Vardhman Textiles Limited (502986) Earnings Call Transcript & Summary

Thank you, Vikram. Hi. Good evening, everyone. On behalf of IIFL, I would like to welcome all of you to the 1Q FY '21 Conference Call for Vardhman Textiles. From the company, we have with us the key senior management, including Mr. Neeraj Jain, Joint MD; Mr. Sushil Jhamb, Director, Raw Materials; Mr. Rajeev Thapar, CFO; Mr. Mukesh Bansal, Senior Vice President, Fabric Marketing; and Mr. Akshay Jain, Finance Head. I would now like to hand over the call to the management for their comments. Over to you, sir.

Thanks, Avi. Good afternoon to all of you. So welcome to this first quarter call of Vardhman Textiles. So I think first time after 9 years, 10 years, where we have posted a loss in this quarter, primarily because of the lesser utilization happened, again, caused by the pandemic. The April was almost lockdown conditions for the end -- for most of the industry. We started running partially in the month of April. May was a little better than that, and June was a little better than that. So since the capacity utilization was much less, I think most of the loss happened on account of the depreciation. We were still in a position to cover the cash cost at least even in this period also. The overall situation continues to be still challenging. The estimate of most of the textile expert was that the textile consumption may come down by 25%, 30% for a year before it normalizes. And I think if you go by the numbers today, by and large, the numbers are supporting that for the most part of the world, including India. The slow process of running of the factories started, and we have the constraints both on the demand side as well as the supply side also. But having said that, I think the organizations are trying to work out a scenario where the situation could be improved upon. Specifically to Vardhman, our capacity utilization was, I think, on the -- first on the spinning stage, for the month of April was only about 25%. It increased to close to about 50% for the month of May. And June, we were close to about 75%. And as of now, we are -- on the spinning side, we are running almost 95% capacity, 90%, 95% and running almost full utilization as far as spinning is concerned. The domestic market is still slow. So -- and as a result of that, I think more reliance is on the exports, and we are exporting also bigger quantities compared to what we normally used to export so that the capacity ramp-up for the capacity utilization could be continued. The fabric side also, Mukesh will give a little more information later, but fabric also, we started with a nominal, but have seen demand for April. May, we were a little better. June was better. We have already started reaching almost 40% capacity utilization on the fabric side also. And we hope that 3, 4 months, it should start -- it should continue to improve so that as the normalcy happens, probably we find out that people start spending money again on the fabric or on the garmenting, and it can come to the normal levels. But yes, as of now, a little challenge. Having said that, I think if we divide the demand into 2 parts on the yarn side, the knitting and the weaving, so more demand as of now is on the knitting side because lots of work-from-home is happening. People wants to wear more on the newer wear, so wear the T-shirts, undergarments, pajamas, shorts and those kind of things, which are more with the knitted, is in a high demand worldwide. And the formal wear is still relatively less as the formal wear, the offices or the exhibitions or the weddings or the other things will -- have still not started in a full operations. Thus on the spinning side, the estimated spinning utilization for the country is close to about 60% as on today. This is Vardhman's internal estimation. So our estimate is it's in the range of about 55%, 60% as of now, whereas we are running definitely better. And that's primarily on the strength of exports where we could -- we had a good customer base, and we could bank upon them and we started utilizing and exporting to them. On the cotton front, things have been challenging in this period. First of all, we covered our cotton pre-lockdown almost for the full season at a cost -- at the prevailing cost at that phase, which was in the range of about INR 39,000 to INR 40,000 a candy. And later on, since the demand was not there, the prices started coming down and the prevailing prices which are primarily driven by the CCI's pricing as of now, Cotton Corporation, are in the range of about INR 34,000, INR 35,000 a candy, which means the company has a disadvantage of INR 4,000, INR 5,000 a candy as of now compared to the other players who may not be carrying the cotton. And to that extent, the disadvantage continues with us, which will continue for maybe next 3 to 4 months' time before we exhaust the old cotton. But at the same time, the silver lining is since the utilization has started happening in a full way, so we might not go more than 3 to 4 months -- 4, 4.5 months inventory, which otherwise could have formed much longer had the company not be in a position to utilize the same. Before we come to the financial and other things, Mukesh, can you add some information on the fabric marketing side?

Yes. Hello. Good evening, everyone. As mentioned by Mr. Neeraj Jain, on the fabric side also, the capacity utilization during the first quarter has been on the lower side. April was almost negligible because we started operations last week of April in a very humble manner. May and June, a little bit picked up, but still the capacity utilization was lower because these are kind of finishing the orders, those out in the pipeline. The new order placement was a little bit lesser. Particularly, the Q1 and Q2 are the quarters where we have the more orders from the Indian domestic market. And Indian domestic market seems to be the worst affected at the moment. We are seeing some recovery happening in the U.S., in Europe and in Japan markets. But Indian domestic market is very, very dull at the moment. As a result, in Q1, Q2, the specialty utilization is likely to remain lower. No doubt, now we are improving. Every day is a better day than the previous one. So we are hoping that the second quarter will be better than the quarter 1. And similarly, the Q3 will be better than Q2. The work-from-home culture is particularly affecting the segment that we are into, which is primarily the shirts and bottoms. So we are hoping that as the lockdown scenario finishes, more people start coming to work, people will require the normal formal clothing, which will pick up the demand in times to come. That's it from my side, Neeraj.

Yes. So I mean, definitely, there's a challenge as of now. But I think as Mukesh also mentioned, the things are improving. So we hope next 3 to 6 months' time, the normalcy -- more normalcy will come, but definitely we're -- looks like we're away from the bus, but how the improvement happens is yet to be seen. And as our capacity utilizations are improving, we can only feel, as of now, that things would be better compared to what it was earlier. So the financials, I think you have seen, so I may not add any value to any numbers to that. So I think we can straight forward move to the QA. And whatever are the remaining questions or the inquiries, we can answer along with that.

[Operator Instructions] We have a first question from the line of Pavan Ahluwalia from Laburnum Capital.

Yes. Just one question. You mentioned where, obviously, a 95% utilization on spinning now. Obviously, if there's a global fall in demand and overall industry capacity utilization is low, that will reflect itself in yarn pricing. If we keep the yarn pricing at present levels, let's say it doesn't increase, but we -- but our cotton cost normalizes, i.e., that INR 3,000, INR 4,000 disadvantage on candy -- per candy disappears, what kind of steady state EBITDA could we do assuming that we are able to run at close to 100%, whatever is happening to the industry. Assuming yarn price doesn't change, but our cotton disadvantage changes, what kind of -- because I would look at that as kind of a trough case EBITDA, and then we can debate does it last a couple of quarters, does it last longer than that. Ultimately, it's hard to speculate beyond a point about global macroeconomic recoveries, but it'd be good to get a sense of what that kind of normalized trough EBITDA might look like. The second question is, given all the dynamics we're seeing between India and China and the United States and given that textile and garmenting supply chains stretch across many countries, including these 3, what do you see the impact of India-China tension or China-U.S. tension or China FTAs or other countries? How do we assess the impact of that on Vardhman? And how are we positioning ourselves for a world where there may be more friction in some of these trade relationships than there's been historically?

