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

Yes [indiscernible].

Yes. Correct. Correct, sir.

The complete commercialization is done. In Q3, we will see the full benefit of this unit.

And sir, when we had the last interaction for quarter 1, we were alluding to the fact that the environment -- the working environment was not conducive, and we were expecting lower -- lower financial performance for this quarter. So if you could just explain to us what factors have contributed to the incremental increase in revenue and hence, the profitability and whether the same are going to be -- we are going to see the continuity of the same for the remaining part of the year, if anything on that front ballpark you can give.

See, first thing is our volume has gone up, right? That definitely adds to our incremental revenue. Second is our proportion of fabric revenue has also increased. Third, we have been able to maintain our overall sales price, right? So our average sales price hasn't dropped so much. I think these 3 factors primarily contributed to higher revenue. We, of course, got a benefit of higher renewable production, which reached about 74%, 70% of our overall power requirement, which was about 60% last quarter. These 4 things, of course, helped us get the numbers what we delivered.

So these factors are in continuity for the ensuing quarter also, we are done with 1 month of operation. So only the [indiscernible] if you could just aligned.

On the volume side, of course, the volume will go up -- slightly go up in this quarter. On the sales price side, it is difficult. As I said, situation can get -- so there are 2 scenarios, right? Of course, if the U.S. deal and other demand side triggers do not happen, then definitely, the pressure will continue on the sales price and overall margin, right? And probably in that case, the performance would be very similar to what we delivered in Q2. If, let's say, it happens and it happens in November, probably December, we can get some benefit. And of course, the overall sentiment of the market and the order flow would increase, and that probably would help us get better, but it would not be a marked improvement because it's only 1 month of demand side getting better. Quarter 4 would be a good quarter to look at the overall improvement.

Sir, on the realization front, how are things shaping up? I think so you mentioned about the cotton prices also trending in the lower band. And I think so if you could just give some color what kind of -- what is our inventory pricing currently? And how are we -- how have the realization shaped on average basis for quarter 2? And post the exit of quarter 2, how have been -- what have been the dip or the change, if any?

Saket ji, I won't be able to give out our inventory cost per se, but what I can tell you that it is trending downwards as the overall aggregate cotton costs come down. right? So that is what I can sort of tell you. Sorry, I forgot your second question. Could you please repeat?

Sir, my question was on the realization -- on the yarn realization on a blended basis, what was the realization trend between quarter 1 and quarter 2? And post the exit of quarter 2, how has the trend been for the last 40 days -- last 30 days?

So on a spread basis, this quarter, our spreads have marginally come down or you can say it has remained in line with quarter 1. Quarter 3, I think it is difficult to say right now because it's only 1 month, which has passed. But as I said, right, I'm just coming back to what I told earlier on the demand side, there are 2 scenarios. If, let's say, the deal doesn't happen or it gets delayed, then probably we will see similar to quarter 2 or maybe slightly lower. And if it happens, then probably it will get slightly better.

So to summarize, we can -- we will see the advantage of incremental volume for the newly expanded capacity for Q3 onwards and also the benefit of mix between the integration will also be in the similar level. These 2 factors will have a positive impact. They will play out in now the ensuing quarter. This understanding is correct, sir?

Yes, yes, you are absolutely correct.

And on the CapEx front, sir, what are envisaging to spend on the CapEx for the second half, sir? How much we would be spending?

See, on the CapEx side are 2 things we have to complete. One is installation of the 15 knitting machines, which have already been ordered, then we would be sort of completing the rest 25 knitting machines, at least we are planning that it should be in-house by about March or April. So this is the priority for us in the remaining quarters. Also installation of the 30 megawatts of solar between rooftop and ground.

Sir, our closing capital work in progress was at INR 13 crores. So for the knitting part and the machine installation, how much are we going to spend for H2, sir?

So I think capital work in progress would primarily be the pending things or work in progress from our 25,000 spindle unit. There are still a few things, which are in completion. After that, this is -- overall, I think about -- we have spent INR 41 crores this quarter and a similar number for the rest of the knitting machines, about INR 20 crores, INR 25 crores is what would be spent for the rest 25 knitting machines.

