Gokaldas Exports Limited (GOKEX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '20 and FY 2020 Earnings conference Call of Gokaldas Exports Limited, hosted by Asian Market Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Shradha Agrawal from Asian Market Securities. Thank you, and over to you, ma'am.

Thank you, Aisha. Good morning, everyone. On behalf of Asian Market Securities, I would like to welcome you all to Q4 FY '20 results conference call of Gokaldas Exports Limited. On the call today, we have with us the senior management of Gokaldas, including Mr. Siva Ganapathi, MD and CEO; Mr. Sathyamurthy, CFO; Mr. Tushar, VP, Finance; and Mr. Harmendra Gandhi, VP Corporate Strategy and IR. I would now like to hand over the call to the management for their opening remarks. Thank you, and over to you, Siva.

Thank you, Shradha. Good morning, everyone. I am happy to report that your company reported a total income of INR 1,400 crores in FY '20 as against INR 1,196 crores in the previous year, delivering a growth of 17%. The year 2020 was quite eventful, I mean FY '20 was quite eventful. We had the Government of India announced complete withdrawal of MEIS in January 2020, with effect from March 2019. MEIS amounted to 4% of export turnover and was very much a part of business considerations for the industry. It was priced into the contract. The company lost INR 41 crores in FY '20 and another INR 6 crores in FY '19 because of this withdrawal. The company did receive an additional ROSCTL of INR 5.3 crores as a onetime release in the year, partially compensating the loss. In October 2019, the Karnataka government announced a minimum wage increase of 10%, with effect from April 2019, so again retrospective. We have absorbed a considerable amount of cost on account of this change as well, and this also impacted the cost structures for the year. In this year, the rupee depreciated by 1.4% against dollar versus the Chinese currency, CNY depreciating 3.8% apart from the relative weaknesses where rupee was relatively stronger than CNY. The lower rupee depreciation did not mitigate the inflationary effects in full. And finally, in Q4, COVID pandemic hit the globe. The coronavirus unleashed an unprecedented event, which has been so sudden and so extensive in its suite that it has cost the world unprepared for the economic consequences. We experienced a tragedy of extraordinary proportions as economic shocks, such as deferred orders, canceled orders, delayed payments reverberated across the industrial value chain, impacting millions of people whose livelihood depends on business. The lockdown in China hit the supply chain in January 2020, forcing us to realign input supply. In the meanwhile, in February 2020, COVID shutdown principal markets of EU and the U.S., retail stores were closed, brands started deferring orders in response. Subsequently, in March 2020, India announced lockdown closing factory operations. Your company lost production for over 8 days during the peak supply season, impacting revenue to the exit of almost INR 30 crores, INR 40 crores. We paid the workers' full salary in March 2020 as a moral obligation. This is one too many odds for any business to bear in any 1 year. Just for context, our growth of 17% came when global economic growth in the full year fell and Indian apparel exports declined by 4.1% in FY '20. We generated an EBITDA of INR 102 crores, excluding exceptional items like profit on sale of land, of INR 26 crores and reversal of MEIS income for previous year of INR 6.1 crores, yielding an EBITDA margin of 7.3%. Our ROCE has gone up to 10.3%, and working capital days have come down to 84%. Many of the changes like MEIS and wage increase are now internalized into the business. We have strengthened our business by expanding our customer engagement, wherein we have growth with our new customers enlarged our engagement with large profitable customers, set up additional adjacent brands in the customers' portfolio and set up to those brands and enlarged product suite to help us become an all seasonal player as far as possible. We set up our design capabilities, making us a partner to our customers and not just be converters. We inducted strong talent in operations, which is helping us drive our delivery initiatives. We digitize manufacturing to a large extent, which allows us extensive tracking of production lines. We have undertaken video analysis of operations to streamline every set of processes. We have IoT-enabled machines to a large extent, and we have put control systems that makes the factories productive, smart and replicable. We drove sustainability to ensure that they are in tune with future needs of the business and of the industry. All of the above gives us confidence that we are well positioned to gain market share. We demonstrated that in FY '20. Please note that we grew when the industry actually declined, and we have done that by gaining market share. And we believe that the strengthening of business that we did in FY '20 further positions us to gain market share. A significant impact of COVID has been in Q1. Our factories were shut in April, except for PPE manufacturing. We opened the factories on May 4 and ramped up to about 50% production level to maintain social distancing, which was mandated by the government. In June, we are operating at about 75%. So this impacted our ability to produce to full capacity in the first quarter. Your company responded well by leveraging new opportunities in health care government. We are the pioneers in India in producing PPEs for Government of India and are a large producer, producing almost 25,000 PPEs a day. We partnered with the DRDO in developing and creating high-quality in woven PPEs as well. This provided us with vital cash flow and operations or otherwise shutdown. We have initiated structural corrections where capacities are being aligned to market demand. We have rightsized the business as well, reducing our operating expenses. We tightened cash management. We deferred CapEx, renegotiated supply terms, ensured extra lines of credit was available for contingency. Overall, we addressed the COVID induce business disruption squarely in Q1 when the industry grow more the brunt of the impact. We expect the effects of the pandemic to last a few more months and likely return to somewhat of a normalcy in Q4 of FY '21. We have the strategy, the business book, the resources and the capability to sustain and bounce back out of COVID and emerge much stronger. Our goal for FY '21 is to emerge as a lean operational entity, delivering superior engagement with our customers. We hope to recover most of the metrics before the end of the year. We want to ensure that in FY '22, we outperform the industry growth and profitability parameters, delivering a strong revenue growth over FY '20 level with superior operating margins. I thank you for listening to us and would be happy to address any questions that you may have.

