Gokaldas Exports Limited (GOKEX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Gokaldas Exports Q2 FY '21 Earnings Conference Call. On the call today, we have with us the senior management of Gokaldas Exports, Mr. Sivaramakrishnan Ganapathi, MD and CEO; and Mr. Sathyamurthy, CFO. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sivaramakrishnan. Thank you, and over to you, sir.

Thank you very much. Good morning, everybody. Welcome to Gokaldas' investor conference for the second quarter of FY '21. I'm happy to report that your company reported a total income of INR 345 crores in Q2 FY '21 as against INR 366 crores in the previous year, adjusted for MEIS loss, coming in at 94% of last year's pre-COVID level. Our EBITDA was INR 33.1 crores, a margin up 9.6% and a growth of 93% over the previous years. Coming so soon after being hit by COVID-19, the company has been able to recover most of the setback of the pandemic. I would characterize our performance as a spirited rebound, which is indeed an expression of our no-limits philosophy. FY '21 so far has been quite eventful. April to June quarter in the U.S. saw a drop in store sales of 61%, which improved to a 23% drop in July to September quarter. U.S. imports in Q2 dropped 31% over previous year. This trend indicates a reasonable market sentiment Q-on-Q, the drop has been decreasing. The economic indicators also point to improved consumer confidence in key markets, which is encouraging. The company was able to capitalize on its customer relationships to tide over these challenging times. We serve a diverse customer base, ranging from fashion retailers to multi-label department stores to grocery giants. Our product capabilities span women's fashion wear, men's and kids' wear, outerwear, industrial wear and sportswear. The breadth of product capabilities make your company an indispensable part of the apparel value chain. To top this, our consistency in product quality and on-time delivery endears us to our customers. Most of the customers are constantly increasingly -- increasing quality standards year-on-year while endeavoring to reduce the lead time to supply. We are lockstep with our customers' need for upgrading product quality standards and have made strides in supply chain throughput, making us a strategic partner. We have prepared ourselves in catering to the evolving needs of customers like sustainable fashion. All of these mean that your company is a critical player in the apparel supply chain and makes us resilient to external shocks. Our export revenue in Q2 was 8% higher than previous year. We consciously chose to stay away from domestic retail business till clarity emerges on the sector in India. We struck a fine balance between the order book in hand and the capacity available, thus aligning cost. We focused on lean operations and cut down wasteful expenditures while effecting structural correction for long-term health. We leveraged technology to ensure operational efficiency while simultaneously reorganized resources by consolidating unutilized capacity to ensure financial efficiency. Our strategy centered around customer endearment, anchored around lean operations, efficient cash flow management and a stringent control over capital expenditure. Many of the actions taken by the company over the last 6 months have helped it sustainably improve the margin. Despite the loss of MEIS incentive last year, the company posted a strong EBITDA margin of 9.6%, proving that your company is increasingly isolating itself from earning from incentives. We would like to see a stable policy regime and hope that the incentive structure that obtains now will more or less be maintained by the government. This will help in structuring the business appropriately and delivering a consistently improving performance. The company managed its working capital well and contained it at 69 days and brought the net debt down to 122 crores from INR 197 crores in Q2 of previous year. While Q3 will see a seasonally induced growth, the overall trend is a reduction in net debt year-on-year. The retail industry is seeing a seminal shift. E-marketplaces are growing at a meteoric pace. Discounters as a format are running up market share and continuing their steady rise across the globe. With mall and department store footfall challenged, all retailers are providing omnichannel options to customers and pivoting to digital marketplaces for direct-to-consumer or buy online and pickup in-store models. With burgeoning options for online customers, brand loyalty is coming under question, and people are shopping across brands. These trends may throw new winners in the retail sweepstakes, diversifying the customer base, staying closer to customers and being agile in the supply chain will be the way to go. The supply chain environment is also undergoing tectonic shifts. The cost of operations in China is increasing, while China itself is becoming a pariah in key markets. Continued policy of economic isolation of China offers Indian firms the leverage and opportunity to step up. In the first 9 months of 2020, China's apparel export share to the U.S. dropped by 8%. Clearly an opportunity for other countries who are exporting to the United States and other markets. Sustaining demand growth would require your company to step up its customer engagement further and become a partner to them. The company also needs to strengthen its supply chain in partnership with high-quality textile companies. Your company is working on many fronts to stay ahead of the market and deliver consistent, long-term results. We are determined to deliver good EBITDA margin in FY '21, which will pave the way for improvement in the future. We are hopeful of gaining market share in the years to come and believe that we have a compelling opportunity and formidable capability to grow in FY '22 and beyond. I thank you for patiently listening to me. We will open ourselves for more questions.

[Operator Instructions] The first question is from the line of Sudhir Bheda from Right Time Consultancy.

And hearty congratulation for achieving the outstanding results in spite of the current prevailing situation. Many, many congratulations.

Thank you. Thank you. Thank you, Sudhir.

And particularly, see, the cash flow-wise and working capital control is really commendable. Sir, my question is, what is the outlook of demand in view of lockdowns prevailing in Europe and work-from-home culture in U.S., too, whether the government demand will be affected because of this? Because this trend may continue for another 3, 4, 5 months. And the second question is outlook on margin. So after the stabilization of government policy as far as these incentives are concerned, so whether we are expecting more than double-digit margin for FY '22?

