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

Ladies and gentlemen, good day, and welcome to the SP Apparels' Q3 FY '22 Earnings Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Ms. Prerna Jhunjhunwala from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, ma'am.

Thank you, [ Jennis ]. Good afternoon, everyone. On behalf of B&K Securities, I would like to welcome you all to 3Q FY '22 Post Results Conference Call of SP Apparels Limited. Today, 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. I would now like to hand over the call to the management for initial comments. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone. A very warm greetings to all of you who are present on this con call to discuss about our quarter 3 FY '22 results performance. I hope and wish that all of you and your loved ones are healthy and safe. Before discussing on the performance of each division, I would like to update you the developments of the Retail [indiscernible], which has been completed on 1st of January 2022. We have shifted the operations of Retail into our wholly owned subsidiary, SP Retail Ventures at the consideration of INR [ 53.5 ] crores. This consideration will be converted into equity at an appropriate time. Further, I would like to take this opportunity to inform all of you that we will be looking to raise the -- our strategic investments in our new Retail venture to grow the business and excel in its industry. Now let's talk about the Garment division's segment wise performances. For Garment division, the shipments to customers has increased both in terms of Q-on-Q and year-on-year. In terms of customers, we have added one new customer from the U.S. and expected to receive initial orders in the next 4 weeks' time. This addition from [indiscernible] will surely dilute our concentration in the UK geography. I would like to update you on our strategy in increasing the utilization levels by aggressive sourcing and training of workmen, which has started yielding better results now. The process of starting our second shift is still to be commenced and will likely happen in the month of May, and we'll update you all on this soon. Our current order book stands at INR 330 crores. Our Garment division revenue for this quarter stood at INR 223.8 crores versus [indiscernible] crores for Q3 FY '21, which is at a growth of 27% year-on-year. The total revenue for 9 months stood at INR 523 crores versus INR 373 crores for 9 months ended FY '21 at a growth of 40%. Adjusted EBITDA of the Garment division stood at INR 44 crores for the current quarter as against, I would say, INR 38 crores of Q3 '21. Adjusted EBITDA of the Garment division for 9 months stood at INR 110 crores versus INR 75 crores for 9 months FY '21. Regarding spinning, spinning is fully being utilized and is leading good markets adding to the Garment division's model. Our expansion of [indiscernible] is completed currently. And they have started yielding production effective from 1st of February this year. Further, as instructed in last call, to mitigate the risk of availability of policy -- availability of quality arm and consistency in supply, we have tied up with [indiscernible] on a conversion basis so that supply is uninterrupted without any volatility. Regarding Processing, this division's utilization level has increased full, which means we are working even on 2 Sundays a month. So working days, we have increased. Coal prices have started decreasing and raw material prices and supply chain cost escalations are putting margins at stress level in the Processing division. We have worked an alternating mechanism to mitigate the price escalation in coal during last quarter. Regarding SP Apparels UK division, the SPUK has seen a lot of disruptions in supply chain majorly due to the third wave in the U.K. and Europe, escalation in the container process put the supply chain on a standstill and disturbed the revenue for the current quarter. The situation is improving now and SPUK will pick up [indiscernible] from Q1 FY '23. Revenue for the quarter stood at GBP 1.4 million as against GBP [ 2.1 ] million year-on-year. Retail division performance has been separately disclosed to the exchange as business of discontinued business in our stand-alone financial reporting structure. Further as highlighted in the -- in the opening remarks, we will be looking for some [indiscernible] strategic investors into our Retail ventures to grow the business and move to the next level in our Retail operations. The current liquidity efficiently is strong, and we have furnished all the debts up to date. Thank you. Now I will request the CFO to give an overview of the financials. Thank you.

