GHCL Textiles Limited (GHCLTEXTIL.BO) Earnings Call Transcript & Summary

So when you say that the implication of expecting to generate a revenue of about INR 250 crores, that is an additional revenue or that is a revenue with the overall spindle capacity?

That is additional revenue.

Additional revenue per year, which will actually commence by quarter 3, right?

Correct.

Okay. And what about -- is there any future CapEx also lined up?

So we had committed INR 1,000 crores of investments out of that INR 570 crores as I mentioned in the note as well, INR 570 crores is done, another INR 430 crores is what we are going to invest in our vertical integration journey.

And how are you going to fund this?

So primarily internal accruals and of course, as and when the debt is required.

So right now, our debt to equity is very low. So we have quite a significant -- I mean, we can take a leverage. Just last question on the ROE, why is the ROE so low? I mean, single-digit ROEs -- that was just low single-digit ROEs. Where do you see this going? I mean, do you think that in the next 1 year or 2 years after this capacity, I mean, how would -- what are we doing on increasing the ROE?

Jalan here. You see basically, historically, if you go -- because right now, at this point of a time, you know the spinning per se or the textile per se, the margins are very low. If you look at our journey of last 20 years, every segment of 4, 5 years, last 5 years, our EBITDA margin was around 14%. If you look at 10 years, my EBITDA margin was also again 14%, 15%. Even including -- if I look at 20 years also, you'll find that our EBITDA margin was, including this 2.5 years, which has been very difficult, our EBITDA margin, has been 14% to 15%. So we -- first and foremost we are assuming is this EBITDA margin or this bad period of this textile will go away and we will come back to this 14%, 15% of EBITDA margin soon, number one. And if that happened, automatically, your return on equity will also go up. Our return on capital employed will also go up, and it will be -- definitely be a double-digit Historically, also our the return on capital employed was double digit. So we'll come back to that double digit in any case. And over and above this, since this vertical integration, we are going, this will further enhance our return on equity or return on capital implied and we are expecting this will be a kind of a 14%, 15% of the return on capital implied, we will be able to achieve in a medium-term thing. But one more thing I just want to clarify, when you ask about this U.K. benefits or the U.S. benefits, the duty advantage. See, basically, what will happen is this duty advantage to the U.K. or to the U.S. or to any part of the world, even Europe, which we are also expecting Europe will also happen soon. This will create a kind of a big boost to the textile industry per se in India. And this will ultimately -- we will be -- being the core producer, we will be benefited because of that. It is not because of that we will be able to export more. It is because of the domestic demand of the yarn will go up because of the overall demand upside into the garments at the home textile, this will benefit to the people like us also.

That's exactly I asked -- but how much is your exposure to people who are exporting to U.S., how many of your clients? I mean, if you could just -- so your analysis only. But if we can have a difference that -- okay 25% of our customers are actually core exporters or something like that. And it will be very helpful for you also to analyze and for us also to analyze that how much would actually the U.S. markets benefit you?

No, no, let me clarify this point also. See, overall, when the industry situation improves, either because of that more export to the U.S. or more export to the Europe or more export to the U.K. Overall, this will help the overall demand per se in India will increase, including the domestic demand. Though domestic demand will not improve, but supply restriction will happen. And this will improve your overall pricing of the yarn also. So it is not that okay since our exposure to the U.S. is 20%, and therefore, we will get an advantage or if we have an exposure on the U.K. 20% and therefore, we'll get an advantage. Overall, textile per se will get an advantage. So of course, like you rightly said, we should do the monitoring of this. But this benefit will not be because of that export to the U.S. or export to the Europe or our exposure to those markets will help us. This will help to every textile industry per se.

Okay. And just a follow-up question on your operating margins. What you said that you're planning to increase operating margins to 15% and what measures are we taking for increasing these margins?

Just give a minute. We have the management line reconnected.

Yes. My follow-up question, sir, was regarding your margins. You said that the margin you're planning to increase it from 9.5%, 10% to 15%. What measures are we taking for increasing the margins?