Okay. So to answer the first question, as to outlook of the market or even demand outlook, we are encouraged by what we see as the end-consumer demand. So store sales have been going up month-on-month, and the gap between this year and the same month previous year has been reducing. This is true for United States and Canada. This is also true for European markets and Asian markets. So all the markets are experiencing growth and a decline in the drop year-on-year. So we are encouraged by the strength. We are encouraged that shoppers are returning to the markets to buying. And we are encouraged by rapidly growing e-commerce sales as well. Most of the brands have pivoted to e-commerce sales, and all of them have their dot-com sites doing very well. So from all of these and our conversation with the brands, we have -- we understand that the market is catching up, and demand is catching up. So we feel encouraged and confident that as we go forward, particularly to FY '22, most of COVID-induced business setbacks may be behind us. We will have to keep our fingers crossed on a second wave of the virus hitting and retail store shutting. But it looks reasonably unlikely that any shutdown in the second wave will be as protracted as the previous one. People are wary of it. People are also aware of the protocols that needs to be followed when going outside. And the COVID-treatment protocols have also improved so considerably that governments will have to think hard and again to -- before they initiate lockdown, which will inconvenience people as well as hurt everyone economically. Be that as it may, the demand growth, which we are seeing through e-commerce and other channels, which anyway will be open, gives us the confidence that end-user demand may not fall as much. Now regardless of what happens to end-consumer demand, that is demand of garments from the brands, we, as suppliers, are one step removed from that. And if we are able to still be a strategic suppliers to our brand, we will stand -- we could stand to gain or we may stand not to lose as much. So if a brand loses a percentage of its sales, it doesn't mean that it would impact all its suppliers in a secular manner. There would be certain suppliers, especially the weaker suppliers, who may get hit more and stronger suppliers may not get hit as much as the brand did in terms of demand. So it is our endeavor to stay ahead of the suppliers and make sure that we don't lose as much volume as our customers lose from their customers. So if we are ensuring that then the volatility that comes -- passes back through the value chain would be better, and we could emerge has less impacted due to all of these. This requires us to stay ahead of the game in terms of operational delivery as well as customer engagement, and we're doing both. As for your next question, this is regarding margins. And you asked if we could get to a double-digit margin. We are working towards it, and we are reasonably confident that in FY '22, which you are asking about, we should be in that zone when we get there.

So my point is whether we are capturing the business by letting up some margin. That's what...

No, we are not doing that. We are very conscious of not dropping our prices, and we're not just grabbing business at any cost. We are playing on our merits, and we are trying to secure business by ensuring that the customers want to do business with us and come to us because we can deliver.

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

Yes. And congratulations for a good set of numbers. Sir, my question was on the employee cost. There has been a substantial reduction in our employee cost. And as a percentage of figure, it has come in at 30% -- less than 30%, which is guided earlier, to bring it down from 33%, 34%. So I assume that this is the result of the cost-cutting measures that we've taken. So I just wanted to know how sustainable is this to keep this number as a percentage of sales of around 30% or below 30%? That would be my first question. And my second question is that there has been anti-China wave that has been there in the U.S. So our -- so I wanted to know if this is something that is helping us in getting more orders? And whether this is visible even among our European customers? And how -- whether this move is seen structural? Or there can be a change if there is a change in the stance of the U.S.A. government against China? That will be my 2 questions.

Okay. So as far as the employee cost is concerned, we took certain decisions to rationalize, and we have done most of that. We've also done a capacity alignment to the orders in hand. All of this meant that we are running an extremely lean operation. Is this sustainable? Answer is yes, we are sustainable. Have we buffered in enough marketing employees for future growth? Answer is yes, we have done that as well. And the cost that we are carrying reflects that. So we are currently at a cost structure which is sustainable, which allows us to carry forth our growth plans in the future when -- as and when the market conditions allow us. And we are preparing ourselves strongly for that. So this is something which you can factor in as directionally a number for the employee cost. As for the market conditions are concerned, China, the -- there is a concerted effort from several countries to isolate China. The U.S. requirement of isolating suppliers who are from Xinjiang province also helps slowly but surely. Obviously, some of what China does spills over to Vietnam, Bangladesh and other countries as well. But we, as an operator, as a large operator out of India, can also stand to gain. And we have been gaining as well. So there have been some orders which we have obtained, which were either, too, being done in that geography, and we continue to engage with our customers to do so. All of these are general long-term trends and do not change overnight or in just 1 quarter. But the trends are visible, and we are seeing some good discussions with customers. So we believe that this will continue. Now as far as Europeans are concerned, we -- our business is a little largely oriented towards the United States, 70% to 75% of our exports are to that market. So to that extent, we are more influenced by the outcome in the U.S. than Europe. Having said that, European buyers are also looking at derisking themselves as there are sentiments even in Europe against China. So all of this augurs well for us. We're not only banking on such sentiments working for us. We have to work hard to make sure that we have the capability, the product capability and the supply chain to be able to deliver what China delivers at the same -- at their levels of efficiency and efficacy. As far as your question of what happens if there are any change in the U.S. government, et cetera, and will that lead to any change in policy, we don't believe so. The policy regime, I mean in my belief, will more or less remain stable. If Trump wins, it continues. If Biden wins, he is not -- he is a respective of institution. He is not someone who's going to be aggressive in terms of changing trade policies. There are many other things for a new government to worry about in America than go and undertake significant shifts as far as trade policies are concerned. And I don't believe that a significant shift in U.S.'s China orientation is going to happen. If required, we can discuss this at length, that is not the purpose of this call. But I feel that on -- overall, the changes which have been assured into the world seems to be here to stay for some time to come at least. And that offers us a window of opportunity to leverage, which we will try to do.

Okay. Just if I may sneak in one more question. If there has been any change in our product mix, which led to better margins like from what we've been reading that there's been more demand for leisure products, so are those products like more margin accretive for us? And in the future, upcoming quarters, when we have orders for spring and summer wear where I believe we enjoy a higher margin. So like do we see better margins in coming quarters then in that case?

See, the business is seasonal and what we supplied in Q2 were largely autumn/winter wear. And during that season, we were heavy on those kinds of products. The -- I'm not seeing a major change in terms of pricing, so margin accretion comes from a better cost management rather than from pricing at this point in time. We're not dropping margins. We have not changed our product mix this Q2 over the previous Q2 as well. More or less, it is the same. And I believe that looking at the order book for the quarters ahead, even for Q3 and Q4, it doesn't seem like the product mix is changing much. So we have to make sure that we get our margins as usual from the product mixes that we handle. As a company, we are conscious in going after better-margin orders and better-margin products, and we will continue this exercise.

So summer wear could be a higher-margin product for us?

It is usually a higher margin. Yes, indeed.

The next question is from the line of [ Piyush Ganger ] from Care PMS.

Sir, I wanted to understand the status of the export incentive scheme currently. And there was a notification that -- recent notification that exporters who will get RoSL arrears from Finance Ministry. So if you can just highlight on that part as well.

