Vardhman Textiles Limited (502986) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I'm Pavitra, moderator for the conference call. Welcome to Vardhman Textiles Limited 2Q FY '21 Post Results Conference Call, hosted by Batlivala & Karani Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand over the floor to Prerna Jhunjhunwala. Thank you, and over to you, ma'am.

Thank you, Pavitra. Good afternoon, everyone. On behalf of B&K Securities, I would like to welcome you all for 2Q FY '21 results conference call of Vardhman Textiles Limited. Today, we have with us the senior management of the company, including Mr. Neeraj Jain, Joint Managing Director; Mr. Sushil Jhamb, Director Raw Materials; Mr. Rajeev Thapar, Chief Financial Officer; Mr. Mukesh Bansal, Senior Vice President Fabric Marketing; and Mr. Akshay Jain, Head of Finance. I would now like to hand over the call to the management for initial comments. Thank you, and over to you, sir.

Good afternoon, everyone. Thank you for joining this second quarter call. First of all, I hope all of you are safe, all your family numbers are safe. So I wish a very, very safe environment for all of you. This has been a mixed quarter started with the challenges and slowly became better. April, May were very, very bad months for the -- most of the textile players, including us as most of the factories were closed. We started operating partially and slowly started building up the volumes. The customer orders were less. Customers were also adding lots of stocks. There were issues with the old outstanding. They were issued with the old stocks and so on. But slowly, the industry took shape, especially the leisure wear, the knitting section, and we moved on to the right track where we could -- not only that we sold whatever was pending with us, but we recovered also most of the money which was due from the market and started improving the volumes as well. Our overall utilization for the quarter on the spending side has been pretty good. Somewhere in the third week or fourth week of July, we reached almost 100% of capacity utilization, and we are maintaining the same for the last 2, 2.5 months or so which means the volume increased; top line increased; cost cut, a portion; the fixed cost. Of course, the raw material challenges are a little different. Same way, Fabric also started improving though the formal wear is still a question mark because still many people, many countries, people are working from home. The events have not started. The social gathering are still much less started and most of the formal wear was not doing good. But in spite of that, I think the company has done reasonably good. And month after month, we are improving our volumes, we are improving our capacity utilizations. We'll give you the details of the volumes in a little while in terms of how the business has been shaping up. But definitely, it looks like the worst is over. When the lockdown happened, we were not very sure. Most of the textile players, textile consultants, they predicted net-net reduction of about 25% to 30% for the consumption of textile. And practically, that's true, maybe first 6 months. But I think the Western world has started picking up in a big way. And maybe the full year may not be that bad, which was predicted earlier. In this period, the raw material also played a different role where after the pandemic, everything was on a very, very low side, both the raw materials, the yarn prices, the fabric prices because there was no demand. Now slowly, as things started improving, the improvement started happening on the raw material sides also, on the yarn side also, and on the fabric side also. So the second quarter results are better compared to the first quarter and primarily both the reasons. One, the volume increased where the first quarter was relatively much poorer. Two, there was some improvement on the prices front also. So both the factors together we showed net profit for the second quarter though the YTD is still small minus. But I'm sure that the the way things are the results for the next quarter should also be reasonably okay. So that's what, in general, my first comments in terms of the business scenario. We are still exporting a lot. The domestic -- on the export side, since the working load is doing good, China is doing good. So the overall export was okay. Domestic market took some time, but again, the domestic also in terms of the knitting sector, I think the very good demand, both for the domestic market as well as indirect export of garments from India. So that demand has increased in a big way in the last 2 months or so. The fabric side, the domestic consumption is still less, but the export is reaching almost 80%, 85% of what we used to export before. The way trend is -- the way things are improving, there's definitely much less pressure of COVID as of now. Confidence of the consumer is increasing. Festival season is coming up. So I'm sure, normally, the festival season is one of the best season as far as textiles are concerned. So I hope if the demand continues or improves, this will give overall advantage and benefit to all the textile players. To the fear factor of whether we are going to survive or not in terms of the individual thought process, and in terms of whether jobs will be there or not, so the spending which generally comes down, at least that fear factor looks like it's not there as of now. So people's confidence in terms of surviving from the COVID, and also this year of not losing the jobs or the incomes, have also come down. As the normality starts happening, people start spending, people start traveling, and fortunately, the overall pressure of the pandemic is also much less. Recovery rate in the country is good. So I think that confidence is slowly building up. And I'm sure the way things are, this is going to improve on only if we do not find a very strong second or a third wave in this country. To start with before on the numbers. So I'll request first Akshay to give you a brief on some of the numbers. After that, we will reply all the questions in the Q&A session as well, including the raw materials, fabrics and everything. So we'll revert to your queries through the QA session. So I'll first ask Akshay to give a small brief on the numbers. Thank you.

