CARE Ratings Limited (CARERATING) Earnings Call Transcript & Summary

Hi, all. Good evening, and welcome. I'm Mangesh Deshmukh, and on behalf of CareEdge, I welcome you to our today's discussion on Indian Ready-Made Garments: Stitching Together a Brighter Future. We sincerely appreciate your time in joining us for this webinar. We would like to welcome our esteemed guest speakers for today. Mr. Amit Agarwal, Group CFO, Raymond Limited; Mr. Ashish Kumar, President and CEO, Apparel, Denim and Advanced Material, Arvind Limited. This session will be moderated by Pulkit Agarwal, Director at CareEdge Ratings. We will commence the session with the presentation by Krunal Modi, Associate Director, CareEdge Ratings. This will be followed by a panel discussion and Q&A session. In case of queries, participants are requested to key in, in your panel. We will take up your queries during our panel discussion. Now may I invite Krunal to make his presentation.

Yes. Thank you so much, Mangesh. Good evening to all. My name is Krunal Modi and I will take you to the presentation. So let us begin with the key messages from today's presentation. The China, the largest exporter of ready-made garment in the world is losing its market share while countries like Bangladesh and Vietnam have gained out of China's declining share in the global RMG. Despite inherent competencies, India, RMG exports have remained stagnant at around USD 15 billion to USD 17 billion. The high inflation and recessionary pressure in the U.S. and the European Union is impacting the global demand. However, with restocking of inventories by global branch retailer, the demand is expected to recover in medium-term. The central government has taken various policy initiatives, including the trade agreements, which will enhance the competitiveness of Indian players in the global RMG market. CareEdge Ratings believes that India's R&D export is expected to grow at a CAGR of 12% to 13% to reach USD 30 billion by 2027. Let us now move to the next slides, where we shall focus on topics covered in this presentation. So during our presentation, we shall discuss the size of the global textile RMG industry along with India's position in global RMG market. Then we will see the RMG industry aggregate and major industry players. We shall also discuss the near-term headwinds for the sector, the recent government initiatives and opportunities lies ahead for Indian RMG sector. In our next slides, we will have an overview of global textile RMG industry. The global textile RMG industry has exhibited CAGR of 4% to 5% during last 4 years. That is CY '17 to CY '21, reaching to around USD 900 billion in CY '21. With RMG accounting for a significant portion of nearly USD 550 billion. So as depicted in the chart on the left-hand side, the global textile and RMG market is expected to grow at a CAGR of 3% to 4% to around USD 650 billion (sic) [ USD 694 billion ] by CY '27. Worldwide, textile trade is undergoing a change with the decline in trade of fabrics and increasing trade of garment. The primary reason for this shift is the changing preference of the RMG brand owner and retailers who now prefers to source ready-made garment instead of sourcing fabric and then getting it converted into garment. Therefore, garment trade is expected to grow at a faster pace. As depicted in the table on the right-hand side, globally, RMG exports account for over 60% of textile and clothing exports. However, India is the only country where this ratio stood below 50% due to various factors that we will touch upon in our [ most ] following slides. Next slide. In this slide, we will be discussing prominent RMG market and exporting measures. As illustrated in the chart on the left-hand side, the global RMG market is primarily comprises of European Union, U.S., U.K., Japan, Canada and South Korea, which together accounts for nearly 60% of the global import, followed by other countries like Australia and UAE. The bottom table on the left-hand side, presents major RMG manufacturers and retailers in the world, which includes Inditex, H&M, Fast Retailing, Gap, PVH, Next, et cetera. So top table on the right-hand side represents the key exporting nations. So countries such as China, Bangladesh, Vietnam, Germany, Italy, Turkey, Spain and India dominates the exports market. China, which is higher labor productivity, along with economies of scale, commands a lion's share of 33% of the total RMG exports globally. Vietnam and Bangladesh are at distant second and third position with 7% market share each. India holds nearly 3% market share in global RMG trade. India's share in global RMG exports has remained sluggish from CY '17 to CY '21, while countries such as Bangladesh and Vietnam have captured a significant portion of China's declining share in the global RMG exports. So competing nations have gained due to duty-free access to crucial exports markets such as EU, U.K. and Canada, in addition to their higher labor productivity and economies of scale. Furthermore, India's dependency on cotton-based textile as opposed to the high proportion of man-made fiber space product in the global RMG market also impacted the RMG exports. So bottom table on the right-hand side represents product category-wise exports in global RMG markets. Export of trousers dominates the global market, followed by sweaters and jackets, where India lacks the competing nations. Next slide. Here, we have presented the size of Indian textile and RMG industry. So Indian textile and RMG industry makes a notable contribution to India's GDP and exports earning, accounting for nearly 5% and 8%, respectively. Textile and RMG is the country's second largest job creating industry after agricultures, employing over 45 million people directly and an additional 60 million people indirectly. Within textile, RMG is the largest segment, employing 60% to 65% of the workforce, which majorly comprises of women. So chart on the left-hand side indicate the size of the Indian textile and RMG industry in terms of domestic market in exports. Domestic market, which accounts for nearly 70% to 75% impacted during financial year '21 due to COVID-19 pandemic and recovered in the year financial year '22 and '23. So chart on the right-hand side indicates the exports of RMG, which has been hovering at around USD 15 billion to USD 17 billion in the past 5 years ended CY '22. During the first 5 months of CY '23, RMG exports declined by nearly 14% on a Y-o-Y basis due to current headwinds, which we will touch upon in our upcoming slides. So table on the left-hand side indicates India's inherent strength, while table on the right-hand side indicate its challenges in global RMG market. India has an abundance of raw materials such as cotton, jute, silk being one of the largest producer of these materials, and it has a presence across value chain from fiber to fabric. India also benefits from favorable labor dynamics with availability of young and skilled manpower. Furthermore, over the past few years, the central and state government have taken various initiatives to improve the sector's performance. However, these strengths are partially offset by some challenges that have resulted in muted exports in recent years. The first and foremost challenge is fragmented nature of Indian RMG industry with a predominance of MSME units, resulting into low economies of scale and low integration, thereby adversely impacting competitiveness in global market. So despite the presence across value chain, cost and time associated with transport within the country, add to the cost of production and to the lead time. Moreover, India is dependent on cotton-based textile compared to the higher share of man-made fiber in the global RMG market. Furthermore, India has a relatively low labor productivity compared to its peer, mainly due to high attrition rate and absenteeism due to festival spending across the year. India also has a duty disadvantage in key exports market. Competing nations such as Bangladesh