Gokaldas Exports Limited (GOKEX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Gokaldas Exports Limited Q3 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. [ Vinesh ] [indiscernible] from [indiscernible] Advisory. Thank you, and over to you, Mr. [indiscernible] .

Thank you, [ Nirav ]. 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 risks that could cause future, results performance or achievements 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 CEO; and Mr. Sathyamurthy, Chief Financial Officer. We'll start the call with a brief overview of the quarter 1 past and then conduct a Q&A session. With that said, I now hand over the call to Mr. Siva. Over to you, sir.

Thank you, [ Vinesh ]. Good morning, everyone. Happy to have you at our earnings call for the third quarter of fiscal '22. Our company, Gokaldas Exports, is one of India's largest apparel makers exporting to over 50 countries. We employ 32,000 people, of whom 25,000 are [indiscernible]. This is a sector that employs over a crore of people, has the potential to industrialize small towns, creates more jobs per unit investment as compared to any other industry, and has a high share of revenue disbursed as wages. In short, a highly desirable industry for social upliftment. The company recorded one of the best quarters ever, posting a revenue of INR 524 crores, a growth of 95.5% over the previous year. Our export revenue growth was 118%, indicating a strong focus on that segment. We delivered an EBITDA of about INR 63 crores, a year-on-year growth of 161%, and PAT of about INR 30 crores, 5x that of the previous year. This performance seems magnified by a weak Q3 of FY '21, which was impacted by a poor demand for spring '21 goods as buyers were carrying excess inventory from previous season. The real growth comparison should be this Q2. Our revenue grew by a healthy 17.5% sequentially. Raw material costs grew in tandem. On the labor front, costs associated with trading and lower productivity of newly recruited people were offset by improved overall productivity of the larger base of the workforce. We augmented the deficit of locally available workforce through the relocation of people from other parts and settling them in third-party run dormitories. Other expenses increased over Q2 level due to additional cost of setting up dormitories, higher job work charges due to higher flow of orders and additional logistics costs. New factories also contributed to increase in other expenses. Our EBITDA margin was more or less maintained at Q2 level despite continuing ramp. While sequential PBT grew by 35% with lower financing costs, the PAT growth was moderate on account of tax impact of INR 8.5 crores for the 9-month period ending December 2021. Our usual business working capital cycle is 75 days. It grew to 83 days in Q3, mainly on account of higher raw material inventory holdings and rise in government receivables. The higher inventory was on account of supply chain disruptions, the advanced raw material purchase. The net working capital at the end of Q3 stood at INR 365 crores. While incremental growth will lead incremental working capital. Our focus will be to bring back the working capital cycle to 75 days, optimizing funds. In October, we had a successful capital injection of INR 300 crores through QIP. We repaid longer tenure loans, carrying a higher rate of interest, brought down working capital loan and held the rest in various liquid debt instruments to deploy in line with fundraise objectives. Though we carried a gross debt of INR 177 crores, net of cash and cash equivalents, we held a surplus of INR 71 crores. During the last 2 years, we not only survived the COVID-led disruption, but thrived on it. We sought new opportunities, invested in productivity improvement, expanded capacity and grabbed market share, consolidating our place in the global supply chain. These results are a testimony to our agile business strategy. Our capacity addition is happening at a good pace. We anticipate to commence commercial operations at our new unit in Tamil Nadu soon, while our Madhya Pradesh unit is under construction. We also incorporated a new wholly owned subsidiary to enter knits business. We plan to set up a fabric processing unit in FY '23 for a capital investment of about INR 100 crores. The company is planning a wholly owned subsidiary in Dubai to lead international expansion. This is work in progress. We will update when the plans materialize. Our senior leadership team, led by Poorana, handling sales, marketing and all business operations; Sathyamurthy managing finance, commercial and logistics; Moideen, managing all aspects of human resources, keeping our 32,000 strong team, highly engaged and helping with their growth; Tushar, streamlining business processes, managing MIS, ensuring that organizations across all stakeholders are in a data-rich environment; and Prabhat, leading corporate development, interfacing and coordinating with the industry and all regulatory agencies for current business and new projects, are wisely supporting the ongoing progress of the company. We have a strong team handling various aspects of the business to ensure sustainable growth. We continue to focus on a safe work environment for all our employees, and I applaud the tireless efforts of our team to maintain a culture of health and safety above all. Our order book continues to be strong for the fourth quarter of FY '22. Our major customers are growing with us. U.S. monthly apparel store sales have been on the rise for 9 months in a row, consistently crossing 3 pre-COVID. YTD November sales in 2021 are 49% higher than 2020 and 3.2% higher than 2019 levels. U.S. e-commerce sales has grown significantly, 40% higher than YTD 2019, indicating a growing shift in consumer trends. The U.S. continues to be the largest market for the company. The new COVID variant is testing us. We continue to be hampered by supply chain issues with shipping logistics yet to be normalized. We are seeing incrementally higher absenteeism among workforce, impacting production in the short term. This is more of a mid-January phenomenon, and we hope will subside soon, at least by early February. We hope that this current wave would ebb soon, allowing us to resume full production level at the earliest. Raw material prices have gone up substantially recently. Global brands have attempted to increase the retail price of apparel to offset these trends. Government of India continues to support the industry. FTA with U.K. is under discussion. When it comes through, it could provide additional impetus to demand. With the pandemic slowly becoming endemic, the outlook for the industry beyond FY '22 looks promising. To conclude, here's the words that describes us. We are on a road less traveled with every turn, offering a choice unrivaled. For when opportunity knocks, we must be there to walk the talk. Only the brave set out to conquer setting off into the white blue yonder, with the determination of a master seeking out fresh green pasture. Courage comes from the knowledge that we are, after all, privileged. So we can build, build and build a formidable business further afield, traveling around the world [ clocking ] [indiscernible], clothing people, building lives. Growth is at once daunting and truly liberating. I wish you all a happy new year, and thank you for listening. I would be happy to address any questions that you may have.

