Gokaldas Exports Limited (GOKEX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Gokaldas Exports Limited Q3 FY '20 Earnings Conference call hosted by Prabhudas Lilladher Private Limited. [Operator Instructions] I now hand the conference over to Ms. Charmi Mehta from Prabhudas Lilladher Private Limited. Thank you, and over to you.

Thank you. Good day, everyone. I welcome you all to earnings con call for Gokaldas Exports. We have with us today, Mr. Siva Ganapathi, the MD; A. Sathyamurthy, the CFO; and Mr. Harmendra Gandhi, VP Corporate Development. And I now hand over the call to Mr. Siva Ganapathi for his opening remarks.

Good morning. Thank you, Charmi. Good morning, everybody. Welcome to Gokaldas Exports Limited Q3 FY '20 Conference Call. I am Siva Ganapathi, the Managing Director. And with me, I have our CFO, Sathyamurthy; and our Investor Relations Head, Harmendra Gandhi. Our results for this quarter were broadly in line with our plan for increasing market share from new and existing customers and making upfront investments to create a sustainable growth for Gokaldas. We have been quite successful in achieving that and building the platform for successful growth in the future as well. When it comes to the macroeconomic setup, the business environment for the sector remains quite dynamic. We are an outsourced manufacturing business where the business itself is so large. Retail apparel business itself is about 1.5 trillion. So we are participating in a very large market space. And we anticipate that the size of the business being what it is, we have enormous growth potential. China is a large outsourced manufacturing destination, but we see that there is -- the increased cost in China is resulting in more and more apparel manufacturing getting outsourced to other countries, India being prominent one among them. Apart from Bangladesh and Vietnam, India is standing up and getting counted as an important apparel manufacturing destination, and Gokaldas Exports is quite well placed to capitalize on that movement. In addition, the company has also been consolidating business from smaller manufacturers who are under pressure from increasing compliance costs, increased challenges with respect to accessing working capital and other quality-related issues and so on and so forth. That business is consolidating in favor of larger players. And again, here, we are really well positioned to capitalize on the business. The most recent government notification which withdrew MEIS of 4% from 7th March 2019 has resulted in a reversal of income of INR 26.9 crores from March to September 2019 and INR 9 crores from Q3 of FY '20. Against this, we got a onetime relief of up to 1% in our incremental RoSCTL, but this is only provided up to December 2019. This accounted for about INR 5.3 crores in total where INR 1.3 crores pertains to Q3 and INR 4 crores pertains to prior periods, that's March to September '19. So getting into the detailed Q3 financials. Our top line grew by 20%. Our revenue for Q3 is INR 330 crores. This is including products and other operating income, which are part of ongoing business revenues. Our overall volume growth was 14%, and we had a realization growth of about 7%. And if we -- and we feel that this growth trajectory would be sustained even in Q4. So we are already in the -- well into Q4, and we are seeing a fairly buoyant growth in the fourth quarter as well. For the 9 months ending Q3 FY '20, we have registered an overall revenue growth of 22%. And for our company, it's been one of the best revenue growth. And I can say with confidence that this is best-in-class growth for the industry as well. Our Q3 revenue does not include MEIS income. And we have taken out INR 7.7 crores of MEIS, net of the incremental RoSCTL benefit that we got, which happened due to the recent government notification. And accordingly, our EBITDA also reflects that INR 7.7 crore reduction in the EBITDA. If the MEIS were not being withdrawn by the government, our EBITDA would have been at INR 43.8 crores, which is 13% of total revenue. However, adjusting for MEIS, our EBITDA is INR 36.1 crores, which is 10.9% of our total revenue. And we had a further onetime provision for one of our foreign customers that went bankrupt last year, which is CF. So we made a further provision of INR 2.5 crores. This is the last and final provision that we have made because we have settled with the customer. And going forward, we don't anticipate any of this carrying forward. So with this last settlement of INR 2.5 crores onetime provision, we've closed the chapter on that customer. And after adjusting for that, our EBITDA is INR 33.6 crores, which is 10.2% of revenue. So overall, I would say that our performance has been very robust in Q3. 10.9% is the true reflection of our performance. 10.9% EBITDA is the true reflection of our performance after factoring in the MEIS withdrawal. It's fairly robust for ourselves. And we are prepared for continued strong performance. The net profit for Q3 FY '20 was INR 12.1 crores, which is a growth of 42% on a Y-o-Y basis. However, after considering exceptional items and the onetime provision for peers, our net profit -- exceptional provision is for prior period as well, the prior period MEIS write-off, our net profit for Q3 FY '20 was INR 13.54 crores negative. So for the 9-month period ending December 2019, our PAT has grown 70% on a Y-o-Y basis to INR 24.4 crores after considering all exceptional items for us. As an outlook, I could say that we're confident of continuing robust revenue growth for the reasons that I mentioned earlier, that we see increased business traction. Manufacturing outsourcing is here to stay and grow. And I can foresee that our customer traction is improving. Our operating parameters are very robust. In fact, our on-time delivery is at its peaks, at its highest, and all the production lead indicators tell -- give me the confidence that we will continue to do well. Our customers have been delighted by our performance, and they have reposed confidence in us by pushing more orders to us. So I take encouragement from that and foresee us sustaining a good amount of revenue growth going forward. Q4 looks good. We've almost booked orders all the way up to Q1 of next year as well. And the reduction in MEIS of 4%, while it's a setback, we, as an industry, would be continuing to engage with the government and see if there is a possibility of recovering it. But I'm not factoring that in for the future, and we are gearing ourselves up for sustainable business growth -- sustainable business regardless of the MEIS. So going forward, whatever RoSCTL that we are getting is refund of embedded taxes. We don't foresee any reduction whatsoever going forward. And this is the worst that we could think of. And from that perspective, I think we need to perform very strongly, both in terms of satisfying our customers, delivering good growth by leveraging our customers' requirements, having an exceptionally strong internal operating performance measures, which would yield further productivity and further profit margins, that we can overcome some of these external shocks and continue to perform well. So with that, I will stop here and will open ourselves for more questions. Thank you very much.