See, two things Mr. Deepesh. So one, like I said, that overall, historically, the margin in the spinning of our, at least, I would say, that 14%, 15% has been there on a longer period of time. If you look at our 5-year data, you will find that our EBITDA margin was 14% to 15%. The first and foremost, we are assuming this scenario of 2.5 years of the bad period of spinning or the textile will go away soon because of the certain, I would say, tailwind, which is likely to happen, U.S. tariffs, U.K. tariff and the Europe tariffs. The second is that, like what our CEO said, that vertical integrations are the margin enhancers, which will happen. This journey has been started on the knitting side. And gradually, in the next 5 years, we have a plan to vertically integrate and offer to the customers ready-to-cut fabric. And all these things will have two advantage. One advantage is my turnover -- capital turnover ratio will be better. And the second is margin -- there has been kind of an additional margin on this. And this both put together, we are talking about the margin which we have projected. So we are very confident of achieving those margins on a medium-term basis.

In the medium term, what do medium term mean? 1 year, 2 years?

Medium terms mean, I would say that maybe '26, '27 when you see the numbers. And maybe just tomorrow, suppose this tariff for clarity comes from the U.S. Probably in the third quarter itself, you will see that improvement will start happening. You see, one thing definitely, we must understand and historically, if you are tracking this company, you will realize, then historically, textile, particularly for the spinning. Such as, I would say, headwind of 2.5 years has never been seen. Historically, I have seen this industry for almost 20 years now. I've seen that maybe 6 months to 1 year, there is a headwind and after that, there is a recovery there. This is the first time this long period. But definitely this long period -- this what you call headwind is going to be over. So hopefully, I would say that the second half of this year onwards, things will start improving. Once this clarity of the U.S. tariff gets clear, definitely, you'll start seeing the improvement in the overall spinning per se, industry per se.

The problem is, sir, that we don't have the historic numbers because the company has just -- after a corporate action, it has come into the stock exchanges. So we have very little historic numbers. But I appreciate that you said that this 2.5 years has been difficult, and you're hoping for better numbers. And if there are any other further questions -- but I really feel that you should work on your ROE.

The next question is from the line of Riddhesh Gandhi from Discovery Capital.

Sir, I just wanted to understand, given what's happening with the MSPs given what's happening with U.S. cotton prices and there is discrepancy between India and the U.S. Is it that the major cause you think of the slightly lower margins, which have been ongoing for an extended period of time? And how does this get resolved in your view?

So Riddhesh, I think that is one of the key reasons, of course, because the cotton prices, of course, are on an upward trend. The other part is also on demand. While the cotton prices have been going up. On the demand side, there is no capacity to sort of accept the increased cotton prices. So obviously, the processing cost, manufacturing cost is almost remaining the same, right? Of course, there have been improvement based on operational excellence. But ultimately, if your demand side is not -- does not have the capacity to take up the additional cotton cost. Definitely, the margin will be in pressure. And yes, the disparity between global cotton prices and Indian cotton prices plays into it as well, specifically for Indian spinners.

So how does this actually rectify over the next few, let's say, quarters or whatever it may be?

Riddheshji what is our expectation. Let me tell you one. First and foremost, in the U.S. -- so first and foremost, the U.S. tariff clarity. We are expecting -- I would say when we are saying we are not saying GHCL Textile, the entire textile industry is expecting a very favorable tariff for the U.S. vis-a-vis Bangladesh or the Vietnam. So that is the one figure point that will be there, number one. In terms of the quarter, see, we are expecting again, these are all wishful thinking. Or I would say that likely may happen or may not happen also. Once the U.S. tariff gets finalized, maybe at the time that there can be some kind of a rethinking of the government on the cotton duty as well in the negotiation. Industry is presenting to the government on this duty and probably this tariff negotiation probably can bring some relief on the tariff of this thing. But once this U.S. tariff gets clarified, I think demand upside will happen that will support the price, and that will improve the margin.

Sir, and the other question was given the extra INR 250 crores of revenue from the new spinning capacity, which we are adding that, I'm assuming, would be even more incrementally accretive to margins, right? So I mean, that would be at how much EBITDA margin, if you can say?

So I think the new unit is definitely a state-of-the-art unit, right? And assuming if some demand stabilizes, definitely it would be minimum 1 to 2 percentage points higher on our EBITDA margins compared to our other units.

The next question is from the line of [ Saket Kapoor ] from Kapoor and Co.

Sir, firstly, the scenario for the cotton prices moving up and the depressed yarn prices correlation is the flattening demand. That is the only reason why we are -- why these spinners are unable to pass on the impact of higher cotton prices and the spread going down?

Yes, I think your understanding is correct. While the cotton cost is going up, there is no capacity on the demand side to accept additional prices. And hence, the spreads are getting compressed.