[Operator Instructions] The first question is from the line of Mulesh Savla from Shan & Savla.

Heartiest congratulations on excellent results.

Thank you.

Sir my only question is on expansion on fabric processing unit. So can you throw a little more light on how is going -- how that unit is going to help us increasing our margins and further backward integration also on card or not, whether are we planning to even go for yarn manufacturing then fabrics and then processing? What kind of integration are we planning in time to come? And there are some news in the newspaper today that government is coming up with some additional scheme, apart from PLI for all those integrated units of textile manufacturing. So can you elaborate on that, whether any -- can we take benefit of any of those new provisions or new announcements?

So to answer your question, the fabric processing unit is in line with our intention of getting to the knits business. Currently, 97% to 98% of what we produce are woven garments, and the customers that we sell to, sell both woven and mix products in their market, in their stores. We do have an opportunity to get into knits as a means to diversify our offering to our customers. And with the existing customers itself, we can leverage to get additional growth. So with that in mind, we thought that mix could be a good, natural move for the company. Moreover, knit as a segment globally, it's 50% of the global apparel trade in value terms, and it is growing a bit faster than woven. We are in the general casualization trend, general athleisure trends in the industry. So given that, we -- having -- we chose knits. And to be a competitive player in knits, you need to not just have a garmenting business, which we are in, but also be able to have control over knits fabrics, especially fabric processing, because that is where most of the value addition happens. Our intention to set up a knits fabric processing unit is to exclusively cater to our own garment production. So we will intentionally convert everything into garments and sell it to our customers. This unit we are planning to set up in FY '23, most likely -- we have identified a place in Tamil Nadu and we will be putting this up. We'll take FY '23 to bring up this unit and will most likely contribute production from FY '24 onwards. It will help us start our growth in the knits segment, so that's the purpose. Whether we will get into yarn production and other areas, time will tell. We will -- we are constantly working on various developments. But at this moment, our intentions are restricted to getting into the knits space for which we believe fabric processing is required. As far as the government policies are concerned, there are several policies. One of them is PLI. We are evaluating application for PLI, which is due by end of this month, and we are working on it. That is for man-made fiber-based business. So there are those incentives. Government has also announced setting up textile parks, giving incentives for textile machinery manufacturers. Some of them may not be of interest to us. Anything which is in the government space or in the space that we are currently operating is what makes more sense for us. So we will focus on what we think we can do.

Right. Right. So about how much this fabric processing unit can add to our EBITDA margin?

See, this -- we may not be selling fabrics as such. So it can be -- I can look at it from a segmental P&L. I would say it will be about 18% or thereabouts. We will be converting them into garment and selling it eventually.

So that's what we will be capturing the value chain from processing fabric to making ready-made garment and selling it?

That is correct.

[Operator Instructions] The next question is from the line of Bhavan Chheda from Enam Holdings.

Congratulations to the entire team for excellent number and successful QIP, reducing debt substantially. So a few questions. If you can quantify the value of the order book which is there, one; and the other on the -- any guidance on margins? Our margins have remained strong in the quarter and 9 months, but the raw material prices have been on an increasing trend. So what can be the long-term margin trend?

Okay. Thank you, Bhavin. See, our order book is strong. We have order book, which can take us well into the next 2 quarters, so we have booked in advance. And at the moment, all our factories are running at full capacity. So there is abundance of orders for us to keep working on them. As far as the margin guidance goes, you have seen us perform at about 12% EBITDA margin [indiscernible]. [Technical Difficulty] Okay. So as far as margin is concerned, our aim is to continue to improve our margins further going forward. We will directionally target to improve it by another 1% to 2% over the next 2 years. We are working on it. The -- while the ramp-up goes on, there will be pressures on margins as new people will keep coming onboard, new factories will keep coming onboard, and they may have a tendency to -- in the short term, to bring down the margins, which we will have to offset by bringing up their productivity to normal levels of other factories. Raw material prices do put a pressure on the margins. Effectively, we have pushed back all of those raw material cost increases back to the customers. We are trying our best to keep it that way. It's always a negotiation that happens between us and the buyers. But so far, we have been able to do it. We hope to keep pushing it. However, sustained increase in raw materials may have a negative impact overall -- in the overall growth because the government prices grow, et cetera, et cetera. But the good news is that many of the retail brands have started increasing the prices of the garments as well. So this is a trend which has started in the Western market. So that's also encouraging. And we hope that the raw material prices will also cool down sometime in the future. So if you look at cotton prices, while they are up about, Y-o-Y, up by about 45%, its average price are up only 10% to 15% and talking of cotton and cotton blend fabrics. Now this is also high. We hope that once the cotton price moves down a bit eventually, the pressure may come down. But in the meanwhile, we will be pushing it all back on our customers.

Good to hear that. And last one on the CapEx. You had given a slide of INR 340 crores of CapEx spread from '22 to '25, so -- which includes INR 110 in '22 and INR 115 in '23. So you are in line with that numbers? Or that numbers have changed?

Yes, sir. I'm in line with that number. Already for the 9 months, we have spent about 52 crores.

52?

The balance which we spent in the -- 52 crores for the first 9 months. Another 55 plus crores is being spent in the fourth quarter. So the spend is all that we see. So we are in line with the CapEx spend for this year and for the years ahead.

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

Congrats with a great state of numbers. A couple of things on the demand side. Is this demand coming from expanding our number of customers over this period? Or this is on ground demand, retail demand, which is growing? And are we seeing any moderation given the last year [ pace ] and over the past 2 years, we have the retail demand has been kind of pushed back and now the pent-up demand is coming back, which is helping us to grow faster? Are we seeing any moderation in recent times and which can kind of detail our growth aspiration?