Thank you, sir. Good afternoon, everybody. I'll just run through you the financial performance of the company. The revenues for this quarter stood at INR 254 crores on a consolidated basis, which is 20% more than year-on-year. Our consolidated Retail stood at INR 41 crores -- adjusted EBITDA stood at INR 41 crores as against INR 39 crores year-on-year. And our PAT -- PBT stood at INR 30 crores as against INR 26 crores year-on-year. Adjusted PAT stood at INR 24 crores as against INR 19 crores year-on-year. It is an increase of 25%. On a 9-month basis, our revenue stood at INR 609 crores on a consolidated basis as against INR 459 crores year-on-year, which is an increase of 33%. Adjusted EBITDA stood at INR 107 crores as against INR [ 78 ] crores year-on-year, which is an increase of 37%. PBT stood at INR 78 crores as against INR 43 crores year-on-year, which is an increase of [ 18% ] year-on-year. PAT stood at INR 59 crores as against INR 32 crores year-on-year, which is an increase of [ 82% ]. On Garment division, the revenue stood at INR 223 crores for the quarter as against INR 176 crores, which is an increase of 27% year-on-year. Garment margin stood at 19.7% as against [ 21.7% ] year-on-year. SPUK revenue stood at INR 17.6 crores as against INR 21 crores, which is reduction in the revenue due to the reasons explained by the Chairman. Our gross debt stood at INR 130 crores, and net debt stood at INR 105 crores. Our working capital limits net is INR 65 crores and term debt is INR 50 crores. Our inventory as on 31st of December is INR 230 crores. It's mainly because of increase in cotton prices and the yarn prices. The cash receivables are at INR 70 crores and payable is at INR 71 crores. Other information was available in the presentation, and we can look into the -- we can get into the question-and-answer section. Thank you.

Sir, can we open the call for a Q&A session now?

Yes.

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

Sir, this INR 330 crore order book, if you can help us understand, compared to, say, pre-COVID, how is it looking like? Is it much above pre-COVID order book levels? Or it is similar to that? Basically, what I'm trying to understand is how is the overall demand trends in Garment division.

In terms of demand, I think there is some good demand, which is coming up. When you compare our order book prior to COVID and after COVID, so like our order book prior to COVID was somewhere around INR 250 crores, INR 260 crores. And now we are [indiscernible] crores. And the demand is really very, very strong.

Let me explain it to you. See, the order book has now increased. It used to be INR 260 crores, INR 270 crores, now it is INR 330 crores, which is against -- it's a profit-based order, so we have a firm delivery, I would say, 3 to 4 months' time, so which means the INR 330 crores will be -- 80% to 90% of its value will be shipped from 3 to 4 months' time. So this is always the case. And this itself is a clear example that there has been an increase in demand for the supply from our existing customers. And that's the current scenario. So we are going very strong with the order books now.

And second one on margins, given the inflationary trend on a Q-on-Q basis also, how are you looking at margins in Garment division going ahead? Any range that could be helpful.

See, one of the [ indiscernible] Garment division margin is only because certainly, we have booked the orders at the remaining prices or beyond on the dyes and chemicals. But after the order book, there will be nobody expected during the beginning of the cotton season, the prices will go up so much. So this is where it has mix [indiscernible] to some extent. So we could not ask for increase in prices from our customers. That's the reason why there has been a little bit of drop in the margin. But now the customers have started accepting the increase in the price, cost price because all over the world, the supply countries, this is the situation. So they have started agreeing to reasonably increase the prices. So we will be back to the same situation of what we used to have the margins.

Sir, is it fair to assume that 20% kind of margins in Garment division [indiscernible] going ahead also?

No, we always give you an indication that the guideline is 18% to 20% always. That is how we work towards [indiscernible]. So we try to always maintain between 18% to 20%. So we don't really give any false promise [indiscernible] because it's all streamlined, our [indiscernible] and the products and customers requirement are all streamlined. So this 18% to 20% is working out all the time. It [ has picked ] up any volatility. So we don't comment anything much bigger than this. So if it [indiscernible].

All right. And sir, in Retail division this quarter, there was spike in losses. What was the particular reason and how we should look at Retail division on an annual basis, some kind of cash loss is going to expect being there?

Retail division for the current year has made losses, and we were not able to make sales during the month of December because of the transition into the new company. So all the stocks were kept on hold until the required movement into the new company. So Retail has made losses for the current 9 months also. And going forward, I guess, things when it stabilizes. So like Q3, if you look at the month of October, we had disturbances where we were not able to open shops during the weekend. Saturdays and Sundays, we're not allowed to open. So we have disturbances in Q3 because of the COVID. But going forward, we get that there will be good amount of traction in the revenue and move to the next stage. So that is about Retail.

And sir, just lastly, on overall debt position. What do you expect by next year -- next year trends [indiscernible]?

I think on the debt level, our current debt is close to INR 105 crores. And on the [indiscernible] crores and on the working capital, we have [indiscernible]. In spite of increase in the cotton prices and all the supply chain, we're aiming to maintain the debt at the low level. In case if we -- if the cotton prices have not gone up, we would have come to a stage where we don't have any debt. But that, I guess, is purely based on how we work on the working capital. But I guess we are working towards 0 debt in 1- or 2-years' time.

The next question is from the line of Kaustubh Pawaskar from Sharekhan.

