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

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of S.P. Apparels hosted by Batlivala & Karani Securities Pvt. Ltd. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Prerna Jhunjhunwala from Batlivala & Karani Securities Pvt. Ltd. Thank you, and over to you, ma'am.

Thank you. Good afternoon, everyone. On behalf of B&K Securities, I would like to welcome you all to 2Q FY '22 Post Results Conference Call of S.P. Apparels Limited. From the company, we have with us the senior management, including Mr. P. Sundararajan, Chairman and Managing Director of the company; Mrs. S. Latha, Executive Director; Mr. S. Chenduran, Director; Mrs. P.V. Jeeva, CEO; and Mr. V. Balaji, CFO of the company. I would now like to hand over the call to Mr. P. Sundararajan for the initial comments. Thank you, and over to you, sir.

Yes. Good afternoon, everyone. A very warm greetings to all of you all present on the call to discuss our quarter 2 FY '22 performance. I hope and wish that all of you and your loved ones are healthy and safe. Most of our divisions have performed well during this quarter. The sustainability and experience gained during this period of the business will take us to new height. Let's discuss our segment-wise performance. Regarding garment division, shipments to customers increased both in terms of quarter-on-quarter and year-on-year. Our customers are witnessing increase in demand and specifically on the online retailing business. We are experiencing high-demand situation despite increase in raw material cost and supply chain disturbances. In terms of customers, we have added one new customer from [ wealth ], who is one of the big retailers, and one more customer is in pipeline, and we'll soon update you all on the new addition of the customers. I would like to update you on our strategy in increasing utilization levels. We have built in sourcing and training of workmen, which is now yielding better results. This workforce mobilization is no longer a challenge for the company, and it will add as an additional strength to our business. As I explained to you in the last call, we are ready to start our second shift quarter and will slowly but surely will look to utilize the capacity with second shift operations. Our current order book stands at INR 313 crores. Our garment division revenue for this quarter stood at INR 183 crores versus INR 148 crores for Q2 FY '21, which is at a growth of 23.8% year-on-year. First half total revenue stood at INR 299 crores as against INR 197 crores for H1 FY '21 at a growth of 61.6%. Adjusted EBITDA of the garment division stood at INR 36 crores for the current quarter against adjusted EBITDA of INR 28 crores for Q2 FY '21. Adjusted EBITDA of garment division for first half stood at INR 68 crores versus adjusted EBITDA of INR 34 crores for H1 FY '21. Regarding spinning. Spinning is fully being utilized and is yielding good margin, adding to the garment division's margin. Currently, we are in the process of expanding our spinning division by another 3,600 spindles, and the project is delayed by another 3 months. Once the process is complete, we will be at 27,000 spindles. We have also started outsourcing our yarn requirements based on contracting on [ a job ] basis. Processing. With regards to the processing division, its utilization level has increased, but the division is undergoing stress due to price increase in coal, dyes and chemicals as well as supply chain cost escalation. We are working on an alternative mechanism to mitigate the price escalation in coal. With regard to S.P. Apparels U.K. division, it has gained momentum during this quarter and expect the same kind of momentum to continue going forward. There have been challenges in this quarter due to containers issued because of the increased cost of container and availability of containers. Revenue for the quarter stood at GBP 2.4 million as against GBP 1.1 million quarter-on-quarter. With regards to retail division, we hope you are all aware about the shareholders' consent given to transfer the retail operations into a new, wholly owned subsidiary company. In our last call, we have updated on the rationale for moving the operation. The Board has constituted a committee to identify the process and names in which operations will be shifted to the subsidiary company. The process could be agent and asset transfer method or [ some ] sale, as agreed they will do, on that specific date. We are planning to move the operations of retail during Q4 of FY '22. Retail division has done well during the current quarter and have a positive EBITDA. It's being a disturbed quarter due to lockdown of malls and stores. We expect this quarter to be better both in terms of revenue and EBITDA. Current liquidity. Our liquidity position is strong, and we have serviced all the best of today. We have strategies on the retail division, and we'll work towards unlocking value for our retail division as well as our stakeholders. In garment division, we are working towards better utilization of capacity and the increase in revenue by strategically having different verticals of business, which internally grow along with this business, and we are excited about the new verticals. Now I will request the CFO to give an overview of the financials. Thank you.

[indiscernible] just to run through the performance of the company. On second quarter, we had a total revenue of INR 223 crores as against Q2 FY '21 of INR 187 crores. We had INR 37 crores of EBITDA -- adjusted EBITDA for the current quarter as against INR 31 crores of EBITDA for Q2 FY '21. We had a PBT of INR 31 crores as against INR 23 crores of PBT, which was -- of FY '21. And we had INR 23 crores of PAT as against INR 18 crores of PAT of Q2 FY '21.

