Gokaldas Exports Limited (GOKEX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Gokaldas Exports Limited Q2 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Binay Sarda from E&Y. Thank you, and over to you, sir.

Thank you, Lizan. Good evening 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 result, 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, Vice Chairman and Managing Director; and Mr. Sathyamurthy, Chief Financial Officer. We'll start the call with a brief overview of the quarter gone pass 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 afternoon, everyone. Happy to have you at our earnings call for the second quarter of FY '24. Retail sales has been resilient and maintained gains year-to-date 2023. Brands have been able to sell their product at full price, reducing the need for discounts, which has contributed to growth primarily in terms of price rather than volume. However, this has not translated into a higher demand for apparel manufacturers. U.S. apparel imports for the year-to-date fell by 23%, while EU fell by 13%. Major brands were consciously liquidating excess inventory holdings and controlling their purchases. During the quarter, our performance remained subdued, which was in line with the market condition. This is a period when we manufacture for the holiday season. Weak retail demand in autumn/winter 2022 due to high inflation, high interest rates and the mild winter contributed to excess inventory impacting offtake for this period. Our revenue for the quarter came in lower by 11.7% due to lower demand. In this quarter, we incurred certain onetime expenses of INR 5.2 crores, of which INR 1.6 crores was for acquisition-led expense and INR 3.6 crores was for the start-up of our MP plant. As you know, when we start up a factory, we have to ramp up our manpower and put a lot of people through training, and there's a lot of start-up expenses that we incur which will probably continue for a quarter more -- quarter or 2 more. On the acquisition-led expense as well, there may be some additional bookings of acquisition-led expense in the next quarter, too. This INR 5.2 crores of onetime expense impacted our operating margin by 1%, adjusting for which our EBITDA margin in Q2 FY '24 stands at 12% compared to 12.5% in Q2 FY '23. We also ramped up our labor force in Q2 in preparation for third quarter business volume, resulting in an increase in wage costs by about INR 5 crores. Further, our operating margin was impacted by an increase in statutory wages for factory employees. We continue to offset some of the cost increases through superior operational performance. In the first half of the year, we generated INR 113 crores in cash from operations and covered our capital expenditure of INR 70 crores. We plan to incur another INR 75 crores of capital expenditure in the second half of the year to continue to build up our capacity as we plan for future growth. Our new manufacturing unit in Madhya Pradesh is on track, and we expect production to increase in the coming quarters. The fabric processing unit in Tamil Nadu is in advanced stages of completion as well. We are making good progress with our acquisition of Atraco. We are awaiting regulatory approvals from different jurisdictions and anticipate the process to be completed by end of Q3 FY '24. We are expecting the momentum to pick up in the second half of the year, particularly with Q3 production for spring '24 as brands have more or less destocked their inventory and are increasing their order placements. This is also a period of increased sourcing from India. We anticipate sequential growth to trend up in the next 2 quarters. We believe that the strategic moves that we are taking will allow us to continue to grow the business going forward. We continue to closely monitor potential macroeconomic situations and take measures focusing on customer relationships and service excellence. We are confident of the medium- to long-term prospects of the company. I thank you for listening and would be happy to address questions that you may have.

[Operator Instructions] The first question is from the line of [ Jatin Chawla ] from RTL Investments.

The first question is, when I look at our export performance and compare it with overall India's export performance, it seems we are largely in line. I would have expected that in...

Sorry to interrupt Mr. [ Chawla ]. [Operator Instructions]

Is this better?

Much better, sir.

Yes. So my question was, if you -- when I compare Gokaldas Exports and India's overall export -- apparel exports, it seems the performance is largely in line. I would have expected that in this kind of weak scenario, the stronger, larger players would probably do better. I just wanted to understand why is that not panning out?