Good afternoon. To -- just to sort of give a brief overview of the numbers, those results have been out in the public domain since Saturday. We saw obviously a great improvement in the top line of the company over the last quarter of FY '21 from about INR 771 to INR 1,533 crore. This is on the back of, obviously, better utilization and better sales achieved in quarter 2 as Mr. Jain initially expanded upon. The higher utilization and the higher sales done improved the EBITDA profile of the company from about 1 point or about 4% last quarter to about 11.5% this quarter, resulting in a significant improvement in EBITDA from about INR 38 crores last quarter to about INR 184 crore this quarter. The other costs such as interest and finance costs, et cetera, slightly lower as the working capital requirements of the company slowly come down as we liquidate the stock of cotton that we have resulting in a lower interest cost of about INR 6 crores. These are the basic numbers for the quarter. Now we open the call to any Q&A that you may have.

[Operator Instructions] We have first question from Abhijeet Dey from BNP Paribas Mutual Fund.

Congratulations on a much better performance. Two or three questions from my side. You had posted -- talked about a derivative loss in the first 2 quarters relating to hedging of your raw material. So I just wanted to know what's the current position, and we can see -- and if we can see a similar kind of loss in Q3 and Q4 also?

We have started cutting the position slowly. It's not the same position which we are carrying as of now. It will depend upon how the Near York Future operates. So I can't say really if the loss can be higher or lower. But yes, the total position which we have taken, we are surely cutting it down slowly because we feel the prices are already reached a level where it may not go up beyond this. But in any case, it's anyone's guess. So as we are consuming the cotton, we have started, we are canceling it as well. So it is difficult for me to say at this stage whether the second quarter will have a similar loss, higher loss or a lower loss. But the only share, I can say, that partially we have started cutting it off.

Okay. And on the -- on cotton prices itself -- outlook on the cotton prices that is going forward. Now that [indiscernible] season would have started. And you have seen cotton prices actually go up both in domestic as well as international market. And assuming that the COVID situation also eases off in the months ahead, what's the outlook on cotton prices for this season?