So the good news is that the demand -- if you look at the end retail demand, it has grown sharply in calendar '21 in the U.S. in comparison to even 2019, which is pre-COVID levels, which is what I alluded to in my opening talks. Europe, which is another large market, they are still trading in 2019 levels. So the good news is that the whole world is not coming out of COVID together. Different markets are at different stages of evolution, with U.S. market really leading the way in terms of demand growth, which is good because in the future, we will be able to -- when the other markets come up to be productive, we will be able to leverage those market demands as well. So I don't foresee any demand drop per se because some certain key markets are yet to demonstrate growth. That's point number one. Second, we -- at the end of the day, India is a small player in the global apparel trade, and Gokaldas, as a company, we have a small share in we whole global trade. So if we continue to do well and if we continue to perform to our customer base, I don't foresee a demand problem to be that much of a critical issue for us as long as we are delivering good results to our customers. We have enough customer diversification to help us get additional business, regardless of the rate of industry growth.

Right. And then knits part. Obviously, the customers do sell knits and that is giving us a cross-selling opportunity there. But in terms of our USP was more towards cash and apparel and knits being a more bulky voluminous business, how are we kind of in the learning curve in terms of migrating to handling that business as well? It's a little different than the fashion apparel woven part, right?

That is correct. It is a little different, but it's not very different. It's an adjacent business, and we understand that business as well. So see, we are already in [ the affiliation ]. So to that extent, we handle knits, but it's a different kind of knits. And knits casual is something which we can handle. This was a choice to allow us to grow faster and allow us to have an additional sphere of growth. So apart from normal growth in wovens, we can start an additional growth opportunity in knits. And this way, we will also have an opportunity to swing from one to another in the event there is any particular pandemic or any other external shocks which will push demand in 1 segment or the other. So we do have some degree of diversification in our portfolio.

Okay so -- but the knits as a business has a low asset as compared to woven, because selling prices are kind of higher in woven versus lower in knits. But the investment required in knits is larger related to woven, but margins are again offsetting each other. So are we saying that written profile will be familiar or better if we move to knits?

From a return on capital invested, I would be more or less at the same space.

Okay, got it, got it, but the CapEx requirement will be higher in knits right as related to woven, given the backward integration? Yes, okay.

Given the backward integration, that is right.

The next question is from the line of Venkat Samala from Tata Asset Management.

Congratulations on putting up a good set of numbers. Sir, my first question is with respect to knits, you partly spoke about it that you'll be adding the fabric processing capability to sort of provide you that competitive edge when you're entering into knits segments. So just as a follow-up on that, I also wanted to understand what will be the CapEx which will be required for buying the additional sewing machinery. And if at all, you've identified any location to put up this facility? And what could be the revenue and the margins that we can expect? [Technical Difficulty]

So we have identified garment unit, and they're all in the plan. So the downstream units will be set up. We will be investing another 100-odd crores, 75 to 100 crores in the downstream units, but that will happen over 3 to 4 years. Some of our existing [ knits ] also, partially if we can convert into some knits production, we may try to do that. We will play it as it comes. We do have 1 full year for the knits fabric unit to come up. So that it will give us enough time to engineer our downstream capacity planning.

And just as a follow-up. So we would expect this to get commissioned largely in FY '24? Is that the right way to look at it?

That is correct. It will take a year for this to come up.

Okay, okay, okay. And we would expect margins of around 18% from this category alone? I mean knits, start to end?

So if I look at it from a segmental perspective, yes. But that is from the knit fabric unit. So that is a return on sales perspective, right? But we will not be selling the fabric. We will be converting it ourselves. So like you have to keep that in mind. It may not only reflect in on the P&L in that sense yet.

Right. So sir, the end-to-end margins, I was just trying to understand, from the fabric processing rights to the RMG that you'll manufacture and sell, right?

Yes. Again, back to about 14%, 15%, 15% to 16% of EBITDA margin for the knits business overall. Higher than the current levels for sure.

And my last question would be, sir, about this incorporation of a wholly-owned subsidiary in Dubai. If you could highlight -- I mean what is the thought process? And what should we expect from this?

So this is a unit which will in turn invest in our international manufacturing unit. We are looking at options at the moment. You see, we will let you all know as and when we [indiscernible]. We're actively working on an international manufacturing unit as we speak. Once that happens, we will let you know. But that will be the holding company for this process.

So that will be the vehicle that will invest into, say, some time back, you said you are actively looking at Bangladesh. So some of the investments, if that happens? Okay, understood.

The next question is from Bharat from ICICIdirect.

Congrats on a good set of numbers, sir. Just wanted to understand the current capacity and the peak potential annual revenue that we could have. Like we're looking at current capacity, we were like close to that INR 1,500 crore annual revenue mark. But now we have clocked around INR 525 crores in Q3. So is it because of higher realization? Have we outsourced? Or has this quarterly run rate above INR 500 crores is a organic one and we'll be able to sustain from here on?

So this -- the number that we have delivered is definitely sustainable because we have delivered it all organically. We have expanded new knits capacity wherever possible. We've undertaken all projects work that can yield additional capacity in all our existing factories. So wherever there is a potential to build some shed in the campus and add additional lines, we have done that and utilized it to the hilt. So there is a plethora of activities which has gone on, which has helped us deliver this revenue. And organically, it has -- it is possible to sustain this. [ Definitely ].

So probably now the annual peak potential would be around INR 1,800 to INR 2,000 crores. Would that be correct understanding, sir?

You could say that.

Okay. And sir, one question I had on the CapEx as well, like we had announced this INR 340 crores CapEx. Now this fabric processing is included in that? Or it is excluding that?

It is included in that.

Included in that. Okay. And this knitting normally has an average realization which is much lower. So the thought process behind this like probably we'll have a better EBITDA. That's why we are getting into it? Or anything else over there?

