Himatsingka Seide Limited (HIMATSEIDE) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I'm Madhuri, moderator for the conference call. Welcome to Himatsingka Seide Limited 1Q FY '21 Post Result Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note, this conference is recorded. I would now like to hand over the floor to Ms. Prerna Jhunjhunwala. Over to you, ma'am.

Thank you, Madhuri. Good evening, everyone. On behalf of B&K Securities, I would like to welcome you all for 1Q FY '21 Post Results Conference Call of Himatsingka Seide Limited. From the company, we have with us the senior management, including Mr. Shrikant Himatsingka, Managing Director and CEO of the company. Mr. K.P. Rangaraj, President of Finance and the Group CFO; and Mr. Ashok Sharma, Senior Vice President and CFO, Strategic Finance. I would now like to hand over the call to Mr. Shrikant Himatsingka for initial comments. Thank you, and over to you, sir.

Thank you, Prerna. I'd like to start with a business update and outlook and then some comments on our financial performance followed by Q&A. The -- so as far as business updates are concerned, let's begin with the impact the COVID-19's had on our operations. The Q1 FY '21 operating performance has been severely impacted on account of COVID-19. Our manufacturing facilities at our Hassan and Doddaballapur campuses, along with our distribution facilities in North America and Europe, were nonoperational during April and most of May 2020. This was on account of the lockdown imposed by the central and state governments, respectively. Our plants commenced partial operations during the month of June. However, the operating conditions remained challenging due to the supply chain disruptions and interruptions in workforce availability. Therefore, the plant operations during the month of June were at low capacity utilizations. In addition to the above, our client mix largely comprised of retailers who did not provide essential goods and services in their respective jurisdictions, and hence, were either closed or operated with minimal store operations. Consequently, they either temporarily held and/or postponed shipments scheduled for Q1 FY '21 to later dates. The 71.6% decline in consolidated total revenues is essentially attributable to the above factors. While we may face COVID-19-related interruptions from time to time, the ramping up of capacity utilizations across our facilities has been progressing well during Q2 FY '21. In other business updates, the ramping up of our capacity -- of the capacity utilizations at our new Terry Towel facility is also progressing well. The utilization levels will continue to increase as we go into H2 FY '21. The company continues to increase its presence in the European, Middle East and Asia Pacific regions. And in addition, we also remain focused to enhancing our presence on e-comm platforms -- e-commerce platforms globally. In order to navigate the challenges on account of COVID-19, we have undertaken several cost optimization measures, while attempting to ramping up operations. And in addition, we continue to have healthy cash reserves to meet challenges as the ramp-up progress -- process is underway. On the order book front, while Q2 FY '21 order book looks healthy under the current circumstances, our H2 FY '21 order pipeline is robust, and we remain focused to surpass pre-COVID levels of operating performance during H2 FY '20. We are also committed to optimizing our working capital cycles, and inventory reduction measures continue to yield results. While we reduced inventories by approximately INR 90 crores during FY '20, we've continued the reduction trend, and the same has come down by an additional INR 48 crores during the first quarter of '21. We are pleased about the fact that the reduction trend continues in Q2 as well and the results of that you should see as we complete H1 '21. While we have seen a marginal reduction in net and gross debt in Q1, we estimate debt reduction to continue, as indicated during our earlier interactions. Some comments on the consolidated financial performance. We assume you've gone through the financials, and we'd like to share the following insights on the consolidated financials. The reasons for the decline in consolidated total income have already been explained earlier in the impact of COVID-19 on operations section. The consequent losses are largely on account of the reduction in consolidated total revenues that we saw during the quarter. The material costs have been impacted on account of the following reasons. We have taken a charge of INR 21.99 crores towards writing down of inventories to net realizable values on account of changes in product portfolio, approximately INR 21 crores on account of product mix, underutilization of our spinning plant that affected the integration quantum during the Q and conversion costs that have come through to impact the P&L arising out of the reduction in inventories during the quarter. Corrected for this, our cost of goods sold will be range bound at normal levels that one sees over the last few quarters. The interest cost for the quarter was lower on account of lower working capital and lower finance charges that we had during the quarter. Moving on to our debt profile. The consolidated gross debt as of 30th June stood at INR 2,786 crores compared to INR 2,814 crores that we saw at the end of FY '20. We had a total term debt of INR 1,758 crores, and our total working capital debt stood at INR 1,028 crores. The cash and cash equivalents and current investments stood at INR 244 crores as on the 30th of June as compared to INR 214 crores on March 31, 2020. Consequently, the net debt as on 30th of June stood at INR 2,542 crores versus INR 2,590 crores during the 31st of March 2020. This completes our updates. We'll be happy to take questions from all of you.