and Vietnam have duty-free access to key export markets, such as EU, U.K. and Canada in addition to the higher labor productivity and economies of scale. Next slide. So here, we have presented the major RMG players and their financial performance. So the chart represents revenue growth and operating margin of a major garmenting manufacturers. Over the last 7 years ended financial year '23, the operating profitability has remained in the range of 11% to 13%. And revenue of these RMG players grew during this same period, except the financial year '21 during which the industry experienced the degrowth due to demand supply disruption caused by the COVID-19 pandemic. Despite stagnant RMG exports from India, as we have seen in our previous slides, the top RMG players have been able to increase their market share at the cost of the unorganized players by leveraging economies of scale and integrated operations. So table indicates major RMG manufacturers and exporters, which includes Arvind, Raymond, Shahi Exports, Gokaldas Exports, amongst other. Next slide. So here, we have presented a detailed comparison of India's RMG industry with key competing nations. India is ahead of China in terms of cost parameters, but lags Vietnam and Bangladesh. Additionally, India has advantage due to its presence across cotton-based value chain, whereas Vietnam and Bangladesh lag in this aspect. However, India, along with Bangladesh and Vietnam fall behind China in production of man-made fiber-based product. For other qualitative parameters, India largely fairs similar to its competitors in some areas while it lags in others. So overall, the competing nation scores better in more than 50% of the parameters. In some critical parameters such as labor costs, backward integration in MMF, and duty structure, some of the India's peers ranks better than India. Nonetheless, in recent times, the Indian government has implemented several measures to improve India's spending in these areas. Next slide. Recently, India's garment exports and order book have taken a hit due to inflationary trend, high energy prices, rising interest rates, recession-like situation in major consumption economics, economies along with the sharp rise in the cotton prices. So these factors have impacted consumer discretionary spending and resulted in excess inventory piling up with the global retailers. The increasingly volatile currencies and geopolitical tensions have further worsened the situation. Retailers have been liquidating their inventories and deferring orders as they prefer to wait and watch until demand picks up materially. Despite an expectation of continuous slowdown in demand over the next couple of months, garment exporters are expected to see an increase in order flow as global brand and retailers commence the process of restocking. As depicted in the chart on the left-hand side, inflation in EU and U.S. remains high compared to historical level despite some moderation witnessed in recent times. Additionally, as depicted in the chart on the right-hand side, prices of cotton witnessed a sharp rise since January 2021, while prices of polyester yarn remained largely stable. So as visible from the chart, there is a moderation in cotton yarn prices from its peak level along with the narrowing of spread between international and domestic cotton prices. And the decline in ocean freight rates may provide some relief to Indian exporters at this juncture. Next slide. Let us now see the potential impact of the crisis in the RMG exporting nations like Sri Lanka, Myanmar and Pakistan, which collectively exported RMG worth USD 17 billion in CY '21. So this situation is expected to shift some orders to India, Bangladesh, and Vietnam. So let us first look at the situation in Pakistan. So Pakistan's artificially strong currency and increasingly debt level made its economy [indiscernible] to collapse. The conflict between Russia and Ukraine and devastating flood created the strong [indiscernible] economy. Pakistan has witnessed rising energy costs increasingly interest rates, rising inflation, currency depreciation, sharp decline in foreign exchange reserves and rating downgrades by international rating agencies. The flood has damaged nearly half of its cotton crop and low foreign currency reserves affects the import of cotton and thereby its inability to meet its exports. Sri Lanka's economic crisis and Myanmar's humanitarian crisis, along with the black list by Financial Action Task Force also expected to shift sourcing by global brands to some extent. Although India is expected to benefit from neighboring crisis, the benefit may be limited in near term due to resistance by global brands to change sourcing amidst demand pressure and currency depreciation of these countries compared to the depreciation of Indian rupee. Since the start of the Ukrainian-Russian conflict in February '22, currencies of garmenting exporting nations have witnessed sharp depreciation as depicted on the right-hand side chart. The currencies of Pakistan and Sri Lanka have depreciation more sharply than those of India, Bangladesh and Vietnam. Nevertheless, in the medium-term, global brands and retailers seeking sustainable sourcing may shift order from these countries. Next slide. So in developing nations like India, it is imperative to explore ways of enhancing the standard of living and eliminating poverty. With a large labor force, export-oriented garment industry presents a significant opportunity for employment due to its relatively low skill requirement and appeal to female workers. Government has set an ambitious target of taking Indian textile exports to USD 100 billion by 2030 to boost foreign exchange inflow and create employment. In order to create a level playing field for Indian exporters in the global market, the government of India has rolled out WTO compliant export-oriented schemes such as RoSCTL and RoDTEP. The government has also increased the RoDTEP rates in January 2023 to boost the investments. In addition, both the central government and several state governments have implemented policies offering incentives, including capital subsidies, reimbursement of interest and state GST, concessional power tariff, labor allowances, et cetera, to attract the investors. We shall discuss some of this incentive schemes in our next slides. So let us first look at the PLI scheme. PLI scheme is introduced with an aim to develop the ecosystem for man-made fiber and technical textile in order to enhance India's capability in man-made-based garment exports. Man-made-based products make up around 60% of the global textile in RMG trade, whereas natural fibers constitutes balance as depicted in chart on the left-hand side, below the table. In India, this ratio is invented with 40% share of man-made fiber, mainly due to lack of man-made-based value chain. Consequently, man-made fiber garment accounts for only 10% of India's apparel exports, whereas competing nations exports 80% man-made-based garment. Given that man-made fiber is affordable alternative, demand for such product is expected to increase at a faster rate compared to cotton-based product. So PLI scheme has its 2 parts, with minimum investment requirement of INR 100 crores and INR 300 crores. So under this scheme, an eligible entity is entitled to receive incentives in the range of 7% to 15% of the revenue as defined under the PLI scheme. So CareEdge Ratings estimates investment potential of USD 2.4 billion, thereby creating annual export opportunity of around USD 3.7 billion to USD 4 billion over a period of next 5 to 7 years. It is also expected to generate 2.2 lakh to 2.4 lakh employment opportunities. Moreover, with lower than budgetary allocation, the government is also expected to launch PLI 2. Government is expected to introduce incentive for manufacturing of both cotton and man-made-based garment and home textile product under the PLI 2, which shall further boost investment, exports and employment opportunity. So