And sir, the point -- sorry, sir, the EBITDA margin path, which you have maintained in your presentation of 16% to 18%, we need to wait for the trade deal firstly then we can give a path or a year by which we would be achieving it. That would be -- that we have to hinge on that factor because we have mentioned about 16% to 18% is what we will be achieving going ahead.

So it would be difficult to give it because as in the overall macro situation isn't very conducive right now. But Saket ji, whatever is controllable at our end, we are doing that, right? When it comes to operational excellence, making sure our capital allocation is correct, moving forward on vertical integration, getting our customer product mix right. I think this is in our control. I think that is what we are doing, but we would need some support on overall macro to make sure that we reach the INR 16 crores to INR 18 crores situation.

16% to 18% right.

[Operator Instructions] The next question is from the line of Deepesh from Manya Finance.

With stable domestic cotton prices and growing global demand, how are you positioning your product mix to balance the cost pressures and pricing opportunities?

See, our product basically is primarily focused on value-added products, right, which are made from your imported cotton going to very premium customers. We try and sort of put our product mix at about 40%, 50% there. The rest is customized products made from Indian cotton and the pending is all sort of usual [ marks ], which is primarily to ensure that we run at optimum utilization levels. This mix is an ideal mix currently because of -- and I think this situation will -- it will depend a lot on overall demand situation as well, but this is where we try to reach in a way.

So now how are the export orders flowing shaping up amid ongoing tariff uncertainties and global demand modernization and also the India EU trade or India U.K. trade, how would that actually help us with our exports?

See from the point of view of exports, at least in this quarter, we did not see exports going higher, right? So I think India exports about 100 million tonnes a month sort of run rate, right? And that more or less has remained the same. Probably if, let's say, the FTAs do not get signed, then probably the demand would move elsewhere. But as of now, mostly, there are no order cancellations in India, at least in our customer set. And that sort of means that most of the customers have continued for now in anticipation of a quick closure on the deal probably by this year end, When it comes to U.K., definitely, that is a plus. And we have seen many of our customers trying to move their end customer base to U.K., but that is still a work in progress because even the rules are not notified yet. EU is a good opportunity. The EU overall market is similar to U.S. While U.S. is more concentrated, EU is more distributed market, that is different. But on a slice basis, probably it is similar to U.S.

Okay. What's your near-term outlook for the global cotton pricing? And how do you see India's competitiveness relative to the peers of Bangladesh and Vietnam?

In terms of global cotton competitiveness, Indian cotton prices, while they have come down, are still at a slight premium to global, right? So when it comes to, let's say, Vietnam, Bangladesh, they, of course, get global cotton from other countries at cheaper prices than India. That puts us at a slight disadvantage when it comes to overall cotton pricing. In India, we see -- I think our view is that it will depend a lot on the quality and the crop output. The prices will depend a lot on that. And then whether CCI becomes the monopoly supplier and how they dictate the pricing in the market.

Can you quantify how much is the difference between the pricing, which Vietnam and Bangladesh [Technical Difficulty] prices?

See, right now, at a -- when the duties are removed, the global cotton prices and importing those within India would be similar. But let's say, India imports about 12% duty on imported cotton non-US. But in Vietnam, Bangladesh, it would be lower. Definitely, it is lower. I do not have a number that what is the import duty, but definitely, it's lower.

No, this is for the imported cotton. I'm talking about the cotton, which they are getting and we are getting from the Indian market. How much is the difference between that?

No, that is what I said, right? Let's say, if we buy from India, right, then I'm comparing, let's say, whoever is buying from globally plus their import duty, if I have to buy global plus my import duty compared to my domestic cotton prices.

So your domestic cotton prices at a premium?

Yes, yes. While the premium has come down, definitely, it's still at a premium.

And there is no quantification for this that how much percent is the premium will grow for the Indian cotton prices and the global cotton prices?

I do not have that number. See, at 56,000, it was about 12% to 15% premium. Probably it is about 5%-odd premium, but I do not have my exact number. This is my guesstimate.

Yes, that's a fair assessment.

The next question is from the line of Lakshminarayanan from Tunga Investments.

See, I always thought that there is -- when you actually sell your yarn to a particular brand or the brand actually says that, look, I want a yarn from GHCL that your margin will go up. And my interaction earlier shows that there is a -- you're actually working with some of -- working towards expanding this. Can you just help me understand of yarn outsource, how much is actually sold in the market and how much is actually sold for the brand, especially the multinational brand.