Okay. Good question. So there are several reasons for it. One of the reasons is that we -- the primary reason is that we are a very outerwear-focused company. And we -- in the second quarter, we do a lot of products, which are meant for holiday season for cold weather purposes. That's a core product for us. Last winter was a very mild winter and coupled with a very high degree of inventory stocking on the brand side resulted in the brands placing very low orders for outerwear products for this coming winter, that is winter of 2023, holiday season 2023. So this resulted in our Q2 volumes being more impacted as we don't do as much fashion wear and other lightweight products or commodity products. So we had to switch to many other product types for this Q2 to offset this peculiar situation of higher inventory stocking of the product types that we tend to specialize in. So that's one of the reasons for our decline in growth, which was -- which came certainly in line with India's destocking -- India's exports. Number two, we are U.S.-heavy. And as you are aware that U.S. imports have fallen much more than European imports, so that also impacted us a bit more in Q2. And number three was if you look at our last year Q2, we had a very strong performance, much, much higher than the rest of the industry. So there is also a base effect, which resulted in us coming more or less in line with the industry decline. So if you adjust for all of this, actually, we have performed well. But that said, if you seek an explanation, this is what I have.

Understood. Understood. But -- so clearly, I understand the product type dependency. Overall, you would think that in the market, the larger players would still be doing better than the smaller players and hence, once this anomaly kind of adjusts, we should expect to do better.

Always, always, absolutely.

Got it. Got it. And given that how small India is as a part of the overall global pie, is it a little bit surprising that Indian exports are not doing better than -- I understand that overall conditions are tougher and India is doing slightly better, but would you have expected India to do slightly better than what we have done in the last 12-odd months?

So again, Q1 and Q2 is not India's strength. Gokaldas is different. We do a lot of synthetics and outerwear and all of that. But typically, India plays to its strength in the third and fourth quarters when more and more spring and summer wear comes into play if they use cotton and viscose-based fabrics. So typically, you will see a little bit of a surge in the third and fourth quarter for India as such. And in a situation where the brands are buying a lot less, then it's a question of relative impact. Globally, all the regions have seen considerable slowdown. So when I talk to operators in Bangladesh, Vietnam, China, they have all seen a much higher degree of slowdown. So in such a situation, it's hard for anybody to outperform. The fact that India has dropped only 12%, it's a good sign, I would say.

And would you expect these market share gains for India then to accelerate a little bit once the overall market picks up, given that then the guy who is sourcing would not be cutting volumes from somebody and giving it, but rather incremental volumes would be given, too?

It should. Some degree of -- I mean the bounce back will benefit at least the stronger players from India for sure, and we will have to build upon it going forward.

Okay. And just one last question, you said you expect...

Sorry to interrupt, Mr. [ Chawla ], may we request that you return to the question queue. There are participants waiting for their turn. The next question is from the line of Gunjan Kabra from Niveshaay.

Sir, I wanted to understand that home textiles in the U.S. has -- are showing a sign of pickup, at least some companies are showing a sign of pickup in their numbers. So do you think that same is -- the inventory has decreased now for the apparel segment also? And how do you see this for the next Q3 and Q4 and going forward for Gokaldas Exports?

So I think inventory issues going forward is a lot lower because many of the brands have managed to destock well. And it is also evidenced by the fact that our order book is pretty good for the third and the fourth quarter. So we have seen traction coming back. If you see the U.S. retail market that has been reasonably resilient, and I hope that it stays resilient through 2024. So that depends on a lot of macroeconomic factors. But as far as the brand is concerned, all the buyers are concerned and their inventory issues are concerned, I think we have seen some destocking that more or less happen. So it will help us in growth going forward.

Okay. Okay. Sir, also wanted to understand your view in short term and long term, like initially like 1.5 years back, at least there was like a tailwind in the sector where India was gaining market share because of the China ban and China Plus One. So right now, because of the slowdown in the U.S. and the Europe and everything, so we have acquired Atraco also, and we are in expansionary phase also. So I wanted to understand what's your vision for short term. And what are the factors that can maybe hinder growth or settle in short term? And maybe the long-term vision for Gokaldas in, say, next 2 to 3 years, 4 years, what kind of growth or what kind of perspective do you see with these 2 acquisitions going forward?

