See major margin expansion in '17; to be debt free by FY19: RSWM

Rajasthan Spinning and Weaving Mills (RSWM) delivered a good set of fourth quarter earnings. Riju Jhunjhunwala, Managing Director of the company said, with most of the expansions coming on stream, they would see a significant margin expansion of around 100 basis points and a 15 percent topline growth in FY17.For the year as a whole, the company reported margins of 14-15 percent from around 12 percent reported in earlier fiscal. The company focuses on value added products that account for 15 percent of total revenues and exports 30 percent, said Jhunjhunwala.Jhunjhunwala is also confident of the company being debt free by FY19. The current debt is around Rs 880 crore and they play to repay around Rs 220 crore each for the next two years. Cash profits too will aid debt repayment, he said.It is the flagship company of the LNJ Bhilwara Group and produces synthetic yarn, fabrics, denim etc. The fourth quarter FY16 revenues were up 1.5 percent at Rs 775 crore versus Rs 763.5 crore for the same quarter in FY15. Margins for the quarter came in at 15.2 percent versus 14.4 percent Q4FY15.It owns the Mayur Suitings brand and has high-end customers like Raymond, Siyaram Silk Mills, Welspun India etc.Below is the transcript of Riju Jhunjhunwala’s interview with Nigel D’souza and Reema Tendulkar on CNBC-TV18. Nigel: The numbers are looking quite good. I think the street likes the margin expansion. But let us focus on the topline. Over there we have seen a growth of only around 1.5 percent. Break these numbers up for us. You were saying you were looking at value added products. What is the percentage over there? Also, what is the percentage of home textiles and finally, tell us what is the percentage that are coming out of exports. A: Our topline is more or less flat if you see the last quarter to this quarter and for the year as a whole also, it is more or less exactly the same as before. But, going forward, you will see at least for the next one year a stagnant topline, but a significant margin expansion that we have been talking about. That is because most of our expansion that were happening in the last 2-3 years, they have all come on stream now in the last six months. So, our denim expansion has come fully on stream, you should see an added benefit of that. So, you will around a 10-15 percent topline expansion, but the margin expansion should now start accruing because all our gains that we were, on the cost reductions, new capacities being added both in the yarn as well as in the denim division, they will all go on stream now. Exports, that you asked me was around 30 percent for the company and that has also remained stagnant for the last few years because the domestic market is really buoyant right now. Nigel: So, exports is around 30 percent and what is your value added products as a percentage to the total revenues currently? A: Value added product would be not more than around 15 percent in total. It is very difficult to define what is the value added products which keep changing according to the market. But yes, of course the fabric business which is the denim business, that is all the in value added segment now. So, around 50-60 percent of that is going purely for value added denim and not in the commodity sector like some other players. And even in the yarn segment, the entire focus is on how to get to the end customers, the bigger brands and all as they are growing in India and abroad. So, really a lot of initiative in the last one year has gone into developing new value added products and how to grow in that particular segment. Reema: Let me come back to the margin expansion. You said that there will be significant margin expansion in FY17. Could you quantify that? What are the average margins you are hoping to enjoy in FY17? A: earnings before interest, taxes, depreciation and amortisation (EBITDA) margins this year were around 14.2-14.5 percent compared to 12.5 percent which is roughly around 200 basis point increase. So, our topline this year should at least grow by 10-15 percent and we are looking at at least 100 basis point increase in the EBITDA margins. So, with the depreciation, interest, everything coming down now, in the next one or two years, all our focus is basically on the bottomline expansion. EBITDA margins have been healthy for the company, 14 percent to 16 percent depending on quarter to quarter. But it is really the bottomline that one needs to focus on now. And that going forward in the next two years should see a significant expansion. Nigel: You have yarn margins that are more or less stable. They have gone up mildly. Can it go higher from here and what us exactly the yarn price trend. Also, tell us, crude prices have been increasing, so what kind of an impact can it have in your margins? A: Crude prices, basically dictates the polyester fibre prices for us. Last one year, polyester prices were more or less stable. They have come down in fact from around levels of Rs 90-95 to around Rs 75-80. But going forward, in a rising market when crude prices increase, you have seen this in 2012-2013, etc. when the margins are going up, when the crude price is actually going up, the yarn prices, we are able to always pass to the customer. And same is the case with cotton yarn. So, for us, in the yarn business, it is a fair mix of cotton yarn, cotton melange yarn, polyester viscose yarn, 100 percent polyester yarn, all of that. So, within the mix of all of these, one thing always balances out the other. For yarn going forward, for margins this year were around 11-12 percent, it should definitely cross the level of 13 percent with all the focus on value added yarn. Reema: If you could tell us what is your current denim capacity and the realisations you enjoy there? A: Our denim capacity, last year was around 13 lakh metres per month which we have increased now to 21 lakh. So, this year after the first quarter is over, second quarter onwards, you should see a full capacity of around 21 lakh metres. And our average denim realisation last year was around Rs 180-185 per metre which is quite high in the value added segment. We are looking at trying to maintain that somehow. Reema: You have got Rs 880 crore of debt repayment coming up in the next four years, how are you planning to make the repayments? A: Rs 880 is excluding last year’s repayment which has already been done, that was around Rs 200 crore. So, for the next two years 2016-2017 and 2017-2018, around Rs 220 crore of debt each year and after that it becomes very comfortable. Our overall long-term debt equity ratio even today is around 1:1.2. So, given that the lower rate of interest for textiles that we enjoy, the debt repayment is really not an issue. Our cash profit this year itself was around Rs 300 crore. So, that takes care of the debt for the next two years. And after that it is a very comfortable position, year 2018-2019 onwards. Hardly any debt left.