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

Ladies and gentlemen, good day, and welcome to S.P. Apparels Limited Q2 FY '25 Earnings Conference Call, hosted by Elara Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Prerna Jhunjhunwala from Elara Securities Private Limited. Thank you, and over to you, ma'am.

Thank you, Manav. Good afternoon, everyone. On behalf of Elara Securities Private Limited, I would like to welcome you all to Q2 FY '25 Post Result Conference Call and Business Update Call of S.P. Apparels Limited. Today, we have with us the senior management of the company, including Mr. P. Sundararajan, Chairman and Managing Director; Mr. S. Chenduran, Joint Managing Director; Mrs. S. Shantha, Joint Managing Director; Mrs. S. Latha, Executive Director; Mrs. P.V. Jeeva, CEO; and Mr. V. Balaji, Chief Financial Officer of the company. I would now like to hand over the call to the management for opening remarks. Thank you, and over to you.

Thank you, Prerna. Good afternoon, everyone. I welcome you all to the post earnings conference call for Q2 and H1 FY '25 of S.P. Apparels Limited. I hope all of you had a chance to look at our investor presentation that is uploaded on the company's website and at the stock exchanges. The Indian textile sector is currently experiencing favorable conditions in the global market. As international retailers adopt the China Plus One and Bangladesh Plus One strategy, India has become a key sourcing destination. This shift is driven by a desire to mitigate risk and diversify supply chains, moving away from traditional markets. In response to these shifts, American and European companies are actively looking for alternative to Chinese raw material. This trend, coupled with India's growing capacity and infrastructure, has allowed garment exporters to significantly increase their production capabilities to cater to this demand. We are seeing this trend gain momentum with few prominent customers, who are actively encouraging their importers to shift sourcing away from China to India. Similarly, U.S. importers are also showing a keen interest in placing orders with India, signaling a positive growth outlook for our market. Moreover, India alongside Vietnam and Sri Lanka, is emerging as a sourcing destination, reflecting a shift in preference from China and Bangladesh. This economic shifts are beneficial for us as we are eager to take advantage of these opportunities. To do so, we are implementing strategic measures, such as maximizing the utilization of our current capacity, and have also begun to attract interest from new customers who are ready to place orders with us. Coming to our business performance. At our spinning division, we have faced some hurdles in the past, particularly due to the volatility in cotton prices. However, cotton price has stabilized on the lower side now, enabling us to maintain the profitability. Additionally, our dyeing facility has reached 95% utilization rate, enhancing the efficiency and performance of this segment. In the garment division, we have made significant strides in our operational efficiency. Our capacity utilization has increased to 82% in Q2 FY '25, up from 79% in Q1 FY '25. Historically, our utilization rates were between 72% to 74%, which has currently increased to 84%, and we are on track to achieve our target of 90% utilization by March 2025. During this quarter, employee expenses were higher due to the recruitment of new workmen, which improved our utilization rate. However, production efficiency was not at its peak since these employees are still in the early stages of the training. Over the time, we expect their productivity to improve. Additionally, the necessity to expedite certain orders via air transport led to increased air freight costs, which affected our operational margins for the quarter. Turning to our recent acquisition of Young Brand Apparel, which is a significant milestone in S.P. Apparels' journey and bring substantial potential for growth. We have identified several areas for improvement that will enhance margins. With full control over the workforce, production efficiency, order bookings, raw material sourcing and overheads, our goal is to improve margins by 4% to 5% in the upcoming years. Currently, out of 1,500 machines, we have achieved 74% utilization rate. And by end of March 2025, we anticipate it to increase to 92.5%, with 1,400 machines in utilization. Additionally, we plan to expand the capacity at the Young Brand by adding 300 machines in the next 2 years. With regards to customers, S.P. Apparels has traditionally been concentrating in European and U.K. markets. However, the acquisition of Young Brand has opened those to the American market, where the brand enjoys a strong reputation. This has led to increased interest for American customers in S.P. Apparels fashion products, demonstrating effective synergy between SPAL and the Young Brand. In Young Brand, we anticipate some initial impact on EBITDA margins, but we are optimistic in reaching our goal of 18% margin in the garment division, including Young Brand. Going forward, the numbers of Young Brand will be combined with SPAL numbers under garment division for presentation process. Furthermore, we are happy to share that training of workmen at Sivakasi unit has been started, and we expect this to operate efficiently in the next 12 to 15 months' time. Our current order book is INR 512 crores, where INR 402 crores from SPAL and INR 110 crores from Young Brand. Looking at the garment division's performance, the adjusted revenue was INR 257.5 crores, with an adjusted EBITDA of INR 43.9 crores and an EBITDA margin of 17.1%. Moving towards our subsidiary in Sri Lanka, which is an asset-light business model with high ROEs has already started yielding positive results. The operations in Sri Lanka are enhancing our capacity without additional investment in assets. We have onboarded new customers of wholesale U.S. importers in our customer profile, which aligns with our expanded capacity and growth in customer volume. In the retail division, S.P. Retail Ventures reported revenue of INR 22.5 crores during the quarter compared to INR 27.6 crores in Q2 of FY '24. I'm excited to announce that our Crocodile brand has reached a breakeven point this quarter, with a top line of INR 22.5 crores despite a nominal loss. We expect the retail division to achieve a breakeven status by end of FY '25. Additionally, we have made the strategic decision to discontinue the Head brand, with the license set to experience in December 2024. We are actively exploring fundraise opportunities for our retail venture, including participation from existing shareholders. With regard to SPUK, our revenue for Q2 FY '25 was GBP 1.83 million and current order book is valued at GBP 4.01 million -- sorry, GBP 5.01 million. At the SPUK, we are experiencing a revival. After a year of transition involving office relocation and team restructuring, including the integration of new generation of designers, we are now back on track. I am pleased to share that in H1 FY '25, we secured 2 new customers, and we have 2 additional customers to be signed up this financial year. We are confident of the growth of this division in FY '26. Now we recognize our team's contribution to our success, for which we have launched employee stock ownership plans, ESOPs, as a token of appreciation. This initiative aims to reward their hard work and foster a sense of ownership, aligning their interest with country and with company's future growth. Looking forward, we anticipate improvement in margins with our aim to reach 18% EBITDA margin in garment division. By March 2025, we expect to have an average of 4,200 machines running, up from 3,600 machines in FY '24, marking a significant increase of 18% growth in the capacity utilization. Moreover, our recent investment in expanding capacities have enhanced our ability to grow, allowing us to seize new opportunities and provide strong value to our stakeholders. These efforts, along with supportive market trends, are set to contribute to our company's expansion in the coming years. Thank you, and over to Mr. Balaji, our CFO.