apart from PLI scheme, the government has also introduced the concept of textile park. Government of India is in the process of establishing 7, PM MITRA parks integrated facilities, including plug-and-play infrastructure on an over 1,000 acres of land in each park. The central government will provide capital support for development of park and incentives for early establishment of textile units with a cumulative outlay of around INR 4,000 crores. The state government are required to grow in at least 1,000 acres of land for the park. Presently, out of the 18 proposals from 13 states, 7 locations are finalized in the state of Gujrat, Karnataka, Madhya Pradesh, Maharashtra, Tamil Nadu, Telangana, and Uttar Pradesh based on the objective area. So textile cluster provides large-scale, integral value chain, common infrastructure and fiscal incentives, which reduces the cost of production. Presently, the input of Tamil Nadu and Ludhiana, or Punjab, are examples of textile cluster in India, contributing significant to the Indian textile exports. Previously, the government launched the integrated textile park scheme in 2006, which did not yield intended results due to various challenges. PM MITRA schemes aims to overcome this shortcomings of earlier schemes of integrated textile park and thus having a better chances of success. CareEdge Ratings estimates investment potential of USE 0.8 million to USD 0.9 billion per park. And consequently, PM MITRA scheme is expected to bring an aggregate capital investment of USD 5.5 to USD 6 billion and [ in return ] annual export opportunity of around USD 4.5 billion to USD 5 billion, once this scheme is fully implemented. This is also expected to generate 3.5 lakh to 4 lakh of employment opportunities. Next, so let's discuss the another important step to make India competitive in global trading. So over recent years, India has pursued a protectionist foreign trade policy that aims to promote exports. In 2019, India withdrew from regional comprehensive economic partnership negotiation. However, it appears that now India is moving towards more liberalized trade policy and has expressed a clear intention to strengthen its economic ties with developed nations. Furthermore, developed countries are increasingly viewing India as a significant trade partner, which is facilitating the rapid conclusion of trade agreement. Table on the top presents the status of the recent trade agreement. In the year 2022, the Indian government signed the comprehensive economic partnership agreement with the UAE and economic cooperation and trade agreement with Australia, while negotiation for free trade agreement with the U.K. are at the advanced stage. As the discussion for FTA with the European Union and the economic partnership and trade agreement with Canada are ongoing, the government is expected to sign at least 2 more trade agreement in near term. Additionally, India is expected to pursue FTA with Israel and GCC countries. So the table on the top depicts market share of top 3 exporting nations and India in key markets. Currently, India has a market share of around 4% to 5% in EU and U.K. whereas Bangladesh, Vietnam and Pakistan enjoys the tariff advantage of approximately 10% compared to India in some of these markets, resulting into relatively higher market share. Through the trade agreements, India's share in export market is expected to increase, while completion of ongoing FTA with the U.K. and EU would be a game changer as it would create a level playing field in around USD 100-plus billion RMG market [ reach ] in these 2 U.K. EU nations. Next slide. In past decades, China share in global garment trade has declined by nearly 10% to 33% in CY '21, mainly due to rising labor costs, along with aging of workforce there. As depicted in the left table, China's share in the key consumption market that is EU and U.S. has declined over the past decade. With rising labor costs, textile companies in China have shifted their manufacturing operation to other regions, including rural Chinese province and underdeveloped Asian countries such as Vietnam, Cambodia and Bangladesh. Moreover, trade war between China and U.S. along with the ban on goods from the Xinjiang have also impacted China's RMG exports in recent years. Moreover, the COVID-19 pandemic has prompted global textile brands and retailers to diversify their supply chain as a part of China Plus One strategy. While India has yet to gain significantly from the shift in business from China, the opportunity, yes, the opportunity is yet to be fully played out. It presents a significant opportunity for Indian garment manufacturers and fabric suppliers. China is expected to continue losing its share in global RMG market due to its declining competitiveness and adoption of China Plus One sourcing strategy. In near to medium term, some demand is expected to shift gradually from China to other exporting nations, including India. Next. So now let me summarize the presentation into a few major points. Post-COVID-19 pandemic, disruption in the supply chain have led to [ vendor ] consolidation resulting into significant increase in the importance of reliable suppliers. Global brands and retailers are now seeking strategic partners rather than just suppliers. India has well-established cotton supply chain from fiber to fabric along with adequate ability of labor, power, [ port correctivity ] which can be leveraged to avail the benefit of complete vertical integration by establishing garmenting capacities. Vertical integration reduces the transportation cost and the lead time, providing customers with a cost-effective solution. PLI scheme is expected to boost the India's limited presence in man-made fiber, while the expected completion of FTA will create a level playing field for India. Some nations are facing challenges, which is expected to prevent them from gaining incremental market share. Bangladesh foreign currency shortages and its upgradation from a least developed country in the year '26 will impact its export in short and long term, respectively. The prevailing sentiment of China Plus One, along with the weakening portion of some competitive countries would strengthen India's position as a reliable sourcing partner for global brands and retailers. The government's focus on textile is at all-time high, which bodes well for the industry's future. Rising inflation and interest rate across the globe have impacted consumption while overall channel inventory has been declining. With the softening of cotton prices, declining freight rates and some revival in global economy, garment consumption is expected to recover. With all these, Indian RMG exports are expected to surpass the USD 30 billion mark by CY '27, translating into 4.6% to 4.9% market share worldwide, compared to the current share of around 3%. However, growth can be impacted by some factors that we will see in our next slides. So some of the important factors to monitor going forward. Firstly, it is essential to have parity between Indian and international cotton prices as the premium of Indian cotton to international cotton prices impact India's competitiveness. Secondly, the demand for the near term will depend on restocking by the garment plants and retailers. Thirdly, the resolution of ongoing geopolitical tension share have a significant impact on exports of RMG. Further completion of ongoing FTAs would be a game-changer for Indian textile player so their progress needs to be monitored very clearly. Furthermore, pace of adoption of China Plus One policy shall also have a significant impact due to the dominant portion of China in global RMG market. even capturing the 1% or 2% of China's market share could lead to a 50% growth in Indian RMG exports. And lastly, timely implementation of PLI and PM MITRA schemes is also crucial for the growth in the Indian RMG exports. So while we have concluded the presentation, we shall now take the input from our guest. So I request Mangesh to take over.