Sir, my first question is on your differentiated mechanism which you indicated during your initial comments to mitigate the raw material pressure. So can you just explain what kind of mechanism or pricing strategy you are alluding towards...

No, you are talking about, I guess it's regarding the raw material yarn, right? Yes, see, we have -- instead of we buy it from the open market, see, currently our existing capacity can manage up to 60% of our requirement [indiscernible] buy from the open market. So now we have increased the capacity so that the -- number one, they get the confirmed delivery of the yarn and the required quality because our's are baby's products, so the quality requirement is very, very, very sensitive. So we have a very consistent policy which we cannot get from the open market. And the third one is at least we have some [indiscernible] volatility of the cost price of the yarn. So these things will mitigate our risk in terms of quality, delivery and the price.

So sir, this 60% has gone up to how much? Like 60% of requirement is through internal...

Its now around 80% to 90% or even near that, 80% I would say.

Okay. 80% of requirement is in-house, 20% you are buying from the open market.

Open market, correct.

And sir, on the pricing strategy, as you mentioned that since the yarn prices and [indiscernible] prices were booked earlier, and it was difficult to increase the price. But now since the market is opening up for the price increases -- how -- what is the maximum where we can increase the price, which will be comfortable for your customers.

Yes, it is really -- Actually, it is working out to 16% to 20%, but we have already asked the customer to increase for 20%. But they say for them, it will work out to 14% to 16%. So they are ready to give up to 15% currently.

So have you taken 15% on this or -- still it is significant?

Yes, we have only taken 15% increase.

Okay. And my last question is on your CapEx. So now you have completed one -- already completed [indiscernible]. Any further CapEx you are looking for?

If you look at what we have guided for in the last con call, we have spoken that we are going -- aggressively moving towards hostel and we are investing closer around INR 20 crores into hostel facility. That will happen in this current fiscal year. FY '23, we will start investing into our -- expanding our hostel facility so that we are also increasing our capacity accordingly.

The next question is from the line of Arvind Kothari form Niveshaay.

Sir, congratulations on a great set of numbers. I was wondering that we have also did a comparison of what has been the price [indiscernible] by our competitors like [indiscernible] and whether they are facing some issues because of the situation in Sri Lanka in terms of currency and all the things. So are we winning models simply with respect to them or they have also taken price increases which in a way put us better off? Or are we [indiscernible] if you could clarify?

[indiscernible] both in Sri Lanka and Bangladesh [indiscernible] they also taking price hikes.

So you mean to say that the [indiscernible] country, right? They are also -- in fact, they have impacted severely in competitors because we have [indiscernible] raw material, but for them, they have to rely on either China or India or Bangladesh or [indiscernible]. So they have been definitely -- severely affected there. So the price increase is going to be the same or more than us for them, and they have to get the price increase. That is the reason why customers are paying increase of 15%, 16%. It should be for all. Unless others demand, they would not be giving [indiscernible].

Got it. And sir, my next question is on -- in the budget, there was a lot of duty changes that happened across the imports like buttons, and I guess accessories for garment [indiscernible]. Could you clarify what kind of cost benefit we would get in percentage terms of our manufacturing parts?

So on the -- in the budget, I guess, there was only one small change for the imports in terms of people who import under duty can get it through an obligation, they can do it -- so that's the only thing. But I don't guess that will be in terms of percentage, which can be marked. It will be very, very small.

Okay. Okay. Got it. And sir, just a new client that we are talking about in the U.S., I mean -- and in the last quarter, I guess, we had [indiscernible]. But in terms of volume or maybe value terms, if you could clarify what did these products of our group target that we had talked about in the last [ point ]?

See, one customer, we have already got [indiscernible] we already got that from Middle East [indiscernible]. And the other one is our [indiscernible] them. So that's a U.S. customer. Now first year, there will be a small portion of [ business ] contribution will be there on the either side. So [indiscernible] onwards. So easily, it will take about 10% to 20% of [indiscernible] our sales. That's the plan.

The next question is from the line of Shikha Mehta from Equitree Capital.

I just have a couple of questions. What is our current labor strength? And are we currently seeing any shortage of labor, et cetera, and now COVID all have subsided a bit. So can you...

Can you speak a little louder, please?

Sir, I was asking if -- what our current labor strength is and if we are seeing any shortage of labor?