Thank you, sir. Good afternoon, everybody. I'll just run through the financial performance of the company. On a stand-alone basis, we have recorded a revenue of INR 257 crores on an adjusted total revenue basis. And the adjusted EBITDA, we have recorded INR 44 crores, which is at 17.1 percentage. And at the PAT level, we have recorded INR 18 crores of PAT at 7 percentage. And for the first half, we have done INR 471 crores with INR 80 crores of EBITDA, which is up 17 percentage and a PAT of INR 40 crores, which is at 8.7 percentage. On a consolidated basis, for the first -- second quarter, we have done INR 393 crores, which is at a growth rate of 32.1 percentage at an EBITDA of INR 52 crores. This is an EBITDA, not an adjusted EBITDA, which is at INR 52 crores, which is 13.2 percentage and a PAT of INR 21.9 crores, which is at 5.6 percentage. On the first half, on a consolidated basis, we have done INR 641 crores, with an EBITDA of INR 87.8 crores, which is at 13.7 percentage, and we have done a INR 40 crores of PAT at 6.2 percentage. On the division-wise performance, on the garment division, we have done INR 257.5 crores with INR 44 crores of EBITDA at 17.1 percentage for the current quarter. For the first half, we have done INR 471 crores with INR 80 crores of EBITDA, which is at 17 percentage. For SPUK, we have done INR 19.9 crores of top line, with an EBITDA negative of INR 1.1 crores. And at the retail division, we have done INR 22.5 crores on -- for the current quarter with EBITDA of 8.8 lakhs negative numbers. And in terms of our debt, on a stand-alone basis, our gross debt stands at INR 167 crores and net debt stands at INR 137 crores. And on a consolidated basis, our gross debt stands at INR 299 crores and net debt stands at INR 241 crores, which is 0.3x on debt equity and 1x of EBITDA. Other data which is available in the presentation, we can get into the question-and-answer session.

[Operator Instructions] We have our first question from the line of Bharat Sheth from Quest Investment.

Okay. Sir, my question is related to our U.S. market. So how many customers as of now we have and when we are seeing, as per our MDA remark, kind of a traction? So what is our strategy? And how do we plan to enter that opportunity currently available from U.S. market?

Yes. So currently, in SPAL, we have about 6 customers, and we are in the process of increasing the customer base. And in addition to that, American customers from the Young Brand, they are also open for fashion businesses. And in addition to that, there are certain basic order size, where there is a requirement from the U.S. market into India is becoming more like Walmart importers and all, and Young Brand has got limited capacities, which will be completely filled, whereas they want more orders to be placed. So what we are planning is are there any additional orders numbers can be taken in the SPAL that is one way of increasing the customer base and the top line also. In addition to that, through them we will be getting more importers from the U.S. which gradually, the number of customers will increase over a period of time. So in the next 2 years' time, both our SPAL and Young Brand, they will be having 10 to 15 customer base.

And what is the kind of, I mean, potential that we anticipate that we'll be able to really reach U.S. sales, I mean, on SPAL and Young Brand, both put together?

You mean in numbers?

Yes. In ballpark figure.

So it is like our sales top line grows only along with the number of machines, the utilization. The more the numbers, the more the orders because filling the capacities has never been a problem. So why we are increasing the customer base is to see that there is a possibility of improving the margins by having more customers. And our continuous effort is to increase the capacity. So over a period of 2 years' time, we have put together -- Young Brand and S.P. Apparels put together, we expect at least about 7,000 to 8,000 machines.

Okay. Great. Sir, and profitability-wise, how is the U.S. market vis-a-vis other this European and U.K. market?

See, the profitability -- because of volume American market, we would be able to improve our margin a little bit. But still, the price pressure is always in both regions.

