S.P. Apparels Limited (SPAL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to S.P. Apparels Ltd. Q4 FY '21 Results Conference Call, hosted by Systematix Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Naushad Chaudhary from Systematix. Thank you, and over to you, sir.

Thanks, Nirav. Good afternoon, everybody. On behalf of Systematix, I welcome you all on S.P. Apparel's conference call. I thank the management team of S.P. Apparels for giving us this opportunity to host them. From the management team side, we have Chairman and Managing Director, Mr. P. Sundararajan; Executive Director, Ms. S. Latha; Director, Mr. S. Chenduran; CFO, Mr. V. Balaji; CEO, Ms. P. Jeeva. Now I hand over the call to the management team. Over to you, sir.

Good afternoon, everyone, and a very warm welcome to all of you present on the call to discuss our financial year in this FY '21. At the outset, I hope and wish that all of you and your loved ones are healthy and safe. COVID-19 pandemic has spread at an alarming pace and has emerged as a social, economic and humanitarian crisis worldwide infecting millions and bringing the countries worldwide to a standstill. This has caused a lot of damages to the biggest of the economies in the world. Your company has weathered well during the crisis, and we have managed better during this second wave. Lockdown during the month of January to March in the U.K. has disrupted the operations, and in spite of the labor disruption, we were able to deliver better revenue during that quarter mainly due to the product segment which we cater to. The end of March second wave started in India, which has affected the performance of the company during Q1 FY '22. But in spite of this, we are managing to perform better than the last year wave, which is Q1 FY '21. We are glad to inform that the Board has recommended for a dividend at 22.5%, that is INR 2.25 per share. Our major divisions have performed well during this quarter. This shows the inherent strength in the company. The sustainability and the experience gained during this period of the business will take us to a new height. Regarding our various segment performances. Garment division, the shipments to customers during this quarter increased year-on-year in spite of the lockdown in the U.K. Our customers are witnessing consistency in demand, especially for their online retailing business. Retailers consolidation of supply base is still happening aggressively, and that is one of the reasons that will support our growth going further as we continue to remain as one of the most preferred suppliers. As of now, our current order book stands at INR 325 crores. The Garment division revenue for the quarter stood at INR 163 crores, an increase of 13% year-on-year. Our EBITDA margins improved from 13.1% to 17.8% this quarter, which improved by 470 bps. EBITDA margin could have been better provided the government has released RoDTEP. This has an impact of 4% in the margins comparing last year -- last quarter. As mentioned in the previous call, we have consolidated factories to reduce the rent, workmen transportation costs and other operating overhead. We are confident that the EBITDA margin will sustain at this level going forward. Our strategy in increasing the utilization level by aggressive sourcing and training of workmen is gradually yielding results. We are working with a mix of employee base. We have migrant employees, home state employees, as well as the local employees who travel through transportation. The strategy to bring more migrant employees will start yielding better results going forward. Second lockdown in Tamil Nadu was for 7 weeks. And on the current status of these factories, we have assumed our operations and have reached to 60% of where we were before the lockdown. We are able to utilize the capacities with the experience we gained during first lockdown. But for the second wave in Tamil Nadu, we would have seen a better utilization of machine. Our efforts in increasing the utilization of machines by increasing the second shift has been deferred due to the second wave and will implement at the right time. As we have explained in the last con call about 2 new customers, we are hereto move forward and start the business very soon. And we'll update you in the right time. With regard to the spinning division, spinning is fully being utilized and is yielding good margins -- good margin addition to the Garment division. Currently, we are in the process of expanding our spinning division by another 3,600 spindles. And now due to the pandemic, the project is delayed by another 3 months. Once the project is completed, we will be at 27,000 spindles. Processing division. The biological treatment plant project is completed and this is up and running. This has improved the efficiency of the plant, and now our capacity has increased by another 3 tons per day. This is also contributing a comfortable margin to the Garment division. Regarding the S.P. Apparels in the U.K., SPUK is looking very promising. We have 3 new customers now in the pipeline. We can expect their orders from October 21st onwards and will work with us in the babies and kids segments. SPUK revenues stood at INR 21.9 crores when compared to INR 11.7 crores of revenue year-on-year. Our current order book for SPUK is at GBP 5.3 million. With regard to Retail, revenue for the Retail division stood at INR 8.2 crores for the current quarter compared to INR 12.7 crores year-on-year. And expectedly, due to second wave in India, we witnessed significant reduction in the sale and we were forced to give deeper discounts on the products, and we have also liquidated certain stocks during the current quarter. Retail EBITDA was a loss of INR 4.5 crores. This decline is majorly due to the low sales and the higher discounts. We hope the economy revives and all the malls and stores will be allowed to operate and we'll start making better revenue and margins going forward. We hope that the efforts of the team will yield us revenue growth and margin sustainability going forward. Our liquidity position continues to remain comfortable. We have cleared all the interest and debt installment obligations that we -- that were due until today. Finally, during this FY '22, we are working towards better utilization of capacities and also to increase in revenue by strategically having different verticals of businesses, which will parallelly grow along with the existing current business, and we are excited about the new verticals. Now I will request our CFO to give an overview of the financials. Thank you.

