some mark-to-market on that. And can you quantify it as compared to Q4 as on date where would it be just to get a sense of the quantum? No, it will be lower than that, but too early for me to say anything as of now because the quarter is still. So, we have not still concluded the position so yes as of now surely will be lower than the first quarter. Second

Just wanted to understand like have you quantified the Q4 hedging losses?

Neeraj Jain

Q4 already is announced in the balance sheet. I mean in terms of P&L impact is there anything that is there? So, 60 crore is already quantified and recorded in the books of accounts. I mean what is your sense in terms of the demand side because I mean some of the US large retailers I mean they are seeing a slowdown in discretionary consumption and inventory levels are high in the chain it seems so I mean like what is the visibility that you have that while you indicated that you can run at 100% capacity in Q1, how do you think about like your utilization level going to year I mean is there a r

I had a question see what we are hearing is even large brands want to have more cotton and acrylic mix and various other mixtures in the textile because of the increased cotton prices what impact does it have on our business and are we also seeing increased penetration or let us say what was 100% cotton moving to 90% cotton and 10% something else and does it really make a dent or changes our spread in yarn manufacturing so this was the first question?

Neeraj Jain

Yes so it is true that lots of brands are looking to reduce their cost they want to move from 100% cotton to the blends especially polyester and viscose. So, we are really finding those kind of trends in the market, but it does not make much watch for us whether we have used in 100% cotton or we are producing all these blends. So, on the spinning side it does not make really much of a difference to us. So, we are finding those changes and to that extent we are converting our internal capacities also on those products and we keep on evaluating it with 100% cotton yarn and whenever we find or we

Sir I just wanted to understand like for your production in Quarter 4 what percentage of the raw material of cotton that was used in Quarter 4 was procured in the previous quarter because there has been a significant rise in prices in Quarter 4, so I just wanted to understand what percentage of cotton was procured in the previous quarter which you have used for production in Quarter 4 if you could highlight on this?

Neeraj Jain

It is ongoing purchase because the new season starts only in the month of November. The online purchase we will keep buying on a daily basis and consuming it. So, it is not we had a huge stock which were available to us till 31st December. Early you have maintained that your cotton procurement season is always been October to March because of the prices and the quality of cotton that you get, but just previously you mentioned that you are still procuring cotton like any reason like behind that because cotton prices are already on an upward trend, so does that have any impact on your margins as

Sir if you could share the average realization for yarn and fabric for Q4 as well as FY22?

Neeraj Jain

I can only say for the industries purpose we do not share our own realization in the industry. I think the average realization in this period would be $4 50 cents or so. If you could share what is the average cotton price for the year? For the year. Yes for the year FY22 the average cotton price for us? For us we do not share our own cotton prices I think once you get the balance sheet you can calculate it yourself.

Couple of questions first I just wanted to be clear on your previous statement are we saying that the current cotton and yarn prices if we were to do business EBITDA margins would be negative?

Neeraj Jain

Negative or miniscule I will say. So, in that case how long can the procurers continue to hold out I mean ultimately there can be some inventory correction in the global system for two or three months, but they will have to start buying as well I mean the government have to be still produced and sold, so is this a very temporary thing they can hold out for or that can be much longer in your experience? No, they cannot really hold on to beyond a point they will have to procure in any case. So, everyone is looking at everyone is feeling these are higher prices. So, everyone is looking by delayin

Just wanted to know when did the official season get over for cotton this year, was it sometime in the mid-April or end April?

Neeraj Jain

No that is our official date so our cotton season typically all balance sheet we talk on media instead of 1st October to 30th September most of the time by 31st March or by 30th April we get almost 90% cotton is available in the system for the season and I think even today also situation is almost like this 84%, 85% profits already come. You mentioned that you continue to purchase cotton even today, but by when did you finish most of your purchases was it by March end or was this by April end? Normally we finish by 30th April. And this year would have been similar? No this year I have already

Just wanted to understand how much is the fabric prices increased in the last 5 to 6 months versus the yarn price increase?

Mukesh Bansal

I would say in the last 5 to 6 months whatever yarn prices have increased about 70%, 80% of that has been absorbed in the fabric prices also. And are we having any price increases experience in any price increases in the last one or two months given that yarn prices are not increasing materially? Yes, once the yarn prices stabilize that when I am giving a range of 70% to 80% that range keeps on increasing so from 80% it will move down up to 90% and so on. So, eventually if the yarn price is stabilized maybe another month or so 100% of yarn pricing set up job in the fabric pricing. Sir, any imp

Thank you very much and as we are discussing it is a very challenging situation for the industry, but I am sure this challenge has some medium term impact or advantages also though there could be short term concern that the mindless expansion which people start looking at may be reduce to some extent and people were start looking at more economic reason rather than it is only a north or one-way traffic for the profitability. Having said that of course there are challenges issues, but I am sure internally we are looking at it very seriously on a daily basis, hourly basis what could be the chang

Management

Speaking time

Neeraj Jain

Moderator

Himani Upadhyay

Sandeep Baid

Bharat Chhoda

Apurva Sharma

Gaurav Jain

Sonal Gupta

Nikhil Agrawal

Keshav Garg

Opening remarks

Abhishek Nigam

Thank you. Good evening everyone. On behalf of B&K Securities I would like to welcome all of you for the fourth quarter FY22 Results of Vardhman Textiles Limited. Today, we have with us senior management of the company including Mr. Neeraj Jain – Joint MD, Mr. Sushil Jhamb – Director for Raw Materials, Mr. Mukesh Bansal – EVP for Fabric Marketing and Mr. Rajeev Thapar who is the CFO and I would now like to hand over the call to Mr. Jain for opening comments.

Neeraj Jain

Thank you. Good afternoon everyone. I am sure the results would have been seen by all of you so as expected the fourth quarters numbers were still okay since the market at that stage was stable the prices of cotton were still not very high till the fourth quarter and in line the business the results are in line with the I think the working which was happening in that period So, there has been one or two major expenditure which has been booked in this period. So, one is hedging lot of loss of about 60 crores. When we were buying cotton at the starting of the season we felt prices are too high because it was the start of the new season and we were covering the cotton physically so we tried to hand it over New York future by selling in the New York future so that in case if prices comes down at least that action could be an advantage there would be a hedging, but unfortunately the market was going in a different way both internationally and domestic as a result of that it was a mark-to-ma

Mukesh Bansal

Good evening everyone. Thank you Neeraj ji. Yes you rightly said that during the Q4 on the fabric side the demand was coming back after a lull of about 6 quarters. So, not only the foreign markets but the Indian market was also rebounding as after a long time we were seeing when all the markets were opened and the consumer was coming to work, coming for tourism so there was a good demand. Of course, as far as the prices are concerned, the profitability has started coming back to normal now, but at that time since the cotton and yarn prices were still rising and there is always a time lag which maybe a yarn price increase and fabric price increase, but nevertheless, people were adjusting to remove price, customer were adjusting to prices during the Q4. Nothing much to be added Neeraj.

Neeraj Jain

I will request Mr. Sushil Jhamb to add or we can start with the questions so first we can take up on the raw cotton, Mr. Jhamb who is our Director (Raw Material) is also available so accordingly we can take the questions now.

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