[Operator Instructions] The first question is from the line of Jayant Mamania from Care Portfolio Managers.

Congratulations for a good set of numbers. Sir, we have booked orders for Q1 also next year. So what will be the impact of MEIS on those orders? Will our margins will be reduced to that event?

So margins are a function of the pricing as well as our cost of production. So whatever orders we have booked, we have no ability to go and change. The industry works by booking orders well in advance. And as it's a fashion business, the customers finalize orders in advance. That allows us to plan our raw material purchase and align our productions to manufacture it. So usually, we are always a quarter ahead as far as business booking is concerned. So going forward, I think up to Q1 whatever orders we have booked, we will not have any ability to change or modify the pricing. We will have to work towards being more efficient in our production and make up for it. Subsequent to that, we will always endeavor to see how much we can push back on the customers as far as pricing is concerned. This is an industry-wide phenomenon and pan-India phenomenon. So all the industry peers, at least from India, would be constrained to revisit pricing. And I'm sure the customers also are aware of it, and this dialogue will happen. Would all the 4% pricing get pushed back on the customers immediately? Answer is no. It will be a gradual phenomenon, but it will happen. In the meanwhile, what will also happen and what is also evident in Q3 this year where you don't -- where we have not factored in MEIS at all, you can see that we are gearing ourselves up with better and better operating metrics, so that we can function in this business without relying on some of these external benefits.

Sir, how optimistic you are that government will restore this by any other measures? Or any big textile policy is expected?

So the way I look at it is that the engagement with the government continues, and there is a lot of positive dialogue happening with the government. Am I banking on any incremental benefit? Answer is no. If anything comes, it is a bonus. So I would rather construct my business model with what we have currently, which I think is the best case scenario. I don't think we have anything more to lose. Whatever RoSCTL we're getting is really refund for embedded taxes. So -- beyond which if we are competitive and if we are able to book the right kind of business and our corporate strategy is perfect, I think we should be able to do reasonably good margin going forward.