[Operator Instructions] The first question comes from Aman Sonthalia from AK Securities.

Sir, my question is whether we have fully installed the 25,000 capacity of the towel division?

Yes. We have. There are some parts of the CapEx that will be -- that are modular in nature and will be implemented as we ramp up, but most of the required equipment and infrastructure to hit the 25,000 tonnes per annum capacity is already in place. Hello?

Hello, sir?

Yes. I can hear you.

Yes. Hello, Mr. Sachin?

Can you hear us?

Yes, sir. You are audible, sir. Please go ahead.

No. I hope I answered your question, Aman.

Shall I go ahead with the next questions, sir?

Yes, please.

Next question comes from Siddharth Rajpurohit from JHP Securities.

Sir, can you quantify in terms of what were the cost-saving measures? And how much of the cost savings you have been able to do in this quarter? And what amount is sustainable?

Well, it'll be difficult to exactly quantify them, Purohit. But we have taken measures on personnel costs, we have taken measures on various other fixed costs. We estimate that even as we ramp up, these savings should aid our operating performance. We've also had rationalization measures implemented on the energy front and so on. So on an annualized basis, I would say, approximately between INR 50 crores to INR 100 crores on the EBITDA front, somewhere there is what we have -- what we believe we have implemented and should be sustainable.

Okay. Annually, is it sustainable? Okay. And sir, is there any change in terms of the kind of orders that are now being placed in terms of margins in those orders for the second half, which is very robust for us, which is a very good indicator?

Yes. I mean I'd take this question -- I mean I'll take this opportunity to add a couple more thoughts other than directly answering your question. I'd like to state that at this point, other than the freak first quarter that we've had on account of the pandemic, I also probably presume that all of you have thoughts with regard to the fact that our model has seen or our operational performance has seen a greater dip in revenue than some of our peers. I'd like to state that, that's really on account of the client mix that we serve. It has nothing to do with the fundamental business model. And therefore, we have seen -- we don't see any fundamental change in business models going forward. Of course, if there's something on account of the pandemic that resurfaces and has large-scale impact globally, that's a separate issue. But notwithstanding that, we don't see any change in the business model at all. So that's my first point. The second point is, I'd like to once again state that going into H2, we see robust order books. It seems to us that these categories of products, both on the bedding and bath side, do have a relatively heightened demand at this point in time. And it's higher than what's normally been visible in the past. So we are making our best efforts to be able to attend to all these demand requirements that are coming through. So there's no change in business model. The demand environment is robust as far as looking into H2 is concerned. Q2 as well is relatively robust vis-à-vis Q1. We will face some interruptions on account of COVID, interruptions may be caused because for sanitization reasons or testing reasons and so on. But as I've indicated earlier, Q2 also looks reasonably robust, and H2 looks buoyant and robust. The demand pipeline looks strong. And we are doing our best to ramp up operations to be able to meet these demand requirements. I hope I answered the gentleman's question because I couldn't hear him after that.

Yes. He is not responding, sir.

Right. Okay.

[Operator Instructions] The question comes from Aman Sonthalia from AK Securities.

Sir, one more thing, sir, why the demand is so robust? Whether it is due to work-from-home culture or due to China factor?

No. I mean, I used the term relatively robust, Aman. So it's not like it's earth-shattering or anything of that nature. But it's notable. The buoyancy is notable. It could be a confluence of reasons. These products vis-à-vis home textile products like bedding and bath products have a hygiene angle to them. There's definitely a work-from-home angle that's playing out. How much of this is attributable to China angle, I guess that is still -- that's not, as we see it, a major factor at this point. Could it become a relatively more important factor going forward? It might. But I think at this point, it's more work-from-home, it's more hygiene sort of led reasons.

And sir, this demand is sustainable? Global demand, sir.

Aman, these are not questions that there are answers to. In the short term, we feel that the relatively higher demand will prevail. If not, we don't see the base demand being disturbed.

Okay, sir. And sir, the coal cost has come down a lot. So our power cost is a big component of total cost? Or it will improve the margin to that extent?

