Gokaldas Exports Limited (GOKEX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Gokaldas Exports 1Q FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Binay Sarda of Christensen IR. Thank you, and over to you, sir.

Thank you, Mohsin. 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 could cause future results, performance or achievement to differ significantly from what is expressed or implied by such forward-looking statements. Please note that we have mailed the results and the presentation, and the same are available on the company's website. 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 Mr. Sathyamurthy, CFO. We'll 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. Burgeoning order book, bereft factory, lockdown unleashed, deliciously unsavory, a quiet pandemic, a raising calm, a dark shining light, a serene storm, a working contradiction, a lovely miss, almost broken yet flawless. Good morning, everyone. Happy to have you at our earnings call for the eventful first quarter of FY '22. Welcome to a season of contradiction. We had a strong order book and a severe production constraint. The company had one of the best opportunities this quarter and yet announced a small loss of INR 2.6 crores on a total income of INR 243 crores and EBITDA of INR 20 crores. The second lockdown, particularly the one imposed in Karnataka between April 29 and July 4, 2021, was more brutal than the previous Q1. We displayed our real potential by successfully aligning our customers, stepping up our production within the constraints and working on creating additional capacities. We had to carry a huge inventory of raw material meant for the planned production, support a large manpower on standby to ramp-up production at short notice and effectively manage our cash flow well. We did everything to come out unscathed. However, I'm not here to talk about the lockdown in the past. I'm here to talk about where we are now and the prospects. Post easing of restrictions from July 5, 2021, we have stepped up production to peak levels and are working towards clearing the order backlog at the earliest and ramping up the business for continued growth. We are maintaining a robust order book for the next 6 months, which is at an all-time high. All our customers are seeing growth in their businesses. We -- with a consistent delivery track record and a strong product development capability, our customers see us as a partner vital to their future. Our largest market continues to be the U.S., where monthly apparel store sales continued to be more than pre-COVID level for 4 months in a row now. Year-to-date sales in 2021 is 75% higher than 2020 and 2% higher than 2019, augurs very well for us. Online sales of clothing and accessories is also continuing its momentum and growing strongly in 2021, with sales registering 50% growth over pre-COVID 2019 level. European Union apparel import data also indicates that 2021 is catching up with 2019 levels steadily. On the supply side, China has been losing share continuously over the years, and this has accelerated in recent times. COVID has been wreaking havoc in several producing countries like Vietnam, Cambodia and Bangladesh. India, with its large population, offers a route to diversification for large buyers to derisk supply chain disruptions. Government of India recently announced continuance of RoSCTL up to FY '24. This provides policy clarity to exporters over the next 3 years, helping the growth of the sector. PLI scheme supporting MMS-based exports could also provide additional support to growth. The government has resumed discussions on FTA with Europe. This could be an opportunity to support labor-intensive textile exports from the country. All of these point to a sustainable advantage for the textiles industry in India. Turning specifically to the company. We are in the process of clearing the backlog from Q1 and gearing up on fall holiday season orders and spring/summer seasons ahead. In order to meet these requirements, we have ramped up our manpower in existing units to the maximum possible levels. We have started precommercial runs in our new Tumkur unit and plan to ramp it up to full capacity by end September, early October. This will add about 4.25% to our existing capacity. We are completing the formalities for a new unit in Bhopal, where we intend starting construction work shortly. This will contribute to an incremental 6.5% capacity. We are also scouting for additional lease capacity to meet with business requirements. We intend exploring options in Bangladesh for growth as well. We are all also working on improving productivity levels in the factories, which will help realize another 4% of capacity. All these efforts will help unlock growth options for the company in the near future in line with market demand. We intend sustaining this growth over the next several years as we see strong growth for the industry and a particularly good opportunity for Gokaldas Exports with its manufacturing track record and diversified customer base and capabilities. The company plans to build upon our FY '21 performance and improve the margin, while delivering growth in FY '22. The company has built the operational talent and capability to capitalize the opportunities and stay focused on being a leading manufacturer that is sought after by top global apparel brands. We are clear on our goals and aware that it's not the obstacles on the path, but the availability of clear paths to lesser goals that we need to be vary of. 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 Mukesh (sic) [ Mulesh ] Savla from Shah & Savla LLP.

Am I audible?

Yes, you are.

Congratulations on at least a good set of numbers in a very challenging time and especially strict lockdown in Karnataka.

Thank you.

Sir, my first question is whatever production loss we suffered in Q1, do you think the entire loss of Q1 can be recouped in Q2 by way of several measures you explained just now?