See, as I mentioned that it started improving. Yes, definitely still being able to sell the capacity with the new recruits, which already started working in the last about 3, 4 months' time. So over -- another about 3 months' time, we should be able to fill the existing installed capacity. And slowly, we will be doing, as I said from May onwards, we will be gradually increasing the number of lines for the second shift without adding any additional machines. So it's in the right track.

And so what's our attrition rate?

Attrition is...

Attrition is slightly on the higher side. Now we have already started working on month on month about 5%. So we are working on the senior [indiscernible] strategies, which will also yield the results in the next 2, 3 months' time for sure.

All right, sir. Sir, I guess orders normally -- our orders normally take 3 to 4 months to be completed. And our current order book is around INR [ 350 ] crores. So are we seeing next quarter, we'll be doing around north of INR 300 crore top line?

Yes, [indiscernible] 90% of INR 330 crore will be for 3 to 4 months' time. So it can be split into 4. So you can work on this. This is the order book we have for the coverage of 4 months of 90%. And another 10 months will be there for the next 3 more months. So we cannot give you the correct number based on this number, but you can guess it.

All right, sir. So our employee cost also for the quarter again on the higher side, which is due to the [indiscernible], et cetera? So can you give the normal salary paid for the quarter?

So like if you are looking at the employee cost based on percentage, yes, the percentage is on the higher side because of our own efficiencies. Once the efficiency comes in, we should see the employee cost in terms of percentage coming down.

So what percentage would you be looking at approximately?

As per the industry, I think the employee cost [indiscernible] 20% to 21% should be right, and we are working towards it.

All right, sir. Sir, if you could tell us the percentage of raw material increases faced for the quarter? And how long will it take that to pass on the [indiscernible] about that a bit earlier, but if you could just shed some light on this?

So raw material costs -- can you repeat the question.

Again. please?

So how much percentage has the raw material costs gone up by?

So it all depends on the product mix, I'd say, it's the basics, if you work on basics, the raw material cost will be on the higher side. And if it is on operation front, the raw material cost will be on the lower side. It all depends on the product wise which we work with...

Sir, If you could give a broad percentage...

You see, we were between 35% to [indiscernible] based on -- based on the product...

It used to be around 37%, 38% raw material costs. Now currently, in this -- the current season, it is about 40% to 42% because the customers have not been able to increase the price. So again, the sum rule is normally, as we said from the current orders what we are booking now, customers will increase the charge, the cost of increase. So we will be back on track around 37% to 40%, it will be the raw material cost.

Okay, sir. And sir, could you give us some light -- could you shed some light on the logistics costs, how much will that increase to?

Logistics. [indiscernible].

Okay. I will come back in the queue, sir.

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

Congratulations Mr. Sundararajan and team on good set of numbers. Sir, now current year, I mean, we expect -- I mean, on the basis of somewhere maybe around INR 750 crores of our garment sales. So subject to how much we realize out from this order book and the way the order book is expanding as well as we are adding the customer. So can you give some sense where do we look for FY '23 subject to everything is normal, and we will be able to ramp up the capacity as well as utilization level and double shift. So how much are we looking for FY '23 as well as -- in the volume term as well as in the -- because of price value term?

See, as I mentioned in most of the con call, we always [indiscernible] about 15% to 20% growth, which is what we are always working towards. And this current year, we have -- the growth is about -- we expect the growth to be 25% for this FY '22. And next year also, it can be between 15% to 20% to big range, I know. But safe side you can have 15% to 20% growth on the top line and the bottom line is always, we maintain 18% to 20% EBITDA.

Okay. That's fair, sir. But if we look at, I mean, the way price increase we have taken, so will that accelerate some growth percentage?

Which growth you are talking about?

Sir, we have taken a price hike of around 15%, correct?

Right.

So from that where your...

Exactly right increase the customer is going to pay now.

Okay. But if they agree, then the growth rate will be a little higher, correct?

That's 15% price will also be [indiscernible]. That is what we are trying to say 20% to 25%.

And SPUK, how we are seeing the situation now?

See now it's back to normal. It's everything because Europe is open and all the retailers or corporate offices are open, they start meeting the vendors, the people. So it's all back to normal same as it was in 2019 -- '18 '19. So the [indiscernible] the demand as usual [indiscernible] after the pandemic that is going to be addressing demand and that is what is happening. So only the U.K. where we have to look at the price increase with regard to the customers, their customers, which will also happen now. So if we look at the top line, there will not be an issue. We'll definitely be hopeful of, I mean, growth by 20%, 30%, and the margin will be maintained as it is.

Sir, last question, I mean, on the Garment side, the new customers that we have added is more of a basics or fashion side?