[Operator Instructions] The first question is from the line of Rahul Singh, Individual Investor.

So I have a few questions. Despite the labor-intensive industry, which employs a maximum number of people in India, the government has not given enough attention to your industry. At what platforms you have given representation to the government for incentives? And how is the response so far?

Okay. So we have an industry body called AECC. And through the industry body, we have represented to the Textiles Ministry -- Ministry of Finance and the various departments of the government to support the industry, especially given that it's got a labor-intensive component. The government is also constrained by its own financial, especially with the tax revenues coming down in the year due to COVID. And support for any industry for that matter wasn't as much forthcoming. I can understand the government's challenges as well. We are hopeful that the government will understand the pain points, and we'll continue to support the industry because they also understand that not only does this generate a lot of employment. In fact, after agriculture, I think this will be 1 of the largest employment generators. And in the formal sector, this is the largest and also employs a lot of women, particularly among the poor. So this is an important industry for the nation and for the well-being of large masses of people. So there is an understanding, and we hope that some support will come going forward in the future.

Yes, sir. Sir, any planning for product mix for profit maximization?

Yes. So in the year, we did a lot of product mix planning. In fact, we have strengthened our outerwear capability in FY '20. That's the reason why you see a robust Q1 growth. Usually, our fourth quarter is the most buoyant quarter for the industry. But in FY '20, you would have seen that our first quarter was higher than the fourth quarter of FY '19 in revenue terms. And that's because we had built a considerable capability in producing outerwears, and that works in the first and second quarter season. We have entered into several new product lines in that space, including pocket jackets and complex industrial wear, et cetera. The whole point behind that was to reduce the seasonality on the industry. This industry is fairly seasonal where spring, summer sales go up substantially, because that works to India strength of cotton and viscose. So there is a revenue skew usually towards the later half of the year. And we have tried our best to minimize that revenue skew by expanding our capability across product lines so that we have a far more balanced growth across all quarters, and volatility in business is low.

Okay. So do you feel our global competitiveness will continue as most of the cheap labor has gone to the places due to COVID?

No. So in that sense, Gokaldas is quite fortunate. We have historically been focused only on local labor force. So most of the labor force that we employ are people who live in and around our factories. We have stayed away from migrant labor for strategic reasons. In the past, we have found that migrant labor typically take a month off or even longer during Diwali, Chhath Pooja and other such festivals. And it impacts our production. It disrupts our operations, and many of them won't even come back after the holidays. So we have historically felt that it is better to focus on local labor force. It also helps us build goodwill in the community where we are operating. And that's the reason why we have set back the -- stuck to local employment. From that perspective, our ability to ramp up as soon as the lockdown were lifted was very remarkable because we did not have a great exposure to migrant labor. So we are in a fast superior position from that perspective.

So any major clients now reducing their volumes?

So we are -- we have announced the layoff in 1 of our factories, which was financially not as strong. And we have scaled down operations where we thought that cost structures are not high. We currently have adequate order volumes for the business capacity that we have and all our factories are running nearly full to the capacities that we are operating at. So we are, from that perspective, we have more or less aligned our businesses by reducing the capacity to the volumes that are mandated by COVID for now, which we hope that by November, December, we should be able to recoup and start recovering from then on.

Sir, any R&D expenditure in broad are expected to improve?

Any R&D expenditures?

Yes, sir. Incurred or expected to incur during this stage of lockdown or to attract customers or to promote our...

So we did -- during the lockdown, we entered into PPE business. And in fact, we were pioneers in that business. We did the design and expect for the PPEs that are being manufactured. So we have done some R&D at that point in time in April and May to get into PPEs, to design in term of the PPEs for the country. We became a large supplier at that point in time for PPE manufacturing, which also helped us substantially in the first quarter. But otherwise, R&D expenses, et cetera, we have torn down or scale down. We don't want to incur unnecessary expenses going forward as we are trying to make sure that our cost structures are aligned to business volumes that we have.

The next question is from the line of Anil Kumar Sharma, an Individual Investor.

I'm Anil Kumar Sharma from Chandigarh. Sir, I want to know what are your idea as a whole for the next year -- coming this year, FY '20, '21, 2021, what do you expect? How the company will -- say, '22, you have explained already it is very good that it is going to be excellent. In this year, how do you expect the profits? And one -- and number two, in the last year, you have provided for certain customers. In the presence scenario when these things are very different deteriorated, how many -- how much realization you expect to go back?

Okay. So FY '21 will be somewhat muted, though not a whole lot for us. We will see some revenue dip. Q1 was a classic case in point where we lost 100% -- almost 100% by almost 85%, 90% of production in April, 85% production in April, 50% production in May and another 25% production in June. So giving an average capacity utilization of only about 50% in the first quarter. So we start off the year with lower capacities, primarily driven by lockdown, and we are still not completely out of COVID as yet because we are seeing some resurgence in COVID numbers across the country. So we're basing this based breath to make sure that our factories run well. Our factories have all the sanitation protocols. We're very, very strictly following all these protocols. Education of employees have been done very well to ensure that there were no COVID cases in our factories. And in touchwood so far, we have been able to manage without any incident. And if we continue to have the business rigor and continue to focus on business development or market development with our customers. We anticipate that we recover our business at least by Q4. By mid Q3, we should be seeing somewhat of a leveling at normalcy levels. And then see a reasonably good Q4 given current conditions, of course, that's the current year and hopefully, a strong FY '22. So FY '21 would have a revenue dip over FY '20. The extent of debt may not be very high. We are hoping to contain it to reasonable levels. And more importantly, from a cost perspective, we have taken out a lot of cost in preparation for this event. And we hope that by the end of the year, we should not be negative. We should try to be profitable and set -- more importantly, set ourselves up for a strong FY '22.