Okay. Sir, what kind of CapEx will be required to achieve this 20%-plus growth?

What kind of -- I'm sorry.

CapEx, capital expenditure.

So from a CapEx perspective, we are looking at -- for FY '21, I mean, we're looking at about INR 20 crores of CapEx for modernization, improvement in our own current manufacturing capabilities, which will unlock incremental capacity, and not just incremental capacity but it will also improve our quality of manufacturing and several other soft measures, which hold us in good stead with our customers. In addition to that, we are still wanting to set up 2 new factories, which are cost effective and will be cost competitive for us. And both of them put together would be about INR 65 crores of CapEx, which we want to do in the next financial year.

Okay. Sir, what is the latest debt figure for the December 31? And what were on 31st -- September 30?

For 31st of December, my net debt is around INR 222 crores. And September 30, I'll get you the number.

Yes, that will -- that I will find out, yes. Yes, yes, yes.

Yes.

The next question is from the line of [ Zaki Nasser ] from Al Nasser Investments.

Congratulations on a truly turnaround quarter, sir. I have 3 small questions. One is, MEIS would be refunded, probably replaced by a refund of taxes scheme. You said that INR 5.3 crores have been taken as credit on that account. Is it in this quarter? That is my question number one. Question number two is, I would like to know what is your direct and indirect employee strength as of now, sir? And although it is a bit early, I would also like to know what taxation scheme you have opted to be in, in terms of the company, sir?

Okay. Thank you. So as far as...

And higher depreciation, sir? What is the cause of the higher depreciation in this quarter?

So let me answer one by one. The incremental RoSCTL has been given only till December 2019. So from fourth quarter onwards, that is in there. It's a relief that they provided of up to 1% for withdrawing the MEIS going forward from March 2019. So that gain of INR 5.3 crores -- out of that gain of INR 5.3 crores, INR 1.3 crores was pertaining to Q3, and that is what we've been factored. That is why INR 9 crore MEIS loss in Q3 was set off by INR 1.3 crores of RoSCTL gain in Q3, net effect was INR 7.7 crores of revenue loss and EBITDA loss in Q3. That's what we have factored in. The other INR 4 crores pertains to prior period, which got adjusted against the prior period reversal of income of INR 26.9 crores of MEIS. And that's why our total net provision that we took for prior period amounted to INR 22.9 crores, okay? Now coming to the employee strength question, direct and indirect employees, our employee count is about 26,000. All of them are on our payroll. We don't employ people on contract basis or indirect employees and stuff like that. So all our employees work on Gokaldas Exports' payroll. The third question pertaining to depreciation. I think, Sathya, you should be...

The depreciation, it includes the Ind AS effect. On a cumulative basis, for 9 months period, we have INR 21.8 crores as Ind AS depreciation, and for 3 months period, it is INR 7.78 crores. You have to reduce it because of the Ind AS classification.

Any other questions?

Sir. And the MEIS loss for the 9 months has been taken as an exceptional item in the current quarter. That is right, sir?

No. MEIS loss for prior period, that is March 7, 2019 to September 2019, has been taken as an exceptional item. MEIS loss for Q3 has already been factored into Q3 P&L.

Yes, sir. And another follow-up question, sir, if possible. You had a very tiny brand under Gokaldas Exports. What have you decided to do with that?

So for now, it is status quo, we have not done anything about it.

And the taxation question, sir, in terms of where you would like to place yourselves under the...

So currently, from a taxation perspective, we are under -- because of accumulated losses in the company, we don't have any tax implications. Going forward, we may have met.

Correct.

The next question is from the line of Mohit Baheti from L&T Mutual Fund.

Congrats on the good set of numbers. I had 2 questions. One was, what is the current net incentive rate versus last year?