So currently, we have -- we get duty drawback and RoSCTL from the government as export incentives. It amounts to about 5.2% or thereabouts, depending on the product type. RoSL was en vogue in 2019. And we have very, very small arrears from RoSL, and we are also hopeful of collecting that. So that is not a big issue from our standpoint. RoSCTL, we have been consistently getting it as soon as we log in our exports. So money is coming in from the government as planned. And the receivables from the incentives is fairly limited, so -- and we are collecting as we keep exporting. So we don't foresee any major change in the export incentive regime. The government is working on moving into an RoDTEP structure going forward, which will be more WTO compliant. A committee had gone into all the details of embedded taxes, et cetera. And the apparel industry has given them -- given the committee all the necessary information to compute the embedded taxes and thereby affix RoDTEP, R-o-D-T-E-P, which will now, in the future, take over from RoSCTL. The committee has done its work for the apparel sector. And I think as and when the government notifies it, we will move from RoSCTL to RoDTEP structure. It's -- we don't anticipate a significant change in the incentive structure going forward, but I am only speculating when I say that. We will have to wait and watch when the government actually releases it. And I just hope that once that is released, that structure remains en vogue for times to come, so that we are very clear as to what is our incentive regime, and we can freely do our business based on the existing incentive regime. The feeling that one gets is, by and large, there will be a degree of stability in the regime, and that should do well from our standpoint. Once that clarity emerges, we will deal with our order booking process, et cetera, assuming those incentive levels and drive to achieve the margins that we intend to achieve. I hope I've answered all the questions that you had.

Yes, sir. Yes. And -- so this 5.2% is lower by 2% versus earlier regime, right?

Oh, no, lower by 4% than earlier regime. So last year, we had an additional 4% of MEIS, which got withdrawn.

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

Congratulations for such a good numbers in this tough time.

Thank you. Thank you, Sunil.

Sir, my question is we -- since many years, we talk -- I mean not we, as a country, we talk about exports opportunity, garment, textile and all. But very few people like you or maybe some very strong and big players are able to convert those opportunity in the business. So if you can just -- you made us understand a lot in this call also about external opportunity. But how prepared we are for taking those opportunities because everybody -- as a country, we have never ever able to capture these type of opportunities. So some thoughts on our preparation, Gokaldas preparation. And second, my question is with this realignment of products and capacity, what type of revenue capability we have maybe generating next year, maybe in '21, '22, subject to demand and orders? Those are my 2 questions.

Sure. So from a preparation perspective, we are well prepared. We are engaging with a lot of customers in design and development. We're closely working with them. And that level of engagement is required for us to ensure that we remain a priority supplier for them. We are engaged in ensuring that our on-time delivery is better and better and better from month-to-month, and we are getting there. We are ensuring that our product capability is as wide as possible. We have developed several new products over the last year, which also helps us fetch additional business and thereby offer the necessary diversity. So from all these angles, we are -- we have the capability. In fact, in many areas, we have the capability which players in Vietnam and China have. So we have developed ourselves to a fairly high degree in terms of technical competency to take on some of the best in the world. Now when it comes to apparel business, it's also the value chain which matters. So having a fabric ecosystem around us, having a TRIMS ecosystem around us, which is far superior in a country like China, and that also helps a country like Vietnam because the raw materials for an apparel maker could be easily accessed in China or in Vietnam because of the proximity. For us, we still are dependent to an extent on certain raw materials or certain types of raw materials from those countries, and that adds to its own lead times, et cetera, which we have to contend with. As and when the ecosystem develops, our competitiveness will only improve, and that's something which we are always working with our suppliers, mainly our fabric suppliers, so that we get a wider variety of fabrics available from India. And for next year's revenue capability, clearly, we are looking at a good growth over, not just this year, but over even FY '20 levels. So we are working at a robust revenue growth. You have always seen that we have not shied away from growth last year, despite the country growing at negative 4%, we grew by 17%. So we have growth orientation, and we will push for a high level of growth in FY '22. Simultaneously, we will also be looking at capacity creation, which we are working on. So clearly, we may have to bring on an additional capacity next year if the growth manifests and what we work on happens. But we will come to it when we reach that area.

[Operator Instructions] The next question is from the line of Ashwin Reddy from Samatva Investments.

Congrats on very strong set of numbers. Sir, my questions are more on the longer- to medium-term kind of time frame. So near term, you guys are probably doing all that you can in terms of efficiency and focusing on the right things. So I'm very happy with that. Over a medium to longer term, if I take a time frame, then if I see in your own presentation, right, the 8% market share which China has lost has gone to Bangladesh, Vietnam and Cambodia. So I'm just trying to understand what gives you the confidence that this will not continue going ahead. And what are the indicators that you are looking for? That's number one. And linked to this, so your -- when you're saying that you would gain, would you gain from your -- from the fellow weaker participants from India? Or do you see a shift from other geographies to India? How do you think about that?

Okay. So when I say 8% China loss and the gains were snapped up by other countries, we are talking of countries, and we're not talking individual players. So when you look at -- with these market share gains have come with reduction in volumes, right? So if U.S. apparel exports have dropped 31%, and somebody has gained 4%, it just means that they have gained when there's a drop, right, gained in share. If you look at our exports, we have been up over last year, so which means that individual operators will see their fortunes move differently from a country-level fortune. So while India has not gained as much as Vietnam or Bangladesh for various reasons, and particularly reasons like proximity to raw materials, et cetera, India has not lost it share as well, which is also an important trend to keep in mind. If China drops, India could have dropped, but India didn't drop. And I see that going forward, India will gain. The way India is also -- Indian players are also coming back up sharply, I would see that going forward, Indian players will also gain. But Gokaldas would gain much more because simply because we are capturing better market share than others. So we will continue our growth momentum, and I don't see us disadvantaged in any ways going forward. In the long run, what we need to do, apart from consistently doing our delivery, is to ensure that we augment our capacities as required. We have the strategic plans for it as and when the need for those come. We're also working with our customers to ensure that they continue to treat us as an important part of their value chain. With all of these things and our partnership with our value chain players, our raw material suppliers, we should be in a better position to capitalize on growth as and when the rebound happens. You've already seen that we are working hard towards the rebound and we are prepared ourselves for the rebound. I am reasonably confident that we are aligned for long term.