Okay. And on S.P. Apparels and Young Brand put together, how much contribution is coming from the fashion and how much is currently at the basic side?

Continuation of? Babies. Babies are only in S.P. Apparels. In the Young Brand, it is only adult products.

Sir, fashion product and basic product that -- my question is, like Primark is basic, correct?

No, no. It's a mix. For all customers, there is a mix of basic and fashion products. In S.P. Apparels, the fashion product is about 60% to 70%, and the rest all basic products. But whereas in Young Brand, it is only the under garment. There is no fashion or there is no basic. Everything is essential, basic only.

And taking further, I mean, sir, this SPUK, the way we are playing out, so can that SPUK kind of again, one more, I mean, venture can help us, I mean, to grow into the U.S. market? Like sourcing from India and fairly distributing to the American end user?

Through SPUK, you mean?

Either SPUK or separate subsidiary, sir?

No, no. We have a plan. We are not ruling it out. We are planning SPUK office to put into American market as well to contact some of the retailers, and they can source from India and Sri Lanka for the U.S. market, which we are not ruling it out. We might have an office in the U.S. also. It's too early to comment anything out there.

Okay. And last question, sir, on Sri Lanka side, how the things are playing out our experiment with Sri Lankan outsourcing market?

Yes. Sri Lanka, see, we have already started the production. The first shipment is yet to go. So far, everything is going good in line with our requirements. And as I mentioned in my speech that we can -- we have a plan for increasing up to 2,000 machines over a period of 2 years' time, so -- without any investment into assets. So this will fetch additional extra businesses, and we have to mitigate only the margin, which is -- shouldn't be a problem.

Margin to the extent of asset-light. Is that fair understanding?

Yes. If it is asset-light, overall, if you look at it, the ratios will be better, but margin will be tight because the labor cost is slightly higher there, but the production efficiency is better. Our ROCE will be better.

[ ROA-CPL ]...

You are talking about [ ROA-CPL ]. Yes. So we have to compromise on the [ ROA-CPL ]. And that is the reason why there will be a pressure on margins. But overall, it will -- as a company, it will fetch better ratios to the numbers.

Okay. Sir, and last question on the retail side. How do we really -- as you said that from existing shareholders, so are we also planning to put the money in this retail business?

See, currently, the idea is to raise money in the retail division where the debt portion will come down and the margins will definitely improve. So it's currently in the discussion stage, nothing has been finalized so far.

But if required, I mean, S.P. Apparels is ready to put also additional money in this -- retail venture again?

No, no, no. We are trying to raise money from outside. Chairman spoke about getting money from the existing shareholders of S.P. Apparels.

We have our next question from the line of Aman Agrawal from Carnelian Capital.

A few questions from my side. Basically starting on the spinning division. So like, sir, how much utilization are you operating currently and are we EBITDA breakeven? Like how is the profitability in spinning division right now, sir?

Spinning utilization is in full and 95% is consumed by the -- it is captive consumed. And moreover, the efficiency levels are better now and the margins are around 14%, 15% at the division stage, EBITDA percentage.

14%, 15% EBITDA margin, right?

At the division stage.

Okay. Got it. Sir, if that's the case, like what was the main reason for current decline in garment margins? Like you alluded to higher employee cost, but still like with spinning going well, we get a kicker in overall garment margins, right? So why was garment margins like 17% compared to like historical level of 18%, 20% for us? So anything on that, sir?

Two things. See, if you look at the EBITDA margins in terms of percentage, we have been guiding for 18 percentage. And now there is a reduction in margins; one, because of the air freight cost, which has a significant impact because of INR 6 crores for the first half, we're sitting in the expenses; two, there is an increased employee cost because of the training where our utilization level has gone up and the training cost is sitting and with the spillover in terms of sales, whatever additions that has happened from to Q1 to Q2 in terms of utilization level, the sales will get completed by Q3 and Q4. So spillover of sales has an impact on the margin; and third is on the training cost also, like we have utilization levels going up because there are a lot of trainees that have been utilized for training has been done. So there is an increased training cost. These are the 3 things which have impacted the EBITDA margins.

Sir, again, on the exports volume, like if see our volumes have basically been flattish Y-o-Y, right, garment exports for the stand-alone division. So with new...

Can you speak a little louder, Aman?

So I was talking about the garment export volumes. So like we have done 15.25 million units in this quarter, compared to last year, it was flattish, right? So like even with new employees and higher capacity utilization, we had similar volumes. So like have we seen an increase in stock, which might go in Q3? Or like why are we not seeing increase in volumes despite the increase in utilization?

Yes. Actually, Balaji has already explained to you, the sales have been pushed to Q3 and Q4. So although the utilization is better, the sales will be pushed to Q3 and Q4. Overall, there will be an increase in growth in a year.

Okay. Got it. One final question on Young Brand like we have reported 13.5%, 14% EBITDA margins in Young Brand. So like will this be a recurring run rate for now? Like we are hoping for EBITDA margin expansion like we are working towards that direction. But like the margins will stay stable from here on like this will be the minimum margins in Young Brand.

Yes. As I mentioned that this is -- any future quarters, the results will be definitely better than what have been experienced now. And we're expecting over a period of few quarters, let's say, 4 to 8 quarters, we are confident that the EBITDA margin can increase by another about 4%.