All right. So if you look at, one is the EBITDA margin there. Generally, we look at what kind of conversion is available over raw materials in the normal times. In the normal times, at a reasonably good as an average industry data and for last couple of years, we should get close to about $1 as a conversion over the net clean cost of raw materials. But as of now, this is close to about $0.60. And if things normalize -- and the impact of cotton will be close to about $0.25 or so. So we'll still be $0.10 to $0.15 lower than the normal conversion, which should be available at a normal time.

We had 85 -- $1, we should expect $0.85 now?

Yes, in the normalized cotton, with the normalized cotton, with the market price of cotton, which as of now is definitely on a lower side for us also. Two, as you mentioned, on the relations between India, U.S.A., China and the other countries. First of all, I think the -- though there are whatever challenges, the social media concerns on all these India and China, but in terms of our actual textile business, there is nothing of that sort which is visible. And still lots of material is being exported from India to China and to other countries also. Two, there is, again, lots of hype or lots of information on people finding different source other than the China in terms of the supply side. But I think the kind of capacities China has, the kind of deliveries they can match, today, there's hardly any other country who would be ready for these kind of deliveries or the pricing. It may take some time but, again, the question will be, it's egg or a chicken story, first order comes in, do you create the capacity or first, the capacities are available, then only the order comes in. And it's a very large number of people required for the garmenting this, et cetera. So it's going to be a little challenging in terms of finding an alternate source. And in the short term, it may not be possible. Yes, medium term, long term, if customer continues to feel that they want to have a second supply, then only it can happen. But yes, as of now, I don't think other than someone as 2 people are talking, I don't think on the ground, there is any substantial things have started happening to that extent. Third, in terms of the FTA, China has given an advantage to Vietnam and to Pakistan. So there is an advantage of 3.5% duties to both these countries for the import of yarn, which is not available to India. To the -- most of the advantage given by the European countries is to Bangladesh for the supply of the garment, where they get under the underdeveloped country, they have this advantage. And the same is not available to India. As a result of that, the cost of Indian garment is much expensive compared to the Bangladesh, and that's one of the reasons the Bangladesh is in a position to show almost 15% to 20% growth year-on-year last almost a decade, which we have not. Our exports from India used to be about $15 billion 10 years back. They're almost at the same level in terms of the garmenting, even after 10 years because we don't capitalize -- we wouldn't have those kind of FTA, which has given the advantage instance to the Bangladesh. And again, now the kind of capacity we have created is going to be challenging or difficult for India to beat that. The model which has been created in the last couple of years, all basic products or the all mass items or the large production runs, they have started going to China and to Bangladesh. Wherever, whatever are the smaller runs for the more value-added products or where you require some additional jobs to be done, which are more buffer, which are more time consuming or effort consuming, probably those kind of orders India is doing. So in terms of the UVR, we are definitely better. But in terms of the volumes, we can't create that kind of advantage which these 2 countries have created.

And just one follow-up. Given that you're saying garmenting obviously is -- has been these countries, we saw a little bit of yarn capacity addition in Bangladesh and in Vietnam. Going forward, do you -- has there been a move by spinners to significantly add capacity in these countries kind of gearing up for future trade flows? Or are we not seeing much yarn capacity being added in these places? What is the global supply-demand balance for yarn looking like? And how does that impact us?

These 2 countries, Vietnam, especially, created lots of spinning capacity last couple of years. But for the last 1 or 2 years, I think there's a slowdown. The Bangladesh spinning capacity is being added by some of the houses for a vertical integration, but as a spinning process, nobody is looking at that. And that too, the capacity addition is not really that big in Bangladesh. So my belief, they'll be doing more garmenting and they'll be more depending upon India and Pakistan primarily for the supply of yarn, which is relatively a low-value addition in their view, if you are doing a garmenting. So I think that model looks like it will be working more. And as the costs have been increasing in China, there are issues and concerns in terms of the spinning continuation in China. So there could be an opportunity where the Chinese capacity may come down. And to that extent, India and Pakistan will continue to supply this thing.

Why would -- sorry, I missed that. Why would China come down?

The -- their cost has already been increasing. The cost of raw material cotton is also much higher because the government gives a subsidiary to the farmers there. And if you look at last couple of years, the cost differential of China, both in terms of the workers cost and the raw material cost has been huge. And as a result of that, the Chinese, it's becoming difficult for them to compete on the spinning side. That's why they import lots of yarn, though they have the almost 50% capacity of the world's spinning capacity, but still they are one of the largest importer of yarn. And it's not 1 or 2 years, it's almost like a decade now.

[Operator Instructions] We have next question from the line of Kumar Saumya from Systematix Group.

I just wanted to know the production and sales data for yarn greying process.

Sorry?

The production and sales data for yarn greying process.

We will put this data on the stock chain today itself.

[Operator Instructions] We have next question from the line of Samir Rachh from Nippon India Mutual Funds.

Sir, you rightly explained in an answer to previous question that how Indian textile industry is stuck due to various policies of Indian government and other government. So in the environment like this, what is the future of Indian textile industry? If you look at our performance, we are stuck in a range of performance for the last so many years. So as we go in the future, you think future also remains the same? Or is there some like better hope on the horizon?

So there are some advantages which the Indian spinning industry has created, for sure. Our machine park, as a country, is definitely very strong. The availability of the product range on the spinning side is also very good. There's raw material availability, is good. The overall expertise in terms of the manpower, both the operators as well as the white collars, that's also very good. The quality of cotton, availability of cotton and there are different areas where the cotton growth happens, and we are surplus in cotton. The capacity is decent. We are almost now 50 million spindles, which is 25% of the world's capacity, and we already are one of the largest exporter, almost 25% of the world's international trade of yarn is controlled through India. So to that extent, I think, on the spinning side, we have a very strong and a good position. But yes, garmenting, as a country, we couldn't increase because both on the FTA side and the internal challenges didn't -- they didn't allow us to really grow on the garmenting side. So I still believe the kind of sizes, which the Bangladesh has created or which the China has created, it's going to be difficult for India to catch-up on the garmenting side, they've become huge. And also the advantage of FTA, which is also very big. Unless we have those advantages, it is going to be difficult for us to increase the garment export on the basic product. So for us, the only thing left will be whatever value edition happens, because over there, it's very difficult for a Bangladeshi or other player who are having large capacities to do these small jobs, which are definitely value-added as well. So I think India's thought process last couple of years has moved from the basic products to the value added. And to that extent, I think we can continue to do very well in this segment.

Right. And sir, this government's policy on this Atmanirbhar Bharat and of late Indian government is providing a lot of incentives to manufacturing in a lot of sectors like chemicals and electronics and all. So on the government policy side, are we expecting any positive thing?