Q3, we had 6.5% net, what we got. And last year was 7.5%, Q3.

Okay. And the second question was, what is the EBITDA level impact of MEIS reversal? So if I see 9 months of EBITDA margin adjusted for interest expense...

At EBITDA level for Q3, it was INR 7.7 crores.

Okay. So if I adjust 9 months EBITDA for INR 7.7 crores, it should give a picture?

No, no, no. INR 7.7 crores pertains to only Q3, which has already been taken out in the revenue itself for Q3. So for Q3, it is -- the P&L has factored in no MEIS benefit whatsoever. So the INR 22.9 crores, which we took as onetime exceptional, pertains to the MEIS reduction for the 7-month period starting March 2019 to September 2019.

Right. So for 9-month basis, what would my EBITDA if I adjust to MEIS impact would be, say, INR 684 crores minus...

We will get back -- I mean for Q1 and Q2, you have to reduce INR 17.6 crores. That's all. So only for Q1 and Q2, you will have to reduce INR 17.64 crores.

The next question is from the line of Arjun Sengar from Nippon India Mutual Fund.

Congrats on a good operating performance. My question was pertaining to your 9-month results, where we have reported an EBITDA margin adjusting for Ind AS of 6.5%. So this 6.5% includes the RoSCTL benefit, which is valid only till December, right?

No. So RoSCTL benefit continues. The additional 1% which they gave is only valid till December.

Correct. So if I were to look at the next year, we will build on this 6.5%, right, after excluding that 1% bonus, which we have till December?

That's correct. So going forward, we will lose another 1% from January onwards, and we will build up on this. And we are on course to building up on this.

So just to summarize that, we will be building on 5.5% EBITDA margin next year onwards. That's the correct understanding? I mean 1% will have to be...

In that sense, you could say that from a Q3 perspective. Obviously...

No, I'm saying from a 9-month perspective, right? We will have to subtract 1% as a new base for the next year?

Correct.

That is the correct understanding?

Yes.

Sure. So basically, this move of taking away MEIS, see in garmenting, if I understand correctly, the margins are somewhere around 8% to 10%. So by removing this, we have -- they have essentially cut down the margin profile for the industry by half. Is that correct?

So at a very practical terms, what you're saying is correct. But in -- what would happen is that people do tend to factor all of this in -- while doing business. So our customers do know that there's an export incentive being available. So in a sense, it gets priced in. People in the production also know all of these exist. So losing this while it hits at an immediate moment and especially when you lose with a prospective effect, you take a hit on your P&L without having -- without being able to do anything about it. Going forward, obviously, one works on many ways to overcome it. Pricing is one key metric; working on the right product mix which works for India is another metric; third is, obviously, further tightening the production is another way of overcoming it. And that all of that is happening. And that's how you see our current Q3, which reflects no MEIS benefit whatsoever, and we have delivered a strong set of EBITDA numbers, is reflective of some of these things that are happening. And even here, we have not had any pricing benefit because this also came with a retrospective effect. We will be trying to push our customers to further get incremental profitability.

Right, sir. And this Q3 EBITDA margin of 8.1% is substantially higher than your 9-month performance. So is there a seasonality element to this? Or there is a sequential improvement in operating performance through this year?

There's both. There is a seasonality element, and there is certainly an operating performance improvement here.

Right, right. And also, like you said, this is an industry phenomenon. But from a brand's perspective, you have the flexibility to source from any country, right, Vietnam, Bangladesh?

Yes.

So I mean is this something that is very serious from a country standpoint that you are representing to the government?