Second part, sir, regarding this realization part. How do you think -- how much can be grow there? How much...

So you asked about provisions for bad debt. And we did provide -- we did provide for bad debt for JC Penney, which went bankrupt in Q1 of this year. We provided that -- for that in Q4 financials itself. We provided almost 50% of the receivables from them. So we don't foresee any new -- any further customers getting impacted due to bankruptcy. We do have certain exposure to India retail as well, which we are working on, and hopefully, we will collect from them. Other than that, I'm not foreseeing any bad debt related problems cropping up beyond what is visible at this point in time. We will have to wait and see how COVID unfolds over the months ahead. If there are no second wave or third wave and recurrences, et cetera, I guess, by and large, in the principal markets of U.S. and Europe, we are seeing some amount of business recovery. Certain customers are recovering much faster than the other customers. And we are obviously aligning our capacities to those customers so that we are able to witness a volume growth in tune with our capacities, and thereby, hopefully, keep our business going strong and partner with customers who are also financially strong.

The next question is from the line of Ashwin Reddy from Samatva Investment.

Thank you for putting up the presentation, that is helpful. So my first question was on the receivable days, right? So if you've seen the last 3, 4 years, there's been a clear improvement in the receivable days. So how should we think about this going ahead, given that the retailers are going through some kind of a -- quite a bit of as pain well. How do we see this in the next 1, 2 years?

Okay. So we have improved receivable days by focusing more and more on export customers where receivable periods are lower and also entering into an early payment plan with our customers. The interest cost for early payments with some of the customers that we entered into have been fairly attractive and better than the cost of financing available in India. And only those cases where we've got an attractive early payment plan, we have entered into those with the customers. Many of the customers now have come back with a fresh early payment plan. And we are again signing up with them. We will ensure that the cost of early payment plan is well within the interest costs that are currently prevalent in India with interest subvention. We don't anticipate a significant increase in receivable days going forward. Maybe a quarter or so, we may have some challenges, minor challenges active, but we don't foresee that also leading to any cash flow related issues. And overall, by the -- for the year, we will be more or less at these levels.

Okay. That's helpful. And basically on H&M because there's been some videos on Twitter floating around about the protest that has applied to H&M and all. So and given that they are a client to us, is there any issue with the receivables there? Or it's a matter of time? Or there's no issue for us at all? Just possibly for H&M?

Sure. So one of the factories which we wanted to -- which we have -- where we have laid off the workers. We've had an issue with lower volumes from various customers that we were working in that factory. H&M is also 1 of the customers there. And we are working with H&M, we are working with other customers to ensure that volumes are there. Receivables related issues we don't have with the customers, so that's not a problem. It's a volume-related problem that we have with customers. The social media driven publicity engine has roped in H&M also, unfortunately, into this controversy. But by and large, we are sorting it out between all of us.

Okay. Understood. Understood. And thirdly, on the consolidation in the industry, which is kind of expected in the next 1 year, 1.5 years. So would this be through an acquisitive route? Or would this be through kind of -- some kind of a toll manufacturing, but is it feasible to kind of scale it up that way and all? In general, so how do you -- so can you talk a bit more about your thoughts on being the consolidator within the industry? And given the fact that there is some kind of debt that we have right now and cash flows could be a little constrained in the next 1 year or so?

Sure. So both the ways are open to us. We do have access to several capacities, which have been mothballed or are being mothballed because people are -- some of our competitors don't have manipulated with. And they do have the manpower there. They do have the technical skill sets and capabilities of those factories. And we can leverage them as soon as we can expand our customer engagement, which means we can get more orders to fill additional capacity. So we do have that ability. That would become more organic because it would just be -- it would just involve leasing of facilities from other suppliers where required. The other option, of course, is to acquire entities which are in financial distress, where there are strong capabilities. So if it brings with a strong product capability that we lack or if it brings with a strong customer that we currently don't have in our portfolio, that will be any -- or it brings with it a manufacturing location, which we don't have in our portfolio at the moment, then those are very interesting options. We will not shy away from those options as and when they come to us and are attractive to us. It's just a matter of time when all of these activities will start. For now there is a bit of an uncertainty around when business volumes will resume. So the -- it is prudent to wait for a few months till some clarity emerges. The way I see it, based on discussions with an extensive set of customers across the globe, is that this may flow over by end of the calendar year. So if that is the time line we are looking at, then looking at acquisitive growth could be timed around that time.

Understood, very helpful. And 1 final question, if I may. On the U.S. FDA issue, because I believe GSM has also now -- has now got an FDA right from June, I believe, I can't explain it to you now. And given that we would be now attributed advantages both Bangladesh and Vietnam, so are there any thoughts on the government on the USDA? Or do you have any clarity on that or any thoughts on that, that would be helpful.