No, no, no. I'm most interested in return on investments and return on capital employed. I mean return -- I mean EBITDA margin is just the return on sales number. That just means one metric in that sense. The whole idea behind this is diversification of our offering to our customers. So today, if I'm catering to only half of my customers' requirements, while the other half is completely open, I'm losing an opportunity. Incremental growth can be obtained by just talking to my existing customers. I don't -- if I have to, let us say, generate an additional growth, I will have to bring on new customers, bring on -- develop new products or expand my existing business with global business with like existing customers. By doing all of this, I have an opportunity to open up the other 50% which I have completely ignored by getting into knits and starting to drive some additional growth. So it is only coming from that perspective, synergize my relationship with the customer and start cross-selling to them.

So better mining the existing customer base is the key thing over there?

Correct.

The next question is from the line of Pulkit Singhal from Dalmus Capital Management.

Congrats on a great set of numbers. So if I just look at -- I mean, so if you are clocking around INR 2,000 crores run rate of sales on an asset base of gross growth of around INR 580 crores because you mentioned around INR 52 crores was spent so far. So that's translating to almost 3.45x asset [indiscernible] 3.4-odd. Is that the correct number to look at while thinking about your incremental asset turns? Or is there also an element of product mix where -- which may not be [ expected ]?

Sir, our asset turns is usually about 4x, 4.5x not 3.5x, as I heard you. So just that correction. And we have been investing CapEx even through this year to augment capacity. So some of the capacity ramp-ups that you see, which are happening in our existing units, and you remember 2 new factories came up in September as well. So they are also contributing, to an extent, to our revenues, and they are still in the ramp-up mode. So in Q4, they will ramp up. And most likely in Q1, they will reach full capacity. So all these capacities will be contributing. And as far as asset terms are concerned, we should -- you could assume 4x, 4.5x as we will -- it's really more appropriate, between 4x and 4.5x real asset turns.

And that I should assume on the incremental INR 340 crores of CapEx that you're also doing? Or would that be slightly lower because we're also going into [indiscernible] on that site?

No, no, no. So the INR 340 crores will definitely contribute to that kind of revenue growth. Now out of the INR 340 crore, the INR 340 crore spend has already started. So this year, we already spent INR 50 crores. We will be spending the balance, INR 290 crores going forward. Some of these INR 50 crores will only yield going forward. So yes, you could assume that the INR 340 crores, the equivalent revenue has to come up now.

Sure. And you also alluded to probably considering the PLI state. But I'm just curious -- I mean you mentioned man-made fibers is what would be considered. So are we looking getting in that segment? Or what is the purpose sir?

No, no, no. We will not be into get into backward integration. We will only be producing garments which utilize man-made fiber-based fabric.

Okay, okay. And that could be a sizable opportunity? Or that's a very incremental kind of thing for you?

It will be an incremental opportunity for us. So that the government has specified very specific HS codes which are hardly exported out of India. These are typically products which are exported out of China and Vietnam. They want to create the textile ecosystem for man-made fibers out of India. So if we start producing those garments [indiscernible], then the whole ecosystem will start to be generated and the government wants the man-made fiber ecosystem, which is larger than the cotton fiber ecosystem, to also be created in the country, thereby expanding the industrial base here. So that is the intention of the PLI. We have the relationships with the customers and we have the product technical knowledge as well. And we already do some such products in our portfolio as of now. So we would reach out to our existing customers once the plans are ready and then start producing those specific garments. The fabric for which may still have to be imported at the moment because there is no such fabric availability, and then we will convert into garments and export.

So I'm just trying to understand whether you -- I mean we get significant benefits from PLI peers, I mean -- does it make it very attractive from a standpoint of ROCE and margins? I mean despite [indiscernible]?

See, the way I look at this business is that any business I get into should be attractive from an ROC and margin perspective without this incentive. The incentive can really be an add-on to the -- if I contract the business which is interesting or financially interesting only based on the PLI -- additional PLI, that is getting into a risk. So I wouldn't do that.

[Operator Instructions] The next question is from the line of V.P. Rajesh from Banyan Capital.

Congratulations. I joined the call late, but I'm not sure if you answered this question, but what is the target ROCE for the incremental capital?

Oh. Sir, see the general ROCE that we are targeting for the company is 20% or a little upwards of that.

Right. And should we -- shouldn't it be a little higher for this incremental CapEx? Or what's your take on that? Is it going to be around 20% of this also?

The incremental CapEx will also be building that. So are you asking if it will be higher than this for the incremental CapEx?

Yes. Yes.

Let it play out. Obviously, the intention is to maximize the return on capital employed. So definitely, we will try to push as much as we can.

Got it. And then one quick question on the customer side. As you are diversifying a way, I'm just trying to understand the logic of it because I would presume that your current market share or the wallet share with your current customers is quite small in the wovens itself, isn't it?

Yes.

So when we are getting into knits, if you can just elaborate the margin for it, that will be helpful.

Okay. So see, at the end of the day, you look at it from a customer perspective. They buy different product categories from various different suppliers and all these suppliers are locked for years together. So while we keep pushing our current product categories and seek incremental business, we, a, seek a higher share of our customers' growth; b, we seek some shares from other suppliers' production; so cannibalize some of the suppliers production; and [ d ], get into new areas so that there also we can participate in incremental growth. See if I am looking at much higher than industry growth in revenue, then I will have to see multiple opportunities and not just seek incremental growth in my current area. So it's from that perspective that I want to increase my options available, whereby I -- today, from a product category perspective, we are in fashion, we are in outerwear, we are in athleisure, now we are in knits. It gives me multiple options to play with. Keep in mind that despite all of this, our wovens will be a much larger piece of business for us. Knits is just the entry and it takes time for it to build up to a substantial level. The other logic behind this is that over the last 2 years, knits has grown faster, mainly because of the pandemic where people were wearing casual. And I don't see the casual trend going away completely. So casuals will have a good prospect in the future. So we thought -- and India has got a solid cotton base as well. So knits will have a reasonably good future as long as we can produce it at an appropriate cost.

Next question is from Bajrang Bafna from Sunidhi Securities & Finance.

