VTLNSEQ2 FY23October 31, 2022

Vardhman Textiles Limited

7,717words

77turns

9analyst exchanges

5executives

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Management on call

Neeraj Jain

MD, VARDHMAN TEXTILES LIMITED

Rajeev Thapar

CFO, VARDHMAN TEXTILES LIMITED

Mukesh Bansal

SENIOR VP, FABRIC BUSINESS, VARDHMAN TEXTILES LIMITED

Sushil Jhamb

DIRECTOR, RAW MATERIALS, VARDHMAN TEXTILES LIMITED

Abhishek Nigam

BATLIVALA & KARANI SECURITIES INDIA PRIVATE LIMITED

Key numbers — 35 extracted

30 million

, the Indian crop last year got damaged and the overall cotton crop was much less, close to about 30 million bales or so. On the top of that, because of the custom duty, the imports could not be done well o

50%

underutilized. It is estimated as on today I think almost the cotton consumption is not more than 50% of what it used to be the normal consumption. That's the estimate as on today, which has both the

100%

part of the spindles were converted on the alternate products which may be viscose, which may be 100% poly spun and so on then the profitability could be either very low or maybe not, maybe small los

120 million

per day. We also ……. because generally from India we were doing an export of closed about 110 to 120 million kg per month. In this period if you look at the last three months our average export from India h

37 million

od if you look at the last three months our average export from India has been in the range of 35-37 million kg only so which means we've lost close to about 70% of our exports in this period and also the d

70%

m India has been in the range of 35-37 million kg only so which means we've lost close to about 70% of our exports in this period and also the domestic demand also had some pressure because all thi

90%

rts of the textile value chain and we are also operating our woven fabric division close to about 90% utilization. So, this was related to India if you look at the outside India, all of us are aware

10%

ms of our spinning capacity I think off and on we have been stopping our capacity in the range of 10% or so. So, our productions were 10%, sometimes 12%, 10% down and another about 8% to 10% capacity

12%

ave been stopping our capacity in the range of 10% or so. So, our productions were 10%, sometimes 12%, 10% down and another about 8% to 10% capacity was diverted to the alternate product which was no

n the range of 10% or so. So, our productions were 10%, sometimes 12%, 10% down and another about 8% to 10% capacity was diverted to the alternate product which was non-cotton. So maybe not making m

80%

ving we sell some surplus grey weaving fabric also. That capacity utilization was in the range of 80%-85% but the process I think still we could manage to do close to about (+90%). The future prospec

85%

we sell some surplus grey weaving fabric also. That capacity utilization was in the range of 80%-85% but the process I think still we could manage to do close to about (+90%). The future prospects,

Guidance — 20 items

Neeraj Jain

opening

“One is the normal demand which got concerned to the demand from India because the cotton prices was a challenge and third most of the people whosoever was there in the world market, they had an excess inventory and since the price of cotton started coming down, inflation concerns were there, everyone was having a concern on the consumptions going forward.”

Neeraj Jain

opening

“Last 3 months was the situation where we were losing more because our cotton prices were higher compared to the other parts but I hope now going forward I think towards the middle of November or end of November depending on which spinner has how much cotton available to them for the previous stocks but surely December onwards I think our prices or our loss or gain would be aligned to the international gain or loss as far as the spinning is concerned.”

Neeraj Jain

opening

“But I hope with the cotton prices becoming reasonably at a reasonable level in comparison to the international prices, there will be some activities which will be improving in India even though the situation may not improve outside.”

Neeraj Jain

opening

“But it's now under commissioning and I hope that maybe next one month or so we'll start operating it partially and by 31st December I expect the plant to be fully operational.”

Neeraj Jain

opening

“Of course, we have to look at the viability and I'm not talking about that from the plant’s readiness perspective, I think the next one month we might start looking at starting the trial runs and maybe by 31st of December we'll try to complete this project as well.”

Neeraj Jain

“So the spinning activity got a bigger damage in India and my belief if our cotton prices are almost aligned to the international markets, probably we will be utilizing better capacity in India compared to the 40%-50% cotton spinning which is stocked as on today.”

Neeraj Jain

“Two, since our raw material prices will be aligned so we will not be losing higher or we will be as I mentioned earlier losing or gaining same which the other parts of the world would be doing.”

Neeraj Jain

“One is in the medium term, what I had mentioned earlier, I still have the same belief that all brands who are looking at India as a serious player continues.”

Neeraj Jain

“The possibility of further spinning stoppage will be …….”

Mukesh Bansal

“So, as a sum total of that we expect that the demand in the coming quarters could be slightly better especially from the US market.”