Okay. And there is also a differential between as the earlier participant was mentioning, the differential between the U.S. cotton and the MSP support that we have domestically. So what is the arbitrage when we compare the international landed prices and the MSP being protective for the domestic producer?

See, on a pure play prices basis, yes, Indian cotton and U.S. similar quality cotton is at similar price levels. The problem or maybe the difference is just the import duty. With the import duty, I think the difference sort of goes away. So as of now, at a 56,000 levels, I think all the cottons are at a similar price on a landed basis. But yes, with the MSP increasing and the expected price increase in the Indian cotton, there will be a difference. And sort of Indian cotton will become expensive in a way.

Come again, sir. The last point, I missed it.

So with the additional MSP increase I am assuming and then that's a big assumption that the cotton prices goes in the same proportion increase as the MSP and the U.S. cotton remains same at the current level. On a landed basis, the U.S. cotton would become cheaper than Indian cotton.

Okay. And what should be the differential in percentage terms?

Yes, I think it would be 8% to 10%. I think that is what the difference would be.

Sir, in your presentation, Slide #9, you did mention about quarter inventory at 10,000 MT sufficient to ensure production continue to benefit from adverse pricing trend into Q2 FY '26. So taking into account the dip in the realization and the inventory gain out of the existing cotton inventory. Will this keep our -- will this keep the margin stable or this dip -- 5% dip, which we have seen in the month of July will take a hit on the realization and hence the bottom line?

I think this cotton inventory of 10,000 tonnes is probably 1.5 to 2 months of our inventory, right? So any additional inventory, which will come in, would come in at a higher price only, right? So while, yes, to some extent, there will be a protection on our cotton prices. But unless and until the demand scenario improves, definitely the quarter 2 would see a tough challenge on maintaining profitability.

Sir, when we look at our employee benefit expenses, that has also moved up Q-on-Q also and year-on-year also. The number being INR 20 crores for this quarter. Previous year, it was INR 17.3 crores. And last quarter, it was INR 18 crores. So this incremental of 10%, was what has led to this? And what should be the number we should look for the entire year?

So this is made up of two things. One is your annual increments, which happens, right, for both wages and salaried manpower. The second is that we have -- as you know, that we have added another 25,000 spindles and sort of the operators linked to it and the manpower link to it would get added in Q1 because definitely, there will be a time of training as well, which will be included. But on a per tonne basis, right, mandates per tonne basis, I think there isn't much increase.

Sir, you mentioned about INR 435 crores being the balance amount, which is to be spent as our CapEx. So where will this money get deployed if you could give the segment, how much will go to addition in the spindle capacity, how much to be knitted? How much do we -- renewable energy, if that ballpark number you can provide.

So I can give you an overall as a directional comment on your question. We are going to spend primarily on our vertical integration journey, right, which includes weaving, knitting and processing because the overall vision is to become a ready-to-cut fabric supplier. Our second pillar on that is that we want to have about 65% to 70% of our power coming from renewables. So whatever necessary investments, which would be required on renewables to maintain this proportion. I think that is what would be done.

Okay. Sir, as we move into the value chain of the dyes, fabric, yarn and fabric, there will be additional requirement for us in terms of the chemicals also. So what will be -- what percentage of our cost will go into the dyed chemicals? And what are the chemicals required? Is it only caustic soda or soda ash requirement is also there?

So packaging, chemical requirements are going to be very minimal. I don't think that is going to be very relevant for -- like even if the caustic soda is required that is not going to increase the demand of soda ash, don't worry. Okay? So I think chemicals will be required and various type of chemical, caustic soda, soda ash and other chemicals will be required when we go for the processing side, right? But that is not going to be very significant.

Okay. But Slide #6, Marshal, sir, if you could just explain me -- when we look at the yarn number for this quarter, it is 8.4 metric tons. When we look at the knitted fabrics, that has moved up from 146 metric tons to 247 metric tons. And whereas the revenue -- if you could just explain this correlation that when the volume for knitted fabric has moved up but that is not commensurate to the revenue. So how should one read this line?

No, I think the yarn sales volume is about 8,400 tonnes, right? While last quarter, it was 8,900 tonnes and you can clearly see that from our fabric, we derived about INR 25 crores of revenue this quarter, which is about 9.3% of our overall. So it is not -- so obviously, you have to understand we work on an outsource model on our fabric, right? So 8,400 tonnes for the overall yarn sales and knitted fabric sale was only 247 tonnes.

No, sir, Q-on-Q, the number looks from 146 metric tons to 247 metric tons, whereas the revenue has gone down.