The only one demand which the textile industry has been making is the refund of unabsorbed duties to the industry. So that's the one -- and that it was announced in the budget last year that the government will come up with a team to -- for the refund of the same. Other than that, we are not looking at any subsidy specifically. So the only thing, whatever duties are paid directly or indirectly into the system which are not consumed in terms of the GST, that should be refunded. So if the government can take a view and clear it on a faster way, I think that can be a helpful -- this can be of help to the industry. Also, the government will have to look at -- there has been a scheme of minimum support price for the farmers, which is a good scheme in terms of supporting the farmer so that the cotton growth can happen. But at the same time, the industry has been talking to the government to give a direct bank transfer to the farmer, nobody is against them, so that they get an advantage, but at the same time, the cost is not to be borne by the industry or rather it is to be borne by the government because if the CCI -- today's model is CCI buys cotton at MSP from the market and then they try to sell to the market where the cost increases for the spinning sector also. This year is different. This year, definitely, the CCI is selling much lesser than their cost, but that's more because of the demand and the pandemic issue. But I think in the general circumstances, in case the government could look at DBT for the farmers so that the farmers are supported and at the same time, the industry also competes. So these are the, I think, 2 issues where the industry has been talking to the government to take a view.

Right, sir. Sir, one last question from my side. Vardhman has been clearly one of the -- I think, the strongest company in the industry. It has like size, it has strong cash flow, it has good people, it has good management practices. So it's such a solid foundation. What will be the kind of opportunities which will be available to us? So is this time where we should diversify into other products? Or is it time where maybe we have to go to other country, what is the management's thought process to take this company to the next level?

So we feel that basically, there are 2 businesses we are in: The spinning and the fabric. And both the places, our feeling is, there are lots of opportunities still available in these segments. So in terms of doing or operating in the different countries, we are very clear. We want to operate through India only, while as the globalization has happened or it continues to happen, I think the players are becoming -- I mean, the seamless transactions or the seamless material movements have started happening across the world. So to that extent, the only disadvantage is the number of days only in terms of the supply side. In terms of any major advantages by having a manufacturing in different countries may or may not happen. So we have no thought process today to go to a different country and put up -- and setup a factory there. Two, in terms of our operations are -- of the -- any other product has, we still find lots of opportunities in these 2 segments. So we will continue to consolidate our position in these segments so that we can become a more stronger player. The third, I think because of the current situation going on, there could be some capacity which can surely may not become operated because of the losses happened to some of the sectors or maybe because of people losing interest or people are not in a position to repay the debt. So there could be some capacity which can -- which may or may not start fully operational. And to that extent, once the normalcy happens, probably the opportunity could come to the players who could -- who are relatively more stronger. And another thing, I think the way overall losses have happened in the system, the new capacity may not come up for the next 1 to 3 years. And to that extent, every year, we look at the world, we've been adding close to about 5% to 6% spinning capacity in the world every year. And in case that capacity doesn't come up for the next 2, 3 years, then there's a huge opportunity and scope which will get created because the demand will become normal. 5%, 7% capacity, it goes out of the system -- if it goes out of the system and the new capacity doesn't come at the same speed, definitely, we look at a very bright future to that extent, maybe a year, 2 years down the line. But definitely, that looks like kind of a doable thing.

Right. Sir, one related question. So in times like this, obviously, conserving cash is a good option. And we would want to conserve the cash so that when opportunities come in the future, we are ready. So in the meantime, any specific cost-cutting or automation options, which allows us to become even more stronger player in terms of cost and in efficiency?

We have looked at all our CapEx and OpEx very carefully. And wherever there is a scope for us to save on the OpEx, we have done that. On the CapEx side, though we are looking at a reduction in the CapEx also, but at the same time, if there are opportunities in terms of any good paybacks because there is no shortage of cash, we are only trying to conserve it. But anywhere, we get a good payback, we're definitely very aggressive on that. And wherever we can get some capital goods at relatively much cheaper prices, which in any case we have to do, we're looking at that also. But I think in these kind of scenarios, the entire organization becomes more responsible and starts looking at every CapEx, every OpEx, all the expenditures very carefully so that we'll become more informed -- we take more informed decisions rather than taking it in the normal course. So the similar exercises, we have done lots of those exercises in the company. And the same is continuing. And I'm sure the -- whatever ultimately we do and whatever savings projects are taken, those will also start giving us the advantage very soon.

[Operator Instructions] We have next question from the line of Prerna Jhunjhunwala from B&K Securities.

First question could be on, are there any write-offs during the quarter with respect to ForEx losses or PM CARES fund or any other start-up expenses because the plants are shutdown for about a month's time so that we understand the operating profit in a normalized situation for the quarter?

Because of the factories are closed and we restarted, I don't think there was really a huge expenditure or to that extent. The foreign exchange, whatever is the normal booking profit/loss on cancellation of utilization, that's in the normal course of business, we keep on doing that. However, since we covered our cotton in a big way, so we try to hedge it through the New York Future by selling the New York Future in the international market so that if the prices go down, because in India, at that stage, the prices are also higher, so our expectation was the prices will go down. And if that goes down, so we should have some kind of a hedging available to us against the international markets. Unfortunately, the situation was different. The New York Future kept on going up or was more stable because of the different reasons, maybe the investors there, though the demand in the near future is also less, but at the same time, I think maybe because of the U.S.-China deal or -- the New York Future did not come down in the same way. And as a result of that, whatever cotton we had sold there in terms of the futures, I think there was a mark-to-market of close to about $3 million, which we've booked in the first quarter. Other than that, I don't think there is any specific or any different provisions which we have done in terms of our debtors, in terms of the stocks, et cetera. Fortunately, till now, there's not really much of a concern. And we did not have to provide anything in the books of accounts till now.

Okay. So also, many companies are taking inventory correction on cotton in first quarter or they have already taken in fourth quarter. We are following our same policy of doing it in the third quarter this year also. Just a clarification on that.

Yes. So we have not provided any mark-to-market of the cotton with the current prices because going by the -- strictly by the accounting standards, the devaluation was not becoming due either on 31st March or 30th June. So we are -- we'll be utilizing it. We'll be providing that loss as and when we are using the cotton.

Okay. Sir, my last question is on opportunities. As a previous participant asked about the next level of the company, I understand you've spoken about garmenting and you not being very much interested in that segment. But do you think getting into a knitted fabric segment would make more sense because it's also a fabric and a related product and B2B product and it's a bit lower CapEx requirements, so it can help you generate better growth going forward because we are already a very large player in the fabric segment -- woven fabric segment. Any color on that would help.