So I don't see too many short-term inferences barring macroeconomic factors, and that's anybody's guess. So you can also judge on how that is going to pan out. If you look at the U.S., interest rates have been kept high and there may see some impact on consumer sentiment going forward. So far, the U.S. market has bucked all the trends and consumer demand has been reasonably resilient in that market. We'll have to see how that pans out going forward. There are elections in several jurisdictions, U.S., Mexico, U.K., India, so on and so forth. So let's see how all of that pans out. But by and large, I think global demand doesn't have such wild oscillations. So my sense is that the excess of inventory, which happened when the supply chains tightened up and then eased out, all of that is more or less wearing off. So we're back to catering to the usual subtle demand growth that will happen going forward. So some degree of normalcy will return to the market. Now in such a scenario, stronger players will have the ability to now win more market share and continue to grow. So going forward, there will be a bit of a steadying of the volatile fluctuations is what I guess. Again, everything caveated to some major geopolitical crisis, right? And I feel that China Plus One will continue to play out. It's already playing out on the cotton sector, but it will slowly start happening in the other synthetics as well. It will take a few years, but that also will move as India's cost structures are far superior, and we are exploring newer, lower-cost locations. We are also looking at a possible FTA with U.K. And if that happens, that will be a great benefit for India. If EU FTA comes, which will take some time, that also will be a major shot in the arm for the Indian manufacturers. So I think that for a good, solid manufacturer who can compete and hold themselves at a global level, the opportunity is very strong. And that's the reason why we are investing in capacity. We are making sure that the capacities that we are investing in are low-cost. We're investing in relationships with new customers. So there are several discussions that are happening with customers. So I feel confident that in the next 2 to 3 years, the prospects should be good for Gokaldas. Our Atraco acquisition has also -- will also come into play most likely from fourth quarter of the current financial year. And the order book for that is also pretty -- that entity is also pretty good going forward. So taking the comfort from all of these strengths, and saying that we should be on a good growth path going forward subject to no major macroeconomic crises.

The next question is from the line of Anush Kumar from Spark Asia Impact Managers Private Limited.

I have two questions. My first question is on the export incentive part, where the RoSCTL, I think the extension is till March '24. What is your take on that? Will there be any further extension on that? And if there is not any extension, and what would be the impact? Because considering the fact that we have put in a lot of money, what would be the margin and revenue impact for that? And second question, can you also throw some ballpark growth for second half? Will the subdued first half be compensated by second half performance, both on revenue and margin front? Are you seeing that type of growth?

Okay. So coming to RoSCTL, your first question. At the moment, RoSCTL is applicable till FY '24, that is March 31, 2024. The Government of India is aware, and there have been discussions going on for continued extension of RoSCTL. We will have to wait for directions from the government on RoSCTL. Since it's an industry-wide situation, the impact will be uniform for all the industry, and we will have to play it accordingly. We will also have to see how much of it we can price it into the customers. Eventually, it will all get priced in as far as the customers are concerned, since it is not impacting one player negatively. There are also several other things going on globally. For instance, even in Bangladesh, there is expected to be a sharp wage increase by end of this year. So all of these do impact regional competitiveness. And I guess we will have to take it on our side. Our best hope is that the RoSCTL gets extended beyond FY '24. All efforts are being made by the industry to secure this. So we will have to wait and watch. But we are somewhat -- we feel that the government may listen to us, listen to the industry favorably given that this industry also employs a lot of people, and it is important to preserve the competitive economics of this industry. So there is a likelihood that this may get extended. As far as your second question is concerned, regarding the prognosis for the second half. Our endeavor is for us to recover the revenue growth in the second half and try to see -- try to come to at least last year's revenue level this year. So if you look at our last year, we had a strong H1. And after that, when the world went into a tailspin, thanks to high inventory, et cetera, we started dropping our revenues to about INR 525 crore level from Q3 onwards. I think we will see a reversal of the trend in this year. And Q3 and Q4, we will see an upward growth such that, by and large, we will try to cover up and get back to the revenue levels of last year. So I anticipate us to get closer to INR 2,200-odd crores in the current financial year. And on top of it, there will be Atraco contributing to incremental revenue in the fourth quarter. So overall, we will have a growth Y-o-Y for Gokaldas. Does that answer your question?

Yes, sir. Yes, sir. So one more question on this...

But market -- I'm sorry, go ahead.

Yes. Sir, on this second half, I think it is more of cotton-based products, which -- can we see margin expansion as well? Is my assumption right on that?

Yes, I think we -- our endeavor is to work towards a margin of 12%, 12.5% EBITDA margin for the year.

The next question is from the line of Vikas from Equirus Securities.

Sir, my first question was with respect to our employee costs. Of course, you mentioned that we did increase our labor to prepare for the 3Q. But can you like go ahead and estimate that the INR 180 crores per quarter would be a sustainable run rate? Or it could be somewhere even inch up higher going ahead in the next quarters?