Mix of basic and [indiscernible] because of our fashion side only. So it will be [indiscernible] 40% will be fashion.

Sir, now you said that in Retail, we have aggressive since it has been transferred to separate 100% subsidiary. And we have aggressive investment plan. So can you give some more color on how much investment we want to make until we raise the fund? So it will be from -- which entity it will be funding?

No, see [indiscernible], we are raising funds for the growth. Not that we are growing at an aggressive pace. So we are looking to raise funds both if there is a strategical investment coming in or a financial investment or a [indiscernible], whatever kind of investment that will accelerate the growth. So the investment is for the growth.

So definitely, we have a plan. We have aggressive plan. And then -- if we need to grow, while it was [ not in this ] company, in SP Apparels. So we did not support them by further funding due to the Board decision. So now this being [indiscernible] 100% subsidiary, now they are going to bring the money from anyone else. But the business plan is always at very, very fast year, domestic retail is very, very positive now. So -- and we are planning of adding [indiscernible]. So we have a plan for adding 1 or 2 more brands in 2 years. So one will be -- see, now this is [indiscernible] men's brand, and we have a plan for adding one [indiscernible] a premium brand. And the third one is going to be a license brand of world-famous sports brand, where we have an apparel and footprint. So the business model and the business numbers are very, very attractive and very, very positive. So with the additional infusion of money, we should be able to take it up for the next 2, 3 years' plan.

One more point to be explained here is that there will be no more additional funding from SP Apparels into Retail without any aggressive growth that is coming in.

And sir, on this garment -- current our [indiscernible] mix is how much?

Say it again.

See In current, I mean, 9 months, what is our basic and fashion mix?

Mix, it should be 60% basic and 40% fashion.

The next question is from the line of Niraj Mansingka from White Pine Investment.

I have a few questions. One, is on which date did you take the price increase?

Prices are quoted based on the orders which we have -- see, for example, today, I'm getting an order, I go with the today's pricing. So it's not like you don't go back and get the prices.

See, it is not a commodity, our products are...

Understood. So let me rephrase this question that from what -- has the quarter 3 seen the full impact of the price increase passed on to customers or the full impact is yet to come?

Partly, it is getting passed on, maybe orders for, like basic [indiscernible] could have been passed on. For certain orders, it could have not been.

The same case for Q4 also.

Okay. So then Q1 would be the full impact. Is it correct? Okay. Got that. The other thing is how many employees do you have right now? And how many machines?

Currently, we are working with 12,500 employees on roll. And we have 5,000 number of sewing machine in-house and capacity utilization is close to around 62%.

Okay. So on related question, you had told in the past also that you don't need to add capacity now considering that we're going trying to go for a double shift. One, what is the -- do you think that by May, you'll be able to start scaling up the double shift? And do you see any delays on that including the double shifting of the resources?

Yes, as per the plan, we are looking towards May, where we'll start up the double shift [indiscernible]. But gradually, we will start having 3 lines, 4 lines and 5 lines and gradually [indiscernible].

This answer cleared about -- for your question?

No. Okay. Some related also. So then why are you -- see, your utilization is low, but you still want to go double shift. So can you -- just can you explain that because...

See, there are certain factors, which are associated with the hostel, correct? We can have the second shift only in hostel factories. So for the local factories, we will continue to fill the existing capacities. At the same time for hostel factories, there will be more inflow of people. So we hear automatically. We will not stop the inflow. We will add on the night shift lines.

Okay, so is it -- the availability is an issue because see, one thing I'm not able to understand is industry is getting a lot of orders to do, but you are still running at [indiscernible]. And there's a lot of scope to increase utilization as well as to increase the hostel facility and go for double shift. So then what is stopping you? Is it the availability of labor or some other [indiscernible].

See, all of a sudden, we cannot simply bring in 1,000, 2,000 people. So it has to happen on a month-on-month basis. So that is what is happening now. So in the next 2 to 3 months, there will be more of inflow, and we have train them and put them on job. So it takes its own course of time.

Okay, so the last question. So -- how do you see the employee scale up in number of employees from here in the next 2 years? Yes? And how do you see the training for them -- facilities that we're planning. I just wanted to the hear the thoughts on that.

See, based on the growth rate there, we said that 20%, 25%. The same manner, first we will fill the capacity -- the existing capacities and then we will reach a level where year-on-year, there will be a growth [indiscernible] 20%, 25%. And we have a proper training center. So we take first people, train them up and we will put them after certain period once we evaluate and found suitable. So this is a routine exercise.