Good afternoon, everybody. Thanks for your participation on the call. I will just run you through the financial performance of the company and the division-wise numbers. Quarter-on-quarter performance, revenue stood at INR 193 crores as against INR 159 crores year-on-year basis, which grew by 14 percentage. EBITDA stood at INR 25 crores as against INR 18 crores year-on-year, which grew by 33 percentage. PBT stood at INR 15 crores as against INR 5 crores year-on-year, which grew by 194%. Mainly, last year this being disrupted during the pandemic. That stood at INR 10.56 crores as against INR 2.81 crores year-on-year, which grew by 275 percentage. Performance of the year, revenue stood at INR 653 crores as against INR 830 crores year-on-year, which is a degrowth of 21 percentage. It's mainly due to the pandemic hit in the quarter 1 and quarter 2. Our adjusted EBITDA stood at INR 107 crores as against INR 89 crores last year, which is a growth of 20 percentage. PBT stood at INR 59 crores as against a PBT of INR 44 crores last year, which is again a growth of 33 percentage. PAT stood at INR 43 crores as against INR 46 crores of last year, which de-grew by 8%, mainly due to a DTA reversal, which happened due to effective tax rate change last year. Garment division. Revenues stood at INR 163 crores versus INR 144 crores year-on-year. The growth stood at 13 percentage for the current quarter. Revenue was disrupted due to the RoDTEP, which was not announced by the government, and we have not recognized RoDTEP in the revenue. And also, it was disrupted due to the container shortage and the Suez Canal issue during this current quarter. This led to a revenue slippage by INR 12 crores quarter-on-quarter. Revenue for the year stood at INR 536 crores as against INR 703 crores year-on-year. This is mainly due to the disruptions caused by the pandemic during Q1 and Q2. EBITDA margin stood at 17.8 percentage as against the quarter -- as against 13.1 percentage year-on-year. Improvement in spite of gross debt not being recognized. EBITDA margins for the year stood at 20.2 percentage for the whole year as against 12 percentage for the whole year. Retail division. Revenue for the quarter stood at INR 8.2 crores versus INR 12.7 crores year-on-year. Revenue for the whole year stood at INR 39.5 crore versus INR 77.63 crores year-on-year. Revenue has come down significantly due to the disruptions of the pandemic. EBITDA for the quarter was negative to the tune of INR 4.5 crores. EBITDA for the whole year was also negative 13% as against an EBITDA of 4.4 percentage last year. This gross -- this EBITDA margin is purely because of reduction in sales. Gross margin also was -- has come down in the Retail, mainly due to the higher liquidation and deeper discounts for the current year. On the performance of vertical SPUK, revenue for the quarter stood at 22 crores -- INR 22 crores as against INR 11.7 crores year-on-year. Growth stood at 87 percentage. Revenue for the year stood at INR 76 crores as against INR 50 crores last year, which is at a growth of 50 percentage. Revenue in terms of GDP was at GBP 7.9 million as against GBP 5.6 million last year, and the growth stood at 40 percentage. EBITDA stood at 5.3 percentage versus 3.7 percentage for the whole year, and this is a significant growth in terms of EBITDA and revenue. Let me give you the status of the debt position on a stand-alone basis. Excluding the right of use, gross debt stood at INR 145 crores, which is a significant reduction in last year numbers. Last year, it was INR 180 crores. Net debt stood at INR 113 crores as against INR 139 crores last year. Significant reduction in debt, it is equivalent to INR 32 crores. Working capital position. We have a receivable of INR 93.8 crores as against INR 85.7 crores last year. Stocks stood at INR 241 crores as against INR 227 crores last year. Our payables stood at INR 73 crores as against INR 75 crores last year. Our operational cash flow stood at INR 79.3 crores as against INR 86.9 crores in spite of the pandemic. Other information is available in the presentation, and we'll get into the question section.

[Operator Instructions] The first question is from the line of [ Jiraj Ahaga ] from [ KMS Area Family Trust ].

Yes. So my first question is regarding -- when I look at your volume for Garment volume for FY '21, it was down about like 27% for the full year. So I want to understand what was the -- as per your understanding, how the industry has behaved and how is our market share in FY '21? Have we lost market share and if yes, how much? And are we able to retain our market share? What was the industry number for FY '21 in your market where you operate?

So see, you cannot just look at numbers versus revenue because revenue has got certain portion of operating -- other operating income also. So like the duties or tax, the change in the incentive schemes, that will also be part of the duties or tax. But if you look at the volume, it will also be like what kind of products we do. So I think looking at volume versus revenue would not give a better picture in terms of reduction. What you say is 27 percentage versus the revenue reduction is close to 50 percentage because we didn't have the opportunity of working in the first quarter.