Thank you, Krunal. Attendees are requested to key their questions, which we will take up during our panel discussion. Now may I invite Pulkit Agarwal to take over the session, please. Pulkit is the Director at CareEdge Ratings and is a qualified chartered accountant and MBA. With 17 years of experience in corporate ratings, Pulkit has various teams across diverse sectors at CareEdge Ratings. Over to you.

Thank you, Mangesh. Thank you, Krunal, for an insightful presentation. Good evening, everyone. Now it's time to seek the opinion from the experts in the field. Before we start our panel discussion, let me introduce our esteemed guest panel members for today. First, panel member is Mr. Amit Agarwal. Mr. Amit Agarwal is the Group CFO at Raymond Limited. He's a finance professional with over 32 years of experience in the steel, aviation and energy sectors, having worked as a CFO of leading organizations across various geographies. He has also been a partner with the CEOs to run the business efficiently and ensure the value creation within the regulatory framework for the shareholder. He is a qualified chartered accountant from the Institute of Chartered Accountants of India. He has also done his cost accountancy from ICWA. Apart from this, he has also been a CFO, a strategic partner, Executive Education from The Whatron School, Pennsylvania. Very warm welcome, Mr. Agarwal.

Thank you, Pulkit. Nice to have -- to be on this panel.

Our second panel member for today is Mr. Ashish Kumar. Mr. Ashish Kumar is the President and CEO of Apparel, Denim and Advanced Material, Arvind Limited. An IIFT graduate with formal qualifications in management. Mr. Kumar is an acknowledged domain expert with a professional career spanning over 21 years, mostly in textiles and apparel. Mr. Kumar has worked in companies like DCM Shriram Industries, Kaybee Group and had incubated apparel start-up Integra Apparels. He has exhaustive leadership experience, managing small and large businesses, facilitating major initiatives for a superior client experience as well as internal transformations. Very warm welcome, Mr. Kumar.

Thank you very much, Pulkit. Very privileged to be here.

Let me start today's discussion with Mr. Agarwal. Mr. Agarwal, we have seen in the presentation that over the years, the share of Indian garment exports in global RMG market has remained almost stagnant at 3.5%. In spite of the fact that India has certain inherent advantages like availability of raw material, availability of skilled manpower. So in your view, what are the challenges that are being faced by RMG exporters in India currently?