If you look at the knitting sector in India, if we go by the historic divisions, the knitting was reserved for small-scale for many decades. It has been last couple of years only when this was unreserved from the small scale. As a result of that, there are thousands of units with a machinery between 2 to 10 machines where people are updating as more of unorganized players. So the -- I think the kind of variety you require and the machineries that are received and the utilization of that machine in the knitting sector is never more than 50%, 60% for any organized player. So when we come to the weaving, I think the utilization of assets, it's more of an organized sector, where the utilization of assets would be as high as 80%, 90%, 95% of assets whereas in the knitting side because of the fashion and designing and the other requirements, the utilization is never more than 50%, 60% in this segment. For a large house to create a very huge capacity to utilize it 50%, 60%, we have done it a couple of times, this exercise, and we still find it's not really, really viable in the Indian context as of now. There are 3, 4 houses which have tried to have the organized knitting in India. But as far as my information and knowledge is concerned, it's a challenge for them also to run it very efficiently. So as of -- plus, since we were expanding our capacity on the woven side, so we decided that as of now, we want to continue to concentrate on the weaving only so that we take full advantage of the potential created on this segment rather than diverting our consolidation as of now. So there is no plans to go in for the knitting segment as of now. Plus, I think this knitting demand, which is coming in, we may envisage it for maybe next 6 months to 1 year. But as the things become normal and the travel starts happening, as the offices start, the woven demand will be back very soon. So this knitting for the work-from-home culture may or may not continue in the medium term.

Okay. So sir, can we expect that your -- we don't know about this year, but in the next year, can we expect you moving to around 70%, 80% utilization on the woven fabric side?

It all depends upon how the pandemic situation improves, how the travel improves, how the offices improve, what time the vaccine comes in. I think more related with the people traveling outside, people going to the offices, people going to the exhibitions, people going for those kind of things. So my belief, as the entire world is working on looking at some kind of vaccine, maybe next 3 months, 6 months, whatever time it takes but definitely, the confidence is far better compared to 3 months back. And I'm sure in any case, this improvement of 70%, 80% should happen maybe next 3 to 6 months' time. I believe rest all depends upon how the countries lockdown is released.

Definitely. Sir, one more thing. Can we get some color on export opportunities in the fabric segment? Largely, we know that Indian domestic market is struggling...

Whatever fabric we are manufacturing today, practically 90% of that is going in for the direct or indirect exports of fabric or the garment exports from India. The domestic consumption of fabric is very less as of now.

Okay. Okay. And do you see that improving, I mean, substantially over the next 6 months? Because we can gain market share also? I mean, with the advantage of being a B2B player, we can get market share.

That's there, but till the time the Indian markets open, still the malls are not operational, still the shops -- there are lockdowns in the various parts of the country. So the sentiment is not improving in Indian context as of now. If -- the moment things start improving over there, I'm sure the confidence will come back very fast.

Okay. And the last question on fabric only. As per a survey that we read some time back, Bangladesh is booked only for 35% of capacities over July to December period, was that article talking about and there is good pricing pressure also in the market. So what would it mean to your profitability in the yarn and fabric segment? Some color on that.

On the yarn side, clearly, there's a good demand of yarn for the Bangladeshi market also, and they want to -- because the prices -- Indian cotton prices are one of the cheapest today. Indian yarn prices are also one of the cheapest today. So they want to book and cover as much as they can. So from the yarns perspective, it makes lots of sense for these guys to import at these prices because they get at a very, very reasonable prices. Mukesh, can you give some idea on the fabric side?

Yes. On the fabric side also, if you look at, almost like 60%, 65% of our fabric is going to international markets only, either directly or indirectly. 35% to 40% is the fabric which is finally consumed in the Indian markets. So we are internationally competitive. And in addition to that, we also export to -- we have also export the -- in the fabric form also, we export to European countries wherever the logistics can be handled in terms of the garment export. So given the advantage that we have in the yarn, fabric is, again, we are internationally competitive. And if the opportunities exist, because at the moment, even international markets, if you talk about U.S. and Europe, there also the demand has not come up to the 100% level. There also, the demand is still at the level of, say, 60%, 65% or maybe even 70% in some sectors. So as the demand picks up, our fabric capacity utilization and sales will also pickup.

Okay. But are there any pricing pressure also that you are witnessing in the fabric segment because...

Of course, whenever there is a demand specification, pricing pressure will be there, but then it is to the extent of we have the raw material pricing pressure, not more than that.

We have next question from the line of Avi Mehta from IIFL.

I just wanted to follow-up on the yarn and fabric realization. Essentially, given that utilizations are improving, does that -- is that also reflected in the realization improving? Or no? If you could kind of clarify that across the yarn and fabric?

No, the realization of the prices per unit of production?

Yes, sir. Yes, sir.

Definitely on a much lower side today. Definitely on a much lower side today. So I mean, just to give you an idea, the 30s Combed prices today are in the range of about, for an international market ranging between $2.40 to $2.50. That's almost $2.90, $3 pre-COVID.

Okay. Okay. And how is it for fabric, sir, per meter this year -- has that kind of still -- so there is no improvement. Because I remember, at the end of first quarter, you had also indicated it hovers around $2.60, $2.50. So it's only weakened or staying at the same level, right, sir?

Yes.

And what about fabric, sir?

On fabric side, Mukesh, what kind of prices indication do you see?

Fabric also, as I mentioned before, that the price correction is to the extent of correction in the yarn rates.

Which means that our fabric margin will not go down lower than what they used to do, provided they can sell the quantities. But on the spinning side, definitely, the margins have gone down.

Okay, sir, okay. And sir, in terms of -- you indicated that we would be making about $0.60, $0.65 as current market prices, if you were to do this current market prices of cotton. In terms of percentage margin, would that -- would it be fair to say that comes to around 15%, 16%? Or how would that...

On the spinning side -- on a standalone spinning side, when we get to $0.90, we still look at a 12% to 14% EBITDA margin. That as a company as a whole we get because of the integration operation. So on a $0.60, $0.65, it'll not be more than 5%, 6%.

Okay, okay. And that is essentially for the company kind of point of view. So from a going-forward basis, what -- it's essentially demand which has to improve is how you should -- how you would see it?

No, I think there's another challenge on the supply side. So if you look at the supply side, there are lots of companies who are not in a position to supply because of the labor shortage, because of the working capital not available, because of the operations they are not in a position to start up. So my belief on the demand constrained side, it's already over. The next, as the demand will increase, the opportunity will come from the supply side as lot of suppliers may still not be in a position to ramp up the production. So definitely, it looks like as the things normalize, the margins will start improving, for sure.

Okay. And sir, I know it's crystal ball gazing to some extent, but would you see -- so the way -- I mean, just to kind of understand the likely scenario, I mean, not numbers but likely scenario would be that things improve, realizations will improve? Or is it more going to be utilization improvement as margins improve? How would you...

Utilization on the spinning side, I think as of now...

We are already at 90%, 95%.

We are already at 90%, 95%, yes. So on the fabric side also my belief is, utilization would improve, but there is a possibility in next 3 to 6 months' time, the realization should also improve.

Okay, okay. And we are still...

As we will be using the new cotton after 3 months, that will also improve our realization -- our margin.

And sir, we are still very much off, that 5% to 6% is very much off from the 18% to 22% range that we typically incur on a...

No, the 5% to 6% came on the spinning side, but as a consolidated, I think in case we can utilize the fabric capacity at 60%, 70%, we will start touching -- improve about 12%, 13% over the company's books.