No, I understand. I want to understand as far client level, have we lost our market share or that was the idea? Has the client also acquired...

Actually, there's no losses in terms of market share.

Okay, so you mean there's no loss of market share for us. The industry -- or the client itself has acquired is 25%, 30% lower this year compared to last year.

No, the ability to take orders also depends on the number of -- I mean, capacities which we productively utilize. So like when there is a reduction in capacity due to the lockdown, so I have to take orders based on whatever capacities I have. So it's purely -- I think your question on the revenue versus product piece may not be right for the current quarter -- current year, financial year.

Okay. I'll actually -- like this year, what is the volume expectation we have? So will you come back to a INR 6 crore kind of a run rate this year as per your order book and per understanding. Assuming there is no fresh COVID wave, can we be able to reach the INR crore volume number this year?

This year, we should be -- first quarter is also a disturbed quarter, right? Until today, we are to get a clearance from the Tamil Nadu government for opening up fully. And the migrant employees traveling is also restricted. So first quarter is a disturbed quarter. We expect that we should reach 6 million -- 60 million by end of this financial year. It will be better than FY '20 Q1.

So Q1 this time will be better than FY '20 Q1. The full year will be better than FY '20?

Yes, correct.

Full year, right?

Definitely, I'm talking about the full year, yes.

So FY '20, we did about 5.76 -- 57.6 million.

Correct, correct. We should be better or very close.

Okay, okay. Understood, understood. Second, in terms of EBITDA per piece. So this time, after a long time, we have come to the run rate of INR 25 crores, which we saw earlier in '17, '18. Do you think this kind of a number of INR 25.7 crores -- or INR 25 crores EBITDA is a sustainable number?

Yes. Whatever -- if you look at what Chairman spoke about in the opening remarks, he said that we expect this margin to be sustained for a period of time. In spite of the increase in the cotton prices and the RoDTEP not being recognized, we are able to deliver an 18% EBITDA this quarter. So we feel that this margin should be sustainable going forward.

I'll just press on this. So 18% for the quarter or you mean to say 20% for the year? So which is sustainable number, 20% or 18%?

So we feel that 18 percentage should be the guidance for the years to come.

Okay. And there, you're not assuming any export duty benefit in 18% margin?

No, no, no. See, you cannot -- you cannot look at EBITDA margins and export incentives, both together. In spite of no export incentives or not being recognized this year, we were able to give you a better EBITDA margin. But what we need to look at is when I have an option of getting and export incentives, I have more -- I do not pressurize on the margins with the customer. So I need not negotiate more with the customers.

And by the way, what is this RoDTEP? It has not been announced. So this 18% number, assume, what, 2% RoDTEP, 3%, 4%? So what was the idea? When you say 18%...

The market here, it is expected close to 4%, between 2% to 4%. So if that is announced, it can -- all the possibilities that it can improve only.

[Operator Instructions] The next question is from the line of Akshay Chheda from Canara Robeco Mutual Fund.

Yes, am I audible?

Yes. Very much.

Okay. So my first question was you did mention about the disruptions that have happened in Tamil Nadu. So because of this, obviously, we would be exporting less. So is there a case where the orders get shifted to other competitive nations or the position of India still remains intact? Because in apparel, it is very important that we deliver the goods on time, so that was my first question. And on the second, on this container availability and the freight cost, like are there challenges still on that side or the situation has somewhat relaxed over time? Yes, these were my 2 questions.

Yes, so regarding the first question, see, there is always competitive countries on the table. And because of this pandemic situation, it doesn't mean that the business is diverted. Because even other countries are also suffering such kind of the pandemic thing. So it is not that the customers are comfortable by transferring the orders to Sri Lanka, Cambodia, Vietnam or even Bangladesh. So definitely, this pandemic is not going to affect the orders getting -- inflow, getting into the country. We are definitely very, very strong in all aspects. India is very, very strong in all aspects. And we especially S.P. Apparels being in baby segment, infant and kids wear segment, always our customers give us priority to us. And we plan in such a way that sometimes even take them by [ air ] to see that the stocks are available. So they will -- they always prefer not to divert the business from us to others in all aspects. With regard to the point number two, the container thing definitely thing now is regularized, it's normal. There is no issue in this container issues.

The next question is from the line of Riddhesh Gandhi from Discovery Capital.

Just had a question with regards to any sense on when we expect like normalcy is due onwards, assuming, obviously, there are no COVID disruptions. But given where we stand with our order book and given that the economy in India is now opening up, do we expect like Q2 to be at levels of utilization, which is close to 100%?

