KPR Mill Ltd

Ladies and gentlemen, good day and welcome to KPR Mill Limited Q3 FY2023 Conference Call hosted by Batlivala & Karani Securities India Private Limited. As a reminder, all participant lines will be in the listen- only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call please signal an operator by pressing ‘*’ then ‘0’ on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Nigam from Batlivala & Karani Securities India Private Limited. Thank you and over to you.

Hello everyone good evening and welcome to the third quarter FY2023 earnings call for KPR Mill. Today we are joined by Mr. Murugappan, who is the CFO; and Mr. Kandaswamy, the Company Secretary for KPR Mill.

Mr. Nataraj, who is the Managing Director, was supposed to join us today, but unfortunately he has to cancel at the last moment because of some urgent travel plans, and now without any further delay I will hand it over to Mr. Murugappan for opening remarks.

Good afternoon, everyone. I am Murugappan, Chief Financial Officer of KPR Mill Limited. I welcome you all for the KPR Mill third quarter earnings call for the financial year 2023. With me, our Company Secretary, Mr. P. Kandaswamy is also present.

Brief background of the industry. The Indian economy is reported to continue its fastest growing economy status. The Indian textile industry is optimistic of repeating growth in financial year 2023 also, despite adverse factors like global recession, Ukraine war, volatility in cotton prices, higher inflation, etc., FTA’s with significant markets like UAE, Australia and prospects for FTA with UK & Canada are likely to create market opportunities for entire Textile value chain. The government is also focusing on policies to make industry globally competitive.

KPR is happy to announce a good performance in the third quarter of financial year 2023 also, overcoming the challenges the industry is facing.

The fluctuation in cotton prices has been putting pressure on yarn margin, with the government order position continues to be encouraging and the cotton prices have started stabilizing, we hope to have a better performance in the current quarter also. To improve its performance further the company is contemplating into certain modernization and expansion plans, which the board has approved in the recent board meeting.

The expansion of ethanol capacity in KPR Sugar Mill Limited. We propose to increase the ethanol production capacity in KPR Sugar Mill Limited from 130 KLPD to 250 KLPD at a project cost of Rs.150 Crores. This project will be funded through internal accruals and term loans. The project is expected to complete by financial year 2023-2024. The project is eligible for interest subsidy under the ethanol augmentation scheme also.

Second, the Vortex spinning mill. The company proposes to set up a Vortex spinning mill for viscose yarn production with an estimated project cost of Rs.100 Crores. This project is expected to complete by financial year 2024, and the entire project cost will be met through internal accruals.

Three, solar power plant. We propose to set up a 12 megawatt solar power plant for captive consumption with a total cost of about Rs.50 Crores. This project cost will be met through internal accruals. The project is expected to complete this year that is 2023.

The expansion of projects under printing division. The company plans to increase the production capacity of its processing and printing by debottlenecking the process, which will increase the production by about 20%. The total project cost of Rs.50 Crores will be met through internal accruals. With this expansion, we hope that the next year’s increase in turnover and the profitability will be improved.

Now the floor is open for questions.

Thank you. We will now begin the question and answer session. We have the first question from the line of Kapil Jagasia from Nuvama Wealth Research.

Thank you for taking my question. Sir my first question is on the demand environment. How is that shaping up?

Demand is comparatively better, only the margins in yarn is a little skewed. So otherwise, demand like both the yarn and garments is doing well.

So like how much margins yarn would have made this quarter. It is about 14%.

Sir, in terms of garment segment volumes, they have increased by around 10% on nine month FY2023 basis. So my question is, even with the increased capacity, the increase is only 10%. So are we facing any export slowdown here in the garment or the order book has shrunk. Like what was the order book position also over here?

Order book currently it is about 1000 Crores, the garment turnover is in line with the estimates because the new factory ramping up is done in the first nine months. So we hope that it will improve in the current quarter, and it is in line only.

Can you please help me with the sugar and ethanol sales breakup for this quarter. Sugar and ethanol sales you are asking. Yes.