Got it. Got it. Got it. That's helpful. And in the near term, has there been any impact of the XPCC ban, the sanctions which U.S. had in China? And -- or is it more only for the yarn guys and not for U.S.? Because -- the reason I ask is I know that cotton is a significant part for you and also U.S. is a big chunk of your revenues. So has there been any impact of XPCC on your -- of operation?

What is XPCC? I probably didn't catch you on that.

The cotton ban from the...

Okay. Yes. So clearly, brands have asked us not to buy raw material from suppliers who are in that region, and there is a long list of suppliers who are "blacklisted." And we are looking at alternate sources. Clearly, Chinese cotton textile exports is huge. I think it's of the order of 17 billion to the United States alone. And that's a pretty significant opportunity. And if Xinjiang province is a significant cotton producer for China, then to an extent, there is going to be a pressure on China. A large part of Chinese cotton production also gets consumed in China, and whatever gets exported is still huge. And that's where India probably can compete. So all of these are opportunities for us. It may not translate into an immediate opportunity, as I said, but over the quarters to come, definitely, we will see the trend improving as suppliers would be incrementally constrained from buying from those -- from producers in those regions. We have a clear list, all the brands have shared with us, including Europe and France, by the way, to not buy from -- any products which are traceable to units there. So it is going to help. I'm sure the way things are panning out as we go forward, things will -- I think the supply -- the buyers will have to look for alternate sourcing, and that definitely will help in Indian cotton value chain, which will be all the way to the apparel sector.

[Operator Instructions] The next question is from the line of [ Pathik Gandotra from Dron Capital. ]

Yes. Siva, great numbers.

Thank you. Thank you, Pathik.

I have just 2 questions. The first is that the incentive scheme that is available, the incentive that are available to you right now of 5-odd percent, how much of them are real incentives? Or -- and how much of them are actually refund of taxes that you are supposed to pay? So is that -- that's my first question. If you could answer that, please.

So all of these, it's actually refund of embedded taxes, right? In the value chain, there is a lot of embedded taxes for which GST refunds are not available; for example, electricity consumption, fuel consumption, et cetera. So it's calculated based on that in the fabric, in the cotton production, et cetera. So it's all -- refund of those levies which are in the system, that's been computed and given as RoSCTL. WTO allows it and all countries to offer a level playing field and refund embedded taxes so that countries can -- players and countries can compete on a level playing ground. The RoDTEP regime will ensure that this calculation of the embedded taxes is done more rigorously and the government will come with a particular value. That's the translation from RoSCTL to RoDTEP. So it's all refund of embedded taxes. Drawback itself is a refund of customs duty for imported elements. So that also is a refund of taxes only. So there is nothing other than those which are available as incentives. So there is no freebie given to the operators saying that, "If you export just for bringing in some foreign exchange into the country, I'm going to give you X percent." There is none of that at the moment. The PLI scheme, which the government talks about and has given to a few other sectors, are more in the nature of providing genuine incentives for increase in exports from the country. At the moment, there has been no announcement of PLI for textile sector, and we are awaiting any inputs from the government. But as and when it comes, that would be an incremental incentive and maybe a good incentive for further -- providing -- for further propelling exports from the country.

So that would actually improve India's competitiveness also, right?

Indeed.

Okay. My second -- so that means the incentive of MEIS, which was what was given as export -- support to export is no longer there, and your margins are now excluding any incentive, which is about what margin you've delivered now and your guidance that you'll do about double-digit next year, which will not include any incentives, right? It will just be this refund of state levy, right?

That is correct. Refund of state levies and drawback, all of which put together, is about 5%.

Okay. Okay. My second question is, what about your capacity? And what about ramping-up capacity over the next 2 to 3 years? What are your plans there?

So we are looking at adding further capacity in line with demand. I do not want to add capacity before demand materializes just to increase costs. So our current thought process is that we may need an additional capacity sometime in the next year, and we may look at some incremental capacity on a lease basis next year. We also have the opportunity to develop 2 additional factories on -- based on certain government incentives for investments as well, which we are working, one in AP and MP. So that is something which we were planning to initiate before COVID hit us, but then we put that in cold storage. We will most likely be looking at restarting the work sometime in the next financial year as the demand goes up for ourselves and then complete it by the end of that financial year. So those capacities will come onstream in FY '23. So that's how we are currently looking at it. Acceleration of all of these can happen depending on how the business unfolds.

[Operator Instructions] The next question is from the line of [ Zaki Nasir, ] an individual investor.

Hello?

Yes, Zaki.

Can you hear me?

Yes.

Yes. Congratulations, Mr. Siva, on a very steady and a fantastic performance in these times. Sir, my 2 questions would be, see the festival season is starting in the U.S. as well as India. So how do you see the next 2 quarters to be in terms of off-take from -- on Gokaldas and your order book? Number two would be, I would just like Mr. Sathyamurthy to elaborate on this INR 122 crores net debt, what it consist of, sir?

Okay. So we feel that the next 2 quarters are -- I am seeing a reasonable level of progress that we're making as far as the next 2 quarters are concerned. The order books are getting filled up, as we speak. Q3 will always have an overhang from the spring of previous year when spring of -- Q3 is when we produce spring goods. And spring 2020, most of the retail stores were closed, so we will be producing spring 2021 goods in Q3. Having said that, our order book seems to be still reasonably strong in the third quarter as well, despite the fact there's an enough inventory overhang in the system of our customers. There is surplus inventory from unsold stuff in spring 2020 when most of the stores were closed on account of coronavirus. So despite that, we have managed to gain, augurs well for the company in the future as well. Q4, also, we are looking at a fairly robust order book. So we -- I'm reasonably looking at a good decent order book for the quarters ahead. As far as the year ahead, I've already indicated that we will look for growth when it comes. So that's that. You had another question on the net debt position, I will let Sathya answer this.

Yes. Our gross borrowings is INR 324 crores. We have fixed deposit to the extent of INR 140 crores, and cash and cash balances in the form of mutual fund, we have around INR 58 crores. So the net debt what we have is around INR 122 crores as on date, as of 30th September.

[Operator Instructions] The next question is from the line of Prerna Jhunjhunwala from B&K Securities.