Congratulations for a good set of numbers, Siva, sir. My first question pertains to, we are seeing multiple headwinds which are coming up for textile industry in Pakistan and as well as Bangladesh. You might be going through a number of media reports which are reporting the unavailability of cotton and all those issues which are also started happening in those countries which are also participating in exporting. So are we seeing our clients from these countries, apart from Vietnam and China which we earlier alluded to, are also scouting some sort of interesting opportunities in India? Have you started seeing some movement there also?

See, not much from Bangladesh. It will take -- all these things do take time to materialize. As it is, there is enough opportunity coming from the other larger supply sources like China. So I don't think more such opportunities from our neighboring states is going to help much. But let me tell you one thing. That one -- with the fabric manufacturing ecosystem largely being in India, especially for cotton, the future for India is much stronger because with India, the fabric can be converted into garments in India. It's always better rather than take it all the way to Bangladesh. The only current advantage in Bangladesh is that it is a very, very solid manufacturing ecosystem and the labor costs are cheaper. So Bangladesh will thrive, but I definitely see that India will thrive as well and opportunity may -- momentum will shift from one to another, but I think both the countries will thrive.

Yes. My question was pertaining to the fact that earlier for Bangladesh, the larger opportunity was that there. They were importing this fabric from China. And now this Chinese cotton is completely banned in U.S. and parts of Europe also. So because of that, now they have to resort to Indian cotton or Indian yarn, which was not the case earlier. So is this particular thing will throw some opportunity to us because we might be more competitive in terms of raw material?

That is what I'm saying. So from a fabric side, we may have an advantage only because India has got the fabric ecosystem for cotton [indiscernible]. And while U.S. has banned it, Europeans are still buying. So keep that in mind. So if you look at China's share into the U.S. market, in the last 2 years it has fallen by 6%. But as far as Europe is concerned, China still maintained its share. So it's mainly a U.S. thing where cotton ban is being aggressively enforced. Having said all of this, yes, there is a benefit for India because the cotton manufacturing base is here and pushing fabric all the way to Bangladesh, there is an additional cost involved there.

Got it. And sir, just my last question on the employee side. We have seen your employee base has consistently gone up. If I remember it correctly, the last number reported was 24,000, and now it is almost 32,000 employees. So can we understand some sort of productivity gain? Because here, the cotton side is also moving up pretty fast. So to get a sense in terms of -- to get a handle on our modeling part, how do we assess the productivity per employees, by some metric that you could provide us from your historical experience will be really helpful, sir. Not in terms of the value, but purely from a volume perspective.

This will require a much larger discussion. I think rather than take away everybody's time, we can schedule it sometime off-line.

The next question is from the line of Faisal Hawa from H. G. Hawa & Co. Limited. [Technical Difficulty]

So what kind of legacy improved from the old management of Blackstone and the promoter remain to be still solved, so that the company can even work better at sales growth?

So there is no legacy at the moment. It's all behind us.

So would I be right in making a statement that most of the turnaround has taken place by installing new machines more modern and entering into new segments where we were not present before this?

Normally that is also improving the business processes. Machines, per se, will not reduce. So the business process which makes -- which is important. So yes, a combination of capital infusion, business process, strategy and consistently delivering to the customer can deliver this.

And how many customers have we added in the past 9 months or so?

The past 9 months, we have added 2 customers, and those customers are yet to begin. These past 9 months have been pandemic-impacted, with global travel still being -- not opened up. So customers are not coming here. We are not able to meet customers to commence the operations. So these are certain challenges that we are facing. Otherwise, we have actually signed up 2 customers, but we're just waiting in the wings for some of those processes to be completed before serious production can be started. Trial productions have already started.

And sir, any particular strategy advantage that we have in setting up in Madhya Pradesh, because it is actually a [ land ] of stake. Secondly, sir, what is the percentage concentration of our top 5 customers to our net revenue?

Madhya Pradesh has offered 2 things -- offered us 2 things. One, availability of labor, less competitive intensity. So we are not competing for the same labor force with other garment manufacturers. Labor is available. And the government incentives are interesting. So we don't have -- we find that state to be attractive from that perspective. As far as access to ports are concerned, whether it is from Madhya Pradesh or JNPT or Bangalore to JNPT, more or less should not be very, very different. So logistics-wise, we don't see too much of a problem. And as far as concentration of top customers go, Sathya, how -- our top 5 are currently about 75% or thereabout, 70% or 75%, somewhere in that range?

Correct. Correct. Yes, sir.

[Operator Instructions] The next question is from the line of [ Niraj ] from Vikan Investments.

I have a question regarding your revenue capacity. Why in your Tumkur and Bommanahalli site is yet to scale up totally? And you have also said that your revenue potential is now around 1,500 -- INR 500 crores a quarter. Can you correlate these to because they're not -- so is that INR 500 crore a quarter x of Tumkur and Bommanahalli that you're talking about?

Yes. So in this current quarter that is the third quarter, Tumkur and Bommanahalli have already participate, but it has not contributed to full capacity [ yet ]. So I would presume that Tumkur and Bommanahalli contribution is to be at 40% of its innate potential. So let us say, Tumkur plus Bommanahalli is equal to INR 150 crores, because we had said that at full capacity utilization, both of them collectively will contribute INR 80 crores, plus INR 80 crores, INR 160 crores of top line. Currently, that is annually, which is INR 40 crores per quarter. Currently, it is contributing to about 40% of that, about INR 16 crores per quarter, okay? so there is an additional opportunity for those 2 units to further contribute to the extent of our [ crores ]. So that's an additional capacity available in the system, which will happen between Q3 and early Q1 -- the Q4 and early Q1.

So then is it right to say the INR 520 crores that you did for the quarter, you have additional revenue potential of around INR 550 crores, but definitely, is the scale-up of Tumkur and Bommanahalli?