No, I think that INR 180 crores -- INR 180 crores, INR 190 crores will be the rate at which labor costs will trend in the quarters ahead.

Okay. Okay. Secondly, sir, would you like to throw some light on how was Atraco's performance in the quarter?

So we have not concluded the acquisition of Atraco. So Atraco still remains a separate entity. And we anticipate that with regulatory approvals coming in sometime in the near future, we should be able to conclude the acquisition by end of this current quarter, that is Q3. So as of now, the company is tracking to its performance, and it's more or less tracking to last year's performance levels despite market headwinds. But we are still not in control of the assets since we have not yet got the regulatory approvals.

The next question is from the line of V.P. Rajesh from Banyan Capital Advisor.

First question is regarding the U.S. FTA -- sorry, U.K. FTA. What's the timing on that? Has it been pushed out? And what's your sense as to when that will come through?

Rajesh, I wish I knew that, and we're all eagerly awaiting for U.K. FTA to happen. Obviously, FTA is just one -- FTA for textile is just one of the agenda in the India-U.K. trade relation. So it's Government of India and the U.K. Government are working on it. We are hoping that it should happen sometime soon. We are eagerly awaiting it, but it's hard to put a timeline on it. I guess a lot of those discussions have already happened. That's what I'm given to understand. But as far as the timing is concerned, it's anybody's guess. Government of India has its own set of priorities and there are a lot of discussions going on between the 2 countries. And discussions are at a fairly advanced and concluding stages is what I understand.

Okay. And then similarly for the Kenya's renewal for its U.S. FTA, what's the timeline on that? When do you think that will come through?

You're talking of U.S. FTA?

Well, the U.S. deal that they have for AGOA business, is it up for renewal?

So AGOA is valid until December 2025. So that discussion will come up only in the 2025. So there is some time for it. Last time, it was extended from 2015 to 2025. The expectations which I hear from Kenya and other markets are that it will get extended by another 10 years. So, so far, it has been going in line. Kenya is also working on an FTA with U.S. because they are -- geopolitically, Kenya is very closely aligned with the U.S. So there is -- regardless of AGOA, I think Kenya is expected to enjoy preferential access to U.S. market. But there is a lot of time before we can talk about our AGOA extension.

Okay. Okay. Understood. And then on the MP plant, if you can talk about when does it gets to 100% capacity and how that ramp-up will look like in the coming financial year?

I think to reach 100% capacity utilization, we are talking of almost like Q2 of next year. They will continue to ramp up. Our endeavor will be to ramp it up as soon as possible. It all is a function of how fast we can get the people trained and deployed on the floor and they reach their peak productivity levels. It's not just about putting the manpower in the floor or to the production floor, but also getting their productivity up and that also takes another 6 months. So I anticipate that we are talking about -- somewhere like next Q2, by which time -- end of Q2, by which time we will have the productivity levels and the full manpower complement to be playing out.

The next question is from the line of Varun Gajaria from Omkara Capital.

Am I audible?

Yes, you are audible. Thank you.

Yes. So I just had a question on FY '24. So earlier today, I think in one of the interviews, you mentioned that there's obviously 10% to 12% growth Y-o-Y in FY '24, am I getting that wrong? If the revenues are going to be flat, then how will that work out?

You are talking of FY '24, right?

Yes, yes.

Yes, that is the expectation. As I mentioned a little while earlier, our endeavor is to come as close to last year's revenue based on our current performance, which is about INR 2,200-plus crores. And then we expect that Atraco should contribute incremental revenue in the fourth quarter. So that will give us an incremental revenue in the fourth quarter, too. So overall, we can expect about a 10% kind of revenue growth in '24 over '23, FY '24.

So that will be on a consolidated basis, I believe.

Yes, yes. Yes, of course.

The next question is from the line of Vikas from Equirus.

Sir, can you -- what are the volumes and the ASPs for the quarter?

We have done 7.77 million, and the ASP per piece is around INR 610.

For the quarter?

For the quarter.

Okay. Right, right, right. Okay. Okay. And going ahead, since in H2, we generally do cotton-based products, so this ASP generally drops for the H2 quarter, right -- for H2 of the year?

That is correct. So as I had mentioned earlier, the outerwear business was a bit slow because of the weather-related issues and excess inventory from last year. So we have produced a lot more non-outerwear products in Q2, which otherwise would have been an outerwear-heavy season for us. So all of that contributed to a slightly lower ASP in the quarter.