There are 2 different factors, which are operating as of now. One is the international prices of Near York Future. So it's beyond any control or any thoughts whether why it's going up or going down, whether there are investors or there are speculators or some fundamentals or not. So it's anyone's guess what's happening there. But yes, the fact of the matter is, it's definitely very strong as of now. So It's difficult for me to comment whether it's right, wrong, whether it'll come down or not. But let's look at -- if this continues or it keeps on strengthening, then the Indian prices are generally driven by the international prices only. So India, there are 2 factors which is going to make changes. One is the international parity through which we can determine what could be the Indian prices because if the prices in India are too low, the cotton will start getting exported. Two, the local policy of MSP and CCI was one of the big operations. The CCI did last year where we bought almost Maharashtra Federation and CCI together more than 13 million base. They're still carrying a huge stock. But in spite of that, the Government of India has announced a hike in the MSP this year by 5%. So the narma prices, MSP is almost INR 5,700 a month. So the way market operates, one, the CCA will continue to buy at the MSP prices. If you go by that, then the prices can rule anything between INR 42,000 a candy to INR 44,000 a candy, depending upon the outturn and the price of seed. But that's on one hand. Two, whether CCI can preserve this much of cotton or what will be their policy of buying new and as well as since they'll be carrying huge stocks of the earlier cotton. So what are the policy going to be in terms of the selling or in terms of how much do they want to buy. So there's no idea to us as of now -- to the industry as of now whether CCI is going to really figure a lot or how they're going to dispose off the old ones. But yes, the fact is since the New York Future is very strong, so as a result of that, the Indian prices also moved down. If the New York Future calms down -- if continues to be like this, then the Indian prices will be almost close to the MSP prices. But if the New York Future comes down, then with the bumper crop and with the existing stock of CCI, there could be a possibility the prices may come down. But how much then it is yet to be known because the sole player to decide the market will be -- virtually will be the CCI. And what policy do they adopt in terms of selling or in terms of the buying, I think they're also looking at market very closely. And depending upon their action plan, we can only determine. Third, since this prices of yarn since the cotton parity is acceptable to the mills. So the mills are in a position to buy, of course, nobody is adding stock in a bigger way. So the day-to-day mills have started buying because the yarn is supporting it as of now. And as a result of that, there is no pressure for reduction in the prices. Fourth, the season has just started. The arrivals are almost close to about 100,000, 120,000 bales a day as of now. And the consumptions are normally about 80,000 bales or so as the country as a whole. We expect soon the arrival will go to about 2 lakh bales or so in the next few weeks. And once it is crossing 2 lakh bales, at that stage, we'll have to look at how much pressure the prices comes under or whether CCI is in a position to acquire or buy anything or not. So it's very difficult going by the -- going by all these sentiments because everyone treats the New York Future is at a very high prices, whether one should stock or not. So I think it's very challenging as of now to say prices will come down or not. But yes, if the international prices are strong, then no way the prices will come down from these levels in India. It looks like -- it doesn't look like possible.

Yes. And would you continue with your usual policy of stocking up of cotton as you do every year and in the next 5 6 months?

There are 2 factors. We were doing it. There were 2 factors in our mind. First factor was the right quality because what was happening in earlier years, in the peak season, lots of good quality cotton used to get exported. So we always had this issue and challenge they do not buy it today in the proper season and the good quality gets exported. Probably by the time the off-season comes in, the quality of raw material generally will be much lower than what is our need. As a result of that, our customer gets a difficulty in terms of the right yarn. So that was one of the reasons we used to buy. The second has always been a commercial consideration. That is, if we think the prices are going too up or commercially we feel it's at a lower price, then only we stock it. So these were the 2 considerations, which we have always looked at, and we are storing or stocking the cotton. The second factor, we are still open. In case we find commercially the prices have come to a level where we can -- where the chances of lose is less, but we can make money, we will definitely look at the stocking policy again, if not 6 months, maybe 3 months, 4 months, I cannot say as of now. I cannot say as of now. But the second factor where we were forced to buy because of the right quality, that probably pressure is not there because if we are not buying, the CCI is buying at least, the good quality cotton is available in the country. So depending upon our need, depending upon how do we want to buy, at least that choice will be available since that quality will be available within the country. So the secondary -- one consideration where we have always been buying because we will not get the right quality later, that consideration has a positive impact that is available in the country. Commercial call, we'll definitely take during the year depending upon how the prices grow.

And one last question. What was the CapEx in the first 6 months of this year? And for the next 6 months, what's the net?

The first 6 months was, I think, some of the ongoing CapEx, which was started last year, so close to about I think INR 100 crores, INR 150 crores only. The next 6 months, we are yet to finalize. But again, it's not going to be really, really, very huge because this period, we decided to be conservative in this period. So maybe I think it can be another INR 150 crores or so. So the total CapEx will not go more than INR 250 crores, INR 300 crores for the full year.

We have next question from Manish Jain, an individual investor.

Congratulation on a good set of numbers. So we have heard that due to the present situation we are in -- companies are looking at India for outsourcing rather than China. So how is Vardhman Textiles placed in order to capitalize this? And also additional question was there's a boom in the home textile sector as such. So how are we placed in this sector as well?

