Gokaldas Exports Limited (GOKEX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Gokaldas Exports Q4 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Binay Sarda from Christensen IR. Thank you, and over to you, sir.

Thank you, Stephen. Good morning to all the participants on this call. Before we proceed to the call, let me remind you that the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties and other factors. It must be viewed in conjunction with our business risk that would cause future results, performance or achievement to differ significantly from what is expressed or implied by these forward-looking statements. Please note that we have mailed the results in the presentation, and the same are available on the company's website, too. In case if you have not received the same, you can write to us, and we'll be happy to send the same over to you. To take us through the results and answer your questions today. We have the top management of Gokaldas Exports Limited, represented by Mr. Sivaramakrishnan Ganapathi, Managing Director and CEO; and Mr. Sathyamurthy, Chief Financial Officer. We will start the call with a brief overview of the quarter gone past and then conduct Q&A session. With that said, I'll now hand over the call to Mr. Siva. Over to you, sir.

Thank you, Binay. Good morning, everyone. I hereby report that your company announced a total income of INR 1,223 crores in FY '21, registering a decline in revenue of 12%. Our export revenue fell by 8.8%, which is in contrast to India's apparel exports declined by 17.4% during this period. The year 2021 was quite eventful. We all learned about a virus that engulfed the world during the year. Unfortunately, after more than a year, we still don't know how to fully contain it and are dealing with the after-effects of the devastation unleashed by the virus in [ states ]. We are severely tested -- we were severely tested by COVID-19 in FY '21 when lockdowns imposed store closures in most markets and imposed factory shutdowns in India and other producing countries resulting in a volatile order flow and disrupted supply chain claiming a toll on the financial health of both companies. When the first wave struck, we had order cancellations and realignments, payment deferral and operations closure, resulting in a stressed H1. Q3 saw a constrained order flow as the customers who were suffering from excess inventory from spring 2020. In addition to such challenges, we also had to deal with price pressure as global orders were far lower than global supply. In response, we managed to cut costs significantly, rationalize our capacity, streamlined operations through share agility and ramped up our order book. Another initiative that came to our rescue during the year was entry into PPE business. We became the pioneers in PPE business when it was unknown to anyone in India. This sees the opportunity to design and manufacture PPEs and became one of the largest producers of the product during the early pandemic. This brought in revenue to the extent of INR 80 crores during the year and substantial cash flows to tide over the financial deficit during the early part of the year. The company also consciously reduced its exposure to Indian retail customers to minimize credit risk. We then returned to business normalcy from Q4 onwards. With all these efforts, we could contain overall export sales drop to just about 9% over the previous year. We ensured high efficiency in our manufacturing process, controlled our costs well, contain working capital deployed, improved connect with our customers. Thus, despite a drop in revenue, the company delivered a superior EBITDA margin for the year as compared to the previous one. The morale of the organization is at the highest level now, quite simply because we came out so much stronger through the year. Customer confidence in Gokaldas Exports is very high, as we have consistently met our commitment through all these challenges. This was possible only because of a can-do approach of the team and positioning of Gokaldas Exports as a true partner to the customer. We had the government of India announced a new scheme from January 2021 called RODTEP to refund embedded taxes, replacing the earlier ROSVPL. The rates under R O D T E P, RODTEP is yet to be announced. Consequently, we have under recognized this amount in our reported Q4 revenue. Due to the pandemic, certain customers of ours went into financial difficulties. In response, we had to make onetime provisions for expected credit loss of INR 7.5 crores during the year. After adjusting for all this, we generated an EBITDA for the year of INR 114 crores, a growth of 11% over the previous year despite a drop in revenue and PAT of INR 26.5 crores, which is substantially higher than last year's after adjustments. Our net debt reduced by INR 38 crores during the year to INR 166 crores. Since our business is denominated in U.S. dollars, we hedge our receivables to insulate ourselves from currency volatility. We book our order based on prevailing forward rate, the P&L that we operate is thus the hedged P&L, while revenue recognition is on the prevailing spot rates. Thus, our P&L may show a hedge gain or loss based on how the rupee trends. But business-wise, this does not impact our profits. Once hedged, if the rupee substantially weakens in the spot market during the period, the hedge loss will widen and vice versa, however, making no impact on net profit. For the year, we had a hedge loss of INR 1.5 crores, which just means that our hedge rate was slightly lower than the spot rates in INR to USD terms. On the contrary, if we had a hedge gain during the period, it also reflects the business earnings and not extraordinary income as order pricing is done accordingly. The apparel industry has been traditionally labor-intensive and low-wage industry. The competitive advantage in this industry is determined by the ability to produce trending designs while maintaining cost effectiveness. The apparel industry's dependency on labor cost is evident with multiple shifts in industry based -- industry base on a global level over the last 50 years to countries that offer cost advantage. As manufacturers, we are responding by keeping track of design trends worldwide and co-creating products for our customers, delivering quality products consistently on time and in full. This calls for a highly efficient manufacturing capability and the supply chain management ability to manage the large number of SKUs that we produce, relentlessly seeking out cost-effective solutions through pursuit of efficiency and accessing structural advantage through production in lower-cost locations. India continues to offer competitiveness vis-à-vis China and other countries. There are regions within India, which are more favorable than others, and we are actively exploring such options for growth. Next is continuously improving lead times to the market as fashion cycles are shrinking and production is happening closer and closer to consumption periods. Supply chain and logistics play a critical role in this and finally, adopting practices which are demanded by discerning global customers like sustainability in the value chain, whether it is 0 discharge, recycled polyester, use of organic materials, adopting sustainable labor practice. We have done all of these to endear ourselves to our customers. Gokaldas Exports is focused on being a leading manufacturer that is sought after by top global apparel brand for its product capability, quality and consistency with a strong commitment to sustainability while delivering profitable year-on-year growth. The outlook for the industry is positive. With vaccination drive gaining momentum in all the countries that we export to, we anticipate a good demand recovery in the forthcoming year. This is already reflecting in our strong order book for the quarters ahead. We are in the process of commissioning a new unit in Karnataka in July, which will increase our capacity. Our goal is to emerge as a lean operational entity, delivering superior engagement with customers. The company has the confidence and resilience to leverage the opportunity provided by the market and take appropriate steps in line with government directives to manage and grow the business. I thank you for listening and would be happy to address any questions that you may have.