Yes. So a lot is a little bit of an overstatement. It has corrected a little as far as the coal that we are using. And as I said, energy is amongst the costs that we feel we will get some benefits from vis-à-vis our rationalization -- cost rationalization programs that we have put in place. So energy also plays a role in that. So to that end, we will get that benefit.

And sir, because of the lower cotton prices, we'll get some benefit?

In some -- in certain product portfolios, yes. And in certain other product portfolios, no. Where -- in certain other product portfolios, I say no because if you have -- if you have gone long on some of the imported cottons, then we may not realize the immediate benefits of lower costs or prices. But in certain other classes of cotton, including Indian cotton, where we haven't necessarily gone long, then in that situation, we will get benefits or get -- avail those lower price benefits. So I would say a little bit of both, yes.

And sir, what is our debt reductions done for the year?

Well, Q1 has seen approximately close to INR 50 crore reduction in net debt. Q2 should see a more aggressive reduction than what we have seen in Q1. And then we should continue the reduction trend for the rest of the year as well. So all in all, I think we should do a pretty good job on debt reduction as far as this year is concerned. And we should also see a strong sort of inventory reduction trend during the year.

Next question comes from Amit Mehendale from RoboCapital.

Sir, there was a statement recently from PVH Corporation that they will end business relationships with factories that use Chinese cotton. Just wanted to ask how will it impact our business?

It has no impact on us, whatsoever.

Okay. And sir, the second question is about interest. I mean this quarter, quarter-on-quarter, if I see the numbers, the finance cost has reduced, whereas -- but it doesn't seem to commensurate with the INR 50 crore reduction?

Yes. So with -- some of it is -- as we had outlined in our updates, our working capital costs on a consolidated basis has come down, including fall in interest rates overseas. And we have saved on some finance charges that might have been in that line item during the last quarter, like for example, bank commissions and so on.

Right. Sir, how do you expect this finance cost item going forward? I think the CWPI -- CWIP is more or less is quite low now. So do we say that this is more or less, it should go down from here because it's -- most of it has now been capitalized?

Yes. We have come to the fag end. We have pretty -- we have completed our calibrated CapEx program with the commissioning of the towel plant. We have some residual CapEx, small residual CapEx left for FY '21, post which we will be in scheduled maintenance/organic CapEx mode, as we see it for these businesses and plants, which will be -- so our organic capital expenditures should be in the region of INR 70 crores a year. And therefore, having completed our major CapEx', we have begun our deleveraging exercise, which should -- which could continue.

Next question comes from Siddharth Rajpurohit from JHP Securities.

India contributes around 38% to the American market. So what do you see? Do you see there is further scope for the -- increasing the share? Or do you see there is some risk that the country would like to diversify and that can impact us? What are you reviews, sir, on this?

Sorry, 38% of what?

India contributes 38% of the imports of U.S., like, sir, in the cotton?

That's right.

Right, sir.

So I just wanted to...See, I feel that our share of U.S. imports will be range bound. There could be years that it climbs a couple of hundred basis points, and there could be years, it remains stable. But I don't see any substantial negative bias as such. So either it will be range bound or it will climb. The probabilities of it climbing given the bilateral tensions between the United States and China and so on and how that would play out, I mean there are the probabilities of some increase in share greater than any reduction. So I would say the bias is for stable/creeping up of market share.

Okay. And sir, what are our plans for the other markets like Europe, Middle East, other Asian markets? And what -- how do you see -- going forward, what would be the share of these markets?

So we have -- we are expanding our geographical reach. So we are focused on Europe, we are focused on the Middle East, we are focusing on APAC. So we are expanding our geographical presence. We are expanding our client base across geographies. And we are also increasing our product offerings. With bath coming in and allied bath products coming in, our product suite is now widened. So we are widening on 3 fronts; clients, product and geographies. So what I call the PCG metrics, and we are working on widening all these 3. Hello?

Sir, there is no response?

Hello?

Yes. Can you hear me?

Hello? Can you hear me, sir?

Yes, I can.

Sorry, sir, the line -- I could not hear after you -- from the Europe answer.

So basically, we are working on something called the -- we are working on broadening our product offering, our brand base and our geographical sort of reach. So we are expanding markets while we are traditionally sort of more focused on the North American market. Our focus on Europe, the Middle East and APAC has also enhanced, and we are looking at adding clients here and adding these geographies to our mix. Second is, we are looking at expanding our client base across these geographies, right? And the third is we are broadening our product offering. So all the 3 strategies are being pursued simultaneously, to answer your question.