Sorry to interrupt. Sir, maybe I request you to speak louder or come closer to the phone as the volume is...

Okay now?

Yes. Could you please repeat the speech?

Yes. Sure. Revenue for this quarter stood at INR 223 crores as against INR 187 crores of revenue year-on-year. Adjusted EBITDA stood at INR 37 crores as against INR 31 crores, which is a growth of 21 percentage year-on-year. PBT stood at INR 31 crores as against INR 23 crores year-on-year, which is at a percentage of 14 percentage. PAT stood at INR 23 crores as against INR 18 crores of last year-on-year with a 24% growth at 10.4 percentage margin. On a half yearly basis, our revenues stood at INR 355 crores as against INR 247 crores year-on-year, which is at a growth of 44 percentage. Our adjusted EBITDA stood at INR 65 crores as against INR 36 crores last half FY '21 H1, which is at a growth of 80 percentage which is at an EBITDA margin of 18.5 percentage. Our PBT stood at INR 48 crores as against INR 17 crores year-on-year, which is at an increase of 177 percentage. Our PAT stood at INR 34 crores as against INR 12 crores, which is at 169 percentage growth rate. Our garment division EBITDA stood at 20% as against 19% year-on-year. And SPUK margins stood at 3 percentage as against 9 percentage year-on-year. Retail margin stood at 3 percentage as against 5 percentage year-on-year. Our debt -- total debt for the current -- gross debt for the current 30th September stood at INR 189 crores. Net debt is at INR 157 crores. All the other information are available in the presentation, and we can take up the Q&A section.

[Operator Instructions] The first question is from the line of Chirag Lodaya from Valuequest.

Congratulations on great set of numbers. Sir, in the opening remarks, you mentioned that workforce mobilization is no more a challenge and we'll look to start second shift operation soon. So given this new set of information, what kind of peak turnover we can achieve and the corresponding margins in garment division?

Yes. See, yes, as I mentioned that this has been a challenge for us in the last few years of mobilizing divestment so that we'll not be bottlenecked for our growth. So since this has been debottlenecked and we are very confident that we will have an aggressive growth plan because it no longer is going to be challenge to us. So definitely -- so we will be maintaining the same EBITDA margins but the top line will be a growth. We have aggressive plans. We -- hopefully around 20% to 25% EBITDA growth. That's what we are planning to. So we are working towards that.

Can you help us understand, whenever you'll be able to achieve it, what kind of peak sales we can achieve with the given infrastructure and changes you have brought in?

Sorry. I didn't get you.

So basically, what I'm trying to understand is what kind of peak sales we can achieve with the given set of infrastructure we have currently? So -- and it is okay whenever you are able to utilize it fully.

So with the existing setup, for the next 2 years, we don't have any additional requirement of putting a new factory because we have enough capacity, which has been under repair because of this reason. So as I mentioned that we are working towards a growth of 20%, 25%. And hopefully, it should happen.

So basically INR 900 crores to INR 1,000 crores garment revenue, is it possible from the existing setup if we are able to utilize it fully?

Yes. That is what I had -- remember, during the interim, see, before, I also indicated that we are working towards about INR 1,000 crores in the export sales of garment alone in the next financial year.

Right. And 20% margin is a sustainable margin going ahead given current circumstance?

We always try to maintain that as much as possible.

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

Just a question again on a similar line. So of the 5,100 actually machines we have capacity of, how much was actually utilized in Q2 of this year?

Close to around increase of 64 percentage because July and August, we had some disturbances because the transportation was not fully allowed. So the utilization was close around 63 percentage for the whole second quarter.

Got it. Sir, so then, if we just assume then effectively, of the 5,100, which is like running on one -- actually [ a moving ] shift, how many would we be able to like run on a 2-shift effectively? So I just want to get a sense on the effective capacity that we have and what the utilization was.

See, we have 5,100 sewing machines. And effectively, we can use all these 5,100 machines. But in terms of -- if you ask what will be the time frame or...

He's talking about shift rate. See, even if you start gradually these 2 shifts. So the capacity overall is -- see, normally, we mention that capacity utilization for one shift only. So we are currently utilizing about 70% plus. So as the things go, anyway, we will always have about 15%, 20% machines idle because of the fashion garment industry. Always, we will have about 20% as a standby arrangement. So by adding 2 shifts in a gradual manner, so utilization will go better, much better.