Just to add one point, it is only 1 quarter since we got -- I mean we have taken our control of Young Brand. So give us a couple of quarters to have a complete control on the EBITDA margin. So I guess whatever Chairman said is that we are working towards the improvement on the EBITDA margins.

We have our next question from the line of Resham Jain from DSP Asset Managers.

So just 2, 3 clarifications. First one is you had like close to 2%, 3% kind of garment growth in the first half, and our guidance at the beginning of the year in the last quarter was close to 10% for the full year. Do we still maintain that?

Yes.

Yes. [indiscernible] the first half is slightly more or less flat. But as we said that the deliveries of Q1 and Q2 are pushed to Q3 and Q4. So we expect the -- overall FY '25, we expect the same number of growth of about 10%.

Okay. So around 15% growth is what mathematically it comes for the second half?

10% to 15%. Between 10% to 15%.

For the whole year, we are looking at 10% to 15%.

Yes. Okay. So -- and the second is that earlier, I think when we acquired this company, we thought of doing close to INR 300-odd crores in this new acquisition, Young Brand. But I think in this quarter, we did close to INR 94 crores. So is it that we have done better than our own kind of expectations here?

No, it was the previous quarter, Q1, the sales -- the top line was a little lesser. It's all been pushed to Q2. That is the reason why it has gone up. So we expect, all put together for the whole year, it will be around INR 303 crores, INR 305 crores.

Okay. So close to INR 75-odd crores kind of run rate?

Yes, between INR 75 crores to INR 80 crores.

Okay, understood. And sir, in this business, again, when we took over, I think the margin was close to 10%, 11%. When I look at the numbers, it seems that this quarter, you have already done 13.5% -- 13.8%. Again, some of the benefits have already started flowing through?

Yes, definitely. See, because although now officially, we took over the position in the end of June, but I have started intervening into the thing for the past about -- even before acquisition of about 3 months or so. And I used to push the previous CFO and the sales team to improve the margins. And now we have shared our expertise to them. So this has yielded the result. And now we are directly -- we have jumped into this operations now. And we know where are the -- which are the areas to be plugged in and easily -- I could easily see straight away 4% improvement over a period of time. It's not by just customer increase the price or something. The efficient way of working in terms of purchase, the sourcing supply base and the excessive employment of staff and above and the expenses are abnormally high, and a lot of other areas where the leakages needs to be plugged-in. So a lot of things we could do and ForEx hedging that will fetch another about 1% or 2%. So many areas needs to be addressed. We have identified the areas and we need to plug them over a period of time. All of a sudden, we cannot do it.

So one more point to add up here. As sir spoke about, first quarter sales being pushed to the second quarter. So the economics of scale is working over in terms of increase the margin. So if you look at it for the first half, as such, we should be anywhere between 12.5% to 13%.

Yes, that's a good point. See because the sale of second quarter is slightly higher. So the EBITDA has shown another 1% to 2% better. So if you average it to H1, it will be more or less 11% to 12%.

Understood. Clear, sir. Sir, the last question is this year, if we just look at the normalized sales of Young Brand, on an annualized basis, we will be doing close to INR 1,330-odd crores kind of revenue in the garmenting business. On that base, with Sivakasi coming in and some improvement further in Young Brand and some of the old facilities getting ramped up, what kind of growth are we expecting in '26 on this INR 1,330 crores kind of FY '25 garmenting number?

I think you are looking at the consolidated numbers of Sivakasi and Young Brand, right?

Yes, yes.

Let's put it this way. SPAL, there will be a growth of, say, 10% next year that will come to, say, around INR 1,100 crores of export. And Young Brand, we are targeting at INR 325 crores. So that will add up on INR 1,100 crores plus INR 325 crores, INR 1,425 crores, which includes Sivakasi for SPAL. So close to INR 1,500 crores.

Okay. And anything from Sri Lanka?

Including Sri Lanka, we said SPAL is part of -- Sri Lanka is part of SPAL. Put together, we say INR 1,100 crores.

Okay. So Sri Lanka will not be very large in '26?

Yes, because now in the early stage, we have to gradually step in.

Resham, here Mr. Sundararajan is talking about INR 1,100 crores on absolute exports, and you'll have the duties of that, all other things along with it. That is why we said we will reach INR 1,500 crores.

We have our next question from the line of Rehan from Equitree Capital.

Okay. On the labor front, I wanted to understand this higher labor cost, are we hiring this labor to prepare for Sivakasi? Or is it because we have -- we're trying to ramp up our utilization to ensure 90% as MD said as well that we're trying to achieve 90% by March in the coming quarter -- 2 quarters. So is this labor cost going to relatively higher on these 2 accounts? Or can you throw some more light on it?

Yes, exactly. For Sivakasi also we started recruiting people from this week. And as you said with the migrant, we are going to increase the utilization to 90% plus. So we have to recruit them and train them before 1 quarter at least. So we started doing that. Because of that, there is an increase in labor cost.

Okay. So this includes the Sivakasi recruiting as well, right?

Yes. Yes. Yes.

Yes. That's just we started 1 week before. So that will happen gradually, whereas the migrant mobilization will be a little aggressive.