Page 5 of 19 It is about 619 Crores. For this quarter.

Sugar and ethanol sales number is 252 Crores. For the year it is 619 Crores.

The breakup for that would be between sugar and ethanol. Sugar sales is 115 Crores 102 thousand. Fine thank you so much.

Thank you. We have the next question from the line of Muthukumar from Fidelity Venture. Please go ahead.

Thanks for the opportunity, sir. I have three questions. First most of the Capex you have told, in your annual report mentioned Capex is planned at Chengappalli garment unit. Could you please clarify what is the quantum of Capex intended at that Chengappalli garment unit.

Chengappalli garment unit expansion is completed in 2022 March itself.

Total project cost is about Rs.250 Crores.

The second question is what are the steps taken to tackle the cotton volatility on prices and when you can expect the demand momentum for cotton and spinning pick up.

Demand wise there is no issue. The movement of goods is good only. Only the margins are fluctuating. That is why we are keeping a very low inventory, say two to three months stock we are maintaining to avoid the high fluctuation impact.

Page 6 of 19 In the preceding season, what will your major focus be, sugar or garment export or cotton yarn. In the… In the forthcoming season, what is your major focus, that is in sugar or in garment or in cotton yarn. All are part of the business only.

What is expected integrated EBITDA margin.

So currently nine months is about 23%. We hope that we will be doing around the level. Okay sir, thank you. That is it.

Thank you. We have the next question from the line of Pratik Kothari from Unique Portfolio Managers. Please go ahead.

Sir earlier, you had mentioned that by quarter three we intend to completely ramp up the new capacity which we have put up. But if you look at the numbers, we have manufactured about 32 million units and if we ramp it all up it would have been 38-odd. So is there any reason for this.

Currently the production capacity is more or less reached. We hope that we will be doing somewhere around 33 million garments per quarter, 35 to 36 million garments per quarter.

Sir, what would be our margins in garment for this quarter. This quarter is about 21%.

Page 7 of 19 You said the excess inventory, the high priced inventory that we are carrying in yarn and fabric that is done now and the margins are back from this quarter.

The fluctuation is very high in cotton. So the margins are skewed only, but we hope that it will stabilize this quarter. Thank you and all the best.

Thank you. We have the next question from the line of Chinmay Shah, an individual investor. Please go ahead.

Thank you, sir for the opportunity. Sir, we plan for new Capex by next year. So what will be the approximate revenue generation from the new Capex.

Actually the sugar division, there would be an increase in revenue of about 50 Crores because sugar will be converted in to ethanol and but the margins will be very good, and over time, we expect a revenue of about 100 Crores from 2024, 2025 onwards because it will be completed in 2024 only. Solar power plant will give a cash saving of around 12 Crore per annum and the processing division capacity will increase by 20%. It will be internally consumed.

Sir, one more thing. I think from January onwards, our yarn margins are staying as of December like 14%. Or it has started to go upside.

January more or less in the same kind of 14%, 15% only. We hope that it will improve in the coming months.

How about our Europe and US order book for garment.

Garment order book is healthy only. We are currently running with order book of about 1000 Crores.

Page 8 of 19 Okay sir, thank you.

Thank you. We have the next question from the line of Yashvardhan Sinha from MIPL. Please go ahead.

Sir, EU, FTA is not expected now. We are expecting FTA with UK.

What would be the impact on the business be with that.

We hope that the business in the UK will improve by about 10% to 15% immediately in the long run it will give a benefit.

Okay thank you.

Thank you. We have the next question from the line of Aman Agarwal from Carnelian Capital. Please go ahead.

Good evening sir, and thank you for the opportunity. I had a few questions.

Starting first on the depreciation. If I see our depreciation charge for this quarter has declined by around 21 Crores. Like for last quarter, it was 50 Crores but for this quarter it is 29 Crores. So any reason why that has happened because when I look at the standalone numbers it has remained more or less similar around 19 Crores in standalone for last quarter as well as this quarter. But in consol, it has declined around 21 Crores so why is that.