I think, Pulkit, there are a few things which we see also a challenge, but it is a large opportunity, which is today for us. Number one, you see as the industry was growing, China had a very dominant play because of the whole raw material as well as the workforce which they had. Second thing in terms of the power, productivity, they played a very massive role and [indiscernible] being such a small player, some of the large players, the retailers which you showed in your presentation, be it Zara, H&M, they were not considering us as a serious player. And second thing, what needs to happen as our logistics was a nightmare, to get the ships on time, or the whole road logistics because it is largely concentrated today in the Bangalore region. And Bangalore is nowhere close to the port. So to that extent, what happened was also we had a lot of time -- transit time between the plants to the port and that also created an issue. Now these things are slowly changing with the introduction of the GST. There is a massive ease in terms of transporting the material from one place to another. The ports are getting decongested. Plus, in terms of the labor reforms, I think that is one area where we need really a lot of change. And I think that would make us into a very dominant position. Second thing with this whole FTA, which I think you covered very adequately, I think that because these are not very high-margin businesses. These -- you are doing as a contract manufacturing for a retailer. So the big ticket, big margin is being kept by that way and a smaller margin. And if you're sitting with a disadvantage to the tune of 8% to 12% depending on the country to country, you do not stand in the queue in terms of supplying those products. I think with the way this -- today's garment is working on. I think they did Australia. And I think the way they are progressing with the U.K., I'm very hopeful that it will open up a good opportunity. The third thing also, I look at it that our quality and especially when I talk here by sitting in Raymond, I think we have a very smart integrated place, right from a fabric all the way to the garment. I think that also helps us for the [indiscernible] like Zara, the HUGO BOSS such people that they can give comfortably that supply. Otherwise, many other countries do not have. For example, Bangladesh does not have that kind of unique [indiscernible], Sri Lanka does not have. So I think this helps us to be there and take the market share from China. And actually, China Plus One is helping, just for our business because it is a listed business. So we can talk about -- we have demonstrated a growth compared to the previous year to this year, '22/'23, almost 50% growth in the garment. And we have been booked out. So there is no pressure of inflation or such things. So I see there is a great opportunity for us as a country to really participate into this big journey. And employment is huge. We employ more than 6,000 women workers and so I think this is a very, very good spot to be in right now.

Right. So even we also -- and this has also suggested there is a good opportunity because if you look at India's textile and apparel export, RMG is only 40% of that, whereas for some of the other countries it's in excess of 60%, and they don't even have the backward integration. They import fabric, import yarn. So this itself suggests that there is a huge opportunity for India in the garment space. Right. So let me come to Mr. Kumar now. So Mr. Kumar, post pandemic, there have been a lot of discussions regarding diversifying and derisking the supplier base by the retailers. So have you seen that happening and there is a shift from China to India in terms of garments?

No. So thank you, Pulkit. I think what has happened, the pandemic was a wake-up call for many of these retailers in terms of how they were organizing their house of business, right. Now one is, they realized that they need to have complete a geography kind of risk mitigation strategy with them. That's where we -- I mean, that's where India kind of came into picture. But more importantly, they also realized that they need to have -- I mean, what's happening on the consumer end that they are becoming a little more demanding in terms of regarding the transparency, the traceability, the overall compliance nature, which is kind of coming up from various governments. So it was very important for them to kind of tie up with or -- work with a few consolidated supply chain and work with definitely a few strategic suppliers who can bring or who can enhance more value. What we have seen is that most of these big retailers over the last 2, 2.5 years are wanting to work with integrated players or are wanting to work with players who can actually bring ot take away a lot of trouble in their entire supply chain. So from a from being a pure contract manufacturer of garment to becoming a supply chain partner is what this journey has kind of taken them. And that's where I think India scores very well. Obviously, there are certain inherent, let's say, challenges which are there, which are also, as Mr. Agarwal said, opportunities in disguise because these are the areas the seed grew upon. Then obviously, we kind of get more and more integrated into their supply chain. But I think what has happened in the past, let's say, so it's very -- it's also very -- the product segment where you're operating. So I mean, let's say, obviously, the woolens were very, very well done in the last 2 years, whereas cotton because of -- the cotton pricing in India are not being anywhere close to what the international pricing was, we were -- we were at a disadvantage as far as cotton fabric pricing and the cotton garment products are concerned. So I think scale is definitely what the retailers are looking at, and they are looking at India now in a more cohesive manner in terms of what's happening. Another thing which is happening is that in India for India. I mean most of these retailers are also coming into India. And I think for them, the growth markets are on this side of the world, which is working around. And for that, India for India strategy, whether it is H&M, where we have -- where we worked with, whether it is Levis, whether it is -- all the big names, they're also looking at kind of [indiscernible] because they are more concerned with today, the total cost of ownership. Then, let's say, stand-alone FOB value, working around that. So I think that's what -- these are the shifts that are happening, and I think we should be able to -- and India is in a good position to kind of capitalize on almost all of them.

So continuing with the same discussion. So the issues that we have seen in some of our neighbors like Sri Lanka, Pakistan and Myanmar, which are also one of the -- a few of the major garment exporters. So does that also give opportunity to Indian RMG exporters in any sense?

So I think for Indian RMG exporters, there is a reasonably big opportunity because there exists when you look at the total cost of ownership, it talks about -- see Bangladesh imports a lot of -- I mean the whole -- one is the cost which is involved, the other is the footprint, which they -- the carbon footprint, which they have to manage. Whereas India, at least for the cotton and now there is a lot of focus also going on with the man-made fabrics. So this upstream being available for the midstream of garmenting, I think the whole proposition becomes pretty attractive for all the retailers to come. What we need to bring in is definitely the scale on garmenting because as you say, we are more focused on upstream and there is a large opportunity on increasing our 40% to 60%, 65% on the RMG. It adds more value when brings in more foreign currency. And also be a little competitive in terms of the efficiency and the overall labor deployment in the right way because that's something which possibly we need to learn from some of the countries around us who have done it a little better.

Right. Right. Let me come back to Mr. Agarwal. So government of India has set an ambitious target of $100 billion of export -- textile export by 2030. What is your view on achievability of the target and whether these incentives and trade agreements are sufficient to enable it to achieve the targets of $100 billion?