Okay. On the freight cost, I think Balaji sir mentioned there were INR 6 crores, INR 7 crores of freight costs. We do our sales on FOB basis. So do we expect -- I mean why is that impact on us INR 6 crores, INR 7 crores?

Yes. Air freight cost is actually, there was a delay in Q4 of last year. Because of that only, it has impacted. And moreover, the higher air freight cost normally [indiscernible] there have been so much, because of Red Sea issue, the freight cost itself was on higher side. Now it is completely stopped.

No, but that delay was from our side because as per my understanding, all our shipments are on FOB basis. So the buyer would take care of the...

No, no. It's like this. See, generally, normally in every quarter, there will be a nominal air freight always there due to late deliveries, and sometimes customers will request for air freight at our cost. And this is -- see, order is only FOB. But if our deliveries are late, they will ask us to air freight at our cost. And it is not something new. Always, in every quarter, there will be a nominal increase due to air freight of some orders, we cannot be 100% accurate, on dot on deliveries. So -- but this time what happened, the airfreight cost of the -- all the airlines are 3x what it used to be. So that is why, generally, we used to spend about 50 lakhs or INR 1 crore for each quarter, but whereas because of the hike in the air freight cost and with a little more air pricing, this has impacted the bottom line. Otherwise, all FOB only late deliveries, customers, we will negotiate. And if the customers accept extension, it's fine. Otherwise, we will have to air freight at our cost.

Understood. That was very helpful. On Young Brand Apparel, I have one more question. The gross margins have come down quarter-on-quarter. Can you tell us more on that as to why we've seen, I think, almost 4%, 5% gross margin between difference?

See, in the beginning, we explained to you about the spillover of sales from Q1 to Q2. And a certain portion of the value-added products would have been spilled over to Q2, and that's why there's a reduction in Q2 gross margin.

For SPAL, you said Young Brand.

Young Brand, sorry. Young Brand, the difference, I think, is about 6% broadly gross margin difference. Q2 is lower gross than Q1 despite higher top line...

It's purely because of the spillover of sales.

But sir, then how is that -- that should be higher gross, right?

Gross margin is 44% as against Q1 of 51%.

There was air freight -- sorry, there was air freight -- or COGS.

When I buy fabric and dye on it, then the dyeing cost is sitting in my COGS, but my expenses for dyeing is sitting on other expenses. So when I net off in COGS, the COGS will definitely be showing lower number. Other expenses will be sitting on the bottom line.

Okay. So you're saying that -- can you reexplain that? It wasn't very clear.

I think the absorption costing is the issue here. Maybe we can [indiscernible] off call and discuss on this separately.

Yes, say, for example, there are 2 ways of working. The raw material, either we buy finished fabric or sometimes we buy the yarn, [indiscernible] for dyeing and then we get it. So when we do the job, -- when give ourselves for the dyeing and knitting, so that comes in the other expenses. If we buy straightaway the outright purchase of fabric, it goes into COGS. So this time -- yes, you can explain later.

I think it needs to be a broader expansion. I mean, the explanation on this [indiscernible] off call and discuss on this. Can I know the name, please?

Rehan from Equitree Capital.

Equitree. Okay. Rehan, we can take the call, and I'll explain to you on this, okay?

Okay. And sir, if you could also quantify the spinning EBITDA for the quarter. I wasn't -- I couldn't hear that absolute figure for the quarter.

Sorry?

The absolute value of spinning in the quarter, EBITDA level.

Spinning EBITDA for the quarter, current quarter you're asking?

Yes, please.

Just hold on a minute. For the first half, spinning EBITDA is around INR 7.15 crores.

This is first half?

First half, yes.

So I think in Q1, we did around 50 lakhs to INR 1 crore, if I'm not wrong. So balance is coming in this quarter?

It would be somewhere around INR 1.5 crores or something. Now we have done INR 7.15 crores.

Okay. And for FY '25, I think you had given a guidance of around INR 1,200 -- I think INR 1,200 crores to INR 1,300 crores top line. And I think we've done a...

On a consolidated basis.

Yes. For FY '25. I'm just going to repeat that...

Correct. Correct.

Yes. So INR 1,200 crores top line in FY '25, you've, I think, achieved about INR 600-odd crores in the first half, INR 6.40 crores.

See, when we gave the guidance, it was Q4, I guess, we expect that Q1 to be consolidated on the Young Brand, but Young Brand, we didn't consolidate for Q1. So I guess we should be in line with the numbers whatever we have given in terms of INR 1,300 crores for the whole year FY '25.

Okay. So you're saying INR 1,300 crores, right, for the full year?

Yes, yes. On a consolidated basis, yes.

Yes. Okay, that's fine. That's what you -- if you even consider this run rate, it's more than that. My question is also on the volumes. I think in -- for first half, if I take H1 FY '24 versus H1 FY '25, on the Apparel business, the garment division, we've degrown in volumes by about 0.7 million pieces. Can you throw some light on why that is happening? And what -- and because I think in either Q1 or Q4, you had mentioned that you expect volume growth of 7%, 8% on a Y-o-Y basis for the full year. So do you see that much volume difference to come out in the H2? Or are we seeing a flattish year again?