See, the utilization in Q2, as we always used to be about 78%, 80% utilization of the total capacity, around 77 -- between 70% to 75%. So that will continue. And probably from Q3, the utilization level will slowly increase once we implement the 2 shifts in certain factories, those 2 factories. So yes, by Q2 we'll be back on track as we were before lockdown. And then gradually, we will ramp up the capacities.

So if we are to adjust for shifts as well, right, how much would be -- how much will be [ giving ] capacity in Q2? And what would you be your expectation around utilization? And in Q3, if you run 2 shifts, how much would be the utilization?

Actually, the shift [ tunnel ] we will be able to plan only in Q4 after Diwali. And for Q2 and Q3, our focus will be mainly on bringing back the previous capacity that we had before lockdown.

Got it. But will we also...

[indiscernible] is about 2% to 3% increase in the capacity additionally from Q4 onwards.

Okay. But is this based on -- because we had also done a CapEx with increased capacity. So is this on the increased capacity?

On the CapEx, what we have spent, what we are talking is purely on the existing -- I mean, the CapEx -- which CapEx you are talking about?

I talked about the historical CapEx will increase our capacity. I'm talking about the historical CapEx where we've increased our capacity, which was about, I think, a couple of years ago we were on the verge of ramping it up. What you already indicated was usually slow in ramping up and profitability is low. You now talked about that [ initial ] CapEx. Do we see that being utilized also actually appropriately from Q2 onwards?

So in terms of your query on what we have spent on the capacities previously...

[indiscernible] talk about utilization. Okay, okay. And the other question was, is that on our existing capacity, how much is the peak revenue, which we can do?

On the revenue, how much peak revenue.

How much?

Peak revenue.

On our existing capacity. How long can we [indiscernible] to achieve solution.

[indiscernible] and we should be easily doing INR 1,000 crores, INR 1,100 crores of revenue on the exports alone, not to include on the duties or tax and the other benefits.

During the peak.

Peak utilization at the 100% efficiency level.

And we would expect to be able to reach this level by Q4 or next year? Or how should we figure. What is the [indiscernible]

[indiscernible] Efficiency is not possible anytime -- I think 90% utilization is possible. And we can gradually improve our efficiency by 5% year-on-year. We cannot improve the efficiency immediately to 100%.

I think his question is what is your peak utilization sales?

Yes.

Not 100%. He is not meaning that way.

Yes, yes, yes. I'm saying given this existing capacity, what is the utilization...

If we really maintain the peak utilization, we can cross INR 200 crores per quarter. I'm talking about only on the Garment exporting.

Got it. Okay, okay. And the incremental is actually -- I mean [ spinning ] CapEx, which we are doing, is the yarn 100% used for internal consumption? Or are we selling the yarn also in the market?

No. We are using only for internal purposes. And if there is any excess available in the market, I mean the [ correction ], and we are able to utilize better rates in the market, we will just sell that across.

Predominantly [ cash sale ] only.

Got it. So the expansion, which we are doing on this additional spindle will actually increase in profitability.

Correct.

Got it. And then the other question was, look, if we see -- we had discussed with you a few years ago, we were talking about EBITDA margins at that time in the range of 20% to 22%, right? You now have your own captive spinning, which you are also effectively increasing. Overall, I mean, operating leverage would also be higher as your capacity coming onstream. Should we not be able to achieve even higher profitability than what we had guided to earlier? And this 17%, 18%, which we're speaking about are actually too conservative a number?

So Riddhesh , if you look at the 20, 22 percentage margin, which we spoke a couple of years before, at that point of time, all our benefits, including RoSL, RoSCTL, MEIS, they're all at the peak of 11 percentage. Now this quarter, our duty drawback and other benefits are only 2 percentage. So we are trying to maintain the margin of 18 percentage in spite of increase in the cotton prices, in spite of increase in the wages, in spite of the duties or tax being -- I mean, the -- sorry, the RoSCTL and the MEIS withdrawn, we are trying to maintain 18 percentage. So our guidance is that we will maintain 18 percentage definitely improve on it going forward with 20 -- I mean, 200 to 250 bps if everything is in our favor. So that is what we are trying to say that we are maintaining a 18% EBITDA margin.

So in other words, the 18% is on its -- on the business' own strength without any other support. So anything plus will be in addition to this one. So this is what is the current scenario.

[Operator Instructions] The next question is from the line of Sumedha Srinivasan from ICICI Prudential Asset Management.

So 2 questions from my end. One is cotton prices have been steadily increasing. So what is our strategy on that front? Do we have -- I mean do we generally keep a stock for large part of the year? Or how does it work? And do you see any impact because of this Xinjiang China cotton ban issues impact on India?

China -- yes, cotton prices, see, yes, there has been a consistent demand for the cotton prices and cotton price is going up. It is reaching 60,000-plus. So definitely, this is a really historical number this high. But finally, there has been -- overall, if you look at it, there is inflation all over. So this will also inflate the currency as well as we have to -- even other competitors from other countries also are getting this kind of costing. So this is not going to have any impact on our costing of the government to our supplier -- our customers. And even the market, the yarn prices are equally, proportionately increasing. So I don't see that there is going to be any difficulty in running the business in a normal way.