Risks & concerns — 15 flagged

In this period if you look at the last three months our average export from India has been in the range of 35-37 million kg only so which means we've lost close to about 70% of our exports in this period and also the domestic demand also had some pressure because all this capacity which has stopped, initially people tried to divert to the domestic market and the domestic could not absorb so much of yarn as a result of that things became worst.

— Neeraj Jain

One is the normal demand which got concerned to the demand from India because the cotton prices was a challenge and third most of the people whosoever was there in the world market, they had an excess inventory and since the price of cotton started coming down, inflation concerns were there, everyone was having a concern on the consumptions going forward.

— Neeraj Jain

It was also a challenge to maintain the quality of final products with that kind of a quality of cotton.

— Neeraj Jain

The final part when the capacity utilization would improve, it's very difficult for me to say as of now because it's not related with India or with Vardhman.

— Neeraj Jain

I think till the time there are troubles, issues, difficulties in the western part of the world, it's likely to be difficult to continue or to start the full operation by most of the industry.

— Neeraj Jain

The first quarter, I was very clear that things are becoming difficult and challenging first, because at that stage, the demand issue was not there that bad in the European, because the effect of war was not looking at in the gas prices at that stage.

— Neeraj Jain

So, on these three accounts there were inventory buildup which was the impact of that was still prevailing up till the second quarter.

— Mukesh Bansal

Though there is some pressure, I understand, but China plus One opportunity should help in both yarn and fabric to sell or export more to countries which were earlier sourcing from China.

— Prerna Jhunjhunwala

There we still see some decline because of the inventory crisis and natural lower level of buying because of the fear of recession.

— Mukesh Bansal

So, the impact of which will start flowing in maybe from fourth quarter of this financial year.

— Mukesh Bansal

Because otherwise as we consuming it in a full basis probably there would have been a shortage of cotton and it would have been difficult to run the operations whatever we are carrying.

— Neeraj Jain

I just wanted to understand what is the risk of inventory loss in 3Q?

— Roshan

So, it's difficult for me to quantify or to share it as of now.

— Neeraj Jain

65,000-70,000 has no sense, no issues, no concern, it’s only whatever is the New York Future, are we aligned to that or not, that’s more important.

— Neeraj Jain

It's very difficult to convert on the garmenting from one country, one supplier to the other.

— Neeraj Jain

Q&A — 9 exchanges

Can you help me with actually like what percentage of the spindle capacity we are running at currently? Number two, I would like to ask is that as you said that the industry is operating at 40% to 50% and over the next 2-3 weeks and when the cotton arrives, then industry is expected to start operating at not normalized capacity but at better capacity utilization than the current level. But what we were reading was that many of the spinning mills have converted themselves to produce this viscose or the other manmade fibers, so can you please highlight on that?

Neeraj Jain

I already covered this in my speech, but for the benefit of you and others I will again repeat. So, we stocked close to about 10%-12% spindles and another 10%-12% we converted on the alternate products like viscose or spun. So as of now out of that stocked capacity, we have started it partially maybe 50% of that and the remaining also we have to look at how do we do that? The converted capacity on viscose and poly we are still continuing because of still the cotton prices are high in India and the enough orders are not there even as one today also. Third I only said since Indian cotton prices

I have two questions. First is, could you just quantify the current spreads?

Neeraj Jain

I already said the current spreads is almost breaking even with the current cost of cotton. I mean, could you quantify that? Because last time you had, I think, mentioned one number. So, I just wanted to compare. You said it's breaking even. Yes. So, it's close to about ¢70-75 as of now. Another question is in terms of your optimism; how would it be different compared to what you said in Q1? Would you be slightly more positive than your commentary in Q1 or at the same level or negative? As regards the yarn demand situation. One is in the medium term, what I had mentioned earlier, I still have

I think this is a fantastic set of results in current scenario so congratulations on the same. I just wanted to understand the demand scenario a little bit in detail. You mentioned that woven demand is still better than other segments. Could you please give us some color with respect to domestic and international how things are panning out and how is the order book panning for the next season?

Mukesh Bansal

I'll take up that question. Actually, if we look at the new orders placement, even in the second quarter people were working on correcting their inventories which they had bought in the second half of the previous financial year. People were still sitting on higher inventory than usual because of two reasons, one, they bought more because of the pent-up demand and second because of the logistics was at that time that started easing out, so all of a sudden, they had inventories which they would have anyway land in US in the next 2-3 months, all of that landed so simultaneously. Third aspect is

I just wanted to understand what is the risk of inventory loss in 3Q?