Okay, sir. Perfect. And sir, lastly, on the working capital situation. In the last quarter conference call, you had indicated concerns about credit and what is happening in the domestic market. If you could highlight how the situation is on the ground now and...

The situation is -- I mean there's still issues and challenges. But I think the -- definitely things are better, lots of money which has come back, still there is some money which is still in the pipeline. So week after week, things are improving. And as of now, we have not identified and we have not looked at any serious concerns on the stock side or on the debt side, where we feel the money may not come in. So -- and things are progressing reasonably well.

Okay, sir, okay. So I mean, from a working capital intensity, it has improved, right? That's what I was trying to kind of understand from...

Yes. Because as our cotton cycle started, new stocks are coming down, so it's improving whatever money was stuck in, the businesses started happening. And since we are more on the export side, so -- which is all LC based, so on the working capital cycle, definitely things are improving at least for us.

We have next question from the line of Resham Jain from DSP Mutual Funds.

Sir, I have 2 questions. So first is on the fabric business. Given that we already had a new capacity addition in the last 6 to 12 months and the utilization is low, so is this a phase when you are looking to add new customers, which were not in your portfolio earlier? Are you seeing that happening right now? And a lot of players on the -- some of the other side like apparel and in home textile also, we have seen good market share gains over the years. So are you seeing any of those trends emerging in the last 3, 4 months, your talks with the customers and all?

Mukesh ji?

Yes. Certainly, we are working on that front. But the thing is that at the moment, the demand from the existing customers is also lower than it used to be. So at best, the addition of the new customers will make up the loss that we incurred from the existing customers. So as a whole, no doubt what you said that new customers are being added, new territories are being explored. But fabric being closer to the fashion cycle, you cannot export the fabric to distant destinations. So it has to be in the close vicinity. The garmenting has to happen either in India or maximum Bangladesh or Sri Lanka. So -- because the fabric is ready to -- they're trying to convert it into garments, number one. Number two, all the fashion brands, they are also reducing their lead times because everybody has learned that more the inventory into the pipeline, more is the risk. So everybody wants to close near shore rather than offshore. So new customers are being added, no doubt.

Okay. And one more related question is that, what we have seen in few of the larger players that the global customers are actually needing more integrated facilities in the same country. You have alluded to the supply chain of yarn and fabric in India and garmenting in Bangladesh, but are you seeing a trend emerging whereby customers are asking to put an incremental garment capacity so that there can be -- they can reduce their lead time and a better offtake from your side also can happen? So any thoughts on that side?

Not really. So the customers are, as of now, I think they're only looking at the -- any customer who is buying from 10 or 20 vendors, they're trying to look at consolidating it to the lesser number of vendors. So to that extent, I think there's a good amount of consolidation, which is happening as of now. But in terms of, yes, if you put up a capacity, I'm sure there could be some customers, but there's really not big pressure from the customers that you create the garmenting capacities and then they can be -- reduce the lead time because practically the garmenting or the textile manufacturing are way 2 different volumes. We tried the garmenting division at Ludhiana mill, small garmenting, where this experiment was happening only on those clients. But eventually, we don't find any synergy or any advantage being created because of that.

Okay. Okay. My second question is on overall the cash flows and the future going forward. So if you can highlight -- let's say, this year is a tough year. But let's say, next 3, 4 years, our cash generation is going to be very, very significant. And we already are sitting with a great amount of cash, obviously, which is required and helping us in this current situation. What are our 3 to 5 years plan on the segment because there is no clarity as such whether we are going to increase the capacity further from the current levels? Or is there a dividend or a buyback plan or any diversification in other segments?

I mean, frankly, I don't have an answer to this question as of now because the last expansion, which was done last year, which was almost like $200 million, our thought process was once this was stabilized, we'll start looking at the new plants. But in between this thing has happened. So maybe once the normal situation happens and we are in a position to utilize our full capacity, then only we will start looking at or will find -- or maybe the Board has to look at how to return it to the shareholders. But there are really no black and white answers to the questions as of now.

My context was that in a normalized situation now, we have -- from the asset base, I feel that we can generate like close to 1,400 to 1,500 kind of cash generation. And already, the balance sheet is light on debt as on September end. So any CapEx, which we will do, obviously, we will be taking some debt. So the kind of cash generation is significant. So -- and that can happen within the next one year's time. So are we going to further build on the cash, which we already have because that is depressing the overall return on capital employed. So that's like a broader question because it's just -- obviously, the situation is there for maybe 6 months more. But beyond that, I think next one year, the cash generation will be significant.

Yes, I agree to the observation and the question you are mentioning. So maybe once this normalizes -- I mean I don't debate the question you are raising. All the factors are there in our mind also. So I think once the normalization happens, we'll have to look at whether we get an opportunity to acquire something good, if we get it at the right price or start looking at some kind of expansion or start looking at some other ways how to use this cash. But yes, next 6 months to 9 months, I think we are not going to take any view and a decision on that, but maybe once things are normal, we'll have to start looking at it. As of now, there is no clarity to that extent.

We have next question from the line of Pavan Ahluwalia from Laburnum Capital.

Yes. Just one clarification on what you said in response to one of the other question, is the 5%, 6% margin on spinning, that is, I assume, for the next few quarters, while you're running with higher cost cotton, right? Starting next year, even at present yarn prices, the margin should be better with a normalized cotton price, is that correct?

Yes. So partially -- so as of now, it will be about 3% to 4%. I think with the new cotton, it may go to about 9%, 10%. And once the prices improves a little bit, then it can go to 12%, 13%, the normal price.

Understood. Okay. That's very helpful. And then also just wanted to check with you on one thing. Actually, 2 things. First is, we've been seeing a lot of people put up spinning capacity that maybe aren't the best qualified people to run spinning units, some of them are backward integrating, other people have other motivations, tax incentives, et cetera. And some of this capacity is now distressed. What we've been seeing happening in some cases is because of the cumbersome and time-consuming nature of the NCLT process, the assets very often decay or become useless by the time they are actually able to be acquired. Are you seeing anything change in that process where banks are starting to get more proactive and taking control of assets and reaching out to people like yourselves, saying, look, is this an asset you'd be interested in speedily acquiring? So some insight on that would be helpful. And secondly, what is your view on the overall sort of demand scenario for cotton textiles? I mean, there's the overall industry trend of cotton versus synthetics and newer variety as a fabric, recycled cotton, et cetera. What's the view at Vardhman on the overall kind of demand for cotton yarn on a 5-, 10-year horizon? Do you expect it to be stable? Do you expect maybe some sort of small decline? Do you expect growth? Would love to get your views on that.