But do we keep -- what is our normal stock that we see in terms of maybe number of months of cotton stock that the company generally keeps?

Yes. As we always mentioned, we don't speculate in keeping the cotton stocks. Always we keep stocks for about 60 days to 90 days consumption. So this is -- we are not facing any severe impact on this one.

Just to add a point, see, cotton always seasonal. So the policy is to maintain stock near 3 months' time. And [indiscernible] you have better crops. And during the season time, it can go up to 120, to 150 days' time. So that's the cotton policy where towards the end of March, which is the end of the season, we used to buy higher cotton during that end of season during the month of March. So that's the policy on cotton.

Understood. And any thoughts on the China cotton ban issue as well as the China Plus One strategy impact on India, how you see it?

Yes. This is -- definitely, this is in India's favor in all aspects because most of our customers, they make sure that directly or indirectly, the raw material what you use should not be from the China, in particular, city cotton. So the customers are very, very vigilant on those things and very stringent. So this is again -- is again, it is leading to increase in the cotton demand. So that's the current scenario.

Understood. And just one last question, if I could squeeze in. What would be your strategy on the retail path going forward? I think this quarter also has been impacted because of lockdown. But any incremental investments is planned on that front? Or what is your strategy to sort of revive that segment?

So like -- see, if we look at incremental investment, we have already stopped investing into retail a year back. So because of the pandemic situation, we are forced to infuse at this INR 2 crores, INR 3 crores so that the liquidity is far better. So we may have to infuse another INR 2 crores, INR 3 crores into retail so that the working capital is effectively ramped up because of the damages that was caused because of the pandemic. But in terms of strategy on retail, I think, yes, we wanted to strategize and see how we can move forward in terms of retail. But the pandemic has not allowed us to think about because it's like open, close and open, close. So we are not in a position to strategize anything at the current moment. But rightly, when the time is there, we will definitely look to strategize how to move forward in terms of retail. But I feel that the capital allocation for retail will definitely be looked at. At least the Board is sincerely feeling that any incremental investment into retail will be the only screened and then will be looked at.

The next question is from the line of Deepan Shankar from Trustline Portfolio Management Service.

Thanks a lot for the opportunity, and good afternoon, everyone. Firstly, I wanted to understand after this lockdown ending in U.K., the U.K. reported very strong retail sales of 10% higher than 2019 sales for the month of May. So are we seeing very good traction in the order book in terms of -- basically from the U.K. region?

Yes. As I mentioned in my opening speech, we are very, very optimistic about the SPUK business model, where...

He asked about the U.K. business retail, not SPUK.

Oh, sorry. Okay.

Yes. Go ahead.

Yes. Actually, there is no problem from booking the order from U.K. market. And since their lockdown is completely open, and we are getting the booking as usual.

Okay, okay. So are we seeing that momentum picking up post lockdown opening up in U.K. market?

Yes, very much. It's very much. And also, this is a time the post lockdown in the Europe, so they are seriously reviewing again and again on consolidation. Because of lack of traveling, lack of one-to-one communications, a lack of capability to manage all on the digital way of working, so they want to concentrate on very limited super suppliers. So which means we are -- the business anyway is good after the lockdown in the Europe. Plus because of the consolidation, the customers are asking us to take more businesses even in other departments. So it is -- as far as the order inflow is concerned, it's not at all a problem. It's very, very positive.

Okay. And also, are we in discussion with any new customers in pipeline for U.K. or U.S. region?

Yes. As we mentioned before, we have 2 customers in the pipeline, which we mentioned before. So due to the lockdown, the things have delayed a little bit. I think, a little bit, they started again -- starting the dialogues now. So probably in Q3, the business will start coming in.

Once we get orders, we will just confirm the name of the customer. We will not be in a position to name any customers for the time being.

Okay, okay. And lastly, the SPUK EBITDA margins, last quarter, it was around 7%. So -- but this quarter, it has fallen. So this is the sustainable margins there, or it can bounce back to 7% EBITDA margin?

So 7% EBITDA margins is purely because of the exchange movements that is happening. So when you reverse that, that is where the changes are happening. But on a year as a whole, the EBITDA margin is sustained at 5 percentage. And I guess going forward, anywhere between 5% to 6% because it's purely a trading business, 5% to 6% of EBITDA margins should be sustainable going forward.

[Operator Instructions] The next question is from the line of Resham Jain from DSP Investment Managers.

Yes. So the first question is on the European retailers per se. What we keep hearing is that the inventory pipeline for the retailers is much thinner than what it was, let's say, a year back or pre-COVID times. And because of the 1Q disruption, which we have seen in India, possibly the kind of imports they could have done, that might have also reduced. So just your thoughts on the same that should we see from here on much better demand because of this situation as well?