Yes. And how could these regions share to our revenue change over the next 3, 4 years?

I think from -- I think the share will hinge to -- in the region of anywhere between 30% to 35% as we see it.

Are there any difference in the margins that we get from the other regions as compared to U.S.?

I mean it's not regional -- it's not region-centric. It's product-centric. So it could swing either way. I think it could move in a couple of hundred basis points band, but nothing to do with regions as such.

Okay. But largely -- means, what you answered in the last call was that largely, the margins between terry and sheet remains largely the same, right?

That's right. The terry and sheet margins exclude spinning.

[Operator Instructions] Next question comes from Prerna Jhunjhunwala.

Yes. Sir, I wanted to understand the demand scenario with respect to what kind of products are being preferred because in India, we're seeing that a lot of economy products are being preferred as compared to premium products. So premiumization has gone for a toss in this COVID era. So what kind of trends are you noticing there in the U.S.? And also, how the supply chain like inventory level with the retail stores as compared to earlier and that would give us some sense about how the demand is shaping up and what areas?

So product preferences, we aren't seeing any pattern, Prerna. We are seeing as much demand for higher-priced prime products as we are for mid- and lower-priced prime products. So we aren't able to distinguish any pattern there. The universal truth that the bottom end of the pyramid or the lower end of the pyramid, obviously, you'll see greater demand, that obviously holds good. But vis-à-vis differentiation and offtake patterns with regard to price points, we aren't able to spot any pattern. As far as -- what was your second question, sorry?

Sir, it was with regards to supply chain. I mean what kind of inventory levels do the retailers...

So our read is that there is a positive of inventory in the retail value chain. We have -- and the industry has, not just us, consistent requests for urgent deliveries and so on, which signals the paucity of inventories that they hold and the difficulties sometimes they're facing in getting these inventories into their ecosystem, given the supply chain disruptions that they are all facing. So I would say that vis-à-vis normal levels, they would be probably below normal levels, at least for the categories we cater to per our reading.

Okay. And how is the off-line versus online sales happening in the U.S., as we see that more of online -- online has started picking up in these categories as well? So any read-through there? And how are our brands placed in this specific arena?

Well, we have also -- so first of all, I'm talking and commenting with regard to our product category. So there is no doubt in the fact that retailers across the board have seen a robust increase in e-comm sales as far as our product categories are concerned. It's been across the board. Second point, most players have, therefore, enhanced their focus on making sure that they benefit from this surge in e-comm revenue streams that they are seeing in our product categories. So our focus on that front also stands enhanced. So on a small base, it's substantial growth, but it's still far away from becoming mainstream and let's say, running large portions of capacity. So that's still a little distance away, at least for us. But on the smaller base that it currently occupies, it seems pretty robust growth.

Okay. Okay. And sir, I wanted to understand your strategy for the manufacturing piece like we had, in the last call, spoken about towels being even sold to third-party retailers, for example, private label of retailers. Is there any change there? And is there any change in the bedsheet manufacturing strategy as well?

No. Our strategy remains well balanced, Prerna. I mean we operate plants of global scale, both on the bedding front and the towels -- on the terry towel front and on the spinning front. We have a strong portfolio of brands. And we have a strong portfolio for private label products. And our share of private label is going up as well as we expand our product offerings. And we, at the same time, continue to focus on strengthening our brand portfolio. So I think the both are sort of growing in tandem in terms of areas of focus. And therefore, there's no fundamental change in our strategy.

So revenue from brands will continue at around 80%, 85% -- 85% to 90% as we had thought about earlier -- in FY '21?

Yes. I think private label could also see a substantial movement. So brands could move in the region of 8%, 10% here and there. That will -- so they will continue to be substantial. And private label attention is as much in terms of our -- the time we devote to growing that segment. So maybe that can take a little larger share going forward because of our larger capacities and broader product offerings. But -- so therefore, in essence, both portfolios should be strong for us.

Okay. And sir, my last question. Is there any margin difference between the portfolio of private labels versus our branded portfolio? I mean just trying to understand, will this mix change have an impact on our margins?

I don't think so, Prerna, because while there are some -- I mean there could be cases where brands are richer in margins and there could be cases where they are not, but give us other benefits of better hold on shelf and so on. So I think as far as EBITDA margins are concerned, they should be range bound, both these buckets.