[Foreign Language] 8,900 tonnes we have sold, right? Fabric, we have done from 146 metric ton to 247 metric ton correct? So that means [Foreign Language]. There are certain fabric, knitted fabric, even we sold the yarn from outside also. Okay. And this 8,900 tonnes out of this 8,900 tonnes or 8,400 tonnes from there also, we are using the yarn for the knitted fabric also.

[Foreign Language]

Let me just clarify, the fabric revenue, which we write on the down right, it is including both knitted and woven fabric, gray fabric, right? So the INR 25 crores is derived from 247 tonnes of knitted fabric and 36 lakh meters of gray fabric.

[Foreign Language]

The next question is from the line of Raman K.V. from Sequent Investments.

Thank you for allowing me to ask you a follow-up question. I just wanted to understand, currently, in terms of the entire market, what's the contribution of imported cotton to the total raw material in the domestic market?

In the domestic market?

Cotton usage in the domestic market than the cotton [indiscernible] the cotton usage in the domestic market.

Are you asking from a GHCL perspective or overall?

Overall as well as from the company perspective.

See [Foreign Language] if I've understood your question rightfully, what you are saying is that how much extra is consuming the Indian cotton and how much is the import cotton they are using? Is it right understanding of your question?

Yes.

India has been -- is producing around [ INR 3 crores base ] and this is largely, I would say that 80% of this gets consumed into the domestic market alone. And the export -- the import of the cotton this year has been around 30, 34 lakh. So in a way you can say that the percentage of the imported cotton in the overall textile per se is around 10%, 10% to 15%, right? And this also primarily, I would say that it is more of a premium cotton like Egyptian cotton, Australian cotton, your Pima cotton. High quality of the cotton are getting imported. Some of the cotton this time has been exported -- imported from Brazil and other parts of the world also. But primarily, these are all special type of cottons have been consumed. If you look at, in our case, I would say that similar kind of a percentage will be there. We only import the three special kind of cotton. One is our Australian cotton, which we import in a large volume and American cotton, which is Pima and your Egyptian cotton, which is Giza, which is -- so these are the three cottons. In terms of the percentage, my understanding this will also be around 10% of the overall consumption of what we do. In the overall 10% to 12% kind of a number.

So basically, just a follow-up on this, with current U.S. India [indiscernible] and if the duty on rest...

I'm sorry, one minute. I think we are not getting your voice clear. So you are speaking -- it looks like that you are speaking on the hands off mode or some background noise is coming so we have not been able to hear you properly.

Okay. I'll just use it speaker. I was using handset only. Can you hear me now?

Better.

Yes. Sir, I just wanted to understand that with respect to if and when India and U.S. finalized their trade deal, the duty on imported cotton from U.S. will reduce significantly. So this 10% share of imported cotton, will it increase to 15% or 20% in the coming years for you or not?

You see, again, the cotton is such a commodity it all depends on the competitiveness of the price. How the Indian crop happens, what is the price of the Indian cotton? And what is the U.S. cotton excluding the duty. So all it will depend on the advantage overall in terms of the landed cost. But yes, logically, if you ask me, if that duty goes down or if the duty gets removed, at least the Indian spinning industry or the textile industry per se will become more competitive, and the chance of bringing more imported cotton will likely to happen.

Okay, sir. And sir, my final question is with respect to the -- again, the capacity addition. Can we expect this spindle to contribute fully in FY '27 and like additional incremental revenue of INR 250 crores in FY '27 and additional revenue of around INR 50 crores from the knitted facility, which will be commence in Q4 because it will be a first full year of operations, right? So around INR 300 crores of incremental revenue on base revenue of previous year FY '25, can we expect that?

No, no you're 100% and let me just add here is that in the third quarter of this year itself, you will start getting the benefit of this new unit of INR 250 crores, which is approximately around, I would say, INR 60 crores of the per quarter benefit. So that should start happening in the third quarter, you should have that INR 60 crores. And then in the fourth quarter also, you should have INR 60 crores. Even in the knitting side also, you will get an advantage in the fourth quarter of knitting -- knitted because by the time this unit will get-- will start running. And in the fourth quarter of this INR 50 crores of -- divided by 4, the benefit you will get in the fourth quarter of this year itself. '26, '27 definitely we'll get the entire advantage even in this year also, you'll get an advantage.

[Operator Instructions] The next question is from the line of Jatin Damania from SVAN Investments.