So that is the intention. We will -- you should remember that a lost time is always difficult to recoup, but we are doing everything in our power by augmenting capacity, working overtime and improving our efficiency to make up for all the lost time. So our intention is to recoup as much as possible of the lost orders -- lost deliveries, which we have deferred to Q2 and make up for it in the next 2 quarters through our incremental efforts.

Okay, okay. So that's really encouraging. And sir, as our past scheme of RoSCTL has been resumed and you said that you have considered that even with respect to the past quarter. That means March '21 quarter also. So may we know what is the quantum of that incentive related to March '21 quarter?

So the March '21 incentive that we considered in Q1 was about INR 4 crores, a little over INR 4 crores.

A little over INR 4 crores. And currently, you have taken as per whatever percentage we were eligible for?

That is correct.

Perfect, perfect. And sir, anything else kind of onetime in the current result, maybe on the income side or maybe on the expenses side, apart from this RoSCTL?

INR 2 crore [ EC approach ].

No, nothing specific. Of course, we carried heavy inventory cost because we had stocked up for full production in Q1, considering where we were. And we also carried a large labor cost because the labor were available. And though we didn't have production, we had the cost to bear.

Okay, okay. That's helpful, sir. All the very best and hope to regain the loss -- production loss, and we come back to our growth trajectory.

Correct. If you look at my -- this Q1 versus the previous Q1, you would see that my labor cost has gone up by over INR 11-odd crores. So that incremental while we have still operated at similar capacity levels. That gives you an idea.

The next question is from the line of [ Gunjan Kabra ] from -- who is an individual investor.

Sir, what kind of scenario are we seeing in the industry after the COVID crisis in terms of like how a customer procurement strategy has changed for like if we apply to H&M? So how has their supply and sourcing strategy changed? Or -- and how do you -- do you think it's a permanent kind of a change? So what are the changes you are seeing now versus pre-COVID?

So this is an evolving situation. So you must be aware that currently Bangladesh is under a lockdown, and Vietnam is facing a raising pandemic. Even in parts of China, the COVID pandemic is raising. Cambodia is facing problems. So it's not just an India problem. It's a global phenomenon or largely a phenomenon in the entire producing pace of countries. So this is evolving. I believe that suppliers would like to diversify their sourcing from across multiple countries. And India being a very large country with regional variations in COVID-related impact and all of that would really augur well from such derisking moves by customers. And it is important for us as suppliers to also try to diversify our production base, particularly within the country, and then eventually globally as well, so that we align ourselves with customers' requirement for minimal disruption going forward.

Sir, but are we seeing any consolidation like the bigger suppliers or bigger, larger companies like us will gain more market share going forward after the COVID crisis? Are we seeing some kind of supply chain realignment on that side?

Absolutely. And I have maintained that in several conference calls before as well that we have been a beneficiary of supplier consolidation. If you look at FY '21, our export sales fell by about 8% to 9%, whereas the global demand fell by close to 25% or even higher. So effectively, we have gained share in a decreasing market by consolidating other suppliers. So when my customers demand fell drastically, my demand did not fall because I took away the share from other suppliers. And that's how Gokaldas has taken a step forward during the COVID year. And now going forward, when we are growing and when the market is growing, we are starting from a higher level and ramping up from where we are. That's why it's imperative on us to augment capacity to keep pace with growth, starting on a higher platform that we found -- that we got ourselves to at the end of FY '21.

Okay, okay. Sir, also, like a lot has been mentioned about the China Plus One strategy, and there's a ban from Chinese cotton, which is going on since a while now. So -- and we have -- we, as a country, have benefited also. So is this like a structural change you see in the industry going forward or maybe a transitory one? Like what's your take on it?

So some of these are structural because the fall of China shares has been going on for the last 5, 6 years. So it is not because of the ban of Xinjiang cotton which has actually led to it. All of these moves only exacerbate China's situation and presents an opportunity for others. The cost of labor in China is high. The trade war with China is real and is being continued by the Biden administration of the U.S. The specific ban on cotton from that particular province hurts China because that's a big cotton producing center for China and impacts cotton-based exports from China. So all of these are more long term in nature and would augur well for other countries like India, Bangladesh, Vietnam, Cambodia, and I think we are all seeing the benefits as well.

The next question is from the line of Bhavin Chheda from Enam Holdings.

Good performance despite challenging times and good to hear that the order book is strong. A few questions, sir. So I want to clarify, RoSCTL rates for all your product segment is around 3.5%, if I'm not mistaken?

That is correct. It's in that region.

Right. And Q4, you had provided 2%, so that INR 4 crores is incremental 1.5%, which was not provided, right?

That is correct.