So good question. Obviously, we are representing to the government, and there is a discussion going on how the apparel industry itself, which is a very large employment generator, that too women employment generator, is desirable for sustained growth of our country. So there's a lot of discussion going on and why Indian garment industry needs to be at least 2x of its current levels, and we can work towards it. So there's a lot -- that is going on at one level. At the other level, if you look at it from a purely competitive landscape perspective, Chinese costs are going up. China is increasingly becoming less and less important from a garment manufacturing standpoint. Though their volumes are pretty substantial, they're still falling. Vietnam's costs have gone through the roof. In fact, in Ho Chi Minh City and Hanoi, we find labor costs touching almost $300 to $350 per month. The comparable cost in India is about $160 -- $150, $160 per month. So their costs are going through the roof. While the manufacturing is going increasingly to interior, Vietnam is also switching more and more to electronics manufacturing and others, and they have a labor constraint as well. So there is a limited potential as far as Vietnam is concerned. Indonesian costs are also of the order of $260 per month, and their working hours are only 40 hours a week while India works 48 hours a week. So we do have a better advantage in terms cost structure. Bangladesh is better than us, but that means only Bangladesh and India. And increasingly, I find that if -- from a sustainable growth perspective for our downstream industry, which is the apparel retail industry, they will need to look at countries like us to get more and more manufactured. This is one part of the story. The other part of the story is, of course, within India, there are a lot of small manufacturers who are increasingly finding the business going tough because they don't have economies of scale nor are they able to compete on quality and compliance and all the other additional requirements imposed on them, which really is resulting in consolidation towards the bigger players. So there is -- both of these factors at play, which is resulting in businesses -- being businesses as in our customers being forced to look at larger players like us to grow business. And that gives me the comfort that we should be able to grow, but grow in the right -- with the right kind of sustainable model going forward.

Right. And one final question. From a policy standpoint, would -- I mean of course, keeping in mind the WTO compliance, what can be done from here on from a policy standpoint, if it has to be done?

So WTO itself is semi-defunct. U.S. has not really funded it, and there are all those issues. So keeping that aside, MEIS was a disputed kind of incentive scheme because it was an ad hoc kind of -- 4% was on just the entire export revenue. And the RoSCTL, et cetera, are somewhat viewed as a refund of embedded taxes, while MEIS was viewed as some sort of an ad hoc sop for the industry. Really speaking, in India, MEIS was given for the incremental hardship in terms of our higher power costs, poorer infrastructure and so on and so forth, which is a competitive disadvantage, which they were compensating for in the past. The government had earlier announced that they will go into an RoDTEP structure, which would encompass both RoSCTL and MEIS. This is still under discussion. Since we are not under any increased pressure from WTO at this moment, the MEIS structure for several other industries are continuing, while the government takes a view on how do we replace it with RoDTEP. In that new RoDTEP, whether we'll get some incremental benefit, jury is out, discussions are on, we will see going forward.

[Operator Instructions] The next question is from the line of Vipul Shah from Sumangal Investments.

I just want to know what was the trigger for government to withdraw this MEIS scheme?

So I mean it's difficult to predict the trigger within the government. But the government in its wisdom thought that RoSCTL plus MEIS both put together is an unsustainable burden. And in the March 2007 -- in the March 7, 2019, when the RoSCTL was increased by about 2.8%, 2.7%, MEIS continued. So the government thought that the industry's overall incentive got to be higher and that's the reason why they came up with this policy of reducing MEIS, which we were getting a 4% going forward. So effectively, if you go back in history when GST got implemented, our export incentives came down by 2.7%. Compensation of that was given in March 2019 to the extent of that value in RoSCTL. But since that was given, the argument was the incentive got richer and let's now reduce MEIS by -- to the extent of 4%. Now keep in mind that RoSCTL incentive is some sort of a conditional incentive; it depends on what is your export -- import content of material, et cetera. So if I import raw material, my RoSCTL benefit comes down to 50%, whereas MEIS 4%, it was obtained regardless. So it's not a very comparable number. But having said all of that, government decided that the incentive values are high, and let's remove it for the time being. So that's where it stands. Obviously, the industry perspective is that this is a desirable need to have a level playing field with competition plus the fact that anything which is done retrospectively, industry has no recourse to customers or any other means to recoup this was the argument that the industry put forth against it, and that discussion continues.