Just a couple of questions. Now looking at the current cotton prices as compared to the imported prices, the decline in the strength that we have seen from last three quarters, majority of the capacity must be in the stress and they will be reporting a loss. So given our balance sheet's trend where we also want to expand and go for a diet or value-added yarn product going down the line. Are we looking at any acquisition of the stressed asset over the next couple of years?

I don't think we are right now looking at any such kind of stressed asset because you see coming around the stressed assets itself is a [indiscernible] task. So we are not looking at any such kind of a stressed asset to acquire in the near future. But of course, we are always open if something really compelling is coming and the size is coming, which size compels us to kind of look at, we will look at.

And next question now since we are only will be into a ready-to- cut fabrics. So are we, any point of time, probably 12 months, 18 months down the line, looking to expand ourselves into a technical textile front where we can get a better profitability, better margin?

See, Jatin again, we are -- right now, we don't have any such kind of a plan on table, but we will always be open to kind of look at some opportunities if it comes. Right now, like our CEO said, our plans are very clear. We want to first go into the vertical integrated unit ready-to-cut fabric delivered to the customers. That is the first priority we have because we believe that if you have a consistency in the plan and you don't switch here and there and probably work on a very clear cut focus, you will always be able to return a better capital -- a better return on your capital. But yes, we will keep on our options open if we get some kind of an opportunity of some kind of a unit which helps us to kind of take a forward, I would say, a few steps ahead of the curve, we will look at that possibility.

And sir, last bookkeeping question. I mean, just to sort it out. In terms of -- can you help us understand the broadly realization of the knitted fabrics in a per tonne basis and gray fabric or a woven fabric on a like meter basis, the broad realization?

See again, here, I would just want to jump in and say that see, right now, we are in an outsourced model, right? In the outsourced model, the consistency of the product basket is not there. Sometimes we are producing coarser count. Sometimes we are producing the kind of medium counts. So therefore, at this point of a time, talking about a consistent, what we call per meter will be kind of a misleading picture. But Marshal rightly said -- our CEO rightly said, once the kitting fabric, which is the units which we are installing, once this gets commission. At that time, you will get a clear picture of how the per meter realization, that will become a more comparable order, it will be more -- making it more relevant for you.

The next question is from the line of [ Vipin Chahar ], an individual investor.

My question has been answered, but just wanted to confirm. In the investor presentation, you have said our long-term EBITDA margin to be in the range of 15% to 18%. While earlier, we were guiding for 17% to 20%. So why is that downward revision?

Basically, we are still believing internally, we still believe that 18% to 20% EBITDA margin, which we should be clocking in. Okay. Like I said, I'm still maintaining that 14% to 15% margin. Historically, we have been able to manage, okay? We have been on the longer term, 5 years, 10 years, we have been able to manage. So on that, on top of it, 4% to 5% will always -- will be possible because of all these vertical integrations, okay? Though we are still maintaining 18% to 20%. However, for a conservative number in the investor presentation, we have said 15% to 18%.

Ladies and gentlemen, due to time constraints, that was the last question for the day. I would now like to hand the conference over to Mr. R.S. Jalan for closing comments.

Thank you very much. I think I must appreciate all the questions. And one of the questions which I'm taking home out of this entire question of, that, work on your return on equity, okay? Rest assured, like I said, always that -- always the management is very focused on the value return to the shareholders. We are working on the return on equity or the return on capital employed and we will definitely deliver on that. In addition to that, I just wanted to kind of give my perspective on the overall business scenario. Like our CEO said, second quarter looks to be challenging. And this is only primarily because of one thing, short-term uncertainty in the demand scenario because of the tariff uncertainty of the U.S. Because of this, lot of hand-to-mouth orders are being placed and the people are not going long into that. Once this clarity will come, we are very clear. We are seeing that the positive uptake into the textile. And surely, we will also be getting benefited out of this. And maybe if everything goes well, once this duty -- because there are a few advantages which I see: one, U.K. deal. Second, I clearly see a very soon likely U.S. -- Europe deal happening. U.S. deal is also likely to happen. The Industry is hoping the kind of this big significant advantage vis-a-vis the competition of Bangladesh and Vietnam including China. So this will also help us the textile industry per se. So any medium term, so again, I'm repeating. This definitely, this industry has a kind of a reach out to the bottom and probably it will take an upside going forward on the one slide which clarity comes. With this, thank you very much to all of your support.

Thank you. On behalf of Go IndiaAdvisors, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.