Yes. See, there is -- see, it's a very unusual. Last lockdown, both the Europe, American market as well as India were in the lockdown, so there are no issues. But this time, what happened in this Q1 period, not from April onwards, until April, May, Europe was under lockdown, and we were open. And now they are open, and we are in the lockdown. So they have -- some customers have enough stocks to manage for another 2 months of supply chain. But some customers are running normal stocks only, so where they are facing kind of expectation of shortfall in supply chain. So there are a lot of support we are getting from the customers to make sure that wherever possible, they extend the deliveries, dates, and then they make sure that -- and most of the orders, they even take by air to meet over their supply chain, to have enough stock. So this is the current scenario.

Sorry. Yes. The second question is on the CapEx. What is the CapEx amount for FY '22, the budgeted number?

FY '22, because the carryover that has happened because of 1Q, so we are expecting a CapEx close to INR 20 crores to INR 25 crores operation.

And this is the -- if you can give a breakup between...

Like sewing, we are expecting close to around INR 15 crores of investments, where we are thinking of 3,600 spindles to be added. Other than that, the other things will be only mostly to do with the maintenance CapEx.

Okay, okay. And sir, just one bookkeeping question. For your garmenting division, how much is -- how much of yarn is procured internally?

So internally, I look at close to 70% of the yarns procured internally. 30% is where -- somewhere 30% to 50% based on the product mix, especially on [indiscernible]. So based on that, 70% to 75% will be internal.

And this will become like closer to 85% after this 3,600 spindles? This is -- this increase in volumes, you are going to increase this -- a year increase?

It can increase by another 5%, anywhere between 75 to 80 percentage.

Next question is from the line of Bharat Sheth from Quest Investment Advisors.

Mr. Sundararajan, see, in FY '19, we did a volume of, for export only, government exports, almost 60 million, which has come down to 42 million. And after that, also, we expanded sewing machines capacity in FY '20 from 4,000 to roughly 5,000. Is that correct statement?

Sorry, can you repeat the question again, sir?

In FY '19, when we did a volume of approximately 60 million, FY '19 I'm talking, at that point of time, our sewing machines capacity was roughly around 4,000 or 4,200. And now we have expanded our sewing machine capacity to 5,000. Is that correct?

Correct, correct.

Okay. So now coming to this -- with this 5,000 sewing machines capacity and whatever, I mean, utilization, you assume from, say, Q3 onward and then going to a double shift, say, in FY '23, so what peak, I mean, revenue can be achieved with that utilization?

So currently, we have 5,000 sewing machines, which you were correct. And at the peak utilization of the [indiscernible], we can be close to INR 1,000 crores of revenue on the exports alone. When you add up other export incentives, we can also go up to INR 1,100 crores, INR 1,150 crores.

Correct. So if whence we do, I mean, double [ safety ] -- double shift, which we are planning to do it from, say, Q3 onwards, subject to normalization of everything, and then again, some of the factory, then FY '23, we may be able to expand this double shift, again, so to more factory. So in that scenario, what kind of a peak your revenue...

The double shifts can be implemented only where the factories have got the hostel facilities. It's not implemented in all the factories. Last call and we clearly said that the factories which have got the hostel facilities can ramp up for the second shift, which could be at a peak of 1,500 sewing machines.

Okay. And are we planning to increase more hostels so that in future whenever we get the opportunity, so without spending too much CapEx, we can expand the capacity itself?

Yes, yes, you're right. Our main objective is to improve the capacities through hostels so that we can increase the second shift, so that there is no investment into the factory.

Yes. All what needs to happen is that once the lockdown has become normal, then our -- we will increase the migrant strength gradually that we have, bring them from other states, training them and put them in place and gradually fill for the 1 shifter vacancy and gradually grow for these 2 shifts on a sales manner. So it's a kind of long-term exercise. So probably next year by now, we would have most of the hostel factories will be operating in 2 shifts.

The next question is from the line of Akshay Chheda from Canara Robeco Mutual Fund.

Yes. So sir, my question was on the Textile Parks announcement that was done in the budget. So do we see any progress there, or things are just the way they were post the announcement? Yes, so...

So Textile Parks, I think we are not [indiscernible] at any textile -- going to any Textile Parks mainly because we have built our own setup, and the problem is not on the infrastructure. It is purely the capacities, how we bring up. So we have to increase our capacity strength, and that is where we are working on.

So, sir, I wanted to understand more from the government perspective. Like do we hear any progress on that side?

I am not aware about the Textile Parks that is coming up on the Tamil Nadu side.

The next question is from the line of Nilesh Doshi from Green Lantern Capital.

Sir, in your opening speech, you mentioned about some new verticals, and you said you are very excited about those new verticals. Can you please elaborate like what are those new verticals? Are you going to bring those products from this current capacity? How much it could add to the revenue? And in what period of time? So can you just help us understand in more detail?