Rehan, if you look at our realization, our realization has gone up in spite of reduction in material cost. So there's a product mix, which has changed. But in terms of -- if you have heard to the previous question, which has come on the sales growth, we are expecting that the second half should be far better than the first half. So the sales should pick up in second half, whereby we should be in a position to end up on a 10% to 15% kind of growth for the whole year.

I'm not talking about absolute sales growth. I'm asking you in volumes. The guidance you had given in Q4 or Q1 was 7%, 8% volumes. And to answer your question on realization, your realization has broadly been -- I mean [indiscernible] is different. I'm looking at the PPT and saying.

No, no, no. The FY '24 Q2, the material cost was on the higher side. The yarn prices have corrected. So in spite of correction in the yarn prices, we are able to maintain the same kind of -- so there is a change in the product mix.

Correct, which is showing in your gross numbers, there's a 1.5% increase in gross numbers. I'm asking -- my question is on absolute volumes. If you have done x amount of pieces that are in H1 FY '24, in H1 FY '25, you have done 0.7 million less. I understand product mix change in absolute terms. I understand that completely. But at an aggregate basis for the whole year, you had mentioned that you'll do about 7% odd volume growth. So are you seeing in Q2, the volumes do well? Or are you seeing realization do well? That's my question.

We are expecting the volumes to go up.

Okay. That's broadly my question. Understood. Okay. And Sivakasi, I think, sir, you had mentioned in the opening remarks, has started?

Yes. The training has started and we expect the production to start in the first week of January.

[Operator Instructions] The next question is from the line of Chirag from White Pine.

Sir, my first question is just a refresh. Some time back, you had indicated that if the retail business doesn't turn around in a specific time frame, you are looking to shut it down. If I recollect, that time frame was March '25. So are you sticking to it? Or is it getting extended for the time frame? My memory is not correctly served?

March '25 was not the deadline, which we have given. Q1, we said we will look for 8 quarters. That is FY '24, we said we'll look for 8 quarters and then take a call on it. So we have crossed just 3 quarters now. So we are looking at raising funds there. So that -- see the problem in retail is that, yes, it has been making negative losses, but it's not being supported by the losses in terms of cash losses. It's not been supported by cash intention. Whatever they get is purely on the debt front, which again is pulling down the numbers.

Sorry to interrupt, Balaji. So just to answer this question -- this is Chenduran, Joint Managing Director. So just to answer that question, yes, we are seeing progress. And I think even this Q2, the -- they're almost at EBITDA breakeven. And even in terms of raising equity, the conversation has been about that. So as you said, we have 2 more quarters, but then we want to extend that because we're seeing progress. And I'm sure with Q3 and Q4, with a significant progress on the EBITDA level numbers, I'm sure we will continue with the retail and the raising of funds. So if it was going negative, it was getting worse or the impact is significant, then as you said, definitely, there was conversation about what do we do with the retail entity if it affects the parent company. But as of now, we are seeing significant progress on the bottom line as well as the EBITDA level. So we will look at Q3 and Q4, and I'm sure we will see the progress.

Okay. Because even if it breaks even, it will still be a suboptimal ROCE business. And it will take time for you to get to the average ROCE.

That's why we intend to move it. We're raising funds outside, so it doesn't affect the parent company's ROCE because again, as an industry, as a sector, it is different and it works in a different way. So the first priority is to make sure that the bottom line doesn't -- the negative EBITDA margin doesn't affect the parent company. Once we cross that, then definitely, there is going to be work towards improving the ROCE, raising money outside and all that. So the parent company's numbers are not affected by retail as a sector.

Okay. This is helpful. Sir, second and a slightly broader question. So if I look at the commentaries over the last 2, 3 years, the China Plus One, et cetera, now Bangladesh Plus, China Plus One, et cetera, a lot of these stories have been made, but we are yet to see any proof of conversions happening in terms of revenue or in terms of customer additions in any form, okay? So where are we in that stage? I understand the approval processes, et cetera, they are still looking at S.P. Apparels in India in general, et cetera, or in next 12 months, can we see some proof of pudding because some of the peers have started seeing those benefits flowing through in their numbers. Though at the initial stage, but they have started seeing the benefits. And second, earlier question is, if I look at last 3 years, while we have grown our revenues, our EBITDA and PAT number at consol level has stagnated. Something or -- one or the other part of business see some issues in one of the quarter, which drags the overall performance. So at times it is SPUK, at times it is retail, at times, it is the garmenting business due to spinning profitability, so on and so forth. So if you -- do you have a ballpark view on how to look at the businesses where we can see a sustainable earnings growth or rev cycle coming across because -- so this is the question that I have.