You're talking of free trade agreements, correct?

Yes. Yes. Yes, correct.

So Bangladesh and Vietnam, to an extent, have free trade agreement advantage working for them. India has its own set of advantage, which is extensive backward integration, especially in the cotton and viscose value chain. So we do have our strength, and we do play to our strength. I foresee that both -- especially Vietnam is more or less at near full capacity as far as production capacities are concerned. And Bangladesh still does have possibilities of further expansion going forward when the business volume starts going up post COVID. India will remain a strong player in the scheme of things, primarily because China, it continues to be a large player. China is the largest exporter of apparels still. And that volume, all of which cannot be outsourced or pushed to Bangladesh and Vietnam alone, they will be overwhelmed, and they will have no capacity to absorb. Good producers like ourselves in India will have a good opportunity to leverage some of these external ongoing, especially with respect to China. The most recent Post Labor Act as well, which U.S. is pursuing, will also potentially help push more cotton related manufacturing to India. So I foresee some of those regulatory moves work in our favor where companies will not just talk about moving capacities outside of China, which has been going on for years, but also will be forced to act. And it is important that people like us position ourselves strongly with capability to produce governments as good as the best in the world. So we have a single-minded obsession about making sure that our production capability are 1 of the best and can compete with some of the best in the world. Automatically business will come. Today, our consistency in performance is 1 of the best across players. We have been consistently rated high by our suppliers of on-time delivery, in full delivery, product quality, et cetera. If we keep maintaining this on a continued basis, automatically, we feel that we will be in the sequence of business volumes.

Understood. Understood. Leasing at high-end. And finally, what is the proportion of cotton in our overall business just to get where we are? What is the growth, if suppose it is cotton garment that we export versus the manmade fiber alone?

I feel it will be about 65%, 70%. If I add viscose, it will be about 75%. Otherwise 75%...

The next question is from the line of Ronak Vora from AUM Advisors.

Sir, the customers have got bankrupt. So how much would be the receivables from that customer, if you can just quantify?

So there's only 1 customer that went into bankruptcy just now post COVID, which is J. C. Penney, 1 of our customers, and the receivables for us from that 1 customer is $322,000, which amounts to a little over INR 2 crores.

INR 2.5 crores.

INR 2.5 crores or thereabouts. We have provided INR 1.25 crores. We are filing for -- filing with -- we have filed with the bankruptcy administration for recovery of our receivables, and we are pursuing it with them. In the meanwhile, in Q4, we have taken a INR 1.25 crores provision we have provided for the bad debt.

Okay. And secondly, I wanted to ask, you said that we have laid off a few employees in 1 of the factories in Karnataka. So can you quantify, so how many employees have been laid out? So if we can just estimate whether the employee cost for the year of FY '20 would be the same as FY '21? Or it will be much lower.

So the manpower in that particular factory amounts to about 1,450 people, about 1,500 people. And they have been in layoffs at this point in time. The manpower cost for that factory is about INR 2 crores per month. So that's the cost, which we have currently laid out. We also have reduced our staff wherever there are surplus people, et cetera, in our operations overall to align to the business needs and thereby saving additional costs. So a lot of costs have been taken out in the system to contend with the business volume change for so and so COVID.

Okay. And thirdly, do we feel that we will be able to have the same revenue that we did in FY '20, like in '21 also, around INR 1,400 crores?

I doubt whether that will happen because right off the bat, in Q1, we -- if you recall, Q1 of FY '20, we had a revenue of INR 352 crores. Right off the bat in FY '21, we lost 50% production in Q1. When you produce half, your revenue can only be half. So that is because of lockdown in our country. So we've lost close to INR 175 crores of the bat straightaway. Now I don't know how much we can recover all of that, given that even Q2 will be somewhat muted in revenue terms since most of the large brands are still trying to figure out how their demand will be. So it's unlikely that FY '21 revenue will equal FY '20 revenue. But what is more important is how do we handle the cost structures and how do we handle the overall net results for FY '21. We have made sure that we are geared up for a lower business volumes in FY '21. We have worked on our cost structures exceedingly well on that front. And we'll make sure that we will not have any hiccups whatsoever in running the business.

Okay, sir. So at least for the time being, we can say that '21 would be a muted year, maybe some kind of a degrowth, but '22 will be surely better than the '20 levels, right?

Quite sure. Very, very sure. That will...

Okay. Then if they operate at full capacity, so how much is the peak revenue that we can make?

At current level?

Not at current levels, but in case if things would return back to normalcy and all our capacities are utilized to fully with full manpower and everything, so what would be the peak revenues that the company can make with the current capacity in hand?

I feel we can go up to INR 1,500 crores.

Okay. Okay. So are we planning any CapEx if we want to surplus the INR 1,400 crores level in '22?

Yes. So as I said, we would -- as and when we are ready for it, we will be looking at additional capacities, which are available in the form of lease as well. So we may not have to have huge CapEx requirements. And if CapEx is required, we are prepared for that as well. We have already identified certain options, which are operationally, which are highly efficient for structures wise, and we were just waiting to -- fresh message or before COVID hit. So now we will wait for those options, and we will start building out -- building them out as well as and when we feel confident that business volumes have revised. So yes, CapEx for FY '21 will be muted. But for FY '22, we will start going full blown on our new factory CapEx. In the meanwhile, taking lease capacity for augmented capacity in other form will continue.