See, I think you have to understand one thing. You have to set an ambitious target. And then one needs to drive towards that. And I think that is a good way as a government. Now I think the single biggest thing which government has to achieve is to deliver the FTAs. Once the FTA is done, you are on a level playing field. In such time that does not happen, you will always be having a compromised situation. So that's number one. Second thing, you see this whole China Plus One which we are talking about. I think these guys are at 35%, 37%. Now to take out 2%, 3% out of these people can make you a significant difference, which you demonstrated on your chart. So I don't think, sir, we need to go and pick up the targets from Bangladesh or Myanmar. I think the China itself and today, let's say, a year back, I can tell you some very vivid examples. We were talking to a large retailer in Europe. He was very clear that the incremental quantity is going to get to us, but later on, their Board made a mandate that you have to reduce your quantum from China. So to that extent, very vividly you are seeing that there is an opportunity which you have, which you can translate and actually, a pace of investment which we all need to do. And the other thing I think we will lack is one thing is the labor. Though we say we have abundant labor, but I can give you an example that especially in the Bangalore, which is a large exporting region, and that Doddaballapur you will have -- everybody has the units. Now what happens is, everybody is taking the people, the same kind of people are there, and we are increasing the rate ourselves. It is the industry who is increasing the rates. Second thing, the reason why it is happening, twofold. During COVID, when people went back to their villages, almost 50% -- 25% to 30% people never came back because they were getting the free subsidy, ration and cash disbursement. So these people never return. And when you are producing the RMG for a top brand, you need to be very quality conscious. So in terms of training those people, what happens to your spending time and effort and money? Now that is all adding to the cost. So therefore, what is very important, is to understand that we create a framework also. And I think the government has to play such kind of a role. I think private people like all of us myself, Ashish, will invest into the CapEx. We'll do the right thing, we'll acquire the customers. I think that will not be an issue. We will get -- there are -- we are investing very, very clear more than INR 200 crores in the next 12 to 18 months to add increasing our capacity by 1/3 for simple reason, there is so much of demand.

Right. That's an interesting point actually about Bangalore like the limited availability of skilled labor and [ they're next ] to the port, which you said earlier. But still, what we are seeing the extent -- garmenting companies are expanding nearby Bangalore itself in spite of all those issues.

Pulkit, can I come in between?

Yes, yes, sure.

I think there is a small change like we took a facility in Telangana. Now this was very attractive. We bought this facility. I think slowly and steadily, if you see all the major garment exporters, they have realized that Bangalore is not the only solution. You have to spread yourself away from Bangalore. And I think some of the recent state garments have been very attractive, have been inviting these investments. And I think all of us are in having at different stages of dialogue in terms of putting up the facility. So when you get the people there, training there. And the only thing is, one has to really see the whole logistics because I think logistics is very, very important in this business.

Right. Right. So now coming to their domestic demand from the export market. So in the domestic also, what we have seen that fashion retail segment has some demand slowdown post last festive season and mainly what we feel is due to the inflationary pressures, which are there. So I will request both the panelists to take up this question. So what's your view, by when we expect the domestic demand to improve? If Mr. Agarwal can take this up first.

Sure. Pulkit, look, the markets, our markets. At the end of the day, you cannot have a run, which we all enjoyed for the last 18 months. I think we all had a very good run in the last 18 months. I would not say just the inflation because there are 2 or 3 things one has to understand in the current scenario, one, this particular summer. I think a lot of the farmers had this fear and today with the digital media and social media, this El Niño played a little bit of a havoc for these guys that they have got worried that how their crop would be. Plus the whole temperatures were very, very high. So what happened was people were avoiding a lot of such events and families and weddings. And typically, you see summer is one time when you have more rural weddings. And winter is more time then you have more urban weddings. So because of these 2 factors, their weddings were less and weddings tend to be occasionally more higher purchase. So that was one of the reasons why you see a slightly lower demand for the products. But in my opinion, I think as a country, we are more than convinced that we have a phenomenally great future. You are a $3 trillion economy over the next 7, 8 years, you should be a $7 trillion, $8 trillion economy. If that is to be there, the consumption has to grow. And the way the affluence is coming into the people, I see from an unorganized sector, people are moving to an organized sector. And I think that is which unfolds a very large opportunity for us. The other thing we all have to gear up also to cater to the young millennials and the Gen Z who has a very different way of buying products shopping vis-a-vis the traditional. I'm not saying everything offline will be gone. I think brick-and-mortar has seen a very strong comeback and I very strongly believe in that. There's no 2 ways about it. But the way you present, the way you bring your designs, I think that you cannot stay typical old fashion, you have to move with the time. And I think those things will help a fashion business, a retail to grow very fast.

Sure. Mr. Kumar, what's your view on the domestic demand?

Yes. So I completely agree with what Mr. Agarwal said. I just need to admit one thing that -- I mean we all are convinced about what the domestic retail market can deliver. And if you see their spending patterns, maybe -- I mean, even, let's say, the urban, if you see your flights are completely full, your restaurants are completely full, and also people are spending and people are spending reasonably more than what they were spending earlier. Maybe at this point of time, their preference is more about going into -- more into travel or more into eating. But I think the fact that most of the chances of them coming back to the apparel retail is bound to be there. And also -- but we need to also look and engage with them in a little different way. So I mean if we engage with them, all the growth factors are intact, there is no reason for the Indian retail market not to grow.

Right. Coming to my next question. So there have been a lot of discussions which are happening on ESG across industries. And BRSR is also becoming mandatory, so if I look from RMG perspective, S is one of the most important factor that is social. So how do you -- what's your view like, do the Indian RMG companies stack up on this parameter vis-a-vis global competitors. Mr. Kumar, if you can take this first?