So like Mr. Sundararajan would like to explain more on it. But for the time being, I guess, the verticals are in the beginning stage. Once it is...

Yes, I'll explain. You see, we cannot be so open about the plans. But we have done a kind of -- I mean, strategizing so many ways how we can ramp up fairly. So one is the existing setup to grow at the pace of, say, 15%, 20%, 10% to 20% that we are always trying to do. Anyway, that is going to happen. In the meantime, we were just internally seriously thinking of how to strategize with parallel vertical setup, so it can go along with this growth. And at one point of time, it will also be like SPUK business model, which is now currently it is supporting about, say, INR 100 crores of business now and which can also go up to double even the next 2, 3 years time. So same way we have strategized some business models about 3 verticals to 4 verticals, without disturbing our existing setup or without any additional investments on the fixed assets or anything, CapEx. So we have brought out some -- and framed something, but the tops are going with the relevant parties like, and probably we'll be able to know by the Q3. After Q2 results announcement, we will be able to give you some kind of inputs. Currently, we will not be able to tell you anything.

But that would be in the same line of products, or it would be completely different category of products, sir?

Related to the same industry, same product.

Okay. The second is on the U.K. business. Can you help us understand in SPUK? So I would assume that the products are already manufactured and exported from the stand-alone business. So the EBITDA of stand-alone 18% is captured. And on -- over and above that, we get 5% to 6% EBITDA of -- for that INR 100 crores sales what you do through SPUK. Is that correct?

Yes, you're right. See, why at all SPUK is that certain sizes of orders which we are not able to execute in-house, we are getting it outsourced from the other factories. So like small set of orders, which they do, which we are not able to do, they are doing it. So we are leveraging only on the relationship what we have. We are doing -- it is purely an additional business which comes to us.

But there, Mr. Balaji, do you sell these products on your -- I mean, you give it to the wholesalers or the big brands like the prime...

Let me tell you, there are setup retailers who are not having any design capacity, sourcing capability or their own people or quality control technical. So they have only the retail business, but nothing, no other -- because of their size of business, they cannot afford to spend so much. So they seek somebody locally in the U.K., who can take this kind of services and supply to them. So we're sitting here, we cannot handle them because their local needs them to interact with them on a weekly basis and design support everything. So what we thought because of the company's reputation of S.P. Apparels, that most of the customers would love to work -- continue with the S.P. Apparels for their product. But we cannot say no to them from India business. So what we decided that there is -- we have evolved this business model, which means same handwriting, same people, same communication strength, but the U.K. office will give design support, technical support, sourcing, compliance, all supports. All they need to do is just give the orders to the SPUK office, who can source wherever they want to, and they can supply to them. So which means we are not sharing our existing capacity to these customers. This business is coming as an extra capacity from other sources.

And how big this business can then become over a period? Because this is a business with complete outsource model.

Yes, it can mostly because -- today, because of this COVID situation, there is -- it's becoming lesser and lesser traveling by the retailers. Previously, they always used to travel once in 2 or 3 months, but now it has completely stopped. So it has become a new normal, new way of working for them, so they would prefer not to travel. If that's the case, they will definitely need some support from local who can have an office in India, can manage it. So it is all the more going to be more prospective, more benefits to the SPUK business. It can easily double, or 3x it can go up to. It's not an issue.

Okay. The second is you mentioned some INR 360 crore kind of an order book on the garment division, right? Is that correct, as of end of March?

INR 325 crores.

INR 325 crores as of now.

INR 325 crores as of now?

Yes, INR 329 crores as of today.

As of today. And how do you see -- I mean, I'm repeating the question asked by another colleague. But how do you see -- because since Europe and U.K. are opening up. Absolutely, as somebody pointed out, the inventory levels are extremely low across the world. There was a disruption in supply chain. So my sense is that you would be under tremendous pressure as of moment to supply, I think, and the kind of orders should be pouring in, should be phenomenally high compared to even pre-COVID levels, especially because of the pent-up in the very poor supply chain and inventory.

Correct. So for us, we will only book as the whatever capacities we have, we expect to have. So we cannot book more than that. Of course, there are pressures. They're asking us to increase the capacity, why don't you do something, you put up new factories or something like that. So there are -- we are looking at some ways to increase the business. We are talking to our customers how we can increase the business. But there are pressure, but we will not overbook.

And still you can book at the rate of INR 250 crores a quarter, right?

INR 200 crores.

Yes, yes.

Up to INR 200 crores we can book.

Another INR 200 crores we can book.

The next question is from the line of Jeetu Panjabi from EM Capital Advisors.

Good connecting again. So 2 questions. One, on the labor side, I remember there was some regulatory stuff by which rate wage hikes would have to happen. Can you give us some color on that and what the implications thereof?

Regarding the wages?