So if I can understand, then out of 5,100 machines, we could potentially effectively run the equivalent of 10,000, assuming 2 -- actually, I mean the shifts which we have. Let's assume a 20% idle capacity. So that gets to about 8,000. And effectively, we have used about 3,200-odd machines in Q2. So we can potentially over -- I mean, double our revenues without doing any increment CapEx. Obviously, this isn't going to happen just by FY '23. But I'm thinking -- like looking forward, we can hit double revenue without any capital expansion, which we need to do.

No, it won't [ take away ] just to multiply it by 2, see, because these 2 shifts cannot happen in all the factories. This can happen only in hostel factories. So hostel factories are running about 50% of the total capacity, where in -- even in the hostel capacities on a gradual manner, we will be increasing the number of shifts. So if -- over a period of about 2 years' time, we will be able to use second shift about 50% of the hostel capacity. So it may not -- since it is not possible to simply double it.

So we still have the potential on just the existing capacity without increment CapEx to effectively materially increase the revenues from where we are today.

Yes. What we are trying to do is -- and we will try to use 5,100 machines fully by combining 1-shift and 2-shift factory put together. The utilization will go up to 100%. That's what we are trying to do.

Understood, sir. Sir, and just to understand, is there constraint between -- is the demand the constraint? Or is it labor requirement the constraint out here? And how are we looking at both of these to overcome the challenges in terms of labor?

Yes. All these years, as I have been repeatedly mentioning in all the conf calls that workforce mobilization was a big challenge to us for which we have overcome now, for sure. And so now we have to balance. Once the capacity increases, so now we have to look for new customers and additional business from existing and the new customers. So that goes on now. The cycle is completely going on now.

Got it. But on the demand side, is there -- I mean is -- the increase in the demand which we are seeing, is it because of the China plus one where diversification incrementally is happening to India? Or is it -- and I mean is it larger orders from existing customers which we are getting? Or to increase capacity, we'll have to effectively look for new customers?

So it is both. See, because of these China issues, our existing customers want to consolidate more into India so as to help also. And even new customers are coming to have -- right now to balance the sourcing strategy. So they are also coming to India. So that will also happen. And in addition to that, our existing customers are also doing the consolidation. So -- wherein they also want us to increase the capacity. The only challenge will be -- is the raw material costs. That is -- again, it's globally, universally for everyone. So there will be pressure, slight pressure on the prices, but we should be able to manage it.

Got it. Understood, sir. Understood. Sir, and then so effectively, because of what we're hearing from others also is that the existing customer demand is also extremely strong. So we don't have an issue with regards to visibility of new orders. It's just about how to get the people available to sort of implement and execute.

Yes. So now I think since the capacity has been debottlenecked, so now we will be looking for more business and existing customers. And I don't see any problem in taking more orders from existing and new customers.

Congratulations.

Thank you.

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

One is just to elaborate on the earlier discussion. You said that for next 2 years, you don't require any capital expenditure except for some -- on the spindle side but not on the garmenting side. And that can take you along with the utilization in the second shift to around, let's say, INR 1,000 crore kind of revenue. So at what point of time over next 2 years you may -- the kind of feedback, what you're getting from your customers in terms of higher requirement, they want to consolidate purchasing from you. At what point of time over the next 2 years you would then think of additional capital expenditure and adding more on the garmenting line?

Yes. See, basically, your first question is about the CapEx. But yes, for '22, '23, we don't see any major CapEx. But yes, from '24, '25, there are possibilities that there will be a garment -- I mean the garment division, there will be some projects expected as the inflow of orders and the workmen are improving. So naturally, that is the time we will be balancing both.

So my question is, sir, when you will really -- because you will need an implementation time of about a year or so. So when -- actually, you are posing currently that you may start talking of CapEx on the drawing board.

That will happen on '23, '24.

So, ma'am, that would be the facility coming up. I am saying implementation point of view.

Implementation is '24, '25. It will be an ongoing project. I think Balaji will explain.

Got you. Sure, Balaji, you can help me on that.

See, for any incremental revenue that comes for '23, '24, your CapEx should be spent on '22, '23. So what we are trying to say is that the revenue will come from '23, '24. The CapEx could happen 6, 7 months before.

Okay, okay. And Balaji, can you share at what scale in terms of economic size now the new CapEx will happen? Like it's in the lot of 500 machines. And how does that work? Because I'm not very expert in that.

[ On dimensions ].

So any factories -- new factories which we put up should be...

300.

Close to 500 to 400 numbers and it could cost us anywhere between INR 20 crores to INR 25 crores per factory.

And sir, any new factories, what you decide to put up, I think it will be based on the hostel concept, right, going forward?

What concept?

Hostel. Yes. We will not rule it out. There is always -- now we have understood that any factory should have a mix of both or maybe 100% hostel. So it's something which we will not rule out.