[Operator Instructions] The first question is from the line of Anand Trivedi from Nepean Capital.

My question is that given the current second wave of COVID, are you all facing any supply constraint issues in terms of running factories or lack of labor by which you can't supply your order book in the U.S. and Europe? And if so, is that creating any issues from a in your contracts as penalties or air lifting of cargo, anything of that sort?

Yes, we are facing some challenges as we speak. In fact, for about a week, there is a shutdown happening in Karnataka. So our Karnataka-based factories are under a lockdown, which means they are non-operational. And our underproduced unit is operational at the moment. Bulk of our capacities are based in Karnataka. So a significant part of our manufacturing for the moment has been suspended in response to government directive. We also had, in the previous week, directive to operate at 50% of capacity utilization to minimize the worker congregating together or increasing the social distancing. So this lockdown, which has been announced is in effect till the end of the current week. So to that extent, there has been an amount of disruption. We have responded by reaching back to our customers. And wherever possible, we have sought deferment in deliveries. Those fast-fashion customers who have very tight delivery schedules, we will be prioritizing the manufacturing for them as soon as the lockdown opens up, so that we could deliver to them. But even in those cases, we have sought some extensions to deliveries. Our customers understand that this is a national level emergency as well as a government directive, which is resulting in all of these. We are also simultaneously exploring options to ramp up our capacity by working overtime or over the weekends, et cetera, post the lockdown lifting. So we will meet our commitment. In fact, having a full order book for the future, it's a constraint in this kind of scenario. But the good news here is that the shipments, the delivery scheduled for the month of May is low. This is a lean season for deliveries. Most of the deliveries are stacked in June. So to the extent that we can reopen the factories and scramble, we may not have too much of a problem in terms of meeting commitments. But then we will have to all play by the year depending on the lockdown scenario that we're seeing.

But fair enough. But in the contracts, in the event this continues, and you cannot meet your commitments. Are there penalties in your contracts?

There are -- no. So the contracts would expect us to air lift, which gives us additional 3 weeks because the sailing time, 3 to 4 weeks because the sailing time is [ touch shot ] in the process. But that is the penalty, right? And if we still are not able to meet the commitment, then, of course, there are certain penalties, which can be waived by the customer, depending on the case-to-case basis based on our long-standing relation. However, what we have done is we have formally got extension for deliveries from our customers. So to that extent, for now, we are good. If the lockdown continues for a longer period of time, then we may have to again revisit these discussions with the customers and see what best we could do.

Okay. And then next question was...

And in the meanwhile -- one more point. In the meanwhile, we are also engaging with the state government to see if we can -- once the case load comes down, if we can operate -- restart operating factories here. So they actually allowed us to finish and dispatch the goods which are in the unit, which are in the ready set, but which we couldn't discuss because the lockdown came into effect. So they have just opened that out for us to dispatch FG from the unit. So there is a bit of a cooperation from the government as well to support the industry. So I'm hopeful that we should be able to come out of the lockdown soon.

Okay. My next question was close to 63% of our sales come from the U.S., everything where you understanding and hearing is the U.S. consumer is coming back in a big way. Can you touch a little bit more light on your order book as to how much traction you're getting in the U.S. specifically?

So our U.S. traction is extremely strong. U.S. is coming back to near normalcy with their recognition drive going exceedingly well. And they're gradually opening up in many parts of the U.S. From our customers, we understand that they are anticipating a reasonably good demand pickup. And hence, we are seeing a good order flow. Keep in mind that for a substantial part of last year and early part of this year as well, the customers who are largely buying casual, which were knitwear, et cetera, and people have skipped 1 to 2 seasons of buying fashion garments. So I'm anticipating that from spring '21 onwards, people will start buying more and more garment as people start going out, carrying out their normal lives, going to work, going and meeting friends, et cetera. So we anticipate a good spring/summer orders, which means our Q3 and Q4 should be strong. We already have a strong order book all the way till Q2. So I'm anticipating that from the trends that I'm seeing, particularly in the U.S. and even early trends in Europe, that the demand cycle has to be very strong.

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

Congratulations, sir, on a strong set of results despite the current scenario of pandemic. So sir, I wanted to understand the capacity at your end, what utilizations are you working at? And how much capacity is expected to come up in the near future to service this extended demand that we are seeing right now?

Okay. So whatever capacity we have, we're working at full capacity. In fact, we were just prior to this lockdown that started last week. We were on a ramp-up of capacity across all units, capacity in terms of manpower. And we were getting the manpower after a good amount of hiatus over the last year. So we are on course to ramping up. I'm also adding a capacity in terms of a new unit in Karnataka, which should go on stream as early as July. And we are looking -- actively looking at more capacity that we could add, given our order book. So capacity, while we will continue to work on ramping up incremental capacities in our existing units wherever possible by building out extra lines in our current factory. We're also scouring for new capacity, which could either be a leased capacity or build out and all of them are work in progress. We would -- I don't foresee too much of a capacity challenge as orders come up, we will keep on building capacities going forward to meet the requirements.

Okay. So what kind of volume growth can we see here coming in for the year?

I can say that the demand is very strong, and you will see a strong growth in the year.

The next question is from the line of Chetan Shah from Jeet Capital.

Sir, just one small clarification from our previous participant's question. Ability of the logistics support, I'm just not talking about currently due to COVID. But even otherwise, in terms of container and all, what we hear from other companies and other business is a bit of a challenge and a problem. So if you can just tell us how the -- how is the situation in our case? And are we doing anything specific because that kind of increases our cost of logistics for export purpose?

So most of our contracts are FOB basis. So our scope in, when we deliver our goods to the customer as a port in India. So yes, there is a container challenge. And oftentimes, we had to wait, keep the finish goods in our factory until we get a container. So that we can load in the containers and then transport them to a port either Chennai, Bombay or to the [ current ] port and hand it over to the customer. So the increased costs, logistics costs on account of all these shortages and higher shipping cost is borne by the customers. But the sheer logistics of container availability did impact us even in the fourth quarter when we were scrambling for containers to move the goods out. But then these are all logistics problems, which we have to take it in our stride, and we've been managing it reasonably well.