It is basically, some of the assets in the sugar business has completed its life, where there is some capital subsidiary also standing there with some underlying conditions. Both are met, so that the subsidy has been written off and the depreciation also will be over in this quarter.

Page 9 of 19 So going forward, we should see a 30 Crore kind of depreciation run rate for all the quarters, right sir.

From this quarter onwards, there will be some more depreciation in some of the capital expenditure incurred during the year, not exactly maybe some of depreciation will come from this quarter around 40 Crores.

Sir the next question was on the sales volume. Like in this quarter, we have done somewhere around 29 million pieces in garments volume, and when I look at nine month basis, we have done somewhere around 91 million, but when I look at the production number, we have been producing around 32 million for the last two, three quarters. So in terms of production, we have been producing more. So what is impacting the overall sales volume pieces for us? That was number one, and second given the prices of cotton has now come down. So when we have this garment inventory with us. So like going forward will it realize at a lower price or will we be able to sell it at a higher price. Like given the contracts we have with our customers.

So garments are produced based on the orders only, prices are all already fixed and that price only it will be supplied. As well, most of the garments are produced with higher cotton cost only because during the period, we confirmed it, the fabrics are all manufactured and dying also done. So we may not get much of the price benefit out of it because already orders are confirmed. Forward orders are also been decided.

The reason for this lower sales volume compared to production volume.

Small difference usually when the quantity goes up there will be some stock. Generally, fourth quarter volumes generally is higher we expect it will be.

In terms of the new plant ramp up, sir, how much capacity utilization have we achieved in the new garment facilities. If you can talk about that.

Page 10 of 19 Yes, more or less, we have achieved the full capacity there. We are expecting production from this quarter onwards. Full production will be from next year.

Sir, in terms of new Capex, like we were talking about ramping up the full capacity of the existing plant before going for new Capex. So since it is now almost fully ramped up, so how are we thinking about the new Capex and when we could decide about putting up another garments facility given our focus is to shift towards garment in future.

Garment production is expected to be full in the coming year. We are just watching the market because of this Ukraine war and the slowdown in Europe and all and also we are looking at the new government policy for this Mudra Scheme and all, we are waiting for some time to take a call on garment expansions. We are expanding the other businesses, as I spoke about it in the earlier comments on this call.

Understood sir. Thank you I will join back in the queue.

Thank you. We have the next question from the line of Sanjay Dhanuka from KPR Mills. Please go ahead.

This is regarding the standalone business. I see one item in quarter two that is purchase of stock in trade 137 Crores, but there is no such item in last year as well as this quarter, what is that one and what are the purchases whether that has been disposed or sold or not. Or is it still in the stock.

It has been sold, it represents some of the garment job orders, when the ramping up was a little slow. It is not there now, our factory is fully running now.

Okay thank you.

Page 11 of 19 Thank you. We have the next question from the line of Prerna Jhunjhunwala from Elara Capital. Please go ahead.

We are trying to keep as low as possible in the cotton inventory unless the prices are getting settled. Now we are getting only two month stock. We hope that we will be doing it for some time from now. If the prices reaches to a certain level somewhere around 60000 we may go for a little higher stock.

Sir, my second question is on sugar profitability. This quarter you did 33.5% of EBIT margins in the sugar segment. What should we assume for full year or what should be the sustainable margin in the sugar business going forward.

Generally, decrease in the margins had been little higher because of the higher power production in the sugar unit. It is in a full year basis we are expecting somewhere around 22% to 25% kind of a margin rate.

EBIT margins or EBITDA. EBITDA.

EBITDA. Okay. Sir, this quarter, could you just give me the sales breakup between sugar and ethanol. I missed that number been asked earlier.

Sugar sales is 115 Crores. The ethanol is 102 Crores.

And rest would be power.

Page 12 of 19 Yes, power.

Sir, in terms of garment business, this quarter, we had seen a little lower margin of 21% what should be sustainable margins for the garments business as well.

So nine months period if you look at it is about 24% we hope that it would be somewhere around 22% to 24% would be sustainable.