Yes. States had mandated some wage hike which everyone in the area had to do, right?

So, there is a routine revision of wages on the DA every year-on-year. That is the only thing is happening. Otherwise, there is no any compulsion or any restriction to increase the wages. We go with the prevailing market prices.

Okay. Great, great. The second question is, if I heard you right, I mean, what I heard you say is you do a little over INR 1,000 crores or the one -- your 18% EBITDA margin is maintainable. Did I hear that correctly?

Yes, correct.

Okay. And the final question is this whole buoyancy in the cotton and the cotton yarn segment that's happening, how do you see -- because the whole area, whole Coimbatore and all the region is a belt doing that. So that must be going through a big boom, and the supply of spindles must have tightened up because U.S. wants a lot of spindles. So is that putting pressure on you guys? Or what are the implications thereof?

See, it's being a captive manufacturing, if the yarn is boom, then there will be a tight margin in our garment division. So -- but margin will be better in the year. So I mean, it is all within the -- because of the backward integration, unless there is an increase in the cotton raw material prices, we will not have any major impact on the price fluctuation. And if the cotton price increases, definitely, it increases to all competitive countries also. So we will be able to negotiate with our customers to get a better price.

Okay. And one final quick one is that you talked about adding some spindle capacity. Are you going to need external capital for that? Or how are you going to fund that?

So we are going to use the internal funding for the CapEx.

And what -- is there a number to that? How much money?

The CapEx will be close to INR 15 crores.

The next question is from the line of Parth Patel from Equirus Capital.

Am I audible?

Yes, yes.

All my questions, sir, have been answered. Just one question. Are you planning for any technological upgradation in your manufacturing process like embroidery or printing 2, 3 years down the line?

Gradual upgradation? What upgradation?

Printing.

Printing.

Printing in the inventory management system, something like that.

In manufacturing, so see, we did definitely some modernization in the existing sewing setup by lean manufacturing and et cetera. Otherwise, on the ancillary facilities like printing or embroidery, we are outsourcing them with the approval of our customers which is fine. I -- we don't see any big investments in the future for the next 2 years. Probably after 2 years, once we ramp up our top line, then probably we will have additional increase in the printing and embroidery to some extent, not immediately.

The next question is from the line of Mr. Resham Jain from DSP Investment Managers.

Yes. So I have one broader question. If I look at the other listed company out of Coimbatore and if I look back, let's say, 5 years out, your revenue was almost similar. And if you can share your thoughts that, what will change in the next 5 years? Where I could see the other competitors growing almost double the size in last 5 years, while we remain -- even on a quarterly basis, it is similar to what we were, let's say, 5 years back. FY '17, if I look at the numbers, you were around INR 600 crores in garment. And if I look at the quarter 4 run rate, it will be like INR 640 crores. So what really will change for us in the next 3 to 5 years for us to move to that next level of growth? Just your thoughts on the same.

Yes, yes, see -- yes, I agree to it, but I don't know. I mean, in the last 5 years, you know that every year, we have been facing a lot of hindrance one way or another, either Brexit or...

I appreciate those facts. I truly appreciate those facts. I don't have anything on those fronts.

As I mentioned to you, there is no issue on financials, no issue on customer, no issue on the capability of manufacturing. The only issue is the increase in the sewing capacity. That's the only constraint we have been facing, where we have taken one step is that to increase the hostel migrant workers, which we already have started doing in the last 4, 5 months time. But for this pandemic situation, this has been slowed down. So already, we are having a plan to bring in more migrants. Already we have set up the training center, and the things are ongoing. On a year -- on a monthly basis, x number of operators, we train and put them -- [ induct ] them into the manufacturing sewing shop flow. That is going to be ongoing for the next 5 years, for sure. So that alone will double the capacity only by concentrating on the migrant workers. So as the capacity increases, naturally, there is no other hindrances to stop the growth of the company. And secondly, we are -- as I told you, we have about 3, 4 vertical strategic business plans. We will run firmly to the existing similar to SPUK business. Now it started about 5 years back. Today, it is doing close to about INR 100 crores of [ the spend ]. So like this, we are having some 2, 3 vertical business strategy model, which is also similar to SPUK, will bring in additional growth for the business. So existing growth, the ongoing process is going on. And there is a ramping up of the business in SPUK. There are 3 more new customers added to the SPUK. So that's quite possible that it can double the business in the next 2 years' time. And these 3 verticals will also bring in a few hundred crores of business in the next 2, 3 years' time. So we have a very clear plan for the next 5 years. It's not going to happen like what we have been doing in the last 5 years.

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

Dear all, I think we have come to end of this con call thing. And I really appreciate various questions we have and raised by you. And unfortunately, we have very limited time, so we could not attend more questions. And I thank you so much for showing interest in our business. And thanks for your valuable time to participate in this con call. Thank you.

Thank you very much. On behalf of Systematix Institutional Equities, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.