Sir, just one last question from my side. Just in a normalized business environment, I'm talking about we -- we had a 2 fashion cycle, and that's how we kind of prepare ourselves both in terms of availability of our raw material and goods to be sold. So in this changing business environment and the climate, how is our interaction with the customer? And in terms of the cycle of the business, normally, we get 3 to 4 time horizon before we -- before the fashion season starts and we export and then they sell it to the final customer. How is business dynamics have changed? If you can give us some flavor on that to get a sense whether it has changed or it is still going on, how it was in the past?

Okay. So the macro -- 4 macro seasons of spring/summer and autumn and winter sales for customers, but then fast-fashion customers are continuously refreshing their product in their stores and have gone to many more drops in their stores, which means that they push us to deliver goods at a shorter and shorter -- on the shorter and shorter lead time. So India, in general, focuses on spring and summer, where there is a skew towards Q3 and Q4 from a production standpoint because India is strong in cotton. We at Gokaldas have actually broken this cycle, and we have a fairly good autumn/winter sales as well because we focus on products which are synthetic oriented, which are outerwear oriented, and we have the capability to do so. So we have balanced the season somewhat by onboarding customers who need all these kind of products as well as managing the order flow in the right manner and developing the technical capabilities accordingly. The fashion cycle is fast fashion continues, the fashion cycle will only -- will remain the way it is and probably will -- people will expect a shorter and shorter lead time, which will put more and more pressure on the factories and on the logistics. But then we are well plugged in with our customer set, and we gear ourselves up for the needs of the customer. So we are good to go from that perspective.

Sorry, just one last question. In terms of the CapEx for expansion of the current capacity or a new location, if you can give some guidance for both FY '22 and FY '23, do we have any plan, please?

For both the years put together, we expect to invest about INR 120 crores for '22 and '23 put together.

The next question is from the line of Chintan Sheth from Sameeksha Capital.

Am I audible?

Yes, Chintan, you are audible.

Sir, a couple of questions. One is on the working capital. If I look at your receivable cycle for this quarter. It seems a big stretch related to what we had in Q4 and September quarter. Anything to read out on that? That is one. Second is on the margins front, if I look at your margins, for the quarter, a large part of it is coming from managing our employee cost relatively better than in the previous year. Despite the gross margin contraction, we have seen because of the input cost prices. So how long we can sustain our margin based on the employee cost side because there is a limit to it? So if you can elaborate our strategy in terms of how we are going to scale up our margins going forward, given the pressure we are seeing from the input cost material side?

Sure. So let me answer the second question first and then come back to the first question. You talked about employee cost. The employee cost for the year was about 30.4%, and we estimate that to be at a similar level for FY '22 as well. So our employee costs look at cost management we have done, we are holding. Whatever incremental employees would be required would be only for expansion. The second point is how do we improve our margins going forward, that it's -- as we grow, the incremental revenue will come at an incrementally higher profitability as not all fixed costs scale up. So capacity expansion in the existing factories itself by adding more lines will come at a much higher profitability. Our factory EBITDA itself runs at about 5% higher than our overall EBITDA. So incremental revenue will come at a higher EBITDA, which will automatically give us a margin inflation as we keep expanding the business. Coming to the first question on working capital. I think -- and particularly, your question was on receivables. There was a huge amount of shipments which got bunched in the last week of March, which resulted in receivables piling up in the last week of March. So that's only a bunching of timing issue from that perspective. Sathya, you want to add a little more color on the receivables.

It is purely because of skew despite is based on customer requirement. This is a one-off issue because of the pandemic. And so about INR 161 crores was the exports receivables. All of them got collected subsequently.

Sure. And lastly ...

Yes. This one a basically -- is a discounting amount, which is again a discounting, balance, INR 88 crores are now subsequently discounted and realized fully now.

Sure. Sure. And lastly, on the FD with Canada Bank, the issue, the fixed deposits stuck with the Canada Bank for working capital. Anything we are trying to move out to the other bank or something like that, if you can -- where are we standing on that front right now?

We are working with the other banks, private banks. The work is in progress. We hope to really have a breakthrough in this financial year.

Okay. So we will be looking at INR 140 crores getting released and that will obviously help us to kind of manage our working capital much better.

Absolutely.

The next question is from the line of [ Bharat Chura ] from ICICI Securities.

Congrats on a good set of numbers. I question regarding the current capacity in terms of line, like what is our current manufacturing capacity in terms of line and how much more line do we expect to add in the next 2 to 3 years, like FY '21, '22 and '23 and also specific to Karnataka unit, how many lines will be added? And what would be the CapEx for the same? This is my first question.

Okay. So I think we have about 200-odd lines internally. Again, line itself is changed based on the product type for outerwear, which are heavier garments. We may have to combine a few lines to get 1 output versus a simple garment, we may even break the line into 2 lines to produce those. So -- but yes, from a standard line perspective, we have about 200-odd lines across the factory. From a capacity perspective, as I said, we will keep pushing the capacity growth based on demand, which is very strong. And we will keep building out lines either in a new unit or in existing units wherever possible. And we'll keep driving that through this year and the next. That is why we are also allocating a good amount of CapEx for expansion. We have -- as I said, we are actively bringing up a unit in Karnataka itself in Tumkur, which will -- which has almost come up and for the lockdown, there has been a bit of a delay in completing the unit and commissioning it, but then that's -- we will be adding capacities through the year as and when we need in order to meet our requirements. So capacity growth will be in line with the demand trend that we are seeing.

Sir, any number you can share on what capacity will be added in Karnataka unit and the CapEx for the same?

So as I said, CapEx -- well, I won't say we will be looking at expansion beyond Karnataka itself. So while this current unit is coming up in Karnataka, we are open-minded about expanding in other areas. For example, the next unit, which we are actively looking for and most likely will commence so once all the paperwork is done will be in Bhopal. So we are looking at expansion beyond south of India as well. Looking at locations within India, which are cost-effective from a labor perspective and from an availability perspective. So that we can even continue to ramp up. So as I said, the CapEx we are looking for is about INR 120 crores over the next 2 years, which will be for expansion, a small portion of it will be for modernization, but largely, we'll be looking at expansion.

Okay. And sir, I had another question regarding the gross margin. Like if you look at the yarn prices have been increasing. So what would be your outlook on the gross margin? And also our employee cost, is it expected to be lower in FY '21?