And sir, if I just wanted to confirm that last -- that is 2Q of '23, our unit sales volume was 6.7 million pieces with an ASP of INR 850. Is that correct?

Q2 of previous year.

Correct. You're right.

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

My first question is just on the kind of engagements you're having with clients. I mean now that the U.S. inventory correction is behind, I mean what is the level of new client engagement? How is that picking up quarter-on-quarter? And how is the conversation with some of the existing clients as they're looking to diversify their supply chains? Are they saying in as many words to you that why don't you just go ahead and set up capacity? So some softer discussions around the same.

See, the discussions with existing clients has been going strong, and we have actually been engaging with them on starting new product lines or product types, expanding relationships with other sub-brands. Many of these retailers have several brands that they carry, and we may be supplying to 2 to 3 brands. So we will -- we can add incremental businesses. So all of those discussions are going on based on our track record, our relationships and the fact that they tend to see that the inventory levels are now coming back to some degree of normalcy going forward. So all of that is going on. So it's encouraging. I'm picking up encouraging signals as I see going forward. The only caveat that I have is, I don't know how the stubbornly high interest rates will pan out going forward in the U.S. from a retail demand perspective because retail demand, despite everything, has kept on growing, albeit at a lower rate, but it's still positive for the calendar year 2023 till date. So I hope that the retail demand stays good going forward. But the dialogue with the brands have always been encouraging. On top of it, if this FTA and all happens, I think there will be further additional growth from Europe. That will be a positive for us. Incrementally, our customers are talking about expanding their relationships with us. So we seem to be drawing comfort from all of that.

Understood. And the second question is on the gross margin front. I mean, you've clearly taken a call of working only on slightly higher margin profile at the cost of revenue growth. Now as growth is coming back, how is the pricing environment now? Do you have to sacrifice some bit of margins to get that growth? Or are you seeing a good margin, I mean, at a gross margin level also considering?

There is a tight pricing regime going on. As long as the buys are less than the past, there will always be a pricing pressure. So if demand is less than supply, we will always have this issue. So buyers have choices. There are players in other global markets as well who are willing to compromise on their margins a bit. So while we try to hold on to our margins to the best extent possible, it's an uphill battle, until there is a degree of normalcy from a demand perspective. So as the demand climbs up, some of these pressures will yield or will reduce. But I don't anticipate that happening anytime soon. We will see how FY '25 plays out. I'm hoping that sometime during that period, we should see some degree of pricing power come back. But in the meanwhile, we do not drop prices and chase revenues, that's not in our DNA. So we will try to hold on to our margins to the extent possible.

The next question is from the line of [ Anurag Agarwal ] from [ Agarwal Analytical Investments ].

Am I audible?

You are.

Sir, I noticed that in our presentation, we were focused towards Europe and U.S. for our export-related business. I just wanted to understand, in future, do we also aim to target other geographies like probably Canada, Australia or MENA region, probably?

See, globally, U.S., Europe and China are the top markets from an apparel demand perspective. Lot of China's demand is fulfilled by China-based player. So China produces for China. So that really leaves U.S. and Europe for players like us from a demand-catering perspective. We have been U.S.-centric in our approach. So 80% -- 75% to 80% of what we produce goes to the U.S. market. Europe is much smaller in our portfolio. We intend to increase our exposure to Europe as we go forward to balance the revenue mix and in anticipation of an FTA with U.K. As far as Australia, MENA and others are concerned, they are much smaller markets. And if it suits us, we will go for those markets. But at the moment, the overheads of a relationship and to cultivate those markets are much higher to warrant efforts in that region.

Got it. Sir, my question was in this particular, if it was due to the factor that we are seeing some kind of an economic risk out there in U.S. since recently, I also read that credit card delinquencies have increased to 60%. So this could have a potential impact on us like in the coming time. So that's why I thought if our company was trying to diversify the geography base.

The only issue is that the other markets are so much smaller. If you look at population of Australia, it's a tiny fraction of United States population. The problem with all of these markets that you mentioned are way too small. So we have to make sure that we secure ourselves with the larger markets and make sure that we work with the right set of customers so that we minimize our impact.

[Operator Instructions] The next question is from the line of Rehan from Equitree Capital.