Sir, in your presentation, Australia revenue share has been declining since FY2021. Could you give some color on that geography how we are faring and what are we doing there.

Since the revenue from the garment business is growing because of that, it is showing a little less in the percentage wise. Otherwise the business is more or less equal only.

Understood sir, thank you so much I will come back in the question queue.

Thank you. We have the next question from the line of Prerit Choudhary from Green Portfolio. Please go ahead.

I have some questions. So the first one is, so for the last few quarters we have been seeing some negative changes in inventory. So are we seeing some big orders in the next quarter that we are going to fulfill. In garments.

Yes, overall in the consolidated results we are seeing negative changes in inventory for last few quarters. So I just wanted to understand are there any big orders that are coming up that needs to be fulfill in the Q4.

Page 13 of 19 Not like that, those are regular orders only. Because of the inventory prices are going up in the last two, three quarters, the negative inventory is showing. Earlier the cotton price used to be some Rs.40,000 to Rs.50,000, and went upto Rs.105000. Now it is trading around Rs.66,000. Because of that higher inventory cost, it shows an inventory negative.

Also in the Textile segment if we see the raw material prices have started cooling down. But our margins are still affected in the profit EBITDA level. What has been the reason for the same.

So even though the prices of cotton has come down substantially, the demand also more or less in line, but the price is not going up because the export demand is not there. So all the yarn manufacturers are coming to domestic market. Otherwise, India is a yarn surplus country, we used to export about 40% to 50% of production. Now everybody is coming to the domestic market since the export market is very slow.

All right. So the next, in Russia, what has been the impact of the Russian- Ukraine war, also the economies like Bangladesh and China have been taken a hit in the textile industry. So are we seeing any benefit that we are getting new customers or more orders from the international companies.

There are no such things happening. We hope that it will happen, but still we are waiting for some changes in the international market.

So there is no currently any impact that the company is seeing. There is none.

What is the current capacity utilization of our ethanol plant.

Totally. Ethanol plant is fully utilized.

Page 14 of 19 Fully utilized and what has been the reason. I mean our EBIT has grown significantly compared to the previous quarter for the sugar and ethanol. So what has been impacting that? Can you come again.

Our EBIT margins have significantly grown compared to the previous quarter for the sugar.

Third quarter, the sugar seasons starts. In the first and second quarter it is off season. Third and fourth quarter is the sugar season.

If you can just give guidance what kind of top line or margins that we can expect for the next couple of years of all those capacity expansions that we are doing and ramp up of our garments facility.

So we try to achieve a growth of 10% on a year-on-year basis. 10% and for the margin.

Same way. We are expecting the margins also.

Are we expecting any planning any demerger as our sugar and ethanol business is also growing, do we plan to demerge the business in the future.

Immediately, we do not have any plan. Anyway we will take up this to the board also for discussion. Thank you that is it from my side.

Thank you. We have the next question from the line of Vikas Jain from Equirus. Please go ahead.

Thank you so much. Sir can you please give a breakup between our yarn and fabric sales for this quarter.

Page 15 of 19 Yarn sales quantity is 15000 tons, fabric sales quantity is about 1700 tons. You want the value also. Yes sir, value also, please.

Yarn value is 450 Crores, fabric is 55 Crores.

Sir, I want some color with respect to the demand from the overall Europe and North America market. What are the trends that you are witnessing with respect to any signs of any slowdown or any market share gains that we are witnessing from any other competing nations. Just some more color with respect to the order book that we have, what is the comfort level and your long-term visibility with respect to the order book and the demand from these markets since the conditions are quite volatile as on date.

As you said, there will be some volatility in the market, but we are operating in a different segment. We are operating in a regular garment and the basic garment segment. We are not seeing much of a fluctuation in the demand for the product. We are operating with an order book of about Rs.1000 Crores, maybe somewhere around for 5, 6 months kind of order book, we are maintaining continuously. We are not seeing any drop in the orders. We hope that it will not have much of an impact.