No. So as I've mentioned, the employee cost in FY '21 was lower than FY '20 as a percentage of revenue. Employee costs in FY '22 will be more or less in line with the employee cost in -- as a percentage in FY '21, the -- that's as far as the employee cost is concerned. As far as gross margin is concerned, if you're asking about yarn prices, cotton prices, even polyester prices and all of these have indeed gone up. So we are very large buyers, and we do have some amount of buying clout in the market. So we were not -- we did not come under as much pressure last year. And moreover, for many instances, we could pass back the higher costs to the customers. So we negotiated and pushed it back to the customers as well. There was a small amount of it, which we had to absorb as well. So these are all dynamic things based on negotiations. But by and large, we have insulated ourselves from a sharp increase. I'm anticipating that the cotton prices may ease a bit, it's already eased a bit. So we will see how it goes in the forthcoming year.

The next question is from the line of [ Akshay Shira ] from [ Perfect ] Research.

I had a few questions. The first one being, what sustainable advantages do we have against Vietnam and Bangladesh in our business? The second one being, are our contracts pass-through which are as in, can we pass the increasing cost material price to the client? And the third one being with 24,000 employees already on the roll what challenges do we see with labor management, union et cetera when thinking of scaling up sell?

Okay. So when it comes to Bangladesh and Vietnam, the competitive dynamics are different. Vietnam works with raw material from China, which is -- for them, it's a short lead time away. And they have a good [ dementing ] base that they developed. However, Vietnam is going -- witnessing significant cost increase in terms of labor cost as they have limited labor availability, and they're also up migrating to other industries in the country. And the country is also doing well and growing. So the salary expectations are going up. So Vietnam costs are going up indeed. And some of the customers are looking at other options like Cambodia, but those countries are also increasing in cost. Bangladesh continues to enjoy a significant cost advantage and more than that, significant availability of labor force and government support to the textiles industry. So Bangladesh will continue to grow. However, I'm also seeing that there is a risk that Bangladesh may lose their FTA status with Europe, I'm saying may because it's not final as yet, in about 4 or 5 years, which means that customers may have to realign themselves as to how much capacity they can get produced out of there. As the large advantage is Bangladesh offers is actually the duty-free access to Europe. That itself gives them about 11% reduced cost to sending goods to Europe. And the labor cost, this makes up the rest. For customers, India -- for the U.S. customers, there is no duty differential between Bangladesh and India. So there's only the labor arbitrage, which comes into play. India can hold on its own, thanks to its fabric ecosystem, thanks to its design capability. And I see that we have ample opportunities to continue to take business away from China, which we have done quite a bit through this period and which we will continue to do as Chinese costs are going up, and China has also fallen somewhat out of favor in many countries. And China's business is huge. So we will continue to gain at their cost. And I don't foresee that Bangladesh and Vietnam will take away all our business. In fact, there's enough business for India to take on a global basis. So I hope that I answered you on that. Can you just repeat your other 2 questions, please?

The second question was, are our contracts [indiscernible]?

Most of the contracts are like that. So when we book an order, we estimate the price of raw materials and back-to-back place an order on them. So to that extent, our raw material prices become pass-through.

Okay. And shall I repeat the third question, sir?

Yes, please.

Yes. With 25,000 to 24,000 employees already on the roll, what challenges do we see with the labor management, unions, et cetera, when thinking of tailing upside?

So labor management always has got its own issues, especially when you have large contingent of women labor. We have the capability and we have the experience of handling the labor force within the company. We've been managing them so far and managing them really well. So I don't anticipate this to be an additional challenger an additional burden from our standpoint. In fact, if you are a fair labor practice -- labor practitioner and do all your statutory compliance and manage your labor force very well, which I believe is one of our core competence, then I think we are in a strong position to manage our labor well. So I don't foresee too much of a challenge on that front.

The next question is from the line of Mulesh Savla from Shah & Savla LLP.

Heartiest congratulations, sir, on a good set of numbers in a challenging environment. And also congratulation for a very nice presentation, very informative presentation that is being put up on the site. Most of my questions have been answered, sir, but I just wanted to have one accounting question related to our finance cost. I see that though our net debt is very low, and as we get some interest subvention also, still, our finance cost comes to around 9% of our debt. Is that right, ready?

No. Our finance cost consists of 2 components. One is the normal finance cost, plus the India's interest accounting. So out of INR 34 crores of our interest costs about INR 6.5 crores is on account of India, the balance only accounts for a normal interest cost. Again, it is INR 28 crores consists of about the bank charges about INR 6 crores, which is on account of various normal transactions import processing fee, et cetera. If I eliminate that, my actual interest [ car ] is only INR 22 crores. Against that, you have to knock off INR 6.3 crores, what I have on account of interest income, which is grouped under other income. So effectively, my interest cost is only INR 15 crores as against my net debt. Which is -- my average interest cost works out to sub-6% at this point of time.

Okay. Okay. So that other charges for export and all those things are also very high.

Yes. It is also because of a number of numerous transactions, what we do. Because every month, the number of invoices and things like that, for each invoices, you take the cost as well as the -- I mean, pre-shipment and post-shipment then insurance cost, which is being charged by the bank, all those things account for that.

Okay. Okay. That's very good. That's very helpful to understand the finance cost. And sir, you have further provided for about INR 4.72 crores for expected credit risk, may we have some detail of that? And we hope that no further provision is expected against any customer.

This is against -- as per the policy, it's the expected credit loss provision, which is being provided by the company on a conservative basis. We do not foresee any recoverability issue. However, as a conservative policy, any receivables exceeding a second period, as per the company policy, we provide for it. And subsequently, we write it back when we realize. And that's how we really provided today -- I mean, for this financial year, we have provided INR 4.72 crores, of which INR 3.5 crores has been provided in the first quarter itself. So ...

This is just to clarify, even INR 4.1 crores was provided in this fourth quarter and INR 3.5 crores in the first quarter, right?

Yes.

So it's about 7.5 quarters -- INR 7.5 crores.

And on realization, it will be accounted back.

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

Congrats on a very strong set of numbers. I have 2 questions. Firstly, regarding the design and the value add services, and which you talk about in the presentation, and the commentary as well. So I just wanted to understand, is it something which is becoming a norm for the industry and kind of part or the course for all the suppliers, system especially the bigger guys like you? Or is it something which we are focusing on to increase the margins over the next 2, 3 years how should one think about it? I mean -- and this is in any way linked to the fast fashion trend out is going on?