Next question comes from [ Sugrith Deora ] from Paladin Capital.

Please pardon my ignorance. I'm new to the business, sir. This is the first time I'm joining into your call. So I have some basic questions, so please be a little patient, we request that. Firstly, one of your opening comments was that your business model is not changed fundamentally, but you had a different client mix, which is why your performance in the first quarter was bad. I couldn't really understand that. Could you please explain that in a little bit more detail?

So basically, there could be questions in some of our investors' minds as to why our revenue dip was higher than our peers. So our best explanation and insight as far as that question is concerned is it's because of client mix. Most of Himatsingka's clients did not offer essential goods and services during the lockdown period, and the couple clients who did, didn't necessarily need inventory at the time. So given our client mix and the fact that they didn't operate -- they didn't offer essential goods and services, they remained shut during that period. And hence, the offtake was very, very low. So that's basically the reason for the Q1 dip in revenues as we -- and then it will bounce back to normal going into H2, and the bounce will also be obviously visible during the second quarter.

Sir, these companies are not facing any issues in terms of sustainability of the businesses, they're not winding up or filed a bankruptcy or anything. It's just that they were closed and they are reopening, is that fair to assume?

Yes, absolutely. I mean there have been cases where retailers have filed for Chapter 11, for example, JCPenney filed for Chapter 11 during this period. But they're not our clients, and we have nothing to do with them, but the point is, I mean, we don't have any exposure of any consequence to such cases. Therefore, in our case, it was a clear situation where retailers had to shut down because that was the direction they had to follow in their respective jurisdictions during the lockdown. And they refused to take product because they didn't need it because their stores were shut. So that's essentially the reason for the steep fall in revenues. But our order books are bouncing back as I said. And that sort of, let's just say, out of the ordinary situation that we faced in Q1 is over and done with, and we feel the worst of the pandemic is behind us, and now we are focusing on the ramp-up. So let me also say so our H2 order books are normalized, and we are making -- we are trying to make sure -- we're trying to see if we can beat pre-COVID performance levels. And our Q2 order book is robust relative to Q1, and we are busy ramping up.

Is there strong seasonality in this business to service the demand that comes in the U.S. holiday season, which is why you might see a sharp ramp-up in Q2 and Q3 and then Q4 is little bit weaker?

No. Seasonal -- well, there is a -- I wouldn't say there's a sharp seasonality. There are pockets of seasons through the year. And I would say they are evenly spread. As far as the United States market is concerned, there are important events through the year. Or, let's say, in most of the -- all of the 4 quarters, there's something going on. But of course, there's certain greater weightages in some quarters with regard to certain promotions. For example, in Q4, as we have shared with stakeholders earlier, a large -- a lot of shipments take place, not only from us and in other product categories as well for back-to-school preparations in such geographies like the U.S. Typically, that's a big season for them. And so shipments ex plants happened during the Q4. So I would say that there are quarters where the weightage of seasonality is a little higher, but nothing eye-popping.

Would you attribute the resilient demand from the U.S. that's coming in to the stimulus checks that have been rolled out, out there, and therefore, it being ephemeral? Or do you think that this is a trend that -- the normalized trend if you go back to is what you might sustain for beyond the next 6 months?

I think as I said earlier, it's probably a confluence of reasons. It's difficult to link with precision why this relatively high demand is coming through. It could be from greater time spent at home. It could be the hygiene factor these products sort of carry and are required for. It could be the age that an additional support that they're getting from stimulus checks. It could be a little bit of the China factor, depending on the company and the product. So I think it's a confluence of reasons. But I continue to remind everyone that at least the way we see it, the step-up in demand is relative. It's nothing -- it's not exponential. It's not relatively higher than what one sees normally.

So would you be able to quantify what kind of numbers or the run rate you would get to towards the end of FY '21 or FY '22?

Run rate in terms of what?

Revenues.

No. We don't give guidances. So I'm afraid I can't comment on that. But I think, as I said, our outlook remains robust. And we hope to make up for lost ground as we go into the year.

Okay. And if I may, on the towel business, I believe this is a new line that you just initiated, what is the revenue potential that you could achieve here?

So first of all, it's not a new business. It's a new manufacturing business for the group. The group had towels as part of its portfolio -- brand portfolio, even prior to us setting up manufacturing facilities. And secondly, 25,000 tonne per annum plant, the consolidated throughput, including distribution and so on, it's difficult to put a number because it depends on product mix. But somewhere in the INR 125 crores to -- INR 1,200 crores to INR 1,500 crores, somewhere there.