Okay. So MEIS scheme was based on fixed 4% of turnover while this RoSCTL scheme is -- means, can you quantify as a percentage of turnover, what will be the benefit for this scheme?

So RoSCTL, it's a range. It depends on the product type unlike MEIS, which is the fixed 4%. Any RoSCTL varies from 4% to 6% -- I'm sorry, 3% to 6%, depending on the product line. Now again, RoSCTL also is dependent on what is your import content of -- for that particular order. So if a particular order has got an imported fabric, then the RoSCTL eligibility comes down. So it's a complicated calculation. And net RoSCTL benefit that we get is about 4.2% or 4.3%. We also get what is called duty drawback, which is about 1.5% to 1.8%.

This is the operator. The line for the current participant got disconnected. We'll move to the next question. The next question is from the line of [ Niyati Kothari ] from M M Savla Consultancy.

Heartiest congratulations for excellent set of numbers. Lot of questions on duties and MEIS and all has been taken up. Just to sum up, now we will be getting about 4.2% and 1.8% duty drawback going forward. So that 1% is not part of these numbers, as you have said, right?

Going forward, correct.

Right. And I appreciate that similar benefits simultaneously cannot go on. So maybe the removal of MEIS may be legitimate, but how confident you are that retrospectively withdrawing this number cannot be challenged by the industry? And are there any hopes or expectation that at least past reversal may not be required and only going forward you may be discontinued with that number?

So the industry is discussing this and looking at all options. First option would be to reason with the government and get it done. So we're working on that. It's an industry-wide challenge inflicted and the response will also be taken up by the industry association. We're discussing all of these, at least trying to recover the past -- the retrospective hit that we took. Discussions are on.

Okay, okay. And you have said in one note that some write-off has been done for past asset on sale. I believe that is for that online portal, which we acquired in past and probably we want to sell that. Is it belonging to that only?

That is correct. That was for an investment that we had in a company called Yepme in the past. We had written off about INR 6.3 crores for the investment that we made in that, not -- we have made a provision for that.

But then you have also mentioned that we are expecting partial or full reversal of the same. So what are the chances or hopes? And what is the current status? I mean what level negotiations are on and things like that.

It is -- my personal feeling is that the chances of recovery is next to nil. That company has gone under NCLT. So there are a lot of challenges in recovering the dues. While we've not given up our hope on it, I would rather not assume any possibility of recovery at the moment.

Okay, great. And about the...

Sorry to interrupt you, sir. May we request that you return to the question queue for follow-up questions.

Sure.

The next question is from the line of [ Trilok Kumar ] from CRISIL.

Congratulations on a good set of numbers. So sir, my question is regarding the RoSCTL scheme only because there has been a lot of confusion about it in the industry level as well. So you mentioned that we are getting around 6.5% in Q3 as incentive rates. That is a combination of RoSCTL and duty drawback, right?

RoSCTL, duty drawback, right?

On partial RoSCTL, the 0.6%, you have to mark it up. On a real-time basis, around 5.9% because there is a onetime benefit, which is available up to December 31. That's not going to be available going forward.

Sure, sure, sure. So you mentioned this about the new scheme that is RoDTEP. I have gone through the Ministry of Finance presentation on September as well. They mentioned the new scheme that is coming up likely to be in this fiscal or next fiscal, they will adequately compensate for the loss of MEIS and everything. So would we see our margins going forward like improving from 10% to around 15% because of that? Or it would be likely to remain same? Because RoSCTL is around the 6% as well, and they have announced that the new scheme will also be around 6% or something.