So it's a bit of everything. We have the capability. We have the report of clients who -- who are a mix of fast fashion as well as the grocer type like your Walmarts and others. So we have -- and industrials as well. So we have all kinds of customers. And what happens is that with the capability that we have and with the cross customer view that we get, we are in a strong position to advise many of our customers as to how to go about looking at their portfolio and help them. And we do that primarily to increase business stickiness, so that we continue to get a good amount of business traction from them. It has worked well with several customers as they get to know our capabilities, our design capabilities, and obviously, with that production capabilities as well and also builds stickiness. Whether that results in us getting a little higher pricing, I would not fully endorse it. What it does deliver to us is a better stickiness and growth in revenues.

Understood. That is helpful. And on the -- and secondly, regarding the credit cost, which we have -- regarding the credit loss, and I understand that last 3, 4 years have been tricky for the U.S. retail and even COVID has not helped obviously. But in terms of structurally protecting Gokaldas against such cases in the future, has it -- is there anything that can be done? Or has been done already to reduce [indiscernible] in terms of [indiscernible].

So we have taken credit insurance. So I'll answer it in 2 parts. One is, we've had some credit issues with Indian customers. So as a consequence, we have actually exited the Indian business completely. So we are only focusing on international business. And we are only focusing on those customers who we believe are financially solvent and strong. We've had certain instances in the past again legacy where we didn't have insurance cover for a few customers, and CS was one of them. And we had a problem and they went bankrupt. And we -- most of the customers, almost all the customers that we have, currently, we have an insurance cover from them, which covers any receivables which are at risk even though it may not cover the goods which are under production. But the best protection that we have is to constantly monitor the financials of our customers and make sure that we adjust our exposures accordingly. So far, the customers that we deal with now, especially post-COVID, are all customers with reasonably strong financials and have a good amount of cash flows or current cash in bank. So we are very careful now to avoid any credit risk instance going forward.

The next question is from the line of Amit Doshi from Care PMS.

Really appreciate the detailed presentation of the type of data covered in the presentation. Sir, you mentioned about the strong order book. And generally, as you've always said, you have around 2 quarters of order book in hand. So this time, do you believe that it is more than 2 quarters order book in your hand? Or it's a type of order, which is more like an outerwear or which is more margin remunerative orders. So can you give some hint on that?

So it's the volume of orders as well as the type of orders. We have a good amount of outerwears kind of orders for the quarters ahead, which is Q1 and Q2. And we have a strong order book, which means that our orders for the -- in the quarters ahead in terms of share volume is high. And so it's a combination of the right orders, high-value orders as well as volume.

Okay. And sir, second, about this cost structure, I was just looking at this March '21 results. And this employee cost, you've already answered about reduction in employee cost. On the other hand, there is job work charges, which are on the increase. So is there some sort of a change in the structure that how we are operating is there? And also on the margin front, while we said that we hedge our ForEx, this thing. But this quarter, we have around INR 7 crores substantial ForEx gain. And probably that's one of the contributors of increase in the margin. So do you want to comment anything on this as well as that cost structure, which I spoke about?

So let me address the ForEx part. For the year, there was a ForEx loss of INR 1.5 crores. For the quarter, there is a ForEx gain of INR 7 crores. Frankly, the ForEx gain or loss matters nothing to the P&L to the past levels of the company. What happens is when I book my order, I hedge my -- I book it based on my forward rate available, and I've already hedged my receivables for the quarters ahead. So at this point in time, for Q1 and Q2, we have mostly hedged. And for the quarter ahead also, we have somewhat hedged. So I work on hedged P&L. If the spot rate in a quarter going forward turns -- if the rupee, let us say, substantially weakened in the quarter ahead. We will show that there has been a hedge loss of a certain value because I have hedged that, let us say, at say, [ $73.50 ] and goes to [ $74.50 ] there is INR 1. I booked my revenue at [ $74.50 ] and then that INR 1 delta, I show it as a hedge loss. So it really doesn't matter what the spot rates are. And hence, what is the hedge loss or hedge gain as the case may be because the business is done on a hedged P&L and not on a spot P&L, whereas the India processes to cost the P&L as per the spot rates. So revenue is denominated in the corresponding spot rate for the quarter and then the hedge loss or hedge gain may be taken accordingly. It really doesn't matter to the bottom line.

Reference to job over [ charges], I just want to clarify, sir, the [ double service ] is part -- some of the activities we engage the people on contract basis inside the factory to complete it. And if you observe that, my employee cost for the quarter is very low. And partially part of the work because of the non-available cap labor on time, we could -- we have engaged some people on contract, and that's why you see the job over charges slightly more in Q4.

Okay. So just a temporary shift going to lack of labor availability?

Correct. Correct.

Okay. Fine. And last one accounting question about this tax, how much tax loss of carryforward loss that we have and which can be set off. So I mean just to ...

Around INR 64 crores this quarter is the carryforward loss, what we have in this financial year.

Sorry, what figure you said?

INR 64 crores, INR 64 crores.

Next question is from the line of Chirag Lodaya from Valuequest.

Sir, my first question was on the ROSCTL, which is now discontinued. So what was the benefit earlier? And what -- how much you have accounted in this quarter?

So we -- ROSCTL until December 31, we used to get about 3.5%. I cannot pin it to a certain value because it depends on product type. So there is a range depending on what product we produce and export at we ship it. But on an average, you could assume at about 3.5% or net amounts. The RODTEP rates, the country is -- the government has announced that starting January 1, 2021, it will be moving to what is called RODTEP of duties and taxes is a similar one, which is the recent of embedded taxes. We do not know the rates because it has not been announced yet, and there has been a committee which has worked on it and given it to the government, but we are not to be to but the -- what we did was to take a conservative approach and recognize only RODTEP to the extent of -- to the extent of lower end of the range, which the industry is expecting. So we have recognized it at about 2% or thereabouts. And we are hoping that when we actually get the RODTEP number, we will make appropriate corrections going forward that we have been conservative with the RODTEP estimation.