On the first question, I still do not find any major aggression from the banker’s side where they want to look at and they want to approach the customers directly for the resale of their plants. I think the process -- they are more -- they still feel because -- they still feel more safe routing it through the NCLT rather than going and looking at the customers themselves. So there has not been any change in terms of the existing versus the other practices. In terms of the cotton yarn demand, the worldwide -- I mean, we are consuming almost 25 million, 27 million tonnes of cotton every year and that has been pretty stable in last 10 years. There is -- again, the challenge will come from the supply side. So growing cotton more than 26 million, 27 million tonnes on a sustainable basis will not be possible because there is always a pressure from the food gains and the other competing crops. So I think on the supply side, I don't think that cotton crop will be -- will always be ranging between 25 million to 28 million tonnes. So there's neither likely to be a drop nor likely to be increase. So in terms of the cotton textile, the demand will continue to be -- or will continue at the existing levels. But yes, whatever increase will happen, because the fiber consumption will continue to increase, that will happen through the -- either the cellulosic or through the synthetic route. So the cotton as a percentage on the overall textile may continue to come down. But in terms of the absolute amounts, will continue to be the same what we are seeing as of now. Third, on the sustainability, yes, both the recycled polyester, recycled cotton, there is lots of inquiries and there are lots of concerns on the sustainability. And people are using lots of recycled polyester. We are also looking at putting up a small recycling cotton plant, which we have already ordered. And I think next 10 to 12 months is this would be available. This is the first pilot plant, which we are putting in, where we'll be using the post-consumer products also to convert into the fiber and mixing it with the virgin cotton to produce the product because there are some inquiries which have started happening. So we are also looking at experimenting the change. I think slowly though the demand for the sustainable products will come in, but whatever cotton -- virgin cotton being consumed today, that may not come down. We're still considered to be the niche segment, which will continue to be there.

Got it. So any growth that Vardhman really gets, assuming you stay broadly in the cotton textile space, will have to come through -- either through some form of market share gain, which will be driven either by the long tail of inefficient producers going out of business or a big increase in demand for innovative products like recycled cotton where you are more easily able to go and then cater to these types of higher value-add or differently produced products, whereas the long tail of inefficient producers can't. So it's really -- your growth really depends on the industry kind of consolidating in some form, is that fair to say?

Yes. So these 2 factors are true. But at the same time, there is a third factor that is synthetic consumption also. So as a group, we are almost using 15% to 20%, 15% at least, on the synthetic side also. So for example, polyester cotton, we are one of the strongest players in the country. On the cellulose thing, we are one of the strongest in the country. So there are other segments -- other lines of products coming through the manmade fiber, which is also increasing for us also, not as a 100% product, but yes, blend of cotton which is having the both advantage in terms of the quality as well as the stability and the price also.

[Operator Instructions] We have next question from the line of Keshav Garg from Counter Cyclical Investments.

Sir, like you were talking about the constraints for India succeeding in garment exports, but these are -- sir, KPR Mills, it's a south-based textile company, sir, and they have really been able to scale up their garment output and so much so that now almost 50% of their turnover is coming from garments as opposed to yarn 2 years back. So then why are we not been able to climb up the value chain like they have been able to do?

They have a very small spinning capacity overall in the total context. Our -- we are the largest spinner in the country. Almost already more than 25%, 30% -- 25,000, 30,000 people are working directly into the company. For us, if the garmenting happens, it has to be a significant part of our operation and adding another 25,000, 30,000, 50,000 people, so it's not going to be easy for us to manage that. If I have only one spinning plant of 100,000 spindles and want to add maybe 2000, 3,000, 4,000 people, it's possible. But for operations like us, which is a $1 billion company, and if I want to add at least INR 2,000 crores, INR 3,000 crores, INR 4,000 crores of garmenting, it will take me at least 25,000, 30,000 people. So from our perspective, it is not really making sense. And they have a single location where they have done a good job in terms of integrating the operation. But -- and for us, we find it -- because we started our garmenting division with these thoughts only. But eventually, when we look at the challenges and the kind of struggle and the kind of efforts required to generate the small top line, I think we finally took a view that we should not look at it on a very large-scale locations.

Sir, so basically, if we have no plans to get into garmenting, sir, then in terms of value addition, sir, what else can we do? I mean within fabric...

Within fabric, the different finishes or the different brands or the different fiber mix or on the yarn side, I think the more of a fashionable product starting from sets to the heathers or to other kind of things, that's the only possibility of value addition within the existing segments. Two, I think there are n number of new fibers which are coming in. So mixing there, blending that and then delivering it for the fashion -- for the fast fashion products is definitely an opportunity available in India. So we might have to look at how we encash that.

Okay, sir. And also sir, regarding this inventory losses, since this a reoccurring thing in the industry, so sir, again this Ambika Cotton, a Coimbatore based company, sir, they are buying cotton during the season, good quality cotton, sir, but they are not making yarn until they get order from the customer. And once they get the order from the customer, sir, then only they are making yarn and supplying and at the same price at which they have bought the inventory, and -- even though the cotton prices might have fallen in the meanwhile. Sir, so why can't we have the, I mean, similar arrangement with our customers that the price at which we have bought our cotton on that price only, we will supply them unless we exhaust our high-cost inventory.

The customer sitting outside has nothing to do what is your cost or not. So they are also competing. They are looking at, if I get a yarn at this price, this is the price I'm willing to give to ABCD factory. So if want to supply to me, fair; you don't want to supply to me, it's your choice. The -- all large players or the -- all brands, all large customers, they will be competing or they'll be asking us to quote a price based upon the existing prices of yarn, which may -- where your cost could be higher or lower. That's one. Number two, the cotton season in India is between October to March. So you have to procure the cotton in that period only and you have to use it for a one year's time, for the next remaining 6 months time. For a smaller mill, to relatively smaller mill not to buy and to rely upon the market to buy the cotton from time to time is possible. Vardhman, which is almost -- using almost 2.5%, 3% of India's total cotton procurement -- production, it is not possible for us to really leave ourselves open for the off-season and keep on buying in the market at the off-season because neither the quality will be available to that extent nor the availability of the product would be there. And we can't leave our customers to be hanging that if I do not get a good quality of cotton, then how do I supply the good quality for the plant. Ambika's relatively capacity is too small. So any mill -- there are hundreds of mills in India with a capacity ranging between 25,000 spindles to about 100,000 spindles, where they do not buy cotton, and they buy cotton on a month-to-month basis, and they'll keep on supplying the yarn. But for me, with 1.1 million spindles, it's practically not possible where I'll not be a position to procure that kind of volume from the market in the off-season. Of course, this year there's been a loss. But if I look at last 15 years, there are -- out of 15 years, there are, I think, 12 or 13 years, where we made huge money also. So at that stage, if my customer says, no, your cost was much less, now you supply yarn to me, probably, if I look at the probability that we made money in 12 years, whether for 1 year or 2 years we like to lose that advantage?

Sure. Sure, sir. And sir, last year, we also skipped our dividend, but even small companies like Nitin Spinners and et cetera, who are no one in front of us, sir, they have also maintained dividend and such a big company like us had to skip the dividends. So I mean, going forward, sir, maybe interim dividend, you can think about giving?

I think it's up to the Board to really look at what they want to do because our feeling was -- there was no previous history to this kind of a pandemic. So we were not knowing really what the dust could be. So it was only at that stage, the judgment call was taken that we must conserve the resources. And to that extent, we have taken a view. I'm sure once the thing starts normalizing, the Board or the company will start looking at it, what to do with it.