INR 1,200 crores to INR 1,500 crores. Okay. And sir, also, I was wondering if you could quantify the debt reduction that you have planned. So I know you mentioned INR 50 crores in quarter 1, and directionally, I know you said, quarter 2 will get more aggressive and so on. But broadly, could you quantify for the year '21 or year '22, what the debt could reduce down to?

So your question is what our debt reduction will look like in '21 and '22 together?

Yes.

Yes.

No. Year ending '21, what it might look like and year ending '22, what it might look like?

I think it's safe to assume that -- I mean it's difficult for us to quantify because we could also see sharp reductions on account of working capital cycle...

Working capital, yes, I understand that.

But in the region of both years put together, approximately INR 500 crores or a little bit higher than that?

And is it safe to say that it'll be roughly equally split?

Yes. I mean it'll be reasonably balanced.

Next question comes from Vikas Jain from Equirus Securities.

The first question as you mentioned in the press release that one of the factors that is impacting our revenues or probably the production was the workforce issue that is the interruptions in the workforce availability. So is -- so I assume that, that might be due to the migrant labor workforce? Or -- so is that problem issue solved to a large extent? Or still we are facing some of the issues at this point in time?

No. I think it's solved to a large extent, but I'd like to caution everyone that this is a pandemic. This is new for everyone in the manufacturing space. Different companies have different sort of symptoms and reactions to the pandemic, et cetera, in terms of what they're seeing on the shop floor. I estimate that there will be some interruptions from time to time in most corporates on their shop floor. Because if someone tests positive, for example, you have to go through protocols of sanitization, testing and so on. But one gets used to that, and it becomes a part of daily manufacturing activities, and one tends to build cushions for all this. So I think keeping this in mind, we have largely sorted all these issues out. Although we have faced some interruptions in Q2 on both these accounts of sanitization and testing and so on, but the directional ramp-up has been pretty satisfactory. And I think going into H2, we should be reasonably settled.

Right. So sir, am I correct in understanding that it will take another quarter for us to get to that production utilization levels that we used to clock at pre-COVID levels?

Yes, I mean, not another quarter. I think by the end of Q2, we should be there -- more or less there.

Okay. Okay. Okay. Sir, in one of the questions, you answered that we are also working towards aiding more of the clients as well as expanding the geographies. Sir, can you give a bit more of a color in terms of how -- or if any customer additions that we have done probably in FY '20 or in 1Q? And any incremental business that you have seen from the non-U.S. geography over last -- in FY '20 or probably in 1Q?

Yes. I mean I wouldn't want to go into client names, but I'll give you...

Any number additions if any.

I mean we've approximately added -- I would say, approximately 40 clients in FY '20. And that makes one wonder as to where is the revenue that 40 clients have been added. So these -- a lot of -- so all clients are not large necessarily. We added several channel partners on the e-comm front, for example, during FY '20. We added several brick-and-mortar clients across geographies in FY '20. We see substantial client additions happening in our new terry division as well across geographies. So I think we are adding e-comm channel partners, we are adding traditional regular brick-and-mortar retailers, we are adding loyalty-led clients who run loyalty programs and so on. So various kinds of clients and retailers who essentially complete the B2C piece. And we see them being added across.

So would it -- so just to my understanding, does it take a certain period of time for the newly added clients to ramp up the operations or give incremental orders to us, so that it flows into our revenues.

Yes, it does. It does. I mean...

Approximately around a year or so or may be higher than that?

A year or 2. It depends on the client and the product and the nature of the opportunity. But I think what's important is a continuous addition to the client base, I think, that's what's important.

Absolutely, absolutely. And sir, just last question. You also mentioned that there was some of the inventory write-off that was -- that occurred in this quarter. Do you foresee additional write-off coming off in 2Q as well? Or we are mostly done with that write-off thing?

No. Actually, no, it's not only this quarter. There was a write-off we took last quarter, which was exceptional in nature on account of COVID. And the write-off we have taken this quarter is nothing to do with COVID as such and anything specifically co-related to COVID, but we thought it's prudent to take a provision on grounds of products given the volatility and so on that one sees, generally speaking. So we thought it's prudent to take this hit. So it's more on ground of things than anything else.