Sure. Sir, second is on the feedback side, when you're talking to your customers, what is the kind of visibility? And what is the kind of potential they are talking over the next couple of years from us?

Yes. See, the visibility is that as I told you that they want consolidation of their existing factories whether it is out of India or within India. So we have -- always, we have preferred -- we're now the most preferred [ among ] our customers. So any consolidation happens, the major chunk will come to us on the -- so -- and we don't see any hurdles in getting the order inflow.

Yes. So in terms of a little longer-term mission statement within the company, are we talking of INR 1,500 crore kind of a garmenting revenue by 2025 around?

Yes. I cannot comment on the numbers. But as I said, 20% to 25% growth, that's what we are working, we are planning for, with all [ probabilities ] that happens in the next 5 years and why it should not happen to INR 2,000 crores.

That's nice, sir. And sir, in the last call, you were talking about a few additional -- a few more very large customers. So can you just elaborate on that, what is the status now and how things are unfolding?

Actually, we are trying on that. And 2 of our customers are almost through. So it will be through from December or January onwards. So that will be enough for the next year sales. So for next year, beginning from May onwards, we'll be looking for 1 or 2 more customers for '23 -- sorry, for '23, '24. So we are working on this and the 2 customers, the new customer, will be through within 2 months' time.

So when, ma'am, you said through means we start getting orders and delivery.

Yes, yes, yes. We'll start getting orders.

Yes. And sir, the last question, if you can help us understand what's happening on that U.K. business. And you are also wanting to expand a similar model in U.S. So can you share what is the current status and how are you seeing that unfolding?

I don't think I ever mentioned that in U.S., we will have a different sales model, but we have it in the mind, but that's too early to comment anything on that. But the U.K. business, the separate -- the U.K. division is definitely going very, very strong. And because of this COVID, there's still logistics issues and other issues. They are not able to deliver the goods on time. So there has been a small step back in the sales. But the order book -- none of the orders have been canceled by our customers for the U.K. division. So we -- I think once everything is settled now in this '21, '22, '23, '24, our plans are so big -- make a big jump in the U.K. division. And once it is streamlined, probably we will think of a similar model for the U.S. also.

Okay. And sir, U.K. business over the next 3 years, how big -- what kind of potential we have? How big it can be? Can it reach to something like GBP 30 million or so?

So already -- I thought you were only asking U.K. division, right?

Yes, only U.K. division.

We are already doing...

At GBP 10 million.

We will end up anywhere between GBP 9 million to GBP 10 million this year, and we look to a growth...

20%.

Will be 25% -- will be -- it should usually cross GBP 30 million in next 5 years' time.

The next question is from the line of Deepan Sankara Narayanan from Trustline PMS.

Congratulations for a good set of numbers. So firstly, I wanted to understand the reason for a sharp reduction in EBITDA margin for this garment export division in Q1.

Q1?

Q2 compared with Q1.

See, Q1, we had RoSCTL recognition of both Q4 and Q1. That is why there is an increase in the EBITDA margin in Q1.

Okay. So how much was that amount, sir?

That was -- amount was around [ INR 4.5 crores ]. So that is equivalent to [ 4.5 percentage ].

Okay, okay, okay. Got it. And this current strong growth in garment exports. So this was possible mainly from higher contribution from our existing customers and also the incremental addition from newer customers also started coming.

No. It is only incremental revenue from the existing customers. If there is any new customer, we will definitely update investors accordingly.

No. I'm just asking like last 6 months, you have added a couple of customers. So any scale-up that's happened in terms of orders from that customer?

That's why we mentioned it, right? It's going to be through, right?

It is going to be through, but for the past 6 months, there was no incremental revenues from the new customer.

The next question is from the line of Deepesh Agarwal from UTI AMC.

Sir, congratulations for great set of number. Sir, my question is, on the garment margins or on the textile margin, how much would be the contribution from the yarn? And is there an element of the low-cost cotton inventory sitting with this?

So like in terms of margin, if you wanted to split between yarn price -- I mean yarn-spinning, margin and garment division, that could be close to around INR 4 crores, INR 5 crores of EBITDA margin sitting on the garment division's margin because of yarn.

Okay, okay. And there is no element of low-cost cotton inventory which would have helped in this quarter?

No. We have cotton procurement policies for every 3 months. So every 4 months, we procure the cotton. So we don't speculate anything with a low-cost cotton or high-cost cotton. So it's on average. It will average it out. That's how it works.

Understood, understood, understood. And sir, with the new -- with this kind of PLI scheme, any further plans to get into any new line of business? Or some quarters ago, you mentioned about the customer keen for you to evaluate man-made fiber. So any thoughts on this?