Okay. Second question, sir, you mentioned about increase in labor so which is also indicating a strong order book. Can you quantify some numbers there?

What was your last question on labor? Can you repeat that?

Yes, yes. Sir, in your opening remarks, you mentioned that you have added further labor to your existing workforce. So if you can quantify the number there. How many people you have added?

So currently, we are at about 24,000-odd numbers. We have added about 2,000-plus people in the last -- in the month of June.

Okay. And this addition has happened because of the Tumkur unit or the existing plants you are adding people?

No, existing plants were adding people between -- I'm sorry, in the month of July, what I meant was month of July. So the existing plants have been adding people. We -- see, post-COVID, post onset of COVID last March, we saw a lot of labor force going away and not willing to come back fearing the pandemic. And we did not fully recover to pre-COVID levels. It's only in July that this year onwards that we have started really picking up post the second wave of COVID that we have started getting a lot more people in every factory, and we have added fairly substantially in all the units. We've also, as I mentioned, started a new unit in Tumkur. So there also, we have begun adding people. And this trend will continue as we are under pressure to deliver the backlog from Q1. So we are working hard to augment people in all our factories wherever there is capacity growth possible.

Sure. And sir, there was no cancellation of orders. Just because of the lockdown-related issues, the clients have understood that and just postponed the dispatches, right? Or you lost a few orders also?

So no, we have not. But wherever possible and a very large proportion of that was possible, we deferred those orders to largely Q2 so that we could manage whatever capacity we had in Q1 to deliver those which were unmovable. Having said that, we had a fairly full Q2 as well. We had to realign some of the Q2 orders as we could not accommodate all the spillover orders from Q1 to Q2. And we did not want a situation where we default in Q2 because our customers will not give a relaxation on delivery dates for Q2 orders. So we had to pass up some small quantities of orders in Q2 in order to accommodate a huge spillover coming from Q1, so that we could realign everything.

Sure. And sir my last 2 questions are the industry related. The -- a lot of news these days are coming from Europe, and they are trying to impose some sanction or because of the blasphemy law on Pakistan and all that. So have some client-specific inquiries started to substitute or replace or add Indian supplier, if there are disruptions on Pakistan supply to Europe is first question? Second question, in your slide, basically, you have given that China is continuously losing market share, but in the same slide we see Bangladesh gaining most of them. So if you can give some instances where U.S. or European clients have added Gokaldas or India as an alternative client to China losing market share? Because it may be the case that the market has gone up and your same client has given your new business. So can you give some trends here where you have 1 new clients or some clients have substituted the Chinese supplier or a Pakistani supplier to Gokaldas?

So coming -- you've asked 2 -- I mean, 2 questions, 1 related to Pakistan and 1 related to China. So the Pakistan move is a very recent one, and European Parliament has proposed it. So it will take a while before it takes effect. Pakistan is not a very large exporter, but nevertheless is a cotton-based exporter. And those opportunities will come India way because we have the ability and the opportunity to deliver some of those. The bigger opportunity always is from China, and Gokaldas, in particular, has been a recipient of orders, which were either to being produced out of China. So we have got several orders which were China-centric orders to ourselves. And we continue to see that trend. We've also added quite a few new customers in the recent past, and those customers have also been pushing more orders towards us. I mean some of the recent customers that we added, recent as in the last 1 or 2 years, were like Marks & Spencer, BESTSELLER, T.J. Maxx, Walmart, et cetera. And some of those are also pushing orders towards us. We are also in advanced discussions with certain customers. And only because of pandemic, there has been a marginal delay, but we are in a fairly advanced stage where we may start production soon with a new customer of a sizable volume. So all of these are trends emerging from a decline in China, the trade war with China, et cetera and an opportunity to produce elsewhere. Now whether India grows or Bangladesh grows, it really doesn't matter. Specific companies within the country will always opportunistically take advantage of the situation and grow. So while India has grown in the last few years by 1% or 2% in terms of market share, I think Gokaldas will see a much higher opportunity coming out of this. As we have been able to consolidate several other suppliers, we are viewed as a supplier of choice by many of our customers, and we are in an advantageous position to take benefit of this.

Next question is from the line of Prerna Jhunjhunwala from Batlivala & Karani Securities.

Am I audible?

Yes, you are audible. Please go ahead.

Congratulations, sir, on a good set of numbers. Sir, wanted to understand your revenue mix with respect to difference between cotton and man-made based garments? What would be the revenue share between the 2?

Sure. So our man-made fiber-based garment will be between 35% and 40%.