Sir, the thing is that our subsidiary has over INR 300 crores cash. So if they can give cash, so we can just tax-free basis pass on the same as dividend and sir, the resources of standalone entity won't we have to spend. So you can consider that also, sir.

Yes. I'm sure the Board will look at that. So I mean, once the things normalize, we'll discuss at that stage. So I can't really say as of now. But yes, once the things normalize, we'll have to really look at what to do.

[Operator Instructions] We have next question from the line of Avi Mehta from IIFL.

I just wanted to understand what you said, export is doing very well and domestic continues to be a cause of concern. Last quarter, we had said domestic was almost at 50%, 60% of normal levels. How has that changed? Or is it similar, if you could share that?

For the spinning, I think, for the domestic, we have started supplying almost 75%, 80% of our normal levels. When I say the things are not good for the domestic, I think it's more on the fabric side as of now because the local demand for the fabric is not improving. But in terms of the knitting or in terms of the other products, even the local or export, both are okay. So on the yarn side, almost 70%, 80% of my normal volumes have starting going to domestic markets.

Okay. And for fabric, how would it be? Fair now? Is it -- has it kind of regular for any level?

Fabric, whatever is happening, that's all -- so there are 3 segments. One is the direct exports. Second is the supply of fabric to be RMG, which means the garment exporters. Third is the domestic consumption. So the first 2 segments are still doing okay. The domestic consumption of fabric, which is for the local brands or the local large retailers or the local shops, that's not picking up at all as of now.

Any number, sir, on what level would it be at in the RMG and export side for fabric? Or is that 40% of the...

Whatever fabric we are doing, 90% of that is either direct export or through the RMG exports. So the domestic delivery will be less than 10%.

Okay, sir. And sir, sorry, I just wanted to clarify on the margin bit because -- so you are saying currently at current yarn prices of USD 2.4, USD 2.5 and currently cotton fetches, we would be doing a margin of 6% to 7%?

3% to 4%.

3% to 4%.

3% to 4% for a company point of view? And what do you mean for yarn, sir.

For the spinning we are -- for the spinning 3% to 4%.

Okay. And that would go up to 9% to 10%, if the...

Yes, it will go to about 8% to 9% once the new crop comes in for the spinning only. And once the yarn prices improve, then only it will go to 13%, 14% as a normal for the spinning. Plus, integrated since the same raw material goes for the fabric, so to that extent, whatever is the spinning margin, generally, there would be an increase of about 4% to 6% for the company as a whole EBITDA margin.

4% to 6% will be better because of the integrated nature, right?

Yes.

So whatever numbers you said, I should look at 4% to 6% benefit because of the integrated nature, obviously, depending on where fabric utilization stands at?

Yes.

We have next question from the line of [ Ujjwal Agarwal from New Horizons ].

I apologize if this question has already been asked because I got in a little bit late, but I've just got 2 questions. Number one, I wanted to get your opinion regarding the recycled polyester that they are making from PET bottles and such, if they can make any inroads on the market share of natural cotton, virgin or recycled, whatever that may be? And the second one, if we have looked at that particular segment as a possible or viable business alongside cotton? Yes, that would be all.

So yes, the recycled polyester business is increasing in India and the consumptions are also increasing because people want a more sustainable product. But that's not taking the share from the cotton side, rather that's taking the share of virgin polyester as of now. So we are also using the same recycled polyester in a big way, but not as a replacement to the cotton but as a replacement to the virgin polyester where people want a sustainable product and they bought it through the recycled polyester.

We have next question from the line of Gagan Thareja from Kotak Investment Advisors.

Yes. So first question around the CapEx. You did give...

Sir, I'm sorry to interrupt. We're not able to hear you.

Hello, am I audible?

Yes, you are.

Yes. So first question is around the CapEx. I think you did give some figures in the preceding quarter's call. If you could just refresh what would be the CapEx numbers for '20 and what can we pencil in for the next 2 years thereafter -- for '21 and the next 2 years thereafter?

The expected CapEx in '21 could be in the range of about INR 300 crores -- INR 200 crores to INR 300 crores, depending upon how much can we really see the things. The year after that, our normal CapEx is about INR 350 crores. So this year it's going to be about INR 200 crores and the normal CapEx in the company will be close to about INR 350 crores a year. So there is no projects envisaged as of now beyond that.

Because at the spinning level, you already are at 90%, 95% utilization. And as markets go back to normal, would you not then require additional capacity?

Not really. We don't want to expand the capacity, but we'll -- we are more looking at more of modernizations to optimize the operations. So we'll look at more on that, but adding spinning capacity as of now, there are no plans.

So with modernization or higher speeds, how much more expecting...

Not really. Not really. In terms of the numbers, it doesn't improve, but it's more of an improvement in terms of product quality or improvement in terms of the utility consumption or the optimizing demand part of the cost and the numbers of people. So in terms of the incremental production, because of modernization, that hardly happens. Whatever modernization we do, we reduce the number of machines because the manufacturing halls are already given. So we can't increase those, size of the -- those halls. So we have to optimize within that. So generally, we try to look at if the modern machine is more in terms of the capacity or the speed, so the lesser number of machines will be accommodated in that.

And second question is, within fabric, is your consumption of grey fabric -- rather your sale of grey fabric and processed fabric is any way interrelated or it's completely independent? And over a period of time, should we see processed fabric sales as a proportion of total fabric sales moving up significantly?

Definitely, our intention is to sell more and more processed fabric. So the grey -- higher capacity is always required to give the right service or a faster delivery for the processed fabric. So since the grey capacity was much higher, we started selling it as an independent product. But eventually, I think if you get more of a processing orders, the grey will keep on coming down as we are not adding now into the grey capacity. So our intention is to utilize more and more processed fabric. And in the meantime -- and during the process, whatever is surplus available for the grey, we'll be selling that only.

Okay. And in a normal demand scenario, over what time frame would you be able to optimally utilize your fabric capacities?

If I look at -- I mean, we expanded our fabric capacity last year. So if I look at the capacity before that, we are -- I mean, we have started touching almost 50% of that capacity as well. Since we expanded this capacity, which could never be utilized, so it may take us maybe next 1 year because in the normal circumstances, it would have taken us 1 year to ramp up that capacity. Since this 1 year or 6 months has been wasted, it will be, again, 1 year from today, where we can expect the full new capacity utilization to happen. Mukesh, tell me if you want to add something?

That looks good.

And given we've had a disruption in demand at least on the fabric side, it's still persisting and it will feed back into the yarn and cotton. I mean I'm simply trying to understand the cotton stocks position, both at a domestic and international level, would it be reasonable to assume that as you approach normalization 6 months down the line with another cotton season on the horizon, you could have further pressure on cotton prices and the spreads ideally would be better as you enter the next cotton season?