But can you speak some number like in terms of -- we can -- explain us how you are thinking? Like how many employees you see since 2 years from now?...

20% to 25%. So you can [indiscernible] 20% to 25%.

Almost 40%, 50% additional employee in next 2 years?

See, every sewing machine, I have to have at least [indiscernible] people on the role. So like as the operator needs to be there and the helper needs to be there. So for every machine I add, I need to have a 2.25 as a whole. So for example, I add 1,000 machines next year, I have to hire another 2,200 people on my role.

But this doesn't include the double shifting, right?

[indiscernible] growth.

Okay. No, I was trying to more understand from like machine versus employees because the machines what I thought is the [indiscernible] in the con call that the machines [indiscernible] time because we were going to slightly 3-plus number of employees versus the machine.

The machine-man ratio, we mentioned [indiscernible] is the ratio. So you can either way [indiscernible].

This is for single shift, right? This is for single shift, but when you go for double shift [indiscernible].

So there, again, the number of machines will increase. So even if it's the second shift, if they are running [indiscernible]. We are not talking about [indiscernible] machine, we are talking about running machine.

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

A couple of questions. One is on the employee availability just continuing on what the previous participant asked. So when I go back to my notes of the last quarter con call, you all had stated that a 2-shift facility will start by -- it means you will start 2-shift operations in one factory by September. So has that started?

See, as we mentioned [indiscernible] because of this Omicron thing that disrupted the whole thing because the inflow of workmen from other states have been -- the government has stopped them. So now it has resumed. So literally, we have lost about 3 to 4 months' time. So again now, which is assuming. So again, I am telling you there is one more pandemic -- one more this viral spread comes, even we don't know what will happen. So these are only the risk factors. So what we planned for September has moved to Jan will again now we are planning for May because it's a disruption to resume, it takes about 6 months' time until we stabilize. After that, that is not an issue. While in the process of stabilizing these disturbances are really disrupting the plan.

Got it. Got it, sir. So sir, assuming you all have 2 shifts in the next year -- over the next year. So what would be the capacity utilization then for the next year that you would be targeting? Sir, it's currently at 62%...

We mentioned before also around 80%, we mentioned. 80% to 90%, then probably we will be adding new more machines.

Okay. Okay. 80% to 90%, and this would be on 5,100 sewing machines.

As sir said, we may be adding couple of more machines next year...

Okay. Okay. Got it. And sir, when I -- on the GP margin, so when I look at the stand-alone figures, and I think that would give me a better understanding of the Garmenting division, correct me if I'm wrong. So when I look at those numbers on a Q-on-Q basis and on a Y-o-Y basis, the GP margin hit has been pretty substantial. So if you could just give some color on how our raw material procurement has been over the last quarter? And what led to this hit, if you could give a little more granular understanding. Because as far as I know, we keep 3 months of quarter inventory with us. And in a rising environment, one would have been able to pass on the price, right, with the low-cost inventory remaining with us as in our stock. So this kind of hit would not have come in this particular quarter. So just wanted to understand this part.

So I think you wouldn't listen to the previous questions which are being come. So we have already explained this why there is a risk. This is purely because of the product mix. So when I do more of product which is basic in nature, there will be no value addition in terms of my cost. So when I being more of basics, then my material cost is always on the higher side. And more consumption towards [indiscernible] go to increase the contribution. But in terms of margin, we have guided for 18% to 20% of margin. They don't look at margin separately, EBITDA margin separately and gross margin separately. If my basics is going to be the -- basic contribution is going to be in the higher side, my personnel cost could be on the lower side. So we have to look at it holistically. Hope, I am clear.

Yes. Got it. And sir, if you could give us -- give me the volume for this quarter in the Garment division?

No, we have already given that in the presentation, but still [indiscernible] million on the domestic front. So both put together [indiscernible] million pieces.

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

Sir, my question is on the growth which we are expecting for FY '23, considering that this quarter, we have already done around INR 225 crores, which means we are already going to see [indiscernible] this run rate that itself will give us at 15%, 20% kind of [indiscernible] assuming there is some more price hike, which was not available during first half of this year. So are you saying that the run rate in terms of volume will be similar to what we have done in [ 3Q ]?

I think volume could be around anywhere between 10% to 15% and the price hike could be anywhere between 10%. So that is why [indiscernible] has instructed that it will be 25% for FY '23.

See, definitely, we are planning for...

That is what I'm asking that if I look at the quarter 3 run rate of Garmenting export revenue, the growth doesn't seem to be very high. It means that you are not adding to incremental volumes next year.