Very clear, sir. My second question was on margins. So you said that current high prices of yarn, et cetera, will not impact us in near-term because we hedge it back to that, and we are able to manage our raw material inflation very well. So is that understanding correct? And if you can just help us understand, say, in the next 1 or 2 years, what can be a sustainable margin from a company point of view?

So from a company point of view, my belief is that we should be looking at a couple of percentage points improvement in EBITDA margin, which will come from a combination of doing higher-value products, managing operations even more efficiently and further growth. Sheer growth itself will give some operating leverage. So all of these will help us gain some additional EBITDA margin.

Okay. And there will be no impact on margins in near-term because all the orders are already hedged. Is that understanding correct?

That is correct. Though, I would say, the current lockdown may have some impact, current lockdown, which is in Q1 because I -- while I do have orders in hand, chock-a-block for my factory. And I'm not producing. When it opens up, I may have to use what shall I say, overtime labor, I may have to get some job work done, et cetera. So all of this may increase my costs a bit and may have a temporary impact on my margin pertaining to the period of the lockdown. But then that's only a temporary blip. Once the lockdown is done and the backlog is cleared, we should not have a problem going forward. But yes, this lockdown and the time loss or the manufacturing capacity loss may certainly have an impact, onetime, which is only one time. And our endeavor will be to recover it as fast as possible and as quickly as possible once the operations are allowed to commence.

The next question is from the line of [ Bhavin Chada ] from Enam Asset Management.

This is [ Bhavin ] from Enam Holdings. A good set of overall numbers and a very good presentation. Sir, just a few questions to clarify on the capacity and all that. From the presentation, if I see your number, you have roughly done 19 million pieces. And I think your annual report had a capacity of roughly 30 million pieces. So you can do 50% growth from here despite that, we are doing INR 120 crores CapEx, which is almost doubling our block. So obviously, I think the buoyancy in the U.S. market is driving this. So can you explain us, that INR 120 crores CapEx will -- are you adding how much line and in terms of million pieces? What would be the capacity post the CapEx?

So just to clarify, when we talk of pieces, there is a bit of a understanding that we need to have. We are not one of those traditional, say, a T-shirt manufacturer, where a piece becomes a standardized piece or a commodity piece. And the difference between 2 pieces are very little in terms of time taken to manufacture, et cetera. So when you are manufacturing some -- when we are manufacturing something as varied as a tank top to complex jacket for the amount [indiscernible]. It's the other end of the spectrum. One garment could take 10 minutes to make, another garment could make 200 minutes to make. So to that extent, pieces are a bit of a misnomer. So piece versus value, both we have to see. And keep all these capacities in mind. So as we are producing more and more outerwear, in terms of capacity itself, we will come down from the 30 million because these garments are equivalent to 6 or 7 garments of a traditional 20, 25 minutes garment variety. So that's the caveat I want you to have, okay? So over a period of time, we have migrated to a higher-value products year-on-year. As far as the INR 120 crores CapEx is concerned, even the CapEx estimates -- based on the CapEx estimate, about 25 -- about INR 30-odd crores will go for upgrade CapEx to upgrade our quality and refresh our machinery. The balance will be for fresh CapEx, which will add capacity. The idea is also -- this is only an estimate. If my demand is strong, then I will go for a faster growth as well. So we are looking at capacity additions based on how fast we can bring up the capacity as well as how fast demand picks up, which I feel will pick up very strongly going forward.

Sure. If I can ask, sir, INR 120 crores CapEx, can give you what kind of revenue potential when you run that on a full basis? That is one question. And second, I understand, as you said that this outerwear is leading to the capacity reduction because it obviously utilizes much more time. But historically -- or your presentation, you have done 24 million, 25 million pieces. So is that number itself gone down because your outerwear share is now 44% versus 30% earlier? So on a comparable basis, you are actually flattish on volumes as compared to past.

Okay. So we used to make 24 million, 25 million pieces. This year, it has been lower primarily because of the pandemic-related loss of capacity. I think going forward, we will -- even though we are producing more and more outerwear, which are equivalent to more number of garments, but we control the [ number ] on garment. We will probably be back to that 25-odd million pieces this year or maybe even more depending on how the volumes go up because we are also adding capacity as we speak. As far as the thumb rule is concerned, which you said, and, Sathya, correct me if I'm going wrong somewhere. INR 1.4 crores, INR 1.5 crores CapEx investment will give about INR 6.5 crores, INR 7 crores of revenue. Is that a fair -- this is per annum, I'm saying. Sathya, am I correct?

Yes, yes. Yes, sir.

So you got the math, [ Bhavin ]?

Yes, yes. So you're saying INR 1 crore investment rate to INR 6 crores, INR 7...

INR 1.4 crores to INR 1.5 crores investment.

So roughly 2x...

INR 6.5 crores to INR 7, yes.

Roughly, it is INR 4 crores to INR 5 crores. That's fine. Second question...

Mr. [ Chada ]. Sorry to interrupt, sir, but for any follow-up, maybe request would you re-queue, please. The next question is from the line of Aditya Lalpuria from B&K Securities.

All my questions are being answered. So I really don't have [indiscernible].

The next question is from the line Riddhima Chandak from Roha Asset Managers.

Congratulations on a very good set of numbers. My question is on our CapEx. So this INR 120 crores CapEx will this totally funded from internal accruals? Or how much debt we could take?

Will [indiscernible] the extent of INR 50 crores.

Okay. Okay. And like you said that in terms of volume growth, so we can, as out of your revenue contribution will be much higher and it is a higher value product. So can -- can we assume that revenue would be around INR 1,500 odd crores, as you said, we can do 25-odd million pieces in FY '22?

We are talking for FY '22, you are saying?

Yes.

So we are obviously trying to do well in FY '22. And hopefully, we'll do very well. I really missed the revenue number you said, but I thought you said 1,500 crores, am I correct?

Yes.

We'll try to do better than that, but we'll see.

Okay. And in terms of EBITDA margin, sir, EBITDA margin, if you compare to our last seven, 8 quarters, it is highest if we see. So will these EBITDA margins sustain in FY '22 and going forward, that is 9%, 9.5%?

That's what I mentioned. That's what I mentioned that over a period of time, we will see EBITDA margin go up primarily because we are pivoting towards higher-value products. Second, operating leverage, that is incremental revenue. Will come at an incremental revenue if all the costs will not scale up in line. So all of these will certainly help us get a better EBITDA margin going forward?