So currently, as I see that, we are at a current net debt level at around 0.67x to net worth. So in case if we want to build up an additional capacity. So what is the extent? Or what is the company's internal benchmark to have a net debt-to-equity level, say, one-time or the max that you will go?

The max that we would be comfortable going will be 1x.

Okay. So not greater than 1, okay?

Yes. Because we will -- I'm confident that we will also have cash flows from businesses augmenting our needs going forward as well as we have the headroom to take some more debt given our current net debt-to-equity ratio. With that, it's more than sufficient. Our business is not very capital-intensive as well. So we can architect it in a way where we don't have to blow up the debt to higher levels.

The next question is from the line of [ Dakshin Akash ], Individual Investor.

Hello.

Hello. Yes, we can hear you.

I think considering the loss of production in the last 10 days, the numbers are looking pretty decent impact. Sir, there are 2 questions, 1 for Mr. Siva and 1 for Mr. Sathyamurthy. Mr. Siva, you would have a pulse of how your consumers are craving in terms of country wise. What is a broad feel between U.S. and Europe? How are the buying trends? And could you briefly -- I mean, at least if you see in India, I mean, there's no clear trend. I mean could you just give us a broad outlook on your feel of the market, how it will be in the next 2, 3 quarters, sir?

Sure.

Also in relation with the countries, which compete with us in producing. I mean, China does, Vietnam does Bangladesh is our large competitors. So how does this balance out? Do you think there is some shift from China to the other countries?

Certainly. So let me first talk about the market side, then I'll talk about the producing side. On the market side, there are -- currently, I find that both in the United States and Canada on one hand in North America, and Europe, stores are opening. Several stores have opened. The discussions with a large sort of fast fashion customers indicate to us that government sales have somewhat picked up. And when you look at say June over June, that is current June 2020 versus June 2019, that's the right comparison metric. We find that in the lower value government, the sales volumes are down by about 20%. Whereas in very high value, very high cost government, the sales volumes are down by about 75%. So there is a fairly good amount of traction that is building up as of now for low-value fast fashion government in most of these markets. The second point is that increasing amount of sales is shifting from brick-and-mortar stores to online. Online is seeing a very, very substantial growth and almost all the brands have stepped up their online sales capabilities, and they are seeing fairly brisk amount of volumes coming from that space. Some of the grocery store brands, which also sell garments like your Walmart or Target or Carrefour in Europe, these guys are seeing good volumes simply because they sell low price garments, so volume levels are high. And even fast fashion customers like H&M, GAP, et cetera, they are finding that the brand levels, they seems to have picked up -- they seem to have picked up volumes to an extent, though they have not reached FY '19 level. So the question is, what would be the prognosis going forward for the months ahead. Everybody is keeping their fingers crossed. The summer is setting in there. And soon fall holiday in set in. Fall holiday market demand will indicate how consumers react as people will have to go buy winter wear or those kind of garments. So we will see in a few months, we will get to know how the demand pans out. But so far, time seems to be encouraging. The sales in East Asian markets like China, Korea, Japan, et cetera, are also encouraging because there also, the numbers have picked up to a large extent. So seemingly, the markets are bouncing back in many countries, but they have not yet reached the FY -- I mean, the calendar '19 levels. As far as the production goes, Indonesia, Vietnam and large parts of China never shut down. So garment manufacturing continued while India shut down in first quarter. So to that extent, operations in those countries benefited in Q1 unlike ourselves. So we do have -- we did have a competitive disadvantage in Q1 as a country. But since we have opened up, we have -- we are trying to get back to track as fast as possible, and the business volumes are aligning across the different production metrics. We have seen that most of the large brands continue to have strong confidence in India. And there also even the COVID risk levels would like to keep their risk levels low, they don't know which country will shut down for what reason for a production perspective, so they would also diversify their production levels -- production capacity across different countries. So we are, in a sense, getting good volumes, thanks to the diversification strategy. And within India, since many players are not as financially strong as ourselves. And there is a degree of vendor consolidation, which happens in this industry. We -- which is happening in this industry. We seem to be -- I believe that we will be a beneficiary of that going forward. Keep in mind that the end-user demand first impacts the brands, which sell the garments. We come 1 step behind them, and we -- our demand will fall when our brands demand fall. But if there is a vendor consolidation, we may not see as much of an impact of sales reduction as the brands would, and that should be our quest as the supplier saying that how do we make sure that while my customer may see a x percent volume decline, I may not necessarily have to take an x percent volume decline if there is a vendor consolidation to some extent. So that's the effort, which all suppliers would try to make and insulate themselves from volatility. Hope I answered your question.

Yes. Yes. Follow-up on the thing, you made an interesting point about your brand demand being affected, but your overall demand may not be affected. See since a lot of sales, as you said, have shared to online, do you see a brand disruption and a lot of volume being shifted to private labels like Walmart and Tesco and stuff like that? I mean, do people keep in mind a brand while buying online? Or do you think that broad preference for our brand pulls away in times like these?

So even the brands which have got fast fashion brands in their portfolio have seen robust demand pickup. Again, albeit not to FY '19, I mean calendar '19 levels. But pickup is happening most opening up of markets. So the growth in the fast fashion segment as is reasonably secular. And almost all those brands have seen an uptick, but as a percentage to different degrees.

Okay. So the brand preference, as you feel it will remain, I mean, the customer supports your x brand will prefer the x brand even if you advertise online?