See, our -- about 30%, 40% of our total output goes to some of the top brands, right? Now what you are saying is true in a situation, which is not depressed. Right now, the way strategic customer base helps us is to ensure that we have a steady pipeline of orders and that sort of helps us also to optimize our operations. This is the benefit, which we get currently. But let's say, in a good market situation, we typically can expect about 1% higher margin by selling to some of these global brands because they have a higher quality requirement, customer spec. So 1% to 2% is what we can expect in a good market situation. Right now, the way it helps us is to ensure that we have a steady pipeline of orders.

So now, you say it's around 60% to 70% is actually sold to agents kind of a model. Is it -- do you have visibility in terms of how those agents would actually place your output? Or how does it work? Can you just help me understand just this part?

Yes. See -- sorry, please complete the question.

No, I just want to understand that part, where you don't have visibility to the end brand. Is this particular supply chain helps you to ensure that the supplies are actually -- I mean, your output is actually get to the market, therefore, your utilization is there. Just want to understand that particular part, where around 65%, 70% of your products directly go to the agents and they actually place your product to the end brands. Do you have any visibility of those brands demand or you actually leave it to the agents to actually figure it out?

See, let me delineate the customer profile, right? So when we say 30% to 40% goes to brands, this is where we either have nominations or very long-term relationships, our products are customized for this particular category of customers. The rest of the product is, let's say, a standard product, wherein we sell directly to brands also and through agents as well, right? Let's say, most of the export business for us operates through agents. And in India also, some of the accounts are done through agents only. But it does not mean that the agent controls customer or communication or relationship with the customer. We do control it. We know exactly what they need. It is more like a situation, where our team works directly with customers' team to develop products, ensure our product is meeting the specs and everything. So it is not a situation, where we don't know who the end customers. We practically know where it is going. And let's say, 90% of the cases, we know who is the end customer, what do they need. That information flow is very open, transparent -- and because the relationship has developed over a period of time and stayed for a much longer time, we definitely know what is their order profile, order cycles, where are we ultimately serving to, right? And all those things helps us in optimizing our operations. In a good situation, we typically would have a 70% to 80% forward booking, which probably would have dropped to about 30%, 40%, 50% right now.

And as we expand our capacity in yarn as well as fabric, I mean, what kind of visibility you would actually have? Or it works that, okay, once only if you have capacity, you will actually get visibility?

No, it is not the case, right? As in, we have been operating on a job work model, right? And we have been able to build a certain amount of volume. So it is not the case that only if you have a fabric capacity you can service. Of course, you won't get the margins, which you would aspire to get, right, in a job work model because you would have too many intermediaries in between and you have to manage multiple things. So I think that is not true that only if capacity is in-house, you can do it. But the way capacity helps you is that a larger brand or a prominent customer would want a higher control over the value chain and hence, internal capacity is required. So as we sort of build internal capacity, we would, of course, go to the same category of customers, where we are selling our yarn and our customer profile would get better and margins would get better.

The next question is from the line of [ Pramod Dangi from Ratnatrayi Investment Management LLP ].

Congratulations for the good set of numbers. Sir, my question is on the ROIC or the ROCE. Despite having the margins similar to our peers, 11% EBITDA, 5% net margins, our ROCE is very low. So is it because of the accounting done at the time of demerger -- or how we look at it once our CapEx forward integration is done, how we look forward to the ROIC.

See, on a ROCE basis, there are 2 things right? One, of course, our normal margins in yarn business is typically around 14%, 15%. And while as in the data is not public because company got demerged in '22. But internally, I can tell you that our 5-year, 7-year margins have been around 15% only, right? That is point number one. And once we get back to this normal situation, our ROCE will get better. Second part is definitely we have been doing CapEx every year. So every year, we have been spending almost about INR 100 crores on CapEx on capacity enhancement, modernization and everything, right? That basically, our gross block continues to increase in a way. The third thing is this is something, which is depressing ROCE or I would say it has not increased that's why. The other thing, which is more controllable on our end, right, which will help this ROCE enhancement one definitely is our vertical integration, which will help; second, operational excellence; and the third is getting to more and more value-added portfolios on a stand-alone yarn itself, the margins would get better.