Okay. And sir -- and I wanted to understand that you added 2,000 people in the month of July, but is it that we had certain capacities? Or will it add more capacity to existing plant?

No. So we kept losing some capacity as well because of lack of people, which we got back in the post-second lockdown. And now we are also trying to see if we can augment some capacities in our existing factories by adding certain lines or building additional sheds, so as to maximize utilization in our existing units. So that's an ongoing activity, which we are trying to maximize that the -- to the highest level possible while incremental growth will all come from new units that we are planning.

Okay. Sir, can -- it will be very helpful if you could help us understand what will be the peak revenues from the new units and from existing units. So it helps us understand the potential that can be reaped in the next medium-term horizon.

So we just commissioned -- I mean we just started pre-commercial trials in our Tumkur unit, and the peak revenue of that unit would be about INR 80 crores, the annual revenue. We intend starting work in Bhopal very shortly. This is the construction work of our factory, which hopefully will get ready by Q4. And the peak revenue there, we -- I had mentioned that we will be about 6.5% capacity, but the peak revenue there would be about INR 150 crores from that unit. So these are 2 ones. We are also scouting for additional facilities. And as and when we get those and we get an understanding of the scaling, we will bring those online as well. So it will be in that about INR 80 crores to INR 150 crores range depending on the capacities that we get.

Okay. And these capacities are also further scalable the way you are doing in your existing capacity, like adding new...

That is correct. And both of these, particularly the Bhopal one, we can -- we will do a Phase 2, which is of a similar capacity. In Tumkur also, once we complete ramp-up, we may consider additional capacities there.

There is additional land available in the existing unit?

That is correct. That is correct.

Okay. And sir, you also mentioned about expanding beyond India and mentioned Bangladesh. Could you help us understand whether Bangladesh is a very much investable geography and is cost structure-wise their market share anyway is higher for U.S. and Europe? So do you think it is a much more cost competitive region as compared to India and would help us better our financial performance or order book size as Bangladesh is being viewed as one of the promising nations for incremental garment orders?

So it is. And for the last several years, that region has grown. It has got a very thriving apparel ecosystem with talent pool, middle management, technical skills and customer base located there. So it is an opportunity spot -- sweet spot for anybody in the apparel industry. We are exploring options at the moment. We are far from concluding anything at this point in time, but we are actively exploring options there, and we'll update as and when some of these fructify.

Okay. And sir last question.

Ms. Prerna Jhunjhunwala, sorry to interrupt. May we please request you to return to the queue for your follow-up question as we have several participants waiting in the queue.

I just had last question, if I can take that?

All right. Go ahead.

Sir, with respect to pass-on on RM cost, now that the raw material cost has been increasing for -- across commodities, so is it -- is the pass on of raw material cost happening with the customers? Or how are the dealings happening?

Yes, yes, it is. Yes, it is.

Next question is from the line of Sunil Kothari from Unique Investments.

Sir, congratulations to you and your team. Since you joined, you're fighting each and every challenges and trouble, which originally was because of old management and now this is because of COVID. So really a great job you're doing.

Thank you.

Sir, my question is with this RoCL (sic) [ RoSCTL ] reinstallation and ramping up of capacity, your -- I think revenue possibilities quarterly is more than I think INR 350 crores. So always you in past, you guided around INR 1,300 crore, INR 1,400 crore revenue possibility and peak revenue target and double-digit EBITDA margin. So with this incentive with now good order book and with all these reinstallation now of factories and manpower, can we achieve annual run rate of around INR 1,500 crores with 10%, 11% of EBITDA margin?

So while I don't want to give specific numbers, what you indicated is definitely in the doable realm.

Okay, Okay. So with this incentive that becomes a little easier? Or it can -- we can talk to maybe higher margin also?

So see margin improvement is an ongoing target. And year-on-year, we will be improving our margins. So currently, we are working on a margin improvement in FY '22 or FY '21. And that is something which we are committed to and we are working on and we will do it. This is despite the fact that new capacities, which are coming on board, may serve to depress some of the margins to the extent that the new capacity has come as they will be underproductive for the first 6 months -- 6 to 9 months as they ramp up and as they achieve their peak productivity levels. So despite all that, I think at an overall basis, we will still be ahead in terms of our margin, and we will do better than the previous year. So that is something which we are committed to and we will deliver. As far as revenue growth is concerned, since we are bringing all these capacities on board and you have a good inkling of the percentages that we are talking about, the incremental capacities will definitely lead to an incremental revenue. We are not challenged from an order standpoint. We're challenged from a capacity standpoint, and we are doing everything in our power to augment capacity so that we are able to deliver higher revenue. So we are confident that we will deliver those higher revenues that we are talking about. I'm more bullish than I was earlier on revenue growth.