Okay. So means of 1%, 2% incremental we can [indiscernible]...

We could be seeing those kind of improvements going forward.

Next question is from the line of Resham Jain from DSP Investment Managers.

And just a couple of questions. So first is we just mentioned INR 1,500 crores is the optimal kind of revenue from the current capacity plus the new one, which is coming up in Karnataka, is that right?

Can you repeat the question?

No. What I was saying is that the INR 1,500 crore revenue, which you mentioned, is the optimal revenue, which you can…

No. I did not mention any INR 1,500 crores. So she asked if we will do it, but we are looking at a good revenue growth. And we say based on demand in a revenue...

Sorry. Sorry, go ahead. Go ahead, sir.

No. So we will push the revenue as much as possible in this year. We are very confident of a strong revenue growth. The number which we just seems to be at the lower end of the spectrum is all I'm saying. We may do better. Yes, go ahead.

Yes. No. So what I was trying to understand is the optimal revenue, which you can do including the new Karnataka capacity, which is coming up, what is that you can do, assuming seasonality into the business, okay?

So you're saying what is the revenue that I can do based on the current capacity? That's what -- is that the question that you've asked?

Yes. Yes, including the new capacity coming up in Karnataka.

So with that, we will do in excess of that INR 1,500-odd crore revenue. So if the capacity also is flexible as we are adding more capacity, in the system. And if I leave the capacity at current levels, then that's the number which you are looking at. But I will also be adding capacity as we speak.

Okay. Got it, sir. My second question is on the number of factories which you have and in the past, we discussed that there are -- there can be few rejects within the cap within the factories which you operate, is that process still on? Or do you think that whatever has to happen in terms of optimization has already happened?

No. So there is some more of that happen. See, the capacity of a factory is dependent on 2 things. One, the space available in the factory to add more life. And two, labor availability in the captive area around the factory, right? So let's say, I have more space, and I can put lines, but if I don't have labor there is no point in going and putting the line. So what we're doing is we have -- we are building up more capacities in the existing factories as well as at the lower cost to build up to increase capacity. And we are also -- when we're running short of labor in the captive area around the factory, we are also now looking at options to put up geometries and bringing in facilities through a third party, of course, so that bringing in more labor force in that area to just break this labor availability conundrum and south of India sometimes can become labor challenged in certain pockets, and that's how we are working through. So all of this is helping us unlock some more capacity in our existing factories, too. How much would that be? It would be about in our existing factories, we could unlock to unlock to the extent of about 10-odd percent in all our existing factories put together. And then all of the new capacities will let you keep going.

The next question is from the line of Pratik Kothari from Unique PMS.

My question to the continuation of earlier comments you made regarding the issue, which we have with the Canada Bank FD. So that as a shareholder, I was not aware about the issue. If you can just highlight what the whole issue is about?

There's a legacy issue. In fact, when we offered the security, some of the properties in the earlier -- prior to 2015 we offered some of the properties as a collateral security for a term loan. When it got -- we have sold off those properties, but then replaced with as a cash collateral and the cash collateral continued. Today, we have around INR 1,147 crores. It's a fixed deposit we have as a cash collateral, which continued as a collateral for the working capital also. So our records with the Canada Bank is to reduce the [indiscernible] as and set up this fixed deposit is the request, which we have been placing with Canada Bank for quite some time. So there were challenges. And because it is a dilution of security, they are not in a position to take a call easily. So we are working with other banks to replace that limits whatever expansion by Canada Bank with the private bank. The work is in progress. We hope to really have a breakthrough in this financial year.

So anyway, for more color, I think you can have an offline conversation on this. I'm sure you'll have more questions on this explanation as well. So you can probably connect with Sathyamurthy offline to know more.

The next question is from the line of [ Anit Jobalia ] from Banyan Capital.

So my question is around the road cap rate, which you have currently booked at around 2%. And the range that we are looking at is in the 2% to 4% range. So our total incentives on exports in the past have been 5% to 6%. So we are looking at a shortfall of, say, 2% to 3% going forward. So how would you be able to recoup the shortfall from your customers in FY '22? If not, what would be a strategy to mitigate this margin headwinds?

So, yes, we I say 5-odd-percent, it also includes a duty drawback, which also comes to about 1.5%. That has not been abolished. So that is very much within the scope. So we will get that as well. So effectively, we are talking of 15-odd-percent delta in terms of margin reduction, if that happens, correct? Now we will naturally price that into our contracts going forward. And once the rates are very clear to us and gets announced, then we will start factoring that into the pricing as it becomes transparent to everyone. For the moment, the rates not being announced, is a challenge as there is no official word on what it is going to be. So we are waiting for appropriate announcements. But then we will start factoring into the extent possible. Rest of it, anyway, we will -- whatever our own efficiency improvement will also compensate for it. So as -- to a large extent, we in pushing back on the pricing.

Okay. So given this, sir, in the next year, we are expecting a very strong growth, assuming a normal scenario as it is today, based on your projections and your visibility, so with such a strong growth, like -- and you have been speaking about the operating leverage payout. So do you think the operating leverage can play out in the next year itself because of such a strong growth and that we are expecting? Or what is the time frame for this margin expansion that you have been thinking of 2%?

The time frame for margin expansion is 2 years, some, I [indiscernible]. And we will obviously try our best to bring it home as fast as can and all of us are on. Now what works against all this margin -- and I'm kind of also factoring in the new RODTEP in the sites after all of that. But then how fast, how soon we can all depends on how much I'm able to price it in and how fast they're able to price it in to what is the disruptions due to lockdowns, which at the moment we are currently facing, so there will be minor hiccups on the way. But I'm anticipating that by the fourth quarter of the current year, that is FY '22, we should be seeing a good chunk of it coming in.

Okay. And just one follow-up, small follow-up. So the margin expansion that we are clearly looking at as per your completion is around 2%, right? I mean that's the right, sir?

Over 2 years, yes.

The next question is from the line of [ Mani Single ], an individual investor.

Congratulations on a strong set of results. Hope all of you and on the company are keeping good. Just wanted to quickly understand from you from a 3, 4-year perspective, are we looking at any geographies in diversification from a market kind of point of view, given the continuing in the economy can go down there at some point in time in terms of the slowdown, et cetera? And secondly, which is about the payments [indiscernible] ...