That is correct. Plus, we are also trying to ramp up in our existing unit. I'm not letting any capacity opportunity go. So wherever we have existing units, we are trying our best to add additional capacity there. So all options are being explored to not lose opportunity to grow. So we will seek to unlock some capacity as we go forward. A lot of them are in planning.

Yes. And one -- 2 more questions. I have one is on the CapEx of INR 340 crores that you said, does it include INR 100 crores of processing?

CapEx of -- does it include what?

INR 100 crores of the processing for the knitting that you're talking of?

Yes, yes, it does include. INR 340 crores includes the INR 100 crores for knit.

Okay. So from here onwards, the next 2 years, total amount to be spent remaining is INR 290 crores, of which the Madhya Pradesh CapEx and the knitting processing would be the main 2 CapEx. Is it right to say that?

That is correct. But there will also be a few more factories which will come up, garment factories. We are working on those actively. We will -- we are also working on an international unit, and that also will require some CapEx. So this is inclusive of all of those. But they will all be in the garmenting space.

And last question on the employees. How many employees would be when you are intact, including Tumkur and Bommanahalli scales, sir? And how much will be when the Madhya Pradesh one scales, sir?

So Tumkur and Bommanahalli at its peak, have about 1,200 employees. And Madhya Pradesh, at its peak, at the end of Phase 1, will have 2,000 employees. Where the Phase 2 also of Madhya Pradesh, that will only commence after Phase 1 is completed, which is an equivalent side.

And how much are Tumkur and Bommanahalli right now?

Right now, Tumkur and Bommanahalli will have about [ 832 ].

The next question is from the line of Abhilasha from Dalal and Broacha.

Congratulations on good set of numbers. Most of the questions are answered. I wanted to know, in the current run rate of INR 520 crores, the quarterly INR 520 crores of top line, how much growth we have witnessed through the volume growth? And how much is the [indiscernible] growth? And when you're talking about we are booked for the next 2 quarters, so are you expecting this INR 500 crores run rate -- we are taking this INR 500 crores run rate because usually, Q2 and Q3 are a better quarter for us.

Okay. So -- I -- we -- when I look at my quarter, I'm also factoring in some of the growth quarter-on-quarter because we are also trying to bring up additional capacity as we speak in our existing units and ramp-up of our new units as well. So when I look at the order book for the next 2 years -- next 2 quarters, I have factored in that growth as well and then carrying that kind of an order book for the next 2 quarters. So it will be in addition to the current -- it will be more than the current quarterly revenue.

Okay. Sure. And sir, can you tell me how much is the volume growth in this current quarter?

In the current -- you are talking of volume growth sequentially between Q2 and Q3? Is that your question?

No. Annually, annually.

Sathya, can you answer that?

Yes, one second, sir. It's about 35%.

Okay. Yes, sure. and the last thing from my side...

The volume growth is [ below 60% ] now. Yes.

Volume growth is 60%. Okay. And around 30%, 35% is the price growth in the current quarter. Okay. Sure. That's very encouraging. Secondly, on the price increases. So we have seen the cotton prices have increased very sharply. And in spite of that, we have been able to maintain our margins. So going forward, as the overall cost increases because of the incremental cotton costs coming into our inventory, how much price increases we witnessed take -- or how much cost push we'll have to keep to maintain our margin?

Sorry, sorry. I didn't fully understand your question. But if your question is, how will we handle incremental cotton price increase, and whether we will be able to push it back to the customers? Or whether it will have an impact on demand. Is that what you're trying to find out?

Yes, sir. I mean like this quarter, we have maintained margin, but cotton prices have increased further. So how much further we have price increase to pass on this -- the cotton increase, as we are -- look, the demand is -- yes, go.

I got you. I understood, I understood. So our endeavor is to pass on almost as much as possible all the raw material prices back to the customer. When I book an order, we tend to factor in the raw material price and then book it. Having said that, we come under pressure as the sustained raw material increase necessitates the entire value chain to take somewhere north of the pressure. So we tend to push back our raw material supplier. So our fabric suppliers get pushed out. Yarn suppliers gets pushed and so on and so forth, to absorb some of the costs. We are a very large buyer of fabric too, so we do tend to have some amount of negotiation power when we source fabric. So we don't absorb all the cotton price increase or fabric price increase. Also, we push it back to a supplier. We push it back to our customers and some of it we let it drop. So it's a constant negotiation going on 3-way between all of us. We try to absorb or retail as little as possible, and whatever little we would like to absorb, we tend to then offset it with improved productivity. So it's a very complex game, very difficult to predict every quarter how exactly it will all pan out. But if I look at the bookings that I have for the quarter, more or less, I have been able to push out some of the fabric price increases.

The next question is from the line of Dixit Doshi from Whitestone Financial Advisors.

Yes, most of my questions have been answered. Just one clarification. You mentioned there are 2 CapEx going on, one in Tamil Nadu and one in MP. So how much would be the CapEx cost? And when both of them would be starting?

The Madhya Pradesh, that is expected to be complete and the construction is expected to be completed in May. And then we will start training and trial production. And so I anticipate that it will take time until Diwali before the daily -- some pilot production -- pilot commercial production can start. So it will be more like a Q3, Q4 of next year revenue. And then it will take a year to ramp up because it's a very large unit. The -- there is 1 garment unit in Tamil Nadu, which most likely, will commence commercial production ASAP. So we are hoping that by end of this month or early next month, we are hoping to get the necessary clearances from the local government authority. This is a garment factory in Krishnagiri in Tamil Nadu. We are completely ready with everything. We just need certain provisions from the government to get it started. Trial productions have also commenced. As far as the knits fabric unit is concerned, the buildup will happen through the next financial year. So that will commence only in the subsequent year.

Okay. Are CapEx for MP and Tamil Nadu separate?

CapEx for MP, the first -- Phase 1 is about INR 50 crores, INR 45 crores, INR 50 crores . Phase 2 is similar. Phase 1 is what we have embarked on at the moment. So you put a [indiscernible]. Knits unit is INR 100 crores, as I mentioned, the fabric unit. The Krishnagiri unit, which is the government unit, our CapEx is about INR 15 crores, INR 20 crores.