The cotton stock -- going by the projections or going by the estimations this year, cotton stock is likely to increase by anything between 3 million to 4 million tonnes. And the next year also, maybe 3 million tonnes could still be added. So a total of anything between 6 million to 7 million tonnes will get added in 2 seasons as the new cotton season -- the international cotton season starts on 1st of July. So between the 2 years, our guess is the total cotton stock by the end of next cotton season, which is June 30 '22, it could be adding close to about 6 million to 7 million or maybe 8 million tonnes in terms of the cotton stocks. Whether this puts in pressure or anything else, logically, it should, but whether really of the -- because there are different factors which are working in. For example, in India, MSP will be working. So what kind of -- if the government continues to buy, so whether the prices comes down or not. Same way the New York Future, the investors are investing with very cheap money. Physically, the stocks could be -- the situation could be different, but the overall sentiments may continue to be different because of the different pressures of the different relations. So I really can't say how the crisis will move, but in terms of the quantity, my belief that this year 6 months and the next year 6 -- first 6 months since the consumption will be less, so the world is likely to add anything between 6 million to 7 million tonnes of cotton on a base of 25 million, 26 million tonnes of consumption.

And how has -- I mean Cotton Corporation, you did indicate in the last call, is holding a fairly significant amount of cotton and their procurement is at MSP. Are you seeing them liquidate significantly in the market or in the export market currently? Or they are holding on to their stocks in a significant manner?

They're trying, but I think, as of now, the demand is not there. So neither the domestic market, nor the export market, the demand is not there. So I think they -- our belief is they'll be carrying, most part of the stocks which they have today, they'll be carrying it to the next financial year -- next cotton year. They're trying to liquidate, but the demand is too less as of now.

Okay. Finally, I mean, given the extraneous circumstances under which you are working, you would have done a certain amount of cost cutting, you would have found out a few cost levers. If you could enumerate what cost levers you have at hand, which of these cost levers you exercise will be sustainable and which will be essentially an unsustainable sort of a cost cut, simply given the current circumstance?

I don't think we will be doing anything which will be harming us in the long term. So whatever cost cutting we are doing, we are only looking at, which is really doable without having any impact either on the quality of product or on the sustainability of the company. There are lots of costs which have to be incurred for the medium to long-term survival of the organization. And if you defer it for a year or 2, that doesn't make really much of a difference. So all our cost-cutting plans are based upon: one, we should be as close as to the conversion cost of the last year or when we were running the full capacity. So that's one base, which we're trying to look at. Two, it should not have any impact on the quality of product. Third, it should not have any impact on the -- either the safety or the long-term viability of the company. So I think all those ideas are based upon this only. And there are N number of projects, which the company has taken, very, very small, small, small projects, and we are happy to share that we are in a position to meet all our 3 objectives, which are mentioned to you with some cost cutting.

And you indicated that at least as of now, you don't have any further plans to expand spinning capacity, but you will try and flex your capability on the product mix and on the cost side. So ideally, as we move into a more normal environment, maybe 1- to 3-year sort of a horizon, since the sales growth would more be coming from a mix change but at the same time, there will also be some cost efficiencies, are we looking at a scenario where you should be in a position to improve margins towards the higher end of the guidance that you normally provide over this sort of a time horizon? I mean I understand there are cotton price fluctuations. I'm just keeping that as a constant factor, and with that as a constant, would such an inference be reasonable?

Yes. Any expansion which takes in, I think it always takes about a year to 2 years to fully capitalize and fully operationalize those kind of expansion. Since we added so much of capacity last year on the spinning, we could still ramp-up but the traffic generally takes 1 to 2 years. And in between, you have to look at all the other costs because you have to prepare, you have to keep demand power, you have to train the people. So the costs start incurring in the system whereas the top line doesn't add to that. And I'm sure, once these -- whatever capacity we have created, once we are in a position to utilize it fully, I'm sure the question which you are asking, we should be moving towards the higher end of the guidance, which we generally give.

Your next question is from the line of Siddarth Mohta from Principal India.

Sir, what would be the price difference between international cotton and our Indian cotton?

The international cotton, if you go by the New York Future, it is ranging between $0.60 to $0.61 and the landed cost will be close to about $0.73, $0.74 or so, the American cotton. Whereas the Indian cotton will be in the range of about $0.56 to $0.58. So a gap of $0.15 as of now.

Okay. Sir, despite the difference between the international cotton and the Indian cotton, it is not being reflected in the spread which you have mentioned at around like $0.65?

Yes, that's true because that's why I'm saying the Indian margins are one of the lowest today, Indian cotton prices are one of the lowest today. And the -- again, the U.S. cotton, though the theoretical prices are $0.73, $0.74 but at the same time, there's hardly any demand for that cotton also. So practically, if you look at the alternate of that cotton, the Brazilian cotton, which is available at $0.65, $0.66 today. So the margin -- the differential with the Indian cotton is only $0.07 for the Brazilian cotton. So technically, New York Future is on a much higher side, where the American cotton is priced at a much higher level because of the exchange rate, but there's hardly any physical demand of cotton to -- at those prices.

Okay. Now I got the clarification because otherwise, I was thinking that given our focus, it has been more towards the export market. And generally export market, they track what is happening in the U.S. cotton market. And hence, our spread, it should be a bit better than what we...

So this is -- so this $0.73, $0.74 is driven from the exchange rate and adding the carry-on to that, whereas physically there is no demand at this price.

Okay. Sir, you said that we are operating our spinning facility at around 90%, 95%. In terms of fabric, whenever things would normalize, so even in that segment, the capacity utilization, it can be as high as 70%, 75%, that is...

No, no. It can go up to 90%. Technically, it is possible to go up to 90%.

Okay. And this is -- okay. And currently -- so technically, might be in 2 years -- 2 to 3 years, we can double our revenue from the fabric segment if things are normalized?

Yes. On the current -- the first quarter numbers or on the June numbers, we can double definitely from these levels.

Okay, okay. Sir, generally, you don't provide this -- the bifurcation between the yarn and the fabric, but on a yearly basis, if you can just provide some rough breakup between yarn and fabric, that would be helpful.

Generally, our yarn sales on the top line will be close to about 65%, 35% comes from the fabric on the previous levels. But as the fabric -- because the last year, whatever capacity we added, spinning, we ramped up fully during the year itself, while the fabric could not be. So I'm sure once the fabric is in a position to utilize the full capacity, this range can go to maybe 60-40 or maybe 55-45 or so.

As there are no further questions from the participants, I'd now like to hand the conference over to the management for closing comments. Over to you, sir.

Yes. So thank you very much to all the investor community, so having faith on us and being with us. And as I have been mentioning, these things are -- they are looking like very, very difficult, though we are away -- we are back from the worst, but it still looks like the challenges will continue. And I can only assure that whatever is the best possible in the hands of management, we're trying to look at that and looking at what best could be done in these circumstances in terms of selling the products, in terms of producing rights, in terms of cost-cutting in terms of CapEx and so and so on. So I'm sure next 3 to 6 months, we will -- I mean, it looks like on today's note, we will be better from what we were, but how much and how this increase in the world, we'll have to look at it. So once again, thanks to all of you for supporting the company and joining this call. Thank you very much.