Congratulations, sir, for a fantastic set of numbers and a steady number reported by you quarter-over-quarter. It's fantastic. Sir, I wanted to understand -- you've talked a lot on the global scenario. I just wanted to understand that this -- you had mentioned that you are increasing your capability in terms of product mix. Could you highlight how they would have changed over the last 1 to 2 years? And how the capability where you have got in line with products manufactured in Bangladesh or Vietnam, and you are competing with those products, and what is the margin profile there? So what changes have actually got you to produce such fantastic set of numbers?

So from a product mix standpoint, we have focused on outerwear a bit more than other sectors simply because it allows us to balance our numbers across quarters. You are aware that usually, second quarter is a seasonally weak quarter for us. And third and fourth quarters, we do well in India simply because we produce goods for spring and summer, which are cotton based, and India is strong on a cotton value chain. So our revenues also were mirroring that trend, and what happens is your capacity is available round the year, but your capacity utilization changes quarter-on-quarter. So developing more skill sets in certain segments would allow us a more reasonably equitable use of capacity across seasons or across quarters. That has helped us, and our outerwear share increase has only helped us in producing better results, especially in weaker quarters like Q1 and particularly Q2. So that has helped. Margin-wise, we are always looking for higher-margin business, whether it is in outerwear or whether it is in fashion wear, and we focus on that. The other reason why the results came better is obviously because our production efficiencies have gone up. Our wastages have gone down. We have built into our manufacturing capability and are holding our operations very, very tight to ensure that we are delivering better margins from the business. So from an order booking perspective, we always focus on better margins as to the extent possible. And from an execution perspective, we have consistently taken the execution numbers, which is what is helping us.

Okay. That's helpful, sir. And sir, second question is that government is focusing a lot on non-cotton products and in the textile segment. And globally also, we're seeing that non-cotton products are seeing higher growth than cotton-based products. Can you help us in understanding how you are building your supply chain in non-cotton versus cotton? And are you seeing more growth in non-cotton area or in cotton area because India is stronger in cotton? So could you just help us understand if the government focus or global trends are leading to certain changes in our company, which will be long-term beneficial to us?

So as an apparel maker, we can be agnostic to the products. We can produce garments based on any fabric, right? We have the technical capabilities to do so. The challenge with synthetic raw materials is the availability of high-quality synthetic raw material in the country, right, polyester fabrics or polyester net fabrics, et cetera are not as -- or not of a quality standards that we would expect for an international market, which is why India is focused more and more on cotton-based, which is India's strength. So government encouraging non-cotton products would help us rebalance the whole product portfolio, and we will certainly benefit if the value chain starts moving towards India, right? So from an apparel producer perspective for -- in the meanwhile, we may have to import certain raw materials and continue making it, which is what we are doing. At the end of the day, the country has to work to its strength as well and not just show up its weakness. So see, one has to work on both the front, improving cotton further because there are other countries which do very well on cotton as well. So we need to constantly keep moving up on our strengths and moving up on our weakness. So both sides have to be pushed up simultaneously rather than one over the other. Establishing a synthetic value chain does take time as the entire raw material ecosystems need to come up. This is a time-consuming, long-term thing, which will take a few years before it fully materializes in the country. In the meanwhile, we will have to leverage on what best we have in the country and keep growing. We are not shy of any product category. We are capable of handling all of those categories. In fact, we do a lot of outerwear with synthetic fabrics and the synthetic products as well as activewear. So we are okay with the product from cotton to synthetics and we're doing that. That was also helping us in keeping our business growth through all of these times.

Sir, last question, if I can squeeze in. Hello?

Yes. Yes, go ahead.

Yes. Sir, outerwear, how much it was earlier and what would be its contribution in our business today?

So in the second quarter, our contribution -- second quarter of FY '21 contribution is 51%, but that's usually outerwear heavy. So that wouldn't be the percentage for the whole of the year. But for Q2, it was 51%. A year back, it was 48%. And a year back, it would have been about 40-odd percent. So we would have grown from that to this level.

[Operator Instructions] The next question is from the line of [ Amit Ghadiyali from Robo Capital.

My question is on the outlook for this year, for the next 2 quarters. So for the full year FY '21, what do you expect your free cash flow to be?

FY '21, I will let Sathya answer that. Why don't you ask another question before we respond to this, right?

Yes, this is -- I mean, I was looking to figure out how the debt position will go down, I think the question. I will come back in the queue, if needed.

No, no, no.

Our debt position for the year -- I mean, for quarter 3, there will be increase because seasonality effect and we will be producing more and dispatch will happen in Q4. But for the year-end, we expect that we will be able to maintain from here another INR 20 crores to INR 30 crores level is what is the net increase what we anticipate for the year-end level.

That's the net debt.

Net debt will go up by INR 20 crores?

No, INR 30 crores, you can take.

Okay. And the free cash flow for the full year?

Yes. Sorry?

What do you expect the free cash flow to be for the full year?

Free cash flow, we'll come back to you on that, if you can give us some time.

The next question is from the line of [ Shriram Ramdas ] from Green Portfolio, SEBI-registered PMS.

This is in regards to the imports from China. Approximately what percentage of cotton imports or raw materials are sourced from China currently?

Out of our total imports, about 50%. Currently, about INR 100 crores is getting imported from China.

So 50% of imports are from China.

Our total imports value is around INR 200 crores. Of the total value, 50% is coming out from China.

Total imported.

Imported value.

So 50% of imported goods are coming from China.

Okay. And just a follow-up on that, if the situation with China were to worsen, have you found reliable permanent alternatives to Chinese suppliers? And what effect will this have on our margins?

So we buy a lot of goods from India. The raw material that we buy from India would be almost INR 300 crores to INR 400 crores. So INR 700 crores minus INR 200 crores, INR 500 crores. So INR 500 crores is the raw material that we buy from India. So INR 100 crores is what we buy from China. Would we be able to find alternate suppliers in Korea, Taiwan, India and other countries? Answer is yes. We are always working towards derisking ourselves from any supplier in any country. So for every product type that we look at, we are always looking at alternatives, and we will -- we feel confident that if there is some such embargo on Chinese products, we should be able to swing away and look at alternate supply source. Keep in mind that today, when we are getting raw material from China, and we are able to procure that, we bid for certain types of products, which require Chinese raw material. But if there is any restriction on that count, then we would move to product types which may have less reliance on Chinese raw materials as well. So we will have multiple ways of addressing this issue, not just finding an alternative supplier for that particular good. We can even take alternative orders to address the capacity issues. So I'm not as worried from a supply side standpoint.