As I mentioned that there is -- there are some different verticals we are working on. So one vertical of business -- additional vertical of business will happen after my visit to the U.K. probably after 10 days' time. So we will start [ and utilize ] additional vertical businesses in addition to existing centers. So that's our plan.

Okay. And last question, just a clarification. We are targeting 80% utilization on these 5,100 machines next year plus additional volumes from double shifts, right?

Yes.

The next question is from the line of [ Bhavesh ], an individual investor.

Congratulations for the great set of numbers [Technical Difficulty]

You're not audible. Would you please reconnect? The next question is from the line of Shivan from JHP Securities Pvt. Ltd.

Sir, a couple of questions. One is our capacity utilization in Q2 was 63%. So could you just tell what the capacity utilization currently is?

Shivan, it has gone up by, say, 3, 4 percentage.

Okay. So about 67%, 68%, right?

Yes.

Okay. And you said that approximately 15% would be the additional -- the hostel facilities, right, on 15% of the capacity?

Sorry. Can you come back on your...

So I just wanted to clarify that the hostel facility is on 15% of the capacity, right?

Yes.

Right, yes, correct.

Okay, okay. So sir, if I look at what you are guiding for next year at 80% utilization, INR 1,000-odd crores top line from garmenting, but when I look at your guidance on the margins, you -- it seems that you are pretty conservative in just guiding at maintaining the margin. So why this caution, sir? Why this conservative stance? Because...

It's a highly fluctuating industry in the sense it involves international various countries, competition and the ForEx involved. And there are a lot of -- on and off, there will be a lot of pressure on the margin from -- when compared to other countries or players. And the duty -- we are not yet duty-free when compared to Bangladesh, Sri Lanka and other countries. So there are various factors involved in this one. In addition to the government, refunds and other things are also, on and off, changing. And even raw material, there are so many raw materials involved in this one. So it is something -- we cannot assure all the time the very promising margins. So it is not conservative. It is -- I would say, the practical one.

It is [ helpful to achieve ] margins. Moreover, if you look at the price or the margin material cost and my personnel cost, it's almost like 82, 83 percentage of the whole costing system. And you have only room of, say, close to around 15 percentage where the scaling will definitely help. So that is why the guidance is around 18 to 20 percentage.

Okay, okay. So sir, just a couple of follow-ups on this. You spoke about competition, but when we had -- in the previous conf call, you have said that there is a consolidation that has happened in the industry where the number of suppliers have reduced. So shouldn't that aid our margins moving ahead considering?

It won't work like that. There's nothing to see. They can only give you enough filling of orders, but it is no way connected with the pricing. They will always take the price of other competitors within India, outside India, and they will take this as a benchmark, and we literally have to work differently to make sure that we are able to achieve this price. I mean given the acceptable price and you will be getting opportunity of getting more orders. That's all. It's not that just because they want to give you the orders, we cannot dictate the price at all.

Okay, okay. And sir, in terms of passing on increase in cotton prices, sir, how does it work in our model with the customers on a broad basis? Is it a quarterly lag or a monthly lag?

Can you give your question more clarity?

Yes. So what I was trying to ask is with our customers, how do we pass on the increase in raw material costs, which would be cotton prices mostly? How do we pass it on? Is it passed on with a monthly lag or a quarterly lag?

No. It is -- as I have mentioned many times, our orders are project-based, which means every order is a project. So when we put today any orders, so we'll take it based on today's cotton prices and the yarn prices. And so as and when, even next week, if we quote something, if there is a change in the cotton or yarn price, we will quote based on that only. So it is all built in on and off. It is not like with a forecast.

Okay, okay. And what would be the time line for a project? Or is it a 3 monthly project, 6 months...

3 months, 3 to 4 months.

3 to 4 months, okay.

Yes. In some cases, there will be a bigger one, 6-month program, but always, we will make sure we protect the yarn.

Okay, okay, okay, sir. And sir, coming to SPUK, what would be the order book currently that we are sitting on?

Should be close to around GBP 4.5 million.

GBP 4.5 million?

Yes.

Yes.

Okay. So sir, if I get it correctly, it was approximately GBP 7 million last quarter. So is there a slowdown that we are seeing in terms of inflow?

Shivan, in terms of what have been shipped of closely around GBP 2.5 million. So the order book is close to around GBP 4.5 million. So there is no big movement in terms of orders inflow because the...

Delays, Shivan.

Retailers are trying to push back the orders. Say, for example, if they are supposed to deliver it in the month of December, we are pushing it back in the month of January so that the orders are getting pushed.

Okay. So I didn't get this. Could you just explain this? Why are they being pushed?