Yes. That's what I'm saying is that we are planning for capacity increase by around 20%. And also the price increase will be around 15%, correct, but it is not for all we will be getting the 15% growth. So we have to work in such a way that combined it will work around 25%, this is what we mentioned to you. So this is only the guideline we are giving, we cannot assure you on the numbers now.

Yes, I understood that part, sir. What I was just saying is that this quarter, we have already done INR 225 crores. That means we are already doing INR 900 crores kind of [indiscernible]. And this means that next year on this run rate, whatever we have done in quarter 3, it seems like -- because 1Q and 2Q was anyways much lower for us because of multiple issues. What you are saying is that you will maintain this run rate and some marginal 5%, 7% growth -- is what I'm coming to. When you say 20%, 25% growth, the growth doesn't seem to be very large. The volume growth obviously doesn't seem to be more than 0%.

You're [indiscernible] quarter we have already achieved. And Q4 -- and I mean, if you look at the run rate, [ 225 ] average if you take -- this [ 225 ] is also locked with the existing capacity, also the previous one, which was because of the container issues and other things which has happened [indiscernible] fourth quarter, it will be easily around INR 900 crores, easily. And incremental -- 10% incremental increase. You can [indiscernible] You are trying to say this incremental growth is not very attractive, you mean to say, not existing?

No, No, sir, I'm not saying that. I'm saying that you're already doing that kind of run rate to reach that 20% growth. So the incremental capacity doesn't seem to be coming in. But what you are saying is that you will do INR 900 crores and then plus INR 100-odd crores. So you can exhibit INR 1,000-odd crores next year, FY '23.

I have also said it in the interview with CNBC that we will be [indiscernible] crores in 2023 FY.

Yes, yes. Got you, sir. So basically, growth will be more towards like 30% rather than 20%, what you are saying?

So you want me to say, Resham, you have done all the homework, why [indiscernible] from me?

Okay, sir. Sir, second question is, we are doing a nice thing by doing debottlenecking by putting up [indiscernible]. But sir, in terms of the real capacity addition, when do you think we need to start putting up newer capacities for incremental growth beyond FY '23, '24?

See, this itself -- with the existing sectors, we can easily grow another 40% to 50%. So which means for another next 2 to 3 years' time, so this itself will give you required increase. Plus, we have a plan of another one big factor into '23, '24. Maybe one more, 2 big factories, we will be planning to put up in '23, '24, depends on how this 1-year post pandemic, how the things are settling down, depends on that. So definitely, there is a plan for 2 big factories that will be -- that will not roll out. Where we will also do some consolidation. It's not straightaway this. There may be a reduction in number of production sites [indiscernible].

Okay, understood, sir. And sir, last question is given that our CapEx is quite [indiscernible] over the next 24 months or so, and the consolidation is quite high and also Retail will not require the money. So how do you plan to deploy the money which you are going to earn over the next 24 months? It seems to be quite large. The debt is already at INR 100 crores, which is all at subsidized rate. So all of the cash which we will be generating now seems to be like a free cash flow.

So anything in terms of cash -- I mean capital allocation, I think we have already [indiscernible] of the EBITDA will be distributed to the shareholders accordingly. And if at all we have cash accumulation, the capital will be used effectively for -- either to pay off the shareholders as a way of dividend or buyback. That may happen once we see good amount of cash accumulation happening.

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

Congratulations on your numbers. Just sir, just a couple of [indiscernible] actually clarificatory question. So you indicated that we are running at about a 65% capacity. This is including this capacity on which we can run on double shifts.

Yes, so when we say the capacity, it is not the installed capacity. We are -- see for example, out of, say, 5 crores of machine, we run 1,000 machines double shift, then it becomes 6,000 machines. So that is how we look at it, like 1 shift, 1 machine installed. So if that is the case -- so if it is 60% now. And when we say 80%, that also includes the night shift also.

Understood. Got it. So we've got a reasonable headroom to grow on existing capacity as well. Sir, and the guidance which you have given sort of 15% to 20% growth, is it that the volume growth that we are looking at?

We said that around 60% will be -- in terms of volume, yes, 60% basic and 40% fashion.

No, [indiscernible] 15% to 20% growth which we indicated, which we can do next year, that would be on actually the volume growth, right? And the pricing would be over and above that, I mean is depending on the price of the [indiscernible].

[indiscernible].