Mr. [ Single ], sorry to interrupt. Your voice is breaking up a lot.

Am I audible?

Yes, sir.

So -- and this ECL that we have provided for, this is a onetime, and had it not been there. So if I have to compare apples-to-apples next year, this INR 4.5 crores should get added into the P&L, right?

Right. So answering the first question first. You talked about U.S. market and compensation risk are we looking at market expansion? In fact, we have pivoted more and more towards the U.S. in response to a better performing market there, and we have [ prevented ] out of Europe. So our exposure to Europe was much higher, and we've brought it down over a period of time. And we continue to do that as we speak because the U.S. market seems to be doing much better. U.S. is a more homogenous market investments, it's a larger market, whereas Europe, what sells in Germany is different from what sells in Italy and so on and so forth. So too many small-scale orders. And most importantly, we end up competing with Bangladesh when we go into Europe, which was -- Bangladesh was duty-free. So we have been doing more and more American business. Now do I see a compensation risk? No, because we have suitably diversified ourselves from -- suitably diversified ourselves across customers and across product class as well so whether it is fashion, industrials and all of those garments. So to that extent, is a reasonable diversification. As far as the market concentration is concerned, we are closely watching. We've also upped our Asia exposure. So we will -- we'll balance all of these between the 3 large geographies that is Asia, Europe and U.S. For the moment, we seem comfortable with our exposure levels to U.S. If there are any headwinds that we see then we may realign because a lot of our customers are global, and we can always realign. As that -- that's for this one. And then you had one more question, which was pertaining to the ECL. Yes, the ECL -- ECL will be an additional benefit going forward because I don't foresee us providing going forward.

Sure. And one last question, sorry. The return on incremental capital should be in excess of 25% to 30%?

I'm sorry, return on what incremental?

Incremental capital employed. So whatever we invest going forward. So return on that?

I will have to come back to it, how the ROCE or incremental -- you're saying incremental return on the incremental ROC or incremental capital, correct? Is that what you are saying?

Correct. Yes.

See, it works -- it doesn't work that cleanly. In the long run, yes, in the short term, no. And I'll tell you why. Because whenever you put up a new capacity, the new capacity takes time to ramp up. And when it is ramping up for the first year, there will be a ramp up cost, et cetera. The skills have to be aligned, we may not be able to go in for the highest quality product in those factories. So typically, a new factory will try to pull it down a bit. Having said that, we are also looking at low-cost locations where the cost structures are significantly lower. The labor cost is much lower, et cetera. and labor incentives also kick in. So there will be an offsetting component based on that as well. So it has to be seen in a net light. We can connect offline to discuss this.

The next question is from the line of Chirag from [indiscernible] Capital.

Sir, all my questions have been answered.

Next question is from the line of [indiscernible] from [indiscernible] Research.

Yes. So we have been seeing a substantial decrease in the employee cost last year. So this is due to the pandemic or there has been some automations done?

So both. One is, of course, pandemic, we managed to reduce our costs, which are all structurally done. And second, we've also gone for higher-value products and higher-margin products. So that also helps in bringing down labor cost as a proportion to the revenues.

Okay. And second question, sir, are we having any benefit from the recent policies announcement by government like PLI, [indiscernible]?

So PLI team, the details -- the PLI team really favors man-made garments, the scheme as the government shared in the first instance was not the best from an industry standpoint. The industry has gone back and represented for the government to alter it. We are awaiting more details before we can take full advantage of it.

We take the last question, a follow-up from the line of [ Bhavin Chada ] from Enam Holdings.

Sir, can you update as you made the comment, India was taking away market share from China, mainly in the U.S. market. Can you elaborate more on the overall market size, if any, of your product segments and how the market share has moved in last 2, 3 years, some kind of a structural change and some data points where it will be useful so that we can track it on a regular basis?

So I can probably have a separate conversation with you on some of these, as it requires a lot of elaboration in terms of detail, product-wise, trends, et cetera. And it will be difficult to just explain it away on the phone. But the key is that China is -- when you look at exports to the states, China has been showing a year-on-year decline. I think even last year, they had a 4% odd decline. And it's -- their loss has largely been taken by Vietnam and a few other places. And India has not gained as much, but only a little. But people like us, operators like us, we have been gaining considerably and gaining share in those markets. So it also depends not just on how the country as a whole does. But an operator individually may be able to take a good amount of share-based on their own capabilities. So there's a lot of those nuances in there.

Sure, sure. That's helpful. And we'll chat on this separately, sir.

Yes, please.

I would now like to hand the conference over to the management for closing comments.

Thank you. So I think I feel confident based on how the market is shaping up our end markets, I'm encouraged to see that most of the markets seem to be turning around the corner post-COVID. They -- all of those countries have had several waves of COVID, and they seem to be getting a firm grasp. If for whatever reason, the markets do get impacted, then there may be some headwinds, though I don't anticipate that at all. On the contrary, I anticipate a strong tailwind from a business standpoint as these countries are opening up. And particularly since our exposure to U.S. is high and as U.S. is opening up, more and more demand will come our way. So our focus of attention or focus will be largely on how do we ramp up our production to state to the demand. And that's where we have single-mindedly focusing on. We do have present challenge or a temporary challenge at the moment in the form of a lockdown in Karnataka, which has kept all our factory shut, which is a source of revenue for us as we are sitting on a huge order book. We are hoping that we will be able to get our factories operational at the earliest. The lockdown continues till the end of this current week. We are hoping to get us back on rails as soon as possible so that we can meet the requirements. To the extent that we have lost time in terms of productive capacity, there will be some minor hiccups in terms of financials in terms of our inability to ship goods accordingly. So it might get reflected in our Q1 financials, but that's completely temporary because as soon as we are operational, we will try to scramble up, make up for lost time and then continue growing as we are sitting on a huge amount of orders. I don't anticipate much from penalties on both kind of perspectives because we are aligning our customers well from that perspective. So we are handling the lockdown reasonably well. It's just the lost time we need to account for and manage as soon as the lockdowns are lifted. But I'm very hopeful and very confident of demand staying strong through the year and the years ahead. Thank you very much for listening into the conversation.

Ladies and gentlemen, on behalf of Gokaldas Exports, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.