So I -- the RoDTEP details are not announced. So I would rather not factor in any incremental incentive coming from the government. Anything that comes is a bonus. We would welcome it because we feel that, that would help us -- as that would help level the playing field with other countries, which are also beneficiaries of various incentives and have some inherent factor advantages. So while we would welcome any incremental incentives from a business standpoint, at least we are geared for working at the current level and planning our profitability based on this. So if we get it, the earlier announcements from Finance Ministry on RoDTEP was that, by and large, all the incentives will be maintained and carried forward into RoDTEP, but now that subsequently, MEIS has been withdrawn, we don't even know whether the current numbers will get carried forward or the earlier numbers will get carried forward. But let's make an assumption that there is nothing more to be obtained, there's nothing more to be taken out further. And with this as a basis, we should plan our profitability. If anything comes, it's great, it's a positive.

Okay. Sir, my second question is that we are okay with the incentive rates and everything. So -- but from the demand side, the European Union has made a recent FTA with Vietnam. So that those numbers are declining from the publicly available data. But how do you see -- our Gokaldas major exporter market is the USA market and there is likely to be a trade agreement that is in the news for a while that U.S.A. and India are likely to make. Any comments on that? Because the U.S.A. has been a strong importer of Indian garments compared to importing from Vietnam and Bangladesh.

Correct. So what happens is Indian companies have focused more and more on United States for 2 reasons. One is when you go to -- when you try to compete in the U.S. market -- in the European market, you compete with Bangladesh, which goes with duty advantage. So you have to compete landed duty paid, it's much harder to compete there. Second, European Union's business itself or economic situation is such that there is not much of a growth. So Indian companies have gravitated more and more towards United States and that's what you see. Gokaldas has, in particular, has gravitated quite a bit to the U.S. markets where we have seen robust growth. Further U.S. somehow prefer India over Bangladesh in terms of sourcing country, and that has helped us well. We have further diversified from U.S. to rest of Asia, Japan and various other countries, so that our country concentration is not very high, and we are reasonably diversified. Thereby, we can continue to hunt for incremental growth without being constrained by any one country or region being impacted on account of their own recession or whatever.

The next question is from the line of Hardik Solanki from Moneybee Investments.

Congratulations on strong set of number. Sir, just wanted to understand what would be your cumulative loss in terms of unabsorbed depreciation and the rest part, so that we can get our understanding about till what period we can enjoy the tax free or no tax or we don't cover under MAT?

Sathya?

Yes. We have a carryforward loss close to INR 110 crores as of March 31, 2019.

Okay. And how much would be the unabsorbed depreciation out of it?

Depreciation, I'll give you the exact figure. In a second, I'll give you the number.

Okay, okay. And sir, what would be the cash flow impact because of the MEIS benefit going out?

Cash flow effect on account of MEIS...

MEIS impacts this year about INR 30 crores is what is the net impact.

Cash impact?

Cash impact is INR 30 crores, yes.

INR 30 crores. Okay. And sir, if you look at the cost structure for 9 months, so we can see over here that my RM cost has increased by what -- so RM -- raw material cost has increased by 400 basis point and my other expenses has gone down by 600 basis points. So can you just help me to understand how we should look at the number?

So RM cost going up is a function of the product type. So if we do more and more outerwear, which we have focused a lot more in Q1 and Q2, our raw material costs go up. So when I export garments, the -- what are the components there? There's fabric, there's the trim and then there's some manufacturing cost embedded in it, and on top of it, there's a profit that we take for selling the garment. So let's say, the underlying fabric in the garment goes up, so if I make an outerwear jacket or if I make a high-value garment which has got a linen fabric or a very sophisticated fabric in it, the value of the garment goes up -- the FOB value of the garment goes up. But the material cost also goes up. So material consumed is a function of product mix.

Okay, okay. And what are the other costs to look at...

Mr. Hardik, may we request that you return to the question queue for follow-up?

Sure, sure. I'll get back into the queue.

The next question is from the line of [ Anshul Mittal ] from [ AR Portfolio Management Services ].

My question was on Q3 domestic sales. So our domestic sales for Q3 have increased sharply? Any reason for the sales?

No. So we -- if we get the right business, we will do it. We did get some incrementally strong business in Q3 from some Indian customers and also some of the international customers order booking for Indian business. For example, Adi and Puma, they took additional consignment for their India sales from us in Q3 and Q4. Likewise, we had a little higher sales for H&M also in India. So some of these factors caused our domestic business to go up.