This is actually, as we all know that this industry is very dynamic, which has got a lot of risk involvement in terms of foreign currencies, then the government policies and importing government policies, then labor intensives and raw material fluctuations. So there are so many things involved in this. So it is a big challenge. The garment industry is a big challenge. So no, definitely, the China Plus One and Bangladesh Plus One is working out in the sense, there are a lot of inquiries are coming, and that is the reason why we are talking about increasing our customer base, and it's not a very short-term task. We need to work for at least about 2 years' time to restructure the whole business model to improve everything. But as far as S.P. Apparels is concerned, we never had a problem of filling the capacities. Our challenge was only increasing the capacities, which now we have -- as we said many quarters before that from 3,600 machines last year by now, now we are -- by end of March '25, our average running will be 4,600. There is a significant growth of at least 15% to 20% growth in the capacity alone, which is a big thing, which we have been able to overcome. So now that -- in addition to it, we have acquired Young Brand. This is in -- it's inorganic growth, by adding it quickly, we are able to get another INR 300-odd crores of business, an additional INR 330 crores of business and capacities addition. So this is a quick -- if at all, we had to achieve those INR 330 crores of sales in Young Brand, we would have to work for another 2, 3 years' time to bring that number, so which we got so quickly here. So I think we are very much on the track and it's a matter of time. And as I said, there are always challenges. In SPUK, this is -- SPUK is only the post-COVID effect, and all of a sudden, this cannot be corrected. And spinning and processing divisions, they are going okay. That's fine. And retail is continuous improvement is going on. It was never up and down kind of a pain. And S.P. Apparels is constantly growing. It has never been flat. There are, of course, like Red Sea issues where the air freight cost gone up. So these things are always there. We have to mitigate. But in the -- for so many years, we have been able to maintain around INR 18 crores of EBITDA, which is a good sign. This company is definitely performing good in spite of so many challenges.

No. But my question -- I'm not disputing the revenue side, revenue growth has been there, which is good. It's more about EBITDA and profit growth. Ultimately, revenue without EBITDA and profit growth doesn't matter much because it becomes ROCE dilutive.

Yes. See, EBITDA, say, in garment division, we are able to maintain the 18% growth, but for...

Sir, I'm looking at consolidated level, not individual business level because ultimately what -- you are not having a garment business separately listed, sir. That's the point I'm trying to drive that at consol level, somehow our profitability has stagnated. And probably you may need to relook at it very closely how to look at this particular piece. And sir, the second question was that if we can -- if I can know what is your share of business in someone like Primark? I'm not saying how much Primark is contributing to your revenue, but would you be like 5%, 6% of their supplies?

Contribution? Please come again?

Sir, whatever amount -- suppose you supply Primark worth INR 100. How much that would be in overall scheme of things for Primark relevant part of the business because you don't supply everything. Why I'm asking is we have 5, 6 customers. While we have done well with the single largest customers, why we are not able to scale up with others in terms of our share of business with them? And more importantly, even with Primark, have we hit the roof over there and we can't increase our share of business over there?

Right. See, everything based on the capacity availability. Whatever capacity we are offering to our existing customers, the business grows with each customer. So that is how it goes. So why we are not able to increase the business with other customers because we never had additional capacity to offer to other customers. Now, for example, Young Brand is additional capacity, now that is coming for American Eagle and Jockey and other customers, there are additional customers. And here from 3,600, now we are talking about 4,500. Now we are bringing in additional new more customers. And we would like to maintain Primark share as it is today because we have to give room for the other customers to come in.

Okay. So you said your number of machine count is going from 3,600 to 4,500, right?

Yes.

Okay. And this will happen over the next 18 months?

Yes -- no, by March '25.

March '25, but it is to get effectively utilized even in another 6 months, correct?

Yes. The utilization of machines from 3,600 last year to 4,500, March '25, for SPAL, including the Sivakasi unit.

We have our next question from the line of Devanshu Mahawar from [indiscernible].

Sir, just wanted to understand a broader question that is how you look at the opportunity on the demand side that is shaping up, especially from the European customers today after seeing from the Bangladesh that outright happens. And if something got -- there is a talk in that either Bangladesh is going to stabilize more in terms of textile. After that, what would be the organic demand? So how do you see that?

See, it's like this. People have got some kind of wrong opinion about Bangladesh issue. The retailers, the brands, what they're taking a stance is, they will not pull out the business from Bangladesh. They don't want to because their margins are better. Landed cost is much cheaper than other countries. What they will now do is they will not increase further in Bangladesh. Rather the additional quantity what they want to increase, that will be done in other countries like Vietnam, India, Sri Lanka and Pakistan.

Okay. So in this -- on this opportunity, if you look at the scenario that they are looking for additional capacity in other countries like India and Vietnam, what could be the organic opportunity for us. Like for example, we have done Young Brand acquisition for cross-selling opportunity. What could be the other opportunities you are looking for that in acquiring the customers in the terms of this?

I'm not able to understand. Can you come again, please?

So if you look at the companies that are looking for the additional capacity, not in Bangladesh, but for other countries, India or Vietnam. For that way, I have to look at for an organic growth, what kind of opportunities you are looking? For an example, you acquired Young Brand just to have a cross-selling opportunities inside yourself only. So what could other opportunities you can have? You are looking for -- look for it in coming upcoming years?

See, the new customers, our American customers will be looking for big factories with the mid capacities, whom we are not working with, so they will also be coming for the additional business. It's not -- because they will be -- there are many American importers and brands, they have never been into Indian market for sourcing. So those are coming in and hunting for the big cycle. So that is the biggest opportunity.