Right. So there are full chances that this could be reversed going ahead when we sell our products to retailers?

Yes. And it also complements -- I mean look, do we -- is it the best thing to take write-offs on inventory? Absolutely not. Have we seen inventory write-offs to this magnitude in the past? No, we have not. In the larger scheme of things, is INR 50 crores, INR 60 crores, anything -- is nothing super high either. We thought it prudent that we should keep this reserve in light of a volatile environment. And making sure that we are lightening on inventory as part of our working capital rationalization initiatives. So I think we are done with what we needed to do. I repeat this has nothing to do with COVID as such. But our estimates of what the net realizable values would be in this environment. So I think we are done with the inventory piece for now. And we shouldn't see it disturbing us going forward in any material form and shape.

Next question comes from Dhwanil Shah from I-Wealth Management.

Sir, just had a question on our Terry Towel side. So can you just help us currently, sir, what is the utilization rate which we're operating at? And how would the ramp-up happen?

Unfortunately, we don't share capacity utilization rates, but it's a plant we started in October. And so when COVID hit us, it was about 5 months into commercial production. And we then kick-started again the ramp-up process in June. So I did tell someone on the previous call, I think that over -- through FY '22, we should be looking at largely placing the capacities of the plant.

Yes. So sir, let me put it the other way. I mean...

We'll continue to ramp up the production during FY '21. And as we go into FY '22, we should be at pretty high levels of utilization vis-à-vis the total capacity available.

Okay. So by sir, '23...

So yes, we would look to place the total capacity by that time is what we are currently estimating.

Okay. And sir, with our current clients, so those are the ones who will be taking the towel also or we need to go and find some other clients in the Terry Towel side of the business because there are some synergies?

The current clients will also take it, but not only. We'll have to -- we will be placing the capacity to several other clients. The gentleman who was asking the question just before this was on similar lines in terms of client additions and so on. So our client addition pace is important than -- because we need to place capacities, not just with a few clients, but we need to broad base our client universe and place capacities across.

Okay. Okay. Because, sir, I'm just trying to understand that when you're saying that we may reach to the pre-COVID levels so that was roughly in the range of INR 600 crores, INR 650 crores of run rate we used to do on a quarterly basis, that's right, and I think the towel wasn't there.

Yes. Towel was there during Q3 and Q4 in the initial phases.

Okay. Okay. So we should see, sir, those levels again coming back? Or we may see that it surpassing that as the towel also starts contributing much higher? Just on the directional side, sir, I mean...

As I said, we are looking to match pre-COVID levels, if not beat it going into H2. There could be some revenue mix changes and so on. So whether it will exactly correlate to the top line piece, I don't know. But that's where we are headed, broadly speaking.

Okay. And in the last 2 quarters, sir, the revenue, which we have lost would there be any chance of those, sir, coming back? I mean there is some spillover because in the Q4, you had said that INR 200 crore of orders were also on hold. So are those orders going to come back or is it, again, we need to see the market side of it?

I don't think they will come back because that time has lapsed. So the orders what have gone are shipped, so instead of placing new orders, something that was on a hold was taken. So I think it's fair to assume that we'll -- when we say we'll make up lost ground in terms of -- we sort of try to make it up with growth as much as possible. But I think the orders, the revenues that we have lost during that period, unfortunately, a substantial portion of that is lost. The next quarter, there won't be any impact of spillovers of the previous quarter of any consequence.

Okay. And sir, last question on your variable cost. So you were saying that a lot of cost optimization things are going on. So if you could just help us to understand slightly in detail, sir, what that would be? And how sustainable you think, sir, that can be there going ahead?

So as I said, we have reestimated that we have taken -- undertaken measures that should yield INR 50 crores to INR 100 crores in a year on a sustainable basis across the board, including personnel, energy and other operating expenditure, which is customary in a model of our nature. So that's what I feel the cost optimization measures needed going forward to answer your question.

Thank you, sir. Due to time constraints, this was the last question. Now I hand over the floor to the management for closing comments.

So thank you so much for your questions and your patience. I do hope that we will be interacting soon for the next quarter. And if you need to check in on anything vis-à-vis questions and doubts that you might have or clarifications that you might have, please do reach out to us, and we'll make sure that we have addressed all your queries. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes your conference for today. Thank you for your participation and for using Door Sabha's conference call service. You may disconnect your lines now. Thank you, and have a pleasant day.