So what kind of ROIC we are looking at the new CapEx is INR 1,000 crores, INR 1,100 crores CapEx, which we are doing till 2028. What kind of internal target we have on those CapEx?

Yes. Our internal milestone is to get to a double-digit ROCE within next 2 to 3 years. I think that is what I can tell you. And we are sort of -- all our capital allocation is towards that only.

The next question is from the line of Madhur Rathi from Counter Cyclical Investments.

Sir, I wanted to understand regarding the margin profile you can expect over the next few quarters. Sir, with the knitting business coming online and it's currently a low-margin business due to the job work nature, so when can we expect to reach the 3% to 5% incremental margin on this segment on an overall basis?

See, for the next few quarters, right, like, let's say, quarter 3, the situation will be very similar to what it is in quarter 2. Quarter 4, of course, depending on -- and most likely the demand triggers would fall in place, we can see an improvement from quarter 4 onwards. As I said, our normal state EBITDA for our yarn business is about 14%, 15%. If let's say the demand [ side ] triggers fall in place and the cotton cost remains benign, we probably will be at that level maybe in next 1 or 2 years for sure. On vertical integration side, till the time we have on a job work model, we cannot expect the EBITDA to become accretive in a way, right, to a significant extent. But we are planning for our knitting -- knitted fabric facility to be in-house by about March or April maximum. For the next year, we can expect this complete unit, which is the 25,000 spindles plus 40 knitting machines to start generating about 14%, 15% EBITDA in similar sort of situation. If, let's say, the demand triggers fall in place, definitely, it will be slightly higher.

And the majority should flow in next year. And sir, if I see on a quarter-on- basis, our gross margins have declined and majority -- the margin that we have maintained it because of the power cost. So can we expect a further margin decline over the next 2 quarters with the knitting facility coming in and you said that the spread will be dependent on demand. So demand seems to be muted. So can we expect a slight dip in our margin over the next 2 quarters?

See, I think on the gross margin, it will depend a lot on the products we make, right? So let's say, if you go coarser or finer, right, it will depend a lot on the product mix also. I think we should look more at an EBITDA level for at least for textiles, GHCL textiles. I think EBITDA would be a good metric because gross margin will depend a lot on the product we make, sort of utilization numbers and everything.

Sir, on overall year, can we expect to maintain the 11% EBITDA margin for FY '26?

Yes. I think we would be able to deliver 11% there.

Sir, just a final question from my end. Sir, the INR 400 crores CapEx that we'll be doing towards the fabrics division, sir, can we expect it to generate INR 80 crores -- is that a fair assumption?

Fabric alone, as in -- of course, fabric would add a part of it, but also some of our units achieving, let's say, full utilization plus change in the product mix, which will increase our average cost. I think these 3 things put together would take us to about INR 2,000 crores.

The next question is from the line of [ Prashanth ], an Individual Investor.

Am I audible?

Yes. Prashanth ji, you're audible.

So my first question is, if you see the presentation on Slide 10, you have indicated a CapEx of INR 1,000-odd crores. And in the call also, you have mentioned that your turnover will increase by INR 1,000 crores. So can we -- so are we assuming that the asset turn is going to be [ max 1 ]? Or is there a possibility of having asset turn more than 1 going forward?

I think the asset turn would be higher than 1 because typically in spinning, it is 1:1. But once you get into vertical integration, it improves to about 1.1, 1.2.

Okay. So I mean, over a longer period, we can assume that it will trend more towards 1.2 kind of -- or that is the ambition?

No, typically, industry-wide also, if, let's say, it is a vertically integrated setup of 2 fabrics, the asset turn would be better. And we definitely, once we sort of get our vertical integration completed, the asset turns would get better to the [ 1.21. 1.1, 1.2 ] is what we can expect.

And the next question is around the Slide 5, where you have given the sales volume and revenue. So on a Y-o-Y basis, we can see that the knitted fabric and griege fabric, the volumes have jumped up handsomely, but the revenue has been kind of muted. So is it that there has been a significant price erosion and we have preferred to take the price erosion to maintain the volumes?