So I mean I would like to talk about where we come from. I mean all of our factories are compliant because I mean the way we work is, we work with the big banks, and we will have to be kind of compliant. See, given the fact that there is a shortage of labor, even in, let's say, a smaller setup -- they will also need to -- I mean they must be paying a little more only because that's how they attract. Maybe it is -- the way they are engaging with the workforce will have to change, to work around and be compliant with, let's say, on the social side. But I think it will come more from the need of deploying the people. So you'll have to -- I mean, that's the only reason why people cut [indiscernible] right, on the social sector. That -- to my point that where there is a shortage of labor where we are looking at going into different states and working around and working with them. So eventually, it will have to -- I mean, all the companies will have to comply with the social side of the business, so to say. And it will become more and more, as a requirement if you have to deal even with the domestic retail because the consumer is going to be much more aware.

Right. Right. Yes, [ Mister ], your view on this?

No, absolutely. I think Pulkit it's a fact. The consumer today, the young consumer is willing to pay x dollar more for a sustainable product. And I think that's a great incentive for the companies to drive that. Second thing, you know there are capital tools available, which drives sustainable investments. So what will happen is people would also skew towards them. Third thing, see who doesn't want to have a more sustainable basis to work with. Everybody would like to. As Ashish mentioned, it is where the question of cost where some [indiscernible] was cutting a corner. But slowly, what will happen is this will become the norm of life. As we all have progressed that how to live, like people talk about safety. Safety has to be a way of life. You cannot say I will do in order to have a safe working environment. You cannot think that way. So therefore, I think this is a fundamental change. Maybe better ESG, ESG as a big but it has to become a norm of life that you have to work legally, you have to work in a social manner. In terms of employment, I can tell you today, the kind of competition, it would get created, that if you do not provide adequate facility to your employees, if you have a younger below age person working. It is -- the coworkers will start talking about it. So I think it is just a whole environment, the framework would convert in that manner. And I think it is very good also because these foreign firms actually do a very thorough audit on this aspect. And when they do a thorough audit, what happens, you have always a fear of losing. So you cannot say that boss 60%, which are used to export, there I will do follow the ESG on 40%, I don't follow. It won't work. So slowly, and that is why if you see some of us started this business by saying, you get good designs, you get the understanding how the market be is. So slowly, that thing you can bring into the Indian market. Similar is the ESG norms. that what you have been applying for the export product, you would start applying in the domestic market.

Right. Right. Now we will call the moderated panel discussion and take up the questions from participants. I would request Krunal to coordinate with the questions from the audience.

Yes, so we have a question from the audience. So I'll take the first question. So the question from the audience is that why the knits-wear segment is lagging behind? So I'll request Mr. Ashish Kumar to take this question, what is your view why the knits-wear segment is slightly behind the woven.

Sure. So I think there are -- I mean, there are a couple of reasons. One, for sure, which is directly attributable to -- it is the cotton pricing. You see what happened last year, the cotton -- I mean, the pricing went very high. And as a product, as a knit product, the amount of cotton which goes into the knit fabric is very, very high as compared to, let's say, a shirting fabric. Like I mean, a kg of cotton can produce, let's say, 5 meters of woven fabric, 1.5 meters of denim, so to say, but maybe 5 to 8 pieces. So that was one. And the price increase was very, very sharp where the margins and the minutes, let's say, of conversion, the cost of conversion is not so high. The second, also what we realize and when we interact with the big customers is that what happened is that every -- during the pandemic, everybody moved into a very casual lifestyle. I mean, everybody was wearing a T-shirt and a shorts and kind of working around. But when it opened up, people moved -- people like to be dressed better. So their preference to go on to the woven side, on the tailored side became a little more. And the third thing is the wrong calculations basis the increase, which happened in pandemic in this category by the brands. So what they did is that they overbought and -- but they could not sell. So these 3 possible reasons are contributing to what is happening currently to the knit-wear segment. But it will stabilize. I mean, it will finally need to find its own curve and meet the right demand.

Okay. So sir, have we now seeing some recovery in that knitswear segment also now the cotton prices are corrected from this...

So you see what happens is, in exports, the planning is off. So I mean, most of the -- it's a lag, right? So it will -- now prices have got corrected in the last, let's say, 3 months, 6 months, and it is getting corrected even as we speak, right. Now we will -- so for them to move the business, it will take at least 1 or 2 seasons, right. So we see definitely the change happening, but it will move [indiscernible]. So there were 2 segments, I'd say, in the knit-wear. One was the essentials, underwears, let's say, and the other was the outerwear, I mean, the knitwear, so to say. We are seeing definite improvement as far as the essentials piece is concerned. I mean, there is already a demand which is kind of coming back. And we are also that on the [ cotton knits ] next season, we will see the demand coming back to us.

So we also have our next -- I mean another question from the audience. So I'll request Mr. Agarwal to take this question. So sir, the question is that with respect to the growth within the RMG, [indiscernible] in the hosiery segment. So what the thing was -- I mean in terms of the growth number, which segment you think that should have a relatively a faster pace in terms of growth ethnic in the hosiery?