INR 15 crores, INR 20 crores?

Correct.

The next question is from the line of [ Gunjan Kabra ], individual investor.

Congratulations for a good set of numbers. Most of the questions are answered. Just one question is that I've been hearing brands in Europe like Mango or Benetton, they are buying from the vicinity because of the supply chain of disruption, like some part of the production is, again, getting shifted there. So because of the lead time has increased, because of how logistic -- because of logistic issues and the logistic costs have increased significantly, so brands like these are shifting to Turkey or nearby countries. So are we seeing any such scenario? Like what is your sense on issues like this impacting the lead time in the industry, which is a very, very important factor for the apparel industry?

See, lead time-related near-shoring is a common occurrence. And spending on the side, we're sure that nearshore sourcing will happen. Firstly, is the nearshore location of EU. EU is not a big market for us anyway. We are exporting single-digit percentage now, 9% or something, to that market as compared to U.S. which is much larger for us. Now the supply chain issue means then there is a huge amount of inventory getting piled up in the shipping line between the supplying countries and the recipient countries. So that is a concern. People are addressing that by adopting 3 rules. One, trying to place orders in advance. So we are seeing that order placement [ season ] have built up, accommodating a longer delivery times. Two, some buyers in desperation are even airlifting goods at their cost so that they can get their goods in-season, especially for important people. And three, a little bit of near-shoring product, they can get their inventory in the stores. Overall, the shipping congestion are only easing a bit. So I don't see this trend accelerating any further if we ease up on it going forward.

Okay. Sir, also on the CapEx side. I wanted to ask that we haven't added any new customers. Like you just mentioned that we are in talks with 1 or 2 customers. So is there -- is the capacity expansion that is happening is on the basis of the top 5, 6 customers that we have currently? Like because the expansion is at a very, very rapid stage currently. So are we expecting that kind of an order book from the existing customers only? I mean -- yes, sir?

So yes, there is an additional growth from existing customers. The other 2 customers I mentioned are not just talks. They are -- we have got them onboard. It is just that startup and the formalities are taking time because of COVID-related travel and so many other issues that go around with it. But definitely, we have visibility and opportunity from some of these customers.

Next question is from the line of Rahul from PGIM Indian Mutual Fund.

Congrats on good numbers. I just want to check, does this CapEx include the international unit also?

Yes, it does.

Okay. So how much of -- I mean if we go at that and how much of that spend will be there?

How much of the investments internationally, you're asking? Or what value?

Yes, yes.

So I find it a little bit difficult to pinpoint. But it will not be less than INR 50 crores.

Okay. Okay. And I mean if you can just like -- what will be your outlook on your debt? i mean you brought your -- I mean obviously, you reduced your long-term borrowings. So from now on, will it primarily the working capital? Will we be taking on some term debt also eventually for the CapEx?

So for now, we plan our growth appropriately. For now, we will not take any term debt, only working capital debt at this point in time? And then depending on how fast we -- what incremental ramp-up or incremental CapEx plans that we come up with, we will decide on further adoption.

Okay. Okay, sir. And [ I seem to recall ] you said the first phase of the MP basically will come from Q3, right, FY '23?

That is correct.

Okay. Okay. And that's INR 50 crores [indiscernible].

The CapEx is INR 50 crores, correct.

[Operator Instructions] The next question is from the line of [ SK Patel ] from Shanti Patel Investment Advisors.

My question is who are our main competitors from India? And where we stand as far as the organized sector is concerned?

Our main competitors in the woven space that we operate in is Shahi Exports. Then we have Arvind. We have others like Orient Craft, we have [indiscernible] there are several players in this space who compete with us. These are competitors from India. Likewise, there are competitors from Bangladesh, Vietnam and China as well. So we all compete for the same business.

These are in the organized sector?

Yes, these are all organized players.

No, no. Where do we stand? What is our ranking?

Oh, ranking. Okay, so the largest player in the business in India -- out of India is Shahi Exports. Their total revenue is about INR 7,400-odd crores, in my opinion. So they seem to be the biggest. At the moment, we -- from a pure garmenting perspective, we may be, we -- I'm not sure of -- based on our current run rate, but I'm not sure certain private players, if they do -- if they also have grown considerably, there is PGI and there is -- there are several other players as well, who are also growing. So we would like to look at all those numbers. But we seem to be generally regarded as a strong second to Shahi domestically. But that really doesn't matter. This is an international business, and we will -- we compete with global players as well. So when I look at players in Bangladesh, there are several larger players there. When I look at Vietnam and China, there are many, many large players out there, players who are more than $1 billion. Shahi Exports rose close to $1 billion in India. So it's a very large sector with large operators. We still have quite a bit of ways to go to reach the prices.

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

Just wanted to get what would be the potential run rate of revenues for Q4 and Q1 next year? And secondly, are we, as a trend, seeing some, say, niche brands also coming to us for production? We're seeing influencer-led brands also catching up as well as some private labels of, say, marketplaces? Is that a trend that is catching up?

So order book is good. We are seeing strong growth. We just hope that the current pandemic, which is impacting our production in January, subsides soon so that we can get back to tracking our normal production continues. So for the moment, the factory absenteeism has gone up, as many people have reported sick, and have quarantined themselves. So there is a bit of a disruption, but we believe it's a short term, and we will see it as a blip and we will overcome it. That said, we expect growth in Q4, Q1, so see that metric continues. Regarding additional niche customers, no, we don't look at small niche customers. It's -- the overhead to manage the customers is too high. We would rather look at volume customers than scale customers for now. Thank you.

The next question is from the line of [indiscernible] from [indiscernible] Investment Advisors.