And one last question, sir. Are there several states like Odisha. Chhattisgarh, Bihar. So if we -- I was going to their industrial policy, they are having a huge amount of subsidies for their textile part in terms of capital subsidy or an interest subsidy. So they are calling out like 80%, 80% capital subsidy, the government is providing to set up the textile plant in state of Chhattisgarh or Odisha or Bihar. So is it a good opportunity for you to move some of their new CapEx lag towards because the labor cost -- the low labor cost of that states are very less compared to the Karnataka. Just wanted your view on this.

Yes. This -- it depends on the management outlook and management capability. See, we -- our stand, what we take as a stand is that, at the moment, we don't look at other states of India because we have still enough space to increase the capacity within Tamil Nadu, where like Sivakasi, then in the existing factories, we can mobilize more local people also. So at the moment, we don't have any plan to cross the state. Rather we are crossing the country to Sri Lanka, where -- because in India, you cannot get this kind of job working factories approved by the customers, but customers accept Sri Lankan factories because their factories are far, far better than Indian thing in terms of compliances and other things. So how -- why we opted that route is because we do not want to invest further into this one, but to make it -- not to make it asset-heavy. So Sri Lanka is as good as Tamil Nadu way of working. So we can immediately get the good factories with the skilled workforce and the customers ready to place the orders. So this is an easier way we think rather than putting up a big factory in northern part or the northeast part of India.

We have our next question from the line of [ Kiran D ] from [indiscernible].

Sir, if I look at your garment revenue, we'll probably end up at around whatever INR 1,000 crores, INR 1,100 crores this year, next year. Sir, to go to -- just focusing on garments, right? To go to, let's say, INR 2,000 crores or INR 2,500 crores, the delta of INR 1,000 crores, INR 1,200 crores, including Young Brand, excluding Young Brand, that's fine, sir. But essentially for that to happen, should we onboard some of the large U.S. players like Carter's or anybody else in the young kid segment? Otherwise, our growth will continue to be 10%, 12%. Is that a fair assumption?

No, we have -- as I have been mentioning, we have increased our customer base, added more customers. And now there is a way for allowing -- there is a room for increase in the customer base because the capacity has been increased without reducing the distance of existing customers who are long associated with us for many years. So only way to increase the customers, even though it is American market, only way is to increase the capacity and give room for them to place the orders with us. So that's what we are working on. The shortcut is Young Brand, then in the state, we got 3, 4 customers. Same way, if they have another 1,000 machines extra in the next 1 or 2 years' time, so we will be focusing on new customers.

Got it. Sir, the other question then I have is, from a garment perspective, is U.S. going to be -- given the demographics of U.K. and Europe, where young population is probably stabilizing or actually collapsing, is our next growth market primarily going to the U.S.? Should we kind of assume that the U.K. market will stagnate from here on at whatever INR 900 crores, 1,000 crores sales? And the next level of growth, the next INR 1,000 crore is going to come from the U.S., is that a fair assumption?

Yes. See, it's like this. 1 or 2 customers are consigned to only the U.K. market, U.K. and Ireland, but other customers are international players. They are into U.K., into Europe, they are into U.S. market. So that is the bigger growth. So I think American market is much, much bigger than the European market. And once we increase the customer base of American customers, then automatically, the business will grow over a period of time, there could be more contribution from the American market.

Got it. Sir, the third final question that I have is, if I look at the 10-year history, right, 10-year history, our margins were substantially higher except for the COVID years. So gross margin, again, on garmenting only, sir, not on the retail and the U.K. But just on garmenting, we are about 20 plus. Our competitor who is based in Kerala also is probably 20 plus. So just trying to understand, is there more competition coming in the children wear, kids wear, infant wear segment from outside India, which is forcing us to reduce our gross margin, just gross margin, sir, I understand about all the freight and all that for EBITDA. But just on gross margin, is there more competition coming, which is sourcing us to reduce gross margins? Or is this a play on scale, where I want more scale so I have to compromise on gross margins. How is that working in the last 10 years?

It works both ways because even there were a lot of competitors are Indian players are coming in. So there is a controlled competition. There's no doubt about it. At the same time, economy of scale, that's what we are working. But for the kind of overheads what we are having, so if we increase the top line to, say, INR 1,300 crores or something. Then definitely, we will be able to sustain this competition. So that's our plan.

Got it, sir. So you're saying the competition is also because from what we understand from the time you've been listed, sir, is that infant wear, children's wear, like the 24 months -- 0 to 24 months is like insanely labor-intensive process, extremely difficult for competition to get in. So therefore, there are only 2, 3 players in India who can actually do this at scale. So now what you're saying is look over the past, whatever, 5, 6 years, there are a lot other competition from India that's coming in that 0 to 24 month space? Is that roughly the conclusion?

Yes, slowly. Slowly because they also like to move to a little more complicated styles where the competitors think they can make a little more money. So that we cannot stop. So we restrategized everything to see how we can maintain this EBITDA margin.

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

Yes. Thanks for the opportunity. I thank all the shareholders who participated in the con-call. And as I always say it, at least, rest assured we have big plans, I mean, restrategizing the business plans for the top line growth and the bottom end. We are consistently working towards this despite a lot of challenges in this industry. And we are confident we have a long way to go, and we will be able to satisfy all the shareholders. Thank you. Thank you for participating.

Thank you. On behalf of Elara Securities Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.