Got it, but any down trading or shifting in lower ASP or any such trend visible. Or it is just as normal as it was earlier. It is normal as it is earlier. Thank you so much, sir.

Thank you. We have the next question from the line of Pratik Tholiya from Systematics. Please go ahead.

Page 16 of 19 Thanks for the opportunity. Sir just a couple of questions. Firstly on the sugar side, can you help the sugar sale volumes for the quarter and whether there was any exports also in sugar this quarter.

Yes, sales volume is about 34000 tons out of which 20000 tons is export. 20000 is export and sir, what is the average realization in the domestic and the export market for us.

We have consolidated average realization only it is about Rs.33.5 per kg.

Rs.33.5 per kg that is a consol realization. Fair enough. But sir export will be higher than this, I am sure.

Little higher because we are exporting raw sugar it will be little higher.

And sir, what is our total export quota this year that you have got.

It is about 27000 tons, 7000 tons will be done during this quarter. 7000 in this quarter and has it been contracted, and if yes, then at what price.

Contract has already been done somewhere around Rs.35 per kg.

What was the ethanol volumes for the quarter. It is about 1 Crore 58 lakh liters.

If you can split it between how much was from molasses and how much from juice.

It is juice, during the season it will be juice.

Page 17 of 19 Okay so we are doing only juice during the seasons, and are we putting up any grain based facility also because after the season how do we plan to run our ethanol capacity.

After the season, the capacity will be run through molasses.

And sir, what would be our average days of operation for the distillery. 300 days.

Season typically three to four months will be juice and remaining will be molasses.

Yes, it is about four and a half months to five months will be juice and the balance five months will be molasses.

Sir, no plans for getting into grain as of now.

No, because our capacity is more or less equal to the molasses production and juice conversion.

So sir, the expansion that you are doing what is the feedstock for that.

It is again same juice and the molasses only as I told you earlier in first plant is we have set up only 130 KLPD ethanol plant whereas in the second plant we set up about 220 KLPD ethanol plant. Now we are expanding the first plant from 130 KLPD to 250 KLPD more or less equal to our capacity.

So post this expansion we will be fully utilizing our molasses.

Yes, fully utilized, the molasses now is being sold, that will be usefully utilized. That will be internal use.

Page 18 of 19 Sir, just wanted to understand what are the recovery rates for us because our margins seems to be much superior compared to the companies, especially in UP belt. So whether our recoveries are higher because I think even Karnataka government has announced some Rs.100 per quintal increase in the FRP. So despite the higher cost, just wanted to understand on the margin front what has led to this margin expansion.

Basically, power and ethanol is giving more margin to us because we are one of the few companies where the company is having a full ethanol capacity because of that the margins are higher and also we have a higher power capacity we have about 90 megawatt of cogen power so both are giving advantage to us.

But sir how is the recovery rates right now in our catchment area. It is somewhere around 10.5% to 10.75%. That is gross recovery. Yes, gross recovery.

Right sir, if I have any questions, I will get back. Thanks for answering and wish you all the best.

Thank you. We have the next question from the line of Jinesh Shah from Congo Commodities. Please go ahead.

Thanks for the opportunity. I just had one question regarding what would be the yarn, which is cotton and manmade what would be the percentage of cotton yarn and versus manmade yarn that you have.

So presently manmade yarn is very negligible very small portion it is about 95% is cotton yarn only.

Page 19 of 19 One more question regarding FASO. How are we ramping up the distribution and what is the future prospects for FASO. What have we planned?

Now the ramping up is good, going well. We hope that we will reach a breakeven level in the coming year 2023-2024.

Most of this distribution happens via online or by offline channel, sir. Mostly offline, online also there. Okay sir thank you so much.

Thank you. As there are no further questions. I would now like to hand it over to the management for closing comments.

Thank you very much for attending the KPR Mill’s quarter three earnings call. Thank you once again for attending the call.

Thank you. On behalf of Batlivala & Karani Securities that concludes this conference. Thank you for joining us and you may now disconnect your lines.