The next question is from the line of Manan Shah from Moneybee Group.

Yes, sir. I just wanted an update. In the earlier quarter, we have shut one of the factories...

Sorry to interrupt. Manan, we are not able to hear you clearly. Your voice is crashing.

Yes. Hello, am I audible now?

Yes, now you can go ahead.

Yes, go ahead. You're somewhat audible.

Yes. [indiscernible] same up and running now, and whether you've taken any more facilities on lease? And second question was on [indiscernible] export of PPE kits, so an update on that?

Well, you were not very audible, but I heard you talk of some PPE thing. So yes, we are exporting -- we were producing PPE kits in Q1. Bulk of the production got over in Q1. We had some residual production in Q2. That also we have supplied to the Government of India. We're not producing PPE anymore. Anyway, PPE's contribution in Q2 was low. We explored PPE exports to other markets. But I found that the margins in that business was not to the level that we wanted from a business standpoint, and that's why we have not focused as much on PPE exports. We remain open-minded about it. If there is an opportunity to export PPE at the right price point, we are open to it. We have the capability. In fact, we have FDA certification. We have all the necessary certifications and the capability to export PPE. But at this moment, we are prioritizing products of higher margins rather than just take up PPE for the sake of doing that business.

Okay. And my first question was that we shut one of our factories in the earlier quarter, so if that factor up and running?

Yes, factor, what? No, what is your specific question is that factor, what?

Is that factory up and running again, now?

No, no, no. So that factory at the moment, we had given a layoff and we have kept it that way at the moment.

[Operator Instructions] The next question is from the line of Riddhima Chandak from Roha Asset Managers.

Yes. Sir, I read in one of the article that in the early July, Tesco was criticized for demanding offensive discount for some certain set of products. So is apparel also included? And do we also supply to Tesco?

So we do not supply to Tesco. And we -- if discounts are asked, it is up to the supplier to agree to those demands or not. We have not gotten into a discounting game as yet with our customers.

Okay. Okay. And does outstanding approx INR 2.5 crore pending from the JCPenney, so how much has that recovered? And what is the volume numbers you have done in the Q2 versus last Q2?

Okay. So out of INR 2.5 crores, we have already provided for INR 1.25 crores, and we are awaiting their bankruptcy proceedings and seeing where they land, and we are awaiting that them out. As far as further business with JCPenney post petition, post bankruptcy, we have done INR 7 crores of business in Q2, all of which we have collected.

Okay. And what is the volume numbers you did in quarter 2 versus last year quarter 2?

For JCPenney?

No. No. For the quarter for the company as a whole.

You're saying volume of pieces...

Yes, volume. Yes, yes, yes.

I will get back to you. I don't look at pieces simply because we produce a wide variety of goods. But let me -- give me a moment.

1.39 million, 5.68 million.

So in this quarter, we did 4.4 million pieces versus 5.7 million pieces last year.

Okay. Okay. Okay, sir.

It doesn't make much of a difference because it depends on what type of piece you produce. And outerwear could be a much bigger garment and can take enormous amount of effort compared to a spring wear. So we don't really compare in terms of pieces. We make very, very different types of garments.

The next question is from the line of Henil Bagadia from Equicorp.

Hello? Am I audible?

Yes, you are.

Congratulations on good set of numbers. So I just got 2 quick questions. Number one, that, as you said, in the Xinjiang province of China that you are -- because of the import embargo that U.S. has been putting on them, there are certain orders that we might get or probably inquiries. So can you put a number on the number of orders or inquiries that have been converted? And the second question is what is the situation of the big retailers in our order book and revenue flows, given that JCPenney in the recent news articles said that they are planning to come out of Chapter 11 bankruptcy. So also on the dues and the order book from the big retailers and the situation going ahead, that given that certain countries in Europe are just implementing lockdown, given the winter that's coming, in order to just safeguard the number of case spreads.

So I can't put a number to the business opportunity coming out of Xinjiang province as this is an ongoing development, and we'd like to see how all of this unfolds across various countries, across various businesses. Keep in mind that while this is happening, most of the retailers also have to realign, buying based on pandemic-induced excess inventory that they are carrying. So there's so many moving parts that it is difficult to isolate the benefit arising out of one event in a series of events and what is its contribution to incremental orders. What we are seeing is incremental orders from that country, but we cannot isolate what is precisely because of the Xinjiang province issue versus something else. Having said that, your question on what's the impact on second round of lockdown in Europe, our dependence on Europe is not very high. We are exporting 15%, 20% at most to the European markets. So maximum dependency is only to that extent, and we have the ability to swing to other geographies if required in the event Europe goes through a lockdown. So we are less vulnerable from that standpoint. And second, I also don't foresee too much of purchasing drop during this period. Holiday season, I mean, maybe the festive season is there. Christmas is coming up. New Year is coming up. People would buy one way or the other. Online sales is still growing and catering to the drop in store sales. So all of these would contribute to degree of buoyancy that we -- it's hard to point a finger as to how much drop will be there. And I am not anticipating. We are reasonably well spread out geographically as well to not be held hostage to any one country or any one region locking down for a few weeks.

Can the situation on some of the big retailers like JCPenney -- like one of JCPenney's companies and they are saying that they'll come out of Capital 11 bankruptcy, the order booking from the big retailer side.

Yes. So JCPenney is the only one which impacted, and JCPenney has already come out of bankruptcy. They have gotten the funding. And they are coming -- going through the process of rebooting, so to speak. In fact, we are getting good amount of orders from JCPenney as well in its new avatar after it came out of bankruptcy. So we're careful in not overextending ourselves to any one particular vendor, that to vulnerable vendor. But looks like now the -- not vendors -- I'm sorry, customers. And looks like now the customer base that we have are more or less able to work their way out of the pandemic-induced financial challenges. So don't foresee too many troubles going forward.