All right. So then we don't need [indiscernible] any incremental capacity at least the end of FY '24. Is it because effectively assuming 15% to 20% growth even for the next 2 years, we still wouldn't be at optimal capacity utilization?

Yes, we may not need additional new machines. But as we said that always we may have to have -- when we [indiscernible] about 10%, 15%, we may have to invest in the new machines to balance the line for each factory. So otherwise, there will not be any increase in the number of installed machines rather than this 10% because we are working double shifts.

Got it. Got it. Sir, given the overall demand scenario and what we are hearing from both the off-line [indiscernible] listed and unlisted, is that the demand scenario is extremely strong? So given we have that capacity and given we have the credibility, we have the client base, we have the scale, shouldn't we potentially be attempting for even higher growth? I mean I know that 15% to 20% is a great number, but just wanted to understand, isn't there a potential to do even higher. Actually, I mean bottleneck in taking into a law.

Yes, [indiscernible] definitely possible. You see extra continued manpower, so it all depends on sourcing the manpower.

We have mitigated the -- we have faced the challenge of inflow of the people, workforce. But one thing which I always used to say, the mobilization was the challenge, which we have now -- we are coming out of this now. But in big volumes and handling such huge mobilization of workmen, most of them, 90%, 95% are women or girls. So certainly, it is not applicable to suddenly take about 1,000, 2,000 people and just put them in the hostel and train them, put them -- So this has to happen as a natural course of action, like gradually first month, we can do about 200 to 300 machines. Like this, we can increase. At the same time, we have to [indiscernible] also because currently, we have [indiscernible] inflow, but we have now started working on retention plan also. So what will happen, say 300 will come, maybe 100 will go. So we cannot just all of a sudden bringing one to manage the whole thing because the productivity, quality issues and trading of the material, these are all challenges. So it has to happen in 20% to 30% of workmen growth. This is what we strongly believe in.

Got it. Sir, and in terms of just -- is this in your view because you know what we're hearing from even some of the larger analysts and the [indiscernible] et cetera, is that people are looking at this as a golden era of potentially in -- I mean garmenting just because international customers are just looking to increase India as a share. Is this something which you are also experiencing and seeing?

Yes, this is a golden era [indiscernible] the price, which is now they have accepted and the second is capacity, see, we simply cannot get acquire a big manufacturing company and just to manage the whole thing, whereas we used to grow 10%, 15% in the past. Now we are talking about 20% to 25% growth. This itself is the message that we want to make use of this opportunity. And we -- maybe I say 20% to 25%, maybe if we get to manage 30%, 35%, we are happy to handle. That's not an issue. But when it comes to the official announcement, we only stick to 20% to 25%.

Got it. And then last question, if and if someone had alluded to the utilization of the cash on the books, given we've got a really a limited amount of CapEx, which is just coming on stream at least in the near term, given our leverage levels are reasonably low as well. And given our retail business [indiscernible] committed with like -- will -- I mean there's no more required capital. What are we going to do with the [indiscernible]. I understand some amount will be received to be dividends. But I mean, in the event that we don't have the utilization, may be a good opportunity to utilize it to do a buyback at a reasonable given the price is also reasonable at the moment.

Yes, you're right. I think you didn't hear the previous call where we have spoken that capital allocation will be strictly looked into. And wherever it is possible and if there is a good accumulation of cash, we will look into a buyback option.

Ladies and gentlemen, due to time constraint, we take that as a last question for today. I would now like to hand the conference back to the management for their closing comments.

Thank you for the participation in the con call. And we appreciate the various questions raised by all of you, which shows that how keen you are in the company's growth. And I'm sure that we have been able to answer all your questions to up to your expectations. And [indiscernible] as I promised talked to the last time, we have very aggressive plans. And as somebody mentioned that -- it's not really a golden era, I think we are back to the [indiscernible]. There are always some challenges. But now we have -- number one, we have learned how to manage -- face these challenges. Number two, the whole thing is in our favor, this industry is in our favor. And the third one is that the talk of this industry all over the world is free trade agreements, which already the dialogues have started. So we are very, very optimistic about it. So the customers -- one of the reasons why customers are focusing more into India is, they also anticipate FDA agreement very soon. So all these things -- considering all these things, yes, the garment industry and the textile industry are very, very positive. And we [indiscernible] to the individual companies how to make use of these opportunities. And we are -- day and night, we are working towards that to see how we can optimize and maximize this opportunity. [indiscernible] that we will do our best to see that your expectations are [indiscernible]. Thank you very much.

Thank you. On behalf of Batlivala & Karani Securities, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.