Yes, yes, yes. All of these brands have an online channel, and people don't change taste so often. And brands also have to keep innovating with designs, et cetera. Some of these brands have a high design caution in their offering. And that's not what your Tescos and the Walmarts can do. Their customer profile are very, very different. So there will be demand for both, and there is a demand for both.

Okay, sir. That's kind of an answer. And I would just like to have a word with Mr. Sathyamurthy on the debt level, sir, right now, our net debt levels are INR 250 crores, as I can see. So I mean, how would you like to manage this going down the next year, sir? Because in times like these, if the lower the debt, the stronger the company's confidence in surviving and driving to these times. So I would like to have a management perspective of the debt level, which you all would want to have over the next 3 years.

Yes. Currently, my net debt is -- I mean, if you remove the bill discounting also it is less than 150 -- around INR 149 crores is what is my net debt level. This -- I mean, today, we do not have any term loan in our books. So current, we believe that in the current year, I need -- I mean, we will be able to maintain the operations at the same level, plus or minus INR 10 crores to INR 15 crores for the operations. Except for any expansion, we may have to rely on partial term loan. So even as Mr. Siva has explained, our is not a capital-intensive any investment. So we believe that we'll be able to really do my term loan requirement, if anything is there. Additional INR 25 crores to INR 30 increase is what I'm anticipating for this financial year. So to answer your question, for this financial year, we will be ending up with around 200 levels is what the maximum with the net debt level, we'll operate with. But that is for the operation size, what we are really talking about is well within the norms, and we believe that we will be able to really generate cash with that kind of investment, and we'll be able to really reinvest. Going forward, as we mentioned, our aim is not to go across the bridge the level of 1% -- one-time of I mean, network. We'll be able to really generate cash, and we'll be able to really reinvest is what we have our plans for the next 3 years.

And would you -- I mean, if a time comes where you are net debt free, would you want that situation?

Net debt free?

Yes.

No. But as we...

We will always keep that fixed debt.

So to quickly answer that question, right? The cost of debt for us with interest subvention comes down to about 6%.

Correct.

So that -- if debt is available at 6%, it may not make financial sense to be net debt free, given the cost of equity by any measure, all of us would agree, will be much higher. So why would we use equity funding to fund working capital when you can have debt available to us with subvention at 6%.

And on top of it for the growth, we want to really rely on this, and then we believe that we need to really reinvest because there is a proper expansion plan for -- in -- we have plan. So accordingly, we'll be taking debt to take care of the expansion plans.

The next question is from the line of Vipul Shah, Individual Investor.

Sir, would you repeat what is your total outstanding with JC Penney? And how much you have taken write-off? And I think after 31st March, in your note #5, you have taken another write-down for some another client. So would you comment on both these issues?

So our...

You want to go ahead?

Yes. Our total receivables as on 31st March was close to -- sorry, INR 5.65 crores.

From JC, Penney?

Yes, from JC Penney, it was INR 8.15 crores was the outstanding as of 31st March, we subsequently collected INR 5.65 crores. We had the outstanding of INR 2.5 crores as on the balance sheet when we went for the Board meeting. As against the INR 200 crores, 50% is what we have provided for in the books.

But are you -- means are you hopeful of a recovery -- any recovery in bankruptcy process?

Yes. Obviously, that is what we are given to understand from the business team as well as the JC Penney local team. What they have suggested is that they have filed this bankruptcy mainly to take care of their creditors debt restructuring, which they have really opted for. And they believe that they'll be able to really get back the funds and then take care of all the vendor-related payments is what they have told. However, as a prudent policy, what we have really done is that we have provided for it. And we also filed our client for bankruptcy claim before the court, we have already filed our claims.

And regarding that another customer for whom you mentioned in the note, so what is the situation, sir?

Sir, we have -- actually, we have -- see this is with reference to Sears Group. Sears Group went for bankruptcy in the previous year. We had outstanding close to $1.5 million. But through the court settlement, we have got a settlement to the extent of 7.65 -- $765,000, of which partial money also has been received. So accordingly, we have taken carefully the provision whatever based on the settled amount. The balance amount to be received from them is only as on date is around 420 million -- USD 420,000 is what is standing as of now.

Rest you have received or you have taken write-down? I didn't understand that.

We have received partial amount almost around $292,000 has been received. And the balance only as what is there has been provided for.

Okay. Okay. And sir, can you comment on the recent trend, means trend of order cancellation from your clients, how you are seeing the demand? So if you can give some color on that, it will be very helpful.

Sure. So initially, a lot of customers came with order deferments. And to the extent possible, we accommodated them because our own production was also shut in the first quarter. So we were also unable to cater to the delivery schedules that we had committed to before the lockdown was announced. So we also -- it also helped us to realign the production delivery schedule -- the delivery schedules as per the customer needs. So to an extent, there was a deferment. We have minimized cancellations to a large extent and anyway, put the liability back to the customers as well. So there is less of those issues. The order deferment is something which, as an industry, we will have to work with, and we are working with customers. As and when they start seeing a pickup in volumes, they are also advancing the deferred orders. So somebody has deferred an order to September, then they have advanced it back to July. So all of these are work in progress as we speak as companies -- our customers are also aligning themselves to rapidly evolving in customer demand. We don't have much of a problem from that perspective. Obviously, first quarter has been hit by production loss because of lockdown. By the time we are entering second quarter, we are seeing demand levels are somewhat restored, though not to previous Q2 levels. I'm hoping that by end of Q3, we should be back to normal -- back to near normalcy.