For the last quarter, it was GBP 7 million of -- because of pushback of some of the orders of the previous quarters, they wanted to take it at a later stage. So that has added on and comparing to GBP 7 million. But on a regular basis, it is always roughly around GBP 4 million to GBP 5 million is the order book for U.K.

Got it, got it, got it. And sir, one question on the facilities that we have. So first of all, it's very good to know that the workforce has -- there is -- workforce issues have started easing. So that's a good part. Sir, just from a broader perspective in our business model, we have multi-location facilities. Sir, do you think that once we receive -- once you achieve a particular scale, this could be a hindrance to grow at a faster clip? Because what -- where I'm coming from is that considering every -- to scale up, you need a lot of labor availability and that in turn depends on hostile facilities. So considering we have multi-location facilities and hostel cannot be made at every facility, do you think this can be a hindrance to our future growth in terms of the speed at which we can clock revenue growth or business growth?

No. This is -- you should look at it as in a positive manner because we have 2 types of taxes. One is 100% committed for local workforce. And another one is hostel and the mix of hostel and local. These are 2 kind of models we have. So these taxes will continue. And in some of the local independent factories, we also will put up a small factory or a small hostel over there so that those factory capacities can be additionally placed by having a hostel in this local factory. This is one thing. And another one is we are also planning for putting up some factories maybe in '23, '24, 100% only hostel factory. So there is a mix of local 100%, a mix of hostel and local, and 100% hostel. So it is a risk mitigation strategy.

Okay, okay. And sir, one last question on what the narrative was in the last quarter. Was that there was a lot of labor issues in terms of availability? Currently, we have mitigated that. So sir, what steps were taken to mitigate this? Because it was quite quick. If you could just help us understand this.

You mean how we mitigated?

Yes, sir. The recent...

[indiscernible] We have been working on this for the past several years. So we price from the models. And finally, we have settled on what was the best model we felt. So I think we have been able to manage.

Okay. So could you elaborate on this model, please, if you...

No. That cannot be discussed now. Maybe we can discuss later when we meet one to one.

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

Sir, I have a question on our inventory days. Our inventory days have increased on a year-on-year basis. As you explained that, our overall same cycle is in the range of 3 to 4 months. And we don't hold any major cotton or yarn inventory. Then why -- I mean why there is so much inventory on our books? This is my first question.

So if you look at our order book year-on-year, the order book has also increased. So proportionately, there would be definitely increase in inventory also. And second, we start at least September. We're looking at inventory because of a couple of order pushback happening that also is forming part of inventory pileup. So definitely, there is no big increase. I would say that there is a proportionate increase in terms of orders, which are -- I have to say you cannot look at inventory based on year-on-year because the orders are also increasing. You have to look at orders in hand. Based on orders in hand, the inventory will -- also will improve.

Okay. So my question is like overall, let's say, if you see, our inventory days are more than 300 days, where in our sales cycle, as you mentioned, it is in the range of 3 to 4 months. So could it be...

I'm not sure whether your calculation is right. There is no [ premium ] that's here in the base of inventory. [ There is no way ]. And we have INR 270 crores of inventory, and my revenue is close around INR 200 crores -- INR 220 crores. How come you look at inventory on 300 days. There is no possibility that it is 200 -- 300 days.

No. I'm calculating on cost of goods. So I'm calculating on the raw material cost, your raw material cost.

See, you cannot look at raw material cost alone because my wage cost is sitting below the item and other cost is sitting in other expenses. For example, what I do in terms of yarn manufacturing, my power cost is coming down in my books as other expenses in the power cost. So you cannot look at it in terms of value onto your yields. That's not the right way.

Okay, okay. So it is better to...

That's a trading model kind of business, where you can look at COGS on the...

Inventory.

Inventory.

So that is a work in progress.

Okay, okay. So going forward, like how do I expect? Because either sales improve, will there -- inventory days also have been improved or it will remain at the current [ level ]?

Today, we have -- we are backward-integrated. We are -- from [ cottoning ] till the exports. So every stage, like yarn -- cotton to yarn, yarn to knit fabric, fabric to dyeing, dyeing to printing, printing to cutting, cutting to -- so we go over stages. So every stage, it's probably like 120 days of inventory needs to be added on the WIP. If you look at the raw materials in terms of the yarn or the fabric or the cotton, it's purely not [ a WIP ] order. So you have to look at the inventory [ importation ], removing raw material, which is purely against the order. And if you look at the WIP, which is -- it seems to be filled within 120 days' time, and [ FG will be sailing ] immediately. So you have to bifurcate it and look at it.

See, for a garment, the yarn cost will be roughly around INR 20 to INR 30 only, while the realization of a garment is INR 15, INR 20. So -- but when we start the yarn today, the shipment is expected in 120 days. So it is carrying the cost all the time.