Sir, and last, the follow-up on when you said that there's a lot of dynamic that's shaping on the Xinjiang province, and there are a lot of factors that's been impacting there. So on that, you'd be looking forward to just Indian deals with the customers who are coming with long-term contracts, right, and not just short-term contracts here and there? Long-term contract, I don't mean that they would -- that it would just range into a number of years, but long-term relationship with the company.

Right. So we are always in for long-term relations. I mean, never for short term. We look at customers and we look -- we plan for years and most of these customers have been with us for years, if not decades. We hesitate taking long-term 3-year, 5-year contracts simply for the reason that most of such long-term contracts are for commodity products. And commodity products, typically, you end up competing with China -- with Bangladesh and other countries where the costs are lower. So if you move into the fashion realm, where your potential to get better margins are there, the fashion particularly changes year-on-year. So what we get is a guidance, which usually there's a growth in guidance year-on-year. If I have to lock a customer in with a kind of a take-or-pay contract for 3 years, typically it will be very sharply priced, and it will be for commodity products like making a shirt or a pant or something like that for years together, which may or may not be the most margin-accretive way of growing. So we have been shying away from such business. While we have had the opportunity to take them, we have been hesitant to lock our capacity to such orders.

[Operator Instructions] The next question is from the line of [ Karthikeyan ] from [indiscernible] Advisors.

For the uninitiated, what are your thoughts on internationalizing operations from a manufacturing point of view, given the constraints you spoke about? Is there a way you could overcome some of those by going international in terms of manufacturing?

So we could go international. There's nothing stopping us from going international. We will -- we always keep exploring the opportunity. We feel that opportunity in India is big and huge. There are parts of India where the cost structures are lower than even in Bangladesh, and we need to exploit that as well. So we are open-minded about all of these at the moment. We see that there is a tailwind gathering for India, and we will try to leverage that. We've also been exposed to examples of players who have gone to places like Ethiopia and Africa and burning their fingers. So we have to be careful in going to virgin countries and starting off. Sometimes, it's better to stick to countries where there is a reasonable degree of apparel ecosystem so that you can learn from others' mistakes as well and avoid it. So we're open-minded about it. We have the capability to do it. We will exercise that option in times to come judiciously.

The next question is from the line of Sarvesh Gupta from Maximal Capital.

Sir, I joined in late, so I might have missed the early part of the commentary. My only question was in relation to the EBITDA margin. So we have seen a substantial growth in the same on a Y-o-Y basis as well. So what is the -- if we forget about this quarter also for the time being, but H2 and going forward into the next year, what is the sort of sustainable EBITDA margin given how things stand for you right now?

I think a sustainable EBITDA margin will be in double-digits.

So if you can specify some number because it's a big range.

We normally don't give guidance, but it should be 1% or 2% higher than where we are that's where we are looking at.

Okay. And if we only reach to maybe 1% or 2% higher, then how do we aim to go to a significantly higher metric on the return on capital employed?

Oh, so return on capital, the capital employed in this business is not too high at all. So even at those levels of EBITDA margin, we could attempt to get to almost 20%, 25% of return on capital employed. I'm happy to discuss this offline with you as it involves a lot of nuance discussion on what is the capital employed, what is the return and at these EBITDA levels, what can be the net levels and percentages, et cetera. But I can assure you that having ROCE in excess of 20% is possible, and that's what we are working towards. The investments per se required aren't much in this business, and we're working on that very closely.

Understood. And the commentary that you had, wherein you said that there are certain parts of India where the cost is lower than Bangladesh, there is a lot of news in recent past also related to how well Bangladesh has been growing now. Its per capita income is even higher than India. And that's partly because they've been gaining a lot of market share in the textile-related exports and doing very, very well over there and significantly beating India in all respects. So with that being the sort of a macro, and we are focused in India, how do we envisage that against this big macro headwind of Bangladesh having a significant advantage through government support and through a variety of sources, cheaper labor, et cetera? How do we envisage that we will be able to win the game against this major headwind?

So apparel trade, globally, we'll look at multiple sourcing regions based on derisking the geography to lead time requirements to raw material availability. So Bangladesh gets all its raw materials from India or China or some other countries, and they have to import them. It increases the lead time of supply from Bangladesh. So raw material in goods produced and then goods out. There are port conditions in Bangladesh, et cetera. So Bangladesh will -- is usually focused on commodity exports, where lead time pressures are a little lower than fashion. There is also the fact that Bangladesh focuses more on traditional products as opposed to high fashion which India does. So we have our niche. They have their niche. And globally, consume -- the brands also want to buy from multiple countries rather than just get exposed to one country, and the volatility associated with that. So there's enough business out there. There's enough business in China and Vietnam, which are all high-cost regions for us to tap into rather than just worry about Bangladesh's cost structure being superior to ours and build upon that. So we are more -- as a country more focused on taking business from other countries and not Bangladesh to begin with. And as an operator in India, we also have the opportunity to take business from other players within India as well. So our market share in India from an export standpoint is very small. And there's enough opportunity out there out of India's $15 billion or $17 billion exports for us to play in as well. So there is enough headroom for our growth that we are not worried about Bangladesh at the moment. We don't compete with what Bangladesh does as it doesn't make financial sense for us. So Bangladesh sends its products to Europe because they have an FTA with Europe. With U.S., we get a little more level playing field despite the fact that they have a higher cost. So we play to our strengths. And there are areas where we have strength which Bangladesh doesn't, and we compete there.

The next question is from the line of Sanjay Singh from PineBridge Investments.

Just wanted to understand...

Sorry to interrupt. Mr. Singh, your voice is cracking. We are not able to hear you clearly.

Can you hear me now?

No, sir. It's really...

Hello?

It's quite bad.

Hello?

Yes. Please go ahead.

Yes. Places like Jharkhand had...

Sorry to interrupt. Mr. Singh, your voice is not clear. Please come back in the question queue. The next question is from the line of [ Kapil from RIRC. ]

Hello?

Yes, Kapil. Go ahead.

First of all, I just wanted to learn, means, how big is this opportunity, means, a lot of people, a lot of newspapers from your south area itself are talking about the opportunity for Indian manufacturers because a lot of people in the U.S. are not trusting China now? Secondly, if we see our cash flow statement for the latest results, [indiscernible] consume has gone down by 5%. So that was the main reason of the increase in EBITDA this time? And there is -- as per cash flow statement, the right of use of assets has gone up from INR 79 crores to INR 43 crores. So why [indiscernible] can you explain that, sir?