Neeraj Jain

There will be inventory loss in one, whatever cotton is available; the prices of yarn is already readjusted to the need of future. To that extent I think there will be definitely a revaluation happening. Two, in the books of accounts, every factory they look at their cost of consumption and on the top of that they add the cost of conversion. So that’s how the finished goods or the WIP inventory is there. Once our cotton prices comes down from the…… the new crop which will be much cheaper, probably there would be a valuation hit also which will be coming in third quarter as a one-time…… . So, i

The first thing, a book keeping question. When we say our total spindle capacity as on annual report FY22 11.3; does this include 35,000 that you have commissioned?

Neeraj Jain

No, that’s after that. So currently it is 11.6, lakh spindles? Yes, whatever because the installed capacities which is actually installed in the packing and anything which is coming after that is over and above that. And you are adding 65,000 that will get commissioned hopefully by December so total would be then 12.2? Total 12 lakh spindles. Putting all together when everything gets commissioned it will be 12 lakh spindles. We have seen all kinds of margin in the last three-four quarters, good-bad-normal. So, any color you can give in a normal demand environment and let’s say cotton settle ar

Just to understand the wait and watch mode of the industry and sustain a continuously for the second quarter I mean third quarter, we are actually seeing that the industry is waiting for alignment of international prices. The local prices are not aligning. So, just to understand the situation that as per the USDA reports and World Trade is projected nearly 1 million bales lower and the off take of China and Pakistan is lower. The overseas countries like even Bangladesh, they have around 40% to 50% advantage to us. If that alignment doesn't materialize maybe by December or so. So, what is the c

Neeraj Jain

There are two factors to that, one would be demand of yarn that I can.…… yarn and ……. . One is the demand of yarn where if the demand yarn is there then probably, we'll start looking at people will reconvert or recalculate their prices of raw material and it makes sense then they will start buying. So, it depends upon how the yarn behaves, how the demand behaves and that's one comfort. But I think from India's perspective, more important is that our historic difference from New York Future is in the range of about 5 to 10 cents over and above the New York Future. Today if the New York Future i

I was just trying to understand the risk of yarn imports from China and the risks attached with the imported Chinese yarn eating into the market share of Indian players.

Neeraj Jain

Let's look at we are the net exporter of yarn to China. That only happened because we were competitive as a country. Now, this year as I mentioned earlier also our raw material prices were much higher where the prices in China were much less. They could export the yarn to India. But once our costs are normalized, once our raw material is normalized, I'm sure once we'll be competitive, there's no issue or concern or a chance for the Chinese to dump yarn in India. I don't have those risks in my mind.

Can you give any ballpark figure in the cotton ecosystem? How much could be going towards the home textile, denim and the woven fabrics and knitted fabrics.

Neeraj Jain

I am sorry, by that bifurcation of figures won't be available. Any ballpark figure will suffice. Not really. Not possible, because it's very difficult to estimate that. We have only estimation of how much do we do cotton spinning, how much do we do for the other fibers. But within those segments, there's no estimation available anywhere. In your sample, when you target your clients, you could be knowing what they are producing, right? From Vardhman’s perspective, we do close about 30% for our internal fabric region. And out of that remaining 70%. Our here is almost 70% in favor of knitting and

Thank you everyone for joining us and many thanks to the management for taking out time for this call. Thank you and have a great evening.

Management

Speaking time

Neeraj Jain

Moderator

Prerna Jhunjhunwala

Falguni Dutta

Awanish Chandra

Surya Narayan

Mukesh Bansal

Aman Madrecha

Roshan

Suryanarayan

Opening remarks

Abhishek Nigam

Thank you so much. Hello everyone. Good evening and thank you for joining us for Vardhman Textiles’ second quarter results conference call. We are joined today by Mr. Neeraj Jain – Managing Director, Mr. Rajeev Thapar – CFO, Mr. Mukesh Bansal, who is the Senior VP from the Fabric Business and Mr. Sushil Jhamb, who is the Director for Raw Materials. I now handover the conference to Mr. Jain for opening the marks.

Neeraj Jain

Good afternoon, everyone. The second quarter numbers are over. It's already with you, which I'm sure you would have looked at it by this time. Just to give you a brief, this was a period which was kind of a very unique period where most of the spinning industry, not only in India but I think outside also is suffering as of now. There were basically two challenges where the industry was facing or it continues to face. One, the Indian crop last year got damaged and the overall cotton crop was much less, close to about 30 million bales or so. On the top of that, because of the custom duty, the imports could not be done well on time because the cost was much more expensive. As a result of that Indian cotton started increasing, the prices started increasing in India much more than the even international parity. The Indian spinners had a bigger disadvantage compared to the other parts of the world where we started losing our competitiveness. As a result of that the spinning capacity was much

Neeraj Jain

I think this is what from a company's perspective. Now I'll request you to start with the question answer session so then we can take it up accordingly.

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