Right, right. Okay. Got it. Secondly, when I'm seeing the challenges, what you have said that -- the manpower management is a challenge. So -- and I see our employee costs have also been moving up, which is required for the increase in sales. So how do you see this inflation going up over a period of time? So will it increase? How will be our employee strength will be going up over a period of time and also the inflation in the manpower cost?

See, one is the raw material cost and second may be personnel cost. Personnel cost is something we have to continuously increase, like 5% to 7% year-on-year of the total in terms -- in value terms. When it comes to raw materials, it's only because of the China issues, dyes, chemicals and coal things are -- it's completely out of control. But at one stage, it should stabilize for sure. It cannot continue like this. One of the things put in place, our government is working on how to get the coal cheaper and even the containers and other things they are doing. And the third one is the raw material, cotton. Cotton again is something -- suddenly in the last 2 months, it had shot up like anything, historically never before, but now it started coming down again. So this is something -- the inflation is something which -- we cannot control it. It has to happen, but at the same time, if rupee depreciation and the cotton price increase, we are able to mitigate those things.

Okay, okay. Sir, actually, I want to know that how much employee strength we will add over, say, next 2 years to reach to that full utilization level.

Additional increase, about 2,000 employees, the next one.

Any incremental capacity utilization, like, say -- one mission is getting incremental, then we may have to have 2 employees for 1 mission addition. So if we are going to increase our capacities to close to 5,000, then we are going to add closely around 3,000 people...

Additionally.

Additionally.

The next question is from the line of Forum Makim from Equitree Capital.

Congratulations on a good set of numbers. So I had a couple of questions. Sir, our debt has increased, but the interest costs have halved. So what is the reason for that?

So that is increased because my working capital utilization has increased because the inventory also has gone up. But because there is a restatement on PCFC, which is a gain of INR 1.75 crores for the current quarter, it's reducing my interest cost. That's why it's a notional number. INR 1.75 crores will get adjusted next quarter.

So what is the run rate we can expect in terms of the interest cost?

Interest costs for a year, I guess, it should be close to around INR 13 crores to INR 15 crores.

Okay. Sir -- and this PAT of INR 20 crores to INR 23 crores, is this like a sustainable quarterly run rate going forward?

Why it should not be. That's our -- see, we are working towards that. So -- but for this -- the COVID thing situation, the whole thing is turmoil. So I don't see there will be any change in this thing.

So sir, that means we are on track to touch INR 80 crores for the year.

Sorry, can you repeat?

So sir...

The whole year.

So that means that for the full year, we can touch INR 80 crores.

Yes, hoping for that, but you never know how can I commit.

Okay, sir. And sir, just one last question. What is our growth plan for the next 2 to 3 years? Like how do we plan to grow? What is our strategy?

As I mentioned before in this call that we have a plan of 20% to 25% growth in the next 2, 3 years. So based on the thing, then you can work out our numbers. This is only the guidance. We have -- we are doing at the back end all the things, the plans in terms of customer -- increased customer base and the capacity infrastructure and other things. So by all means, it should grow by 20% to 25% the next 2, 3 years.

The next question is from the line of Chirag Lodaya from Valuequest.

Sir, my first question was on -- in your presentation, you mentioned how much garment produced and how much garment exported. And generally, what we [ see ], whatever we produce, we are able to export. But this quarter, there is some difference. So is it that there was some delay in shipment and this pillar of revenue is in Q3?

Yes. Because of the container issue, as Chairman stated previously, we have a certain portion of goods which were not able to be exported.

So is it fair to assume that around INR 30 crores, INR 35 crores revenue, which could have been booked in this quarter now can be booked next quarter because of this issue?

Not INR 35 crores. It could be closer around INR 15 crores...

INR 10 crores to INR 15 crores.

INR 10 crores to INR 15 crores.

Okay. Got it. And secondly, sir, just one clarification. You mentioned INR 1,000 crores revenue next year that is for garment, that is for the overall company.

Now that generally, we are working towards for the company, company as such.

See, basically, we are doing only the garment exporting, spinning mostly [ capital ] only. Dyeing is also mostly capital. So it is understood as a group. There is no big difference.

No, no. But your SPUK subsidiary, which is almost doing INR 100-odd crores plus the retail division is around INR 50 crores. So it is INR 150 crores. INR 1,000 crores is a big number. So -- and I was just cross-checking.

I think we are looking at 20% growth rate for garment division next year. And in total, it could cross more than INR 1,000 crores for company assets.

Right. Because we -- I mean INR 540 crores of FY '21. And if I assume, say, 20% growth this year, then it is INR 650 crores. And on that 20% comes to INR 780-odd crores. I mean there is a difference of shortfall of, say, INR 200 crores. So clarification was needed.