So your voice was not so clear. So you were -- the first question was on market, right?

Market, the U.S. and China...

So I've discussed at length about it. So if there is any need to further elaborate on U.S.-China opportunity, I'm happy to engage with you separately so that we just can keep moving on the other points of yours.

But with reference to the material consumption, I think if you have asked for it, it is -- I mean it depends upon the product mix and absolutely based on the product mix it is reflecting. Coming back to the right-to-use assets, because based on the lease renewal agreement, we revalue the assets, and then accordingly, the liability is created. If you look at the balance sheet, we have shown the right-to-use assets as well as liability -- with the lease liability with the references we have given, and that is mainly because of the lease renewal which has taken place for a few of our factory premises, and accordingly, it has been reflected.

Okay. Okay, sir. So I'll speak to you offline then.

The next question is from the line of Mulesh Savla from MM Savla Consultancy Services.

Heartiest congratulations for a spirited rebound in our company's growth trajectory. I know we were confident that because our company is in the hands of Shiva, Rama, Krishna and Ganapathi. Most of my questions are answered, so I look forward to further growth, and wish you all the very best.

Thank you, sir. Thank you very much.

The next question is from the line of Zaki Nasir, individual investor.

Hello? Can you hear me?

Yes.

Hello?

Yes, Zaki, we can.

Yes. Sir, there was a few weeks that there were some [ IRS ] report regarding the supplies to the Indian Army. I believe that their quality and the supplies are not good and not adequate. What is Gokaldas doing on this front, sir, in supplying in -- to our armed forces?

So in the past, we have supplied goods to the armed forces for use in extreme cold weather. We do have the technical capability to do so. The issue was that the army a few years back had issued a tender and at that point in time, some other suppliers have won the bid. And then they couldn't supply the goods when army placed orders on them. So army had to go and procure it from international suppliers. So as and when the opportunity comes to bid for these projects, we will get into the act and bid depending on the opportunity. We do have the technical skill set. The armed forces contracts do have its own time lines and processes, which are fairly protracted and that's the reason why don't want to entirely focus on it. These things are also depending on how much of budgets the government allocates to armed forces for various purchases. So for now, there is no contract from the armed forces with us on these extreme cold weather garments. As and when it comes up for bidding, et cetera, we may consider it.

The last question is from the line of Sanjay Singh from PineBridge Investments.

Yes. Can you hear me now?

Yes, we can.

Yes. So firstly, I want to know...

Sorry to interrupt. Mr. Singh, your voice is still not audible. We are not able to hear you clearly.

Hello?

Yes, Sanjay, we are struggling to hear you. Your voice is breaking up.

Are you able to hear me now?

No, sir.

We can hear you in parts. Please go ahead. We'll -- if we are able to catch the question, we will answer it.

I just wanted to know Jharkhand incentives, are you exploring opening up a unit there...

I got it. So we're not exploring Jharkhand as a geography. I think there have been a few other players who have been to Jharkhand and have set up units as well. So we're not currently looking at Jharkhand as an option. We're looking at other states.

[indiscernible]

I couldn't hear you. You are talking of incentives in Jharkhand? Or what are you discussing?

[indiscernible]

No, no. So there are incentives available in Jharkhand. As per their official textile policy, their incentives are very rich. We have to also be careful in determining where we are able to set up based on where our management team is, et cetera, and not nearly chase the state which offers the highest level of incentives. I also don't want to go to a place where there's already a surfeit of players who are already operating there. So we do have options in other states where the incentives are reasonably strong and nearly as good, but where the comfort for ourselves is much higher, and we may go and play there. So we -- for now, we are not looking at Jharkhand.

Lastly, my understanding of [indiscernible] investment, what is the incentives that Bangladesh gets from, which you won't get?

Sorry, we couldn't...

What is the incentive Bangladesh gets, is that the question?

Yes. Bangladesh get [indiscernible], the European Union, which you don't get...

Oh, so Bangladesh goes duty free into Europe because they have a free trade agreement. So the goods that we supply to the Europe attracts anywhere between 10%, 11% on an average duty, which Bangladesh does not incur. So if I am a European buyer, I would compare India's landed duty paid price with that of a Bangladesh price, which is 10% or 11% higher. So another way of putting at it is, if I have to compete with them, then we have to be cheaper. Doesn't make any sense because they already have a manpower advantage, et cetera. So they have paid off the batch about 10% to 11% advantage in duty drop in -- in duty in Europe.

And do you think [indiscernible] India and Bangladesh and Vietnam [indiscernible]?

So between India and Bangladesh, as far as U.S. is concerned, it's a level playing field. Both of them -- both of us attract the same level of duty.

Okay. Okay. There is a gross debt higher than net debt. Why don't you [ read out ] per se?

Why is gross debt higher than net debt...

Yes. So we have about fixed deposits as a cash collateral with the existing banks towards the working capital facility to the extent of INR 145 crores. And we also have cash in the form of cash on hand as well as in mutual fund, we had around INR 58 crores. That's why we say my net debt is INR 123 crores. This cash collateral with bank is a legacy issue, which we are working with the banks to really unlock it and reduce our debt component. We are working towards that, and we are hopeful that at least before this year-end, this will happen.

Okay. Okay. And is there any long-short opportunity to go out of apparel to maybe footwear, et cetera? I mean, are you [indiscernible] even thinking about?

Sanjay, I'm struggling to hear you. Out of apparel to what?

Footwear, footwear.

Footwear.

No, no, no. We are not -- we are sticking to what we are capable of. We're not getting into other businesses.

As there no further questions, I would now like to hand the conference over to Mr. Sivaramakrishnan for closing remarks.

So thank you very much for all the questions. We are happy -- we were happy to answer all of these. And if there are any specific questions, we wouldn't mind taking them offline as well. So thank you all for coming on to our conference call. As I have always indicated in calls, we are closely monitoring the industry scenario. We are always endeavoring ourselves to stay ahead of the curve as far as the business is concerned, and we will continue to work towards growth going forward in the future. Thank you, and look forward to seeing you again. Have a great day.

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