[Operator Instructions] The next question is from the line of Amit Doshi from Care PMS.

Yes. Just wanted to know, since you mentioned that we'll -- we are limiting the impact of lockdown or the kind of reduced sales, et cetera. So where do you plan to fill the gap from? Because some large customers, et cetera, already have either gone bankrupt or have seen less demand, et cetera. So when the gap would be filled.

Sure. As far as bankruptcy is concerned, Sears bankruptcy happened last year and this year only JC Penney has gone through that. And frankly, post-petition that is post bankruptcy, JC Penney has got some funding lines, and they are also operational, even though we have reduced our exposure to them, we are not taking further exposure. But it's being driven by bankruptcy ports and their business is continuing. So we don't foresee any further bankruptcies. And our exposure to customers who are financially weak is very, very minimal. So to that extent, our businesses is low. The volume risk remains because it is really a function of any customer demand. If you and I as individuals don't go and buy garments in the market, the brands will not sell, and hence, the producers will not be able to produce more. Now how do I foresee that happening? As I said earlier, the trade seems to be coming up and hence, the volume seems to be restoring. If you look at Q1, whatever order deferrals that we had was mitigated by the fact that we were post to lockdown our factories and not produced enough. So to that extent, our challenge was twin fold and more to do with production capacity related issues rather than business related issues. Q2, we do have volume -- volumes being lower than the previous Q2 but we have already aligned our production capacity to those volumes. So I am not carrying those costs anymore, and I have reduced my volumes, which -- means in times of need, we can always ratchet up as required. And that's the reason why they lay off in 1 factory and reduced capacity operations in a few other factories, just to keep our capacity aligned to demand. So we have done that. So we have flexed our capacities in a fairly nimble fashion to address the market demand, and we are handling it reasonably well.

[Operator Instructions] The next question is from the line of Sunil Kothari from Unique Asset Management.

My question is Mr. Siva, during last 3, 4 years, you have seen all the tough scenario like minimum wages increasing, exports incentives was begun by government, this COVID and all. So we have really managed and restructure our organization really well. How do you feel for next 2, 3 years, what else you can do? Hopefully, nothing negative happens furthermore. And with your cost control, you reach always 7.5% EBITDA margin. So looking at the China replacement and all this global replacement theory, India being very capable in terms of raw material, labor and all these things, what's the largest picture you want to row for Gokaldas as a CEO, which faced 2, 3 years, very tough time?

Okay. Good question. So I really appreciate you asking this. See, if you look at a larger picture, our goal is to ensure that Gokaldas is a manufacturer of refute, he's a manufacturer of solid standing amongst his customers. He's a manufacturer who is not just a near converter of tech specs given by our customers. But is a partner with our customer designing their garments and also working with them in their strategies and producing garments for them. And we have slowly but surely build capabilities in all these areas. We have also focused very, very heavily on consistency in what we do because manufacturing is all about delivering products and servicing our customers on a consistent basis. Order by order, by order, by order by order. And you're as good as how you delivered your last Q orders, and we have to make sure that we don't relax our guard and produce accordingly. Now if you look at some of the macroeconomic headwinds that we faced in the last couple of years, I feel most of it is done. I mean, today, the export incentives are down to a minimum whatever we are getting is a small amount of duty drawback of 1.5% or thereabouts, and we are getting refund of central and state levy, which is just the refund of levies. So we don't anticipate any further reduction of all of these. What we need is a stable environment so that we can factor all of these into contracts and not have an environment where things happen with retrospective effect, which impedes us from putting it in contracts and getting the necessary benefits. So minimum wages settled for next 3 years or 4 years, our export incentives is more or less settled. We don't foresee any setback on that. So we have merely a stable regime going forward. Now we need to perform, and we need to perform really well to our customers' requirement, to benchmarks, which are best-in-class in the world and make sure that we are the performer in India who customers want to work with. And I think we have -- while we have combated all the headwinds, we have ensured that all of the other are addressed very well, and customers are confident of the capabilities of Gokaldas to continue to report their space with us and expand business with us. Now it's a question of ensuring that we are able to grow. Now to grow, we have to ensure that we are, a, 1 of the lowest cost producers, so that margin sustainability is high. World over demand hunts for capacity, which is low cost. And of course, the capabilities do get a premium, and we do get a premium for that. But still, overall, cost -- cost huntings happened. So we have to ensure that all of our capacities are working efficiently, working at a relatively lower cost and the incremental capacities come at incrementally lower cost so that the incremental margins are high. We are ensuring that. We have to also make sure that we have enough of customer diversification so that we are not dependent on our business fluctuations of any 1 of our customers. We have done that also successfully. Earlier, our top customer was almost 35%, 38% of our revenue. Today, we have brought them down to about 28%, 29%, and we will continue down that journey, which means that when we grow, we are growing on a secular basis with our other customers. And with adding new customers into our portfolio, we are confident that we will have multiple growth engines available to us. So if I look forward into, say, FY '22 and beyond, and if we are able to keep up the pace of growth, which we did in FY '20, which is 17%. If I grow, let's say, even at about 15-odd percent or it's higher, then I think we are in a very strong position. So FY '22 will be a big bounce back, which we will have to ensure, given that FY '21 will be low. But beyond that, if we are able to grow at a brisk pace, which is quite doable, I don't foresee by, say, FY '25, we should at least theoretically aim to be at, say, INR 3,000 crores or thereabouts at a top line basis. And is that doable? It is quite doable if we apply ourselves and keep growing. Operating margins will be strong by then because, a, we will have the operating leverage in place. And we will be 1 of those strong capacities, which will be there in India, competing with some of the best globally. So if we continue to deliver benchmark performance, doing these kind of growth should not be a problem. And with that will come our EBITDA and cash flows accordingly.