Okay. First, let us divide the market, domestic and export. If we talk about the domestic market, you see ethnic-wear has a very small base, so the growth will be in terms of percentages, and they'll be very, very large. Now when we talk about an export, what happens is ethnic wear is primarily worn by our fellow Indians or Indian diaspora globally. So that will never get to a growth level to the kind of numbers which you are talking about $10 billion or $20 billion or $100 billion that will never reach to that level. However, in terms of the undergarments and such things, hosiery is something which is worn and it is leading into many categories. It is getting into athleisure and so on and so forth. And it is also slowly stretching into the man-made fibers. So what is happening is, obviously, the potential there to grow is very, very large. And India with the PLI scheme, there is a good opportunity. Some of the large players can really participate. And at the end of the day, you see all these big brands which they buy, they buy from us, China, Vietnam and so on. So if we create a large-scale facility, we clearly see an advantage. There is nothing short that the technology we don't know, we don't have skill, we don't have design. I think it is all there. It's only a question of that now we need to get the framework right. So that way, I think ethnic wear, we like all the space ethnic wear because it is too much of a new hype, so to speak, in the Indian market.

Okay. And sir, just a follow-up question on that side. I mean, as we understand that PLI 1 has already been launched by the government of India. And in terms of budgetary allocation, they are still having some budgetary allocation. So they are in discussion with PLI 2 also. And they are probably the likely to introduce the cotton-based textile product in the home textile unlike the PLI 1. So what is your view? I mean, what is the possibility that government would soon launch that PLI 2?

So I'll -- look, the target is set for $100 billion. If $100 billion has to be achieved, there has to be enough and more platforms and incentives such to be provided. But you see, I think my view is on the strength of a PLI and such things, today, you don't go and invest into a business. First, you see, is there a business rationale? This becomes additive to do the investment. But can I say that for PLI, I will invest? Answer is no. The answer has to be that the business makes sense, do I see a market? Do I stand a chance? Because PLI would not make all the difference in the life. If I don't have a market, what do I do with this? So I think that is, for me, more fundamental than having a PLI or not a PLI. But it is both that the government is coming forward. It attracts a lot of investment into India.

Okay. So I mean, we also see that now government, central government focus [ textile it is ] all-time high, probably. I mean, we never experienced such a policy initiative from the government prior to this. I mean all from the trade agreement through the launching of the various incentive schemes or RoDTEP or [ RoSCTPL ]. I mean, everywhere they're now focusing on incentivizing the sectors. They have probably also understand the importance of employment regeneration and the foreign exchange earning out of this industry. So sir, probably we will take the last question for today from the audience side. So sir, this question is from, I mean, audience with respect to cost of production between the competing nations. So Amit [ forget about ] about time being the duty disadvantage that India has. But in terms of cost of production, how we are fairly with Bangladesh, Vietnam and China? I request Ashish Kumar to take this question first and probably then Mr. Agarwal can respond.

No, I think you had very clearly elaborated in a slide where you had very clearly shown that on the labor index in terms of the cost, if we are at 100, only Bangladesh is at 97 or 95 and China is at 130. So as far as the absolute cost is concerned, that is where we are. But I think in terms of productivity, we are not [ slugging ] with respect to China, with respect to Vietnam, with respect to Sri Lanka. So I think that is where continuous training, continuous interventions inside, having the right -- so everything comes -- so I mean, there's always this discussion that if I have scale, if I have big orders, then I can really build it up, build the efficiency. I cannot build efficiency on small orders and small runs, so to say. But it's -- as I said, total cost of [ production ] will involve not what your absolute labor wages because that, in any case, we are increasing -- the minimum wages are increasing and they are supposed to, I mean, they will only go north from here. I think the play way we have is on the efficiency, which is a combination of product -- I mean, where we increase productivity through training and also through interventions of what we call as, I mean how do I descale certain operations and work around in a way that the labor index going on to the garment is becoming lower.

So Mr. Agarwal, what's your view?

No, I think what is he said it, I think in terms of labor, as per your chart, you see 100 was our index and 115 was Vietnam. But in terms of productivity, you see we were at 6, they were at 9. So you just do the simple that the total cost still turns out to be more expensive. So therefore, I think that productivity. However, I see the way this productivity would go up, that we have to take a leap of faith, train the people and bring them up to the speed. And I think then everything will follow. So it is not -- it is always a question of chicken and egg. So I think we need to invest first, and then I think things will follow. Exposure creates demand. I strongly believe in that. So therefore, I think once you have created the plan and everything, the customers will come to you will say, I want to buy and then you continue to grow and grow and grow. And I think that's the way to move forward. And look, this all, in my opinion, we are used to the kind of labor legislations. I think government of India, not for this business, as an industry, we need to improve our labor laws and legislations because that is going to be one big area for the government to change. And it cannot be done by 1 company, 2 company, 1 industry or other, it is a fundamental that change is required. Once we do that, I think we will be set because you see the skill in India we have. Second thing, please also understand it is important that we give a respect to tailoring as a profession. Because today, what happens is it is not even or treated it with a respect that [Foreign Language] so that needs to change. That is a skill. And not everybody can acquire that skill. So I think that is also very important that the -- socially when you uplift, people get attracted to this profession or this job. I think that is also very, very important, and that is an effort which we all have to do. There, we don't -- there we can't say the government can do that. It is actually our job. However, the government can do the labor law legislations simpler, easier to implement, not very cumbersome.

Okay. Thank you. Point taken, sir. Point taken. So I'll now hand it over to Mangesh for the closing remarks. Mangesh?

Yes. Thank you. Thank you, Krunal, and thank you, Pulkit for moderating the session, and Krunal for your presentation. Thank you again to our guest speakers and for their insightful views. Thank you to all the participants for taking the time out and being a part of the CareEdge webcast. For any further queries, feedback or solutions, please write to us at [email protected]. Goodbye for now. I request the tech team to log off.