See, on this fabric side, right, it is on the job work model only, right? So definitely, we won't be able to get the prices, which we would have got if the capacity is in-house or whether if we control it completely. So -- and again, this is -- I request that the fabric has to be seen as something, which is in transition, where we are first building the volumes, getting our sort of volume and customers ready and then bring it in-house. I think the volume -- fabric business has to be seen once the capacity is in-house.

On an overall basis and industry-wide, this knitted fabric, how has been the trend in terms of prices? Has it been stable? Or have the prices on an overall basis come down due to competition? Aligned to that is because China is facing duty from U.S., there have been reports that [Technical Difficulty] are dumping the products all around. Has that made an effect on our product pricing and our strategy?

Fabric prices will move in line with the yarn prices, right, and at an industry level. If the yarn prices become softer, which has been the phenomenon across the industry, the knitted fabric and then the woven fabric will move in that direction only. So yes, there is some softness in the fabric sales price, but we are very small compared to the overall knitted fabric industry in India. So it hasn't affected us that much. But yes, I think part of your reasoning is correct that the prices have become softer.

And so basically, the China effect has no kind of a measurable or a significant effect on our price.

As of now, no.

And just lastly, in terms of overall, I mean, once the renewable energy goes up as per our plan, how much impact would you expect that on our margins, EBITDA margins?

See, I think the renewable power, what we -- I earlier told is that we are putting up almost INR 45 crores of CapEx for this rooftop solar and ground solar that as in the benefit is about INR 7 crores to -- INR 6 crores to INR 7 crores is what we can say.

Per year.

Per year. Per year.

Ladies and gentlemen, due to time constraint, this was the last question for today. I now hand the conference over to the Jalan, sir, for closing comments. Thank you, and over to you, sir.

Sorry, thank you very much. I think Marshal has very well addressed all the relevant questions raised by our investors. And I think let me just try to summarize 3, 4 things. First and foremost, our growth journey, as you have envisaged in the earlier periods, if you look at the past 2021 to 2025, we have grown by 2x. And the similar kind of vision we keep for going forward in the next 3 to 5 years' time. That's number one. Second, this growth journey will continue quarter-by-quarter. See, like just Marshal just said, that out of our new capacity of 25,000 spindles, we have only achieved the 50% in the last quarter, which is June '25. The balance 50% will come into the third quarter. That's number one. Second, our investment into the solar will get added to the -- in going forward. And subsequently, we are looking at another 25 machines on the knitting that will also get added into that. Overall, our journey of doubling the turnover will continue on one side. And second is the vertical integration journey will continue. There are 3, 4 priorities in our mind, which are very clear. There are certain things, which are not in our control, but there are certain things which are in our control. One is the cost competitiveness. We are significantly making our efforts towards the capital deployment in a manner so that we get a better ROC and better result on the numbers. Like Marshal very rightly said, our vision is that the vertical integration once is completed from knitting, weaving and the ready-to-cut fabric for that processing, our margin will go up around 4% to 5% over and above the margin of the spinning. The second is volume increase, which some of our investors was asking about, the double turnover, where you have only talked about INR 1,000 crores ratio versus 1:1 no. You see out of this INR 1,000 crores, we have already invested INR 600 crores. The balance investment is likely to be only INR 400 crores going forward. And that will lead to the kind of a number, which we have just spoken. So that's number one. Second, like Marshal very rightly said, our margin has been historically 14% to 15%, and that will go to around 18% to 19%. Three things we will always keep in mind. One is the vertical integration. The journey will continue on that. Second, our investment and the cost competitiveness like one in the energy and other modernization so that our other costs also get addressed. And the third is our strategic supply to the premium customers or the value-added along with the strategic customers. Just to highlight, our overall total volume, which we have seen in this quarter, out of the 33% of that goes only to the 10 customers. And Marshal, as you rightly said, out of that, some of them are the nominated customer we have. So this ultimately goes to the higher brands and there we get a better realization and more of a reliable supply chain for them as well as for us. And that's the reason you see in this turbulent time of last 2 years, we have been able to utilize our capacity fully. including the new capacity, which we have just added it. Once it will ramp up, we will be able to utilize fully. Overall, we are on the right track. We will be able to achieve the number, which we have envisaged for ourselves and very confident of having a double-digit of ROCE in this entire business. Thank you for the support of all of you, and we'll continue to grow our journey.

Thank you very much, sir. On behalf of GHCL Textiles, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.