[Operator Instructions] The next question is from the line of Manan Shah from Moneybee Investment Advisors.

Sir, I wanted to know, is it in our post withdrawal of the MEIS benefit, have you been able to negotiate better realizations? And you also mentioned about reducing our labor cost. So currently, we're maintaining that as around 1/3 of our revenue. So post the reduction, should we expect the labor cost to remain at the same level as in a percentage term? So what kind of revenue? Or should it become better?

So to answer your first question, MEIS, obviously, after MEIS was withdrawn in January, when it was withdrawn in January, almost all of our Q4 business was contracted in Q3 itself. By November, we had closed our Q4 order books. And by January, we had also done a reasonable amount of Q1 order book as well. Going forward, since we are all clear, including our customers, that there is no MEIS, we are able to factor in the pricing accordingly. So that gets included in our contract negotiations going forward. So MEIS we will be able to absorb going forward. So that's 1 point. As far as the cost structures are concerned, what we have done is, as far as the labor cost is concerned, we have no way of reducing labor cost per capita. We had to go with the minimum wage increase in FY '20 because that was mandated by law. So we can't reduce it further. The reduction in people is to align our capacity to demand. So as a percentage of revenue, it will not when it comes to the factory labor cost. When it comes to the corporate overheads, et cetera, which we had built for another 20% plus kind of growth in FY '21, we had the ability to take down some of those costs, some of our R&D costs, some of our development related costs, et cetera, which we have fairly down. So that there, we will be able to reduce some cost structures. Overall, I think our manpower cost will come down to about 30% of our revenue from about 30% to 33%.

Due to time constraints, the last question is from the line of Maulik Patel from Equirus Finance.

This is Maulik from Equirus Securities. Just 1 question. I think I don't know whether it was asked earlier or not. When you joined, you said that there are so many levered because organization did improve for the timing, in previous 10 years before you joined it. And there was so many levers for improvement in margin, either for productivity improvement or to a necessary cost-cutting and all, has all this been done largely? And if yes, where do you see in terms of from a overall margin improvement, despite all the challenges of the last 2 years, our margin has done relatively better than what 1 could have expected. But where do you see this trajectory going on?

So see a lot of these initiatives, which are productivity improvement, efficiency improvement, wastage reduction, et cetera have been done in FY '19, FY '20, we have done a fairly reasonable job of increasing throughput. We almost increased the 9% throughput in FY '20 out of the same capacity as compared to FY '19. So all of these are -- have been yielded. And we will continue, there is still some more scope, so that will continue. Our margins in FY '20 have been actually -- operating margins have been strong despite the fact that we had retrospective setbacks as far as MEIS is concerned or even the minimum wage is concerned, where we had to absorb all of it in the first operating year post the wage increase. So we have done all of that. Going forward, we don't anticipate any further changes. So these performance metrics will allow us to also pricing the contracts well. Some of the challenges that we had in FY '20 was that the MEIS related MEIS withdrawal could not be affected post factor in our contracts, so we got hit. Whereas going forward, we will be not left with this kind of a situation. So I don't foresee -- I foresee that margins on a steady state continuing business only to improve from current levels, for sure. And that steady improvement will definitely be visible. The first few quarters in FY '21 would be challenged for other reasons, which is the business volume reason. But otherwise, from an operating perspective, there will be a steady improvement.

And just last -- just addition to the same. In your discussion with clients, are you indicating any move to transfer some volume from China to India? Is there some thought processes there?

So we are getting businesses from China to India. It's just that it's not a flood. It is at still. We have got a few customers who had a very, very high China exposure, reduced their China exposure and increase their India, Vietnam, Bangladesh exposure, and we have got some good share. So we have got our share of business from customers, particularly for years, for decades, which was China denominated business, we have now moved back to India, wherever the fabric ecosystem was available and where we could pick those businesses. Will that trend accelerate? I think I foresee, to an extent, it will happen. Historically, when I say, historically, it's not been for a very long period. Vietnam was a bigger beneficiary of this and so was Bangladesh after that. But the volumes in China being what it is, there is still a benefit that we could obtain. The other thing, of course, is to also consolidate within India and gaining share with respect to the volumes being done by other players. So we will have twin benefits of getting additional allocations for the country as well as consolidation business.

I would now like to hand the conference over to Mr. Ritesh Badjatya from Asian Market Securities for closing comments.

Yes, sir. Thanks for -- we thank management of Gokaldas for giving Asian Market Securities for an opportunity to use the call. Thank you, sir, again, for giving this opportunity. Sir, any closing remarks you want to give?

Yes. I think I have answered most of the questions and given an overview of the business. So I would do the formality of a closing remarks. We feel confident of what we are doing. And we feel that we have addressed the COVID related issues squarely in its space. And we feel comfortable that we will be able to overcome the business disruption induced by COVID and come out much stronger going forward. With that note, I would like to sign off. Thank you.

Thank you, sir.

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