I think we are leading into your -- essentially your assumption or your expectation. But we are working towards achieving INR 1,000 crores of revenue.

[indiscernible] INR 1,000 crores.

In the garment division.

Garment division.

Next year.

Next year, yes.

Okay. And is there any debt repayment plan next year?

Sorry, debt...

The repayment.

So see, the roughly INR 187 crores of gross debt, only INR 35 crores of debt is down. The other portion is all working capital limit. So in case -- if there is any accumulation that are happening in terms of cash, we'll definitely go to reduce working capital levels.

Got it. And sir, one basic question, how many customers that we have in [indiscernible]? What will be the contribution of the top 3?

So now we are looking at 7 customers as of today.

Right. And top 3 contribution?

Top 3 contribution will be close to around 85%.

85%, okay. And generally, sir, what is the time to scale up new customers to maybe achieve say, like INR 50 crores to INR 100 crores revenue extracted from a new customer. What is the typical lead time for that?

Customer lead time.

To scale up new customers, Chirag, it will take 2 seasons. That's 1 year or complete year for experimenting [ incident ].

So whatever clients will be adding this year, we might see the ramp-up happening in H2 of next year, is that understanding correct?

Yes. Correct.

The last question is from the line of Bharat Sheth from Quest Investment.

Mr. Sundararajan, currently, we have around 15% of the -- I mean a hostel facility of the total installed base of the sewing machine. Is that correct understanding?

Yes.

And how much can we further increase from 15% to?

No, see, the factors which are available with the hostel is 50 percentage. That is where we can increase the second shift.

Okay. And can we...

If we need to increase more, then we may have to put more hostel where the factories are available.

So sir, how many place where we can increase this 50% in existing without expanding the new factory?

So that's -- what's the question?

Sorry, the [ customer increase ]?

Currently, we have around 50% of hostel capacity we -- of have of the existing base, correct?

Right. Correct.

And say existing base, we have to add the hostel. How many hostel we can add and take this 50% to 70%, 80% or where...

So we may add about, say, -- with the existing hostel capacities, we will be able to tweak some more into this fund. So probably, we may have to add 1 or 2 more hostels, not the big-sized, medium-sized hostel and 1 small-sized hostel.

Okay. Now coming to this, how we are seeing the mix of the business, basic and fashion, because with basic, we can generate more -- I mean more utilization. So currently, what is the business mix? And now new customer we are acquiring, so there is -- how much will be the basic and how much will be the fashion?

So that -- as we always say that 50% fashion and 50% basic, that's the concept in order to make the factory running smooth.

Okay. And this year, you said that we have added one customer in Middle East, correct?

Yes.

So that will change. I mean can give -- the seasonality that we have? Because normally, in Christmas, we have higher sales. So some of the month, we may see a much higher demand. So how that mix can really -- this will smoothen out our operation?

So like production -- like we don't have production like season-wise, but your request -- your question on whether it is the customer will bring in more volume than there is off-season I don't think will suit our kind of [ posting ].

Because we are into the fashion only mostly. But I don't think it will have any change in the customer mix.

Okay. And the one more customer which is -- in which region, U.S.A. or Europe?

In Europe.

Okay. So now still, we have a larger concentration on the Europe only, correct?

Yes.

Yes.

But U.S.A. side also, we have been working. So how do -- when we expect, I mean, more customer from U.S.A.?

So we may add 1 or 2 more. These customers, we will start exploring now. It may be fruitfully after 1 year time or so. Maybe '23, '24, we may start winning some business from the U.S. customers.

Okay. And with this current addition of spindles, we'll be able to meet our 100% in-house requirement except this fancy yarn that we keep on buying?

Correct. But we know that the business grows. We may help to outperform some of the yarns from the market. So that's what we are just thinking.

Okay. And last question. Balaji, this working capital, what is the rate of interest that we pay because since it is available, we are exporter, it is made for export. So are we getting it at much cheaper rate?

Yes, yes. We have a concession of 3 percentage. And moreover, that could be -- also take PCFC, which is in foreign currency, where it is more likely roughly 85 bps. So net rate in terms of working capital will be close to around 3 percentage.

Thank you. As there are no further questions from the participants, I now hand the conference over to the management for closing remarks.

Thank you. Dear all investors, as I always mentioned that please rest assured and we have the confidence and trust in this organization. We always strive to perform better year-on-year and we are working towards -- the whole team behind me working towards that. Thanks for your support -- continued support all this crucial time. And henceforth, we look for a better income from better business in coming years. So we hope for the best. Thank you.

Thank you. On behalf of Batlivala & Karani Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.