Sir, just one clarification if I missed it out, can you repeat? Sir, as you said, there is a lot of kind of again pace on the outbound shipment and some disruptions and [indiscernible] escalations. So like is there any like possibility of shipment getting deferred during this quarter also? Or like what kind of quantum of price hike in terms of benefit we are seeing on the outbound site?

No. Outbound costs continue to be high, and there are certain delays in shipment to the market. So those challenges continue. I don't see it completely resolved by -- in any time soon. It would take probably till second half of 2022 or even end of 2022 to kind of fully resolve, given that shipping line conditions are a real issue. Keep in mind that China is also importing pretty aggressive lockdowns in response to Omicron. So they are shutting down ports. Even today, we are struggling to get raw material from China, where we did, simply because many ports are shut or ports are working at low capacity. So disruptions are here to stay, and with disruptions come higher cost. Now outbound logistics are our customer scope. So we don't tend to pick up much cost. But some amount of cost increase on account of the inbound logistics is expected to happen because of these disruptions.

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

Yes. Sir, there was a note on lower provision for RoSL in the quarter. Can you explain what is the current RoSL run rate now?

So I'll let Sathya explain the RoSCTL run rate. But the topic is as follows. RoSCTL is refund of state and central levy, which the government gives us. These are taxes which are embedded in the raw materials that we buy. So for example, any exporter, to provide a level playing field, WTO allows the local governments to reimburse embedded taxes. So for example, the petroleum fuel-based inputs, electricity duty last inputs are a lot GST. So we don't get any refund which is GST refund. So that is given back in the form of RoSCTL. It has been fixed for different product types based on a very elaborate calculation and refunded back to us. Now RoSCTL has started coming back to us from then onwards when they had put a block on it earlier, but they come in the form of scrips. So we get a scrip whenever we export, and we can sell the scrip to an importer who can use it to import an equivalent value, and thereby monetize the RoSCTL value. So what used to happen in the past was, we used to get almost 97%, 98% of the scrip value when you sell in the market. These days, the number has fallen down to 80% because importers -- the import levels have come down. So our realization on sale of scrips has come down. And we have represented the government of India saying that look, you -- this is effectively a transfer of subsidy from exporters to importers, as importers can buy scrip at a cheaper rate and exporters are subsidizing importers costs. So with -- represented in the meanwhile, we have related the RoSL and receivables down to accommodate for the lower realization we are getting on the scrips. That's the line item. So about 5-odd crores which you see is on account of -- under [ valuing ] the receivables from the government of India on account of lower realization of scrips as we do so now. It's just proven accounting policy that we are doing.

And now the outstanding is around INR 42 crores, net of this provision.

Current outstanding is INR 42 crores, which you -- it's worth of scrips which you have to sell in the market?

Correct.

Okay. So that you have already done mark-to-market lower at 80% realizable value?

Yes, we have taken an estimate. And accordingly, we have provided, we are currently taken at around 88%.

Okay. Sir, my second question was in the quarter and the first 9 months and the top line growth, how much is the volume then? And how much is price hikes or a blended realization driven?

See, In terms of the volume, if you look at it, it's about close to 60%. And it is not surprise that is -- I mean, you can call it a surprise, it is because of the product mix, we got almost 35%.

This quarter? Or 9 months?

This quarter.

So you are saying 60% volume growth and 35% blended NSR growth?

Correct.

Okay. So I understand product mix would have also driven it. But how much has been the pure price hikes due to raw material cost escalation which you have taken to clients?

My assessment would be about 3.5%, 4%.

3.5%, 4% in this quarter?

That would be the maximum, but I'll take that assessment off-line. Let me come back to you with a detailed calculation...

And where does their cotton yarn and freight prices have been rising, how much you think further price hikes would be required to maintain double-digit margin?

See, we don't -- it's difficult to say that because it is not a tight -- different products or different types. So we will also tend to blend it. So for example, in [indiscernible] cotton, the product shifts with this cost. So the styles change, the product type changes. And hence, it is very, very difficult to say that what is it that contributes to the prices. For example, if a government is $8, now I can change the design to make it consume less fabric and thereby change the product itself. So it's a more complicated exercise. We can handle it off-line.

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

I'm still looking at -- in the balance sheet, the fixed deposits held with banks. So [indiscernible] on that issue?

We have already got INR 70 crores during the month of January. We have already got it release -- partial release has happened already. The balance amount also, we are in the process of getting it unlocked during this quarter. We are in the process of migrating the working capital facility from the existing banks with the new banks who are sanctioned without that collateral. So that activity is in progress. So we hope to get the balance amount also during this quarter. So in Q4, the entire amount will get unlocked.

Sure. That's good. And the volume growth, 60% you spoke about will translate into INR 12 crores, INR 12.5 crores of garment volume? That is a ballpark, right, number I'm looking at -- in Q3?

I'll just to give you a correct number if you want, part 4.6 million is Q3 last year and 6.6 is Q3 this year, million [ pieces ].

Million [ pieces ],okay. Sure. Okay.

Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.

So thank you all. I think as a company, we believe in continuous growth, we believe in taking care of our people -- We believe strongly that this business has great potential in the country, textiles as a business is a traditional business. It has been around in the country for years and years for centuries. And today, I see that the opportunity has come for the country to dominate this segment and lead its growth. Manufacturing out of India is quite doable. We have been consistently demonstrating that even though it is quite labor-intensive, and we have been able to successfully ramp up. We will continue down this trajectory, and we believe that the most important element of sector is continuously engaging with customers, delivering a very, very consistent experience to our customers. And that's exactly what we are doing as we speak. The challenge is quite formidable especially when we keep adding new factories and to make sure that the new factories are as productive and as quality conscious as our existing decade-old factories. So we have to make sure that our business processes are quite scalable, robust as we keep expanding. We have the operational depth in our team to deliver this, and they are continuously focused on that so that we stay ahead in terms of delivery parameters to our customers. We hope that we will continue this journey going forward into Q4 as well as into FY '23. Thank you all.

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