Okay. So after this withdrawal of 4% MEIS benefit, is the margin similar for domestic as well as exports or domestic would be better? Or any clarity on that?

I still feel exports is better for the following reasons: one, we are playing in a larger market and not being exposed to one market, which -- in any business, there is an amount of seasonality. So India also has got a purchasing which is skewed towards the festival season, which starts -- which is around Dussehra, Diwali and that period of time. So in the second half of the year we see bulk of sales, and the first half is fairly low. So as a manufacturer, I would like to cater to multiple markets to keep my factories fully occupied. Second, the still prevalent export incentive helps me focus on export market. Third, my quality of production being so high, I get a much superior realization by catering to high-quality brands, and the Indian brands don't tend to pay that incremental price for the export quality manufacturing that we do. So there is -- our preference continues to be to cater to the export market over the Indian market.

Sure. And any short-term benefit you see from the impact of Coronavirus in China? Any higher number of orders in the short term or any benefits which you see over the short term, quarter or 2?

So in a outsourced manufacturing world, there is nothing short term. As I said, we have booked orders till Q1. So whatever happens will happen subsequently. Second, China has just about come from its holiday season, New Year. So we will have to see how some of these things transpire. A lot of fabric also comes -- which is consumed in China is produced in China. So if the production has to move, then we still will have to depend on Chinese fabric. A bit early to comment on it, but it will only accelerate the movement out of China is my view. So China is declining. More and more manufacturing is going out. Some of these events only tend to speed up the movement. What I understand now is U.S. is now putting curbs on consignments from China to test for Coronavirus on even those goods. So if some of these things do tend to slow down business in China, which eventually we'll have to find other geography.

Sure, sure. And last question. You mentioned about the 4% MEIS benefit, which has gone at pan-India level. So -- but we compete on a global scale with countries like Bangladesh, et cetera. So do you feel that we have still the leeway to increase the pricing from our customers to recover a part of that benefit?

So any leeway to increase will only be to recover a part of it, not full of -- all of it. People come to India for various reasons. One, to diversify their sourcing base; two, to leverage India strength, which is cotton and viscose. So there are a lot of business which are India denominated. And those businesses don't go to, let us say, Bangladesh or Vietnam and other countries, which focuses -- Vietnam especially focuses more on synthetics and stuff like that. So there are businesses which are India denominated, and on India-denominated businesses, all of the manufacturers in India will be impacted. So if other manufactures also, who are constrained by this MEIS withdrawal, will also have to push back and start negotiating with their customers. So this is going to happen. It will take some time before all of these fructifies, but definitely, it will put all of us in that direction, and buyers will have to also factor this in.

The next question is from the line of Prerna Jhunjhunwala from B&K Securities.

Good set of numbers, so congratulations. Sir, just wanted to understand your capacity utilization and how much room you have on your current capacity to grow without any further CapEx?

Okay. So capacity utilization is a function of manufacturing productivity. Currently, our capacity is fully utilized. There's zero headroom for further growth, one could argue. However, I can foresee growth in the next year with the existing capacities, I mean, not adding new capacities, as you have asked. I can push my productivity up further by about 7% to 8%. That, I'm very confident of with the kind of internal CapEx we have done. In terms of machinery modernization, certain critical productivity improvement initiatives that we have taken and so on and so forth, I can foresee about 7% to 8% incremental productivity, which leads -- which yields incremental output. An additional 5 -- 6%, 7%, we are trying to gain from brownfield expansion where we have augmented. Already we have identified some possibilities of increasing capacity within our existing factories by building additional sheds in the same campus. So we can extract about 13%, 14% of additional output from our existing units is my best estimate.

Okay. So continuing this question, I was just trying to understand that will the product mix also play a major role in this growth? Or it is irrespective of what kind of orders that you get?