And sir, this strategy of a little scattered facilities, one is Bhopal Tumkur, we have very much in Bangalore. So how difficult it is to manage this scattered in a different state also? Can you just provide your logic and just understanding that why we are following this type of system?

So we need to diversify our production base in order to derisk ourselves. We need to also seek lower cost locations as we keep expanding, so that the incremental revenue comes at an incrementally higher margin and are sustainable well into the future. I do not want to put a lot of CapEx in high-cost locations. So some of these new locations are -- have been selected in such a way that they will come -- eventually when it reaches full capacity, they will come at a much higher margins for us as their cost structures are lower. Secondly, we have evolved our manufacturing capability, which will allow us to remote manage a factory very effectively from wherever we are. We have dedicated the factory management and we have improved our systems and processes to such a level that each factory can self-manage and address the customers' requirements and work at peak productivity levels. So we're confident that we don't need all those factories within our vicinity and within a certain distance from Bangalore in order to manage them. We have evolved to a level where today, regardless of where the factory is, I'm confident that I can run it very effectively.

Great. Really good. And sir, my last question is to Mr. Sathya. Sir, what will be the possibility of paying tax during the year? And second is on the way we are reducing debt, our interest burden should be hopefully lowering from this INR 10 crore per quarter. So if you can guide on tax and interest costs.

So our carryforward -- income tax carryforward loss, we have almost close to INR 64 crores. So for the financial year FY '22, we do not anticipate any tax outgo at this point of time. So for the next year -- we may get into the tax bracket in the next year. Coming back to the interest cost, the interest cost, it has 2 components. One is the regular interest, other one is the Ind AS interest -- the reclassification. So we have INR 7 crores is the interest, which is normal interest and INR 3 crores is on account of Ind AS. So given the current utilization and the increased volume, we anticipate we will be able to operate slightly around this level and slightly a little more over this level because of the increased volume for this current year.

Next question is from the line of Keval Ashar from DSP Investment Managers.

Congratulations, sir, for this good performance in FY '21, even due to some uncertainties. Sir, I had a few questions. First is regarding we've seen volatility in our business over the past few years and now we are foreseeing sustainable growth over the next few years. So sir, what has changed on the ground for us, if you can throw some insight?

So the change is clearly consistency in operations of the company and consistent delivery to our customers have proven to our customers that we are a very dependable supplier to them. So come any challenge, come any difficulty, we have been meeting our targets. Even through humungous COVID disruption through last year, our on-time in full was close to 99%. And prior to that, we had reached almost 99.7%. So this is a stellar track record from a customer's perspective. Most of our customers have, over the years, upped their quality standards. Today, for many customers, we are delivering at AQL 1, where they -- our standards were AQL 5, moving to AQL 2.5 then to AQL 1. So we have taken all of these changes in our stride, upped our quality standards significantly, upped our delivery standards and reliability to such high levels that automatically customers are coming to us. Today, I'm not going and marketing much to our customers. Our delivery speaks for itself. So this is one point. Our customer diversification strategy has also helped because today, we have a very large number of big customers whom we are focused on and the opportunity landscape there is very, very large. So we can grow with each one of them to levels where we won't have capacities to deal with them. Third, we've also done a lot of product development, enhanced our capabilities. So if you can see how we have over the years, over the last 2, 3 years, ramped up our outerwear capacity leveraging the incremental capacity that we have in Q1 and Q2, brought in those kind of technical skill sets and ability to produce new complex products has also helped in product diversification, thereby bringing ability to participate in a larger opportunity pool. So all of this has helped us to effectively take on better opportunities, better margin products and execute well to the satisfaction of our customers. So that's what has changed. That's what has brought in reliability. COVID-related disruptions, in my opinion, are all short term, and we will tide over that, pass over that. What's real is some of these core capabilities that the company has. In addition to that, some tailwinds, which come towards India and come towards specific operators in India, are always helping us in accelerating forward. Hope I answered your question.

Yes, yes, yes . Great to know that. Sir, the next thing I wanted to know is, if you can throw some light on the opportunities that we are exploring in Bangladesh.

See, it's early stage now. So we will let you know as and when we get to that. We are always open to looking at options wherever we can expand capacity quickly and expand capacity at a relatively lower cost. So from that perspective, this opportunity becomes important. We are evaluating. If and when we close that, we will update you. But that's -- I wanted to let you know that that's on the agenda.

Next question is from the line of V.P. Rajesh from Banyan Capital.

Congratulations on coming out stronger through the COVID times.