Definitely, there's lots of brands which are talking about buying the -- they are divert -- they want to divert from the basic Chinese cotton, especially Beijing and Indian. So to that extent, the customers are coming to India directly, indirectly or they are asking their vendors in China to use the Indian cotton or the Indian yarn. So to that extent, I think the business has improved in India, especially on the spinning side. And on the fabric side also, lots of brands are talking where they want to have some diversification from China. Physically how much will they do or how much will India or the countries be in a position to offer or to serve them, that's a separate question. But yes, the inquiry levels are huge. It's improving. And in case we are in a position to take advantage of that as a country, it can give us some benefit. The second question you have asked for the home textile. So Vardhman Textiles is not a part, we do not have any business which relates to home textile. We are the only yarn supplier including super fine counts which goes for the home textile. So we are a yarn supplier, we are there, but direct business of towel, sheeting or the home textile, we are not into that business.

We have next question from Krishna Nagpal from Latin Manharlal Securities.

Congratulations on the great set of numbers. My question is just a basic outlook of how things have changed for all? And what is the -- so what is the future, like the perspective and how you'll can see yourself growing in the near future?

So the basic outlook has definitely improved because whenever there's a pressure for the -- in terms of the income level of the people, the garment is something which -- where the demand can be postponed conveniently. At least in this period, those kind of pressures are not there. We are finding the overall sentiment to be far better country as a whole, world as a whole. So to that extent, I think we are quite comfortable in terms of the improvement coming into the business, which can be sustained as well. The second question is how the volume growth will happen. So the volume growth will happen only through -- the top line growth will happen only through the volume growth. We still have lots of unutilized capacity, especially on the fabric side. Once we are in a position to utilize it fully, I'm sure then only the top line will happen. On the spinning side, we are running 100% capacity utilization. So there's no possibility for us for the near future to increase any volume growth in that. So the only possibility is with the improvement in the fabric business, which is happening month after month, the value addition happens into the company, the top line improves, and the margins should also improve.

Sir, can you give numbers on the utilization of the fabric business, sir?

Generally, I can share -- I mean, on the spinning side, as I mentioned, we are running practically close to about 97%, 98%. On the fabric side, now we have started reaching almost 65%, 70% capacity utilization. Which I'm -- I mean, if you look at the quarter, second quarter was surely less, but last 1 month, 1.5 -- I mean, every month it's improving 3%, 4%, 5%. So as of now, it will be close to about 65%, 70%.

We have next question from Saurabh Patwa from HDFC Mutual Fund.

I just wanted to have some sense on how the cotton yarn spreads are there for us since our pricing was slightly different -- our raw material prices were slightly higher because of your spot inventory? And how big they're now? The spread?

When the pandemic happened -- I mean, let's look at the situation before pandemic and during the pandemic and so on. Before pandemic, the yarn prices were close to about $3 or so. And the Indian cotton prices was close to about INR 40,000 a candy. Pandemic happened, the cotton prices came down to as low as INR 34,000 a candy. And the yarn prices also came down to $2.40 or so. So as of now, today, of course, this improvement happened gradually and people -- we keep on selling at every level. As of now, the yarn prices are touching almost close to $3 and the cotton prices have also gone to the same level of INR 40,000, INR 41,000 a candy. So practically -- international prices are also again $0.71, $0.72, which is normal reading prices. So practically, all prices are reaching the same level which was there before the pandemic. In between, the advantage of cotton could not come to us because we already bought the cotton whereby the prices came down. But anyone who didn't have the cotton was buying cotton at INR 34,000 and selling yarn at $2.40 was not a loser at all. So we couldn't take that advantage because we had covered the cotton by the time the pandemic happened in the month of March, and we had to sell based upon the market price.

Right. So now things are normalized in terms of pricing?

Yes.

So it will not matter whether water inventory would hold and how the prices move going forward?

Yes, yes.

[Operator Instructions] We have next question from Keshav from Counter Cyclical Investments.

Sir, I wanted to understand that, sir, after Q4, we kept the dividend because of the lockdown and related uncertainty, then first quarter we had a loss. But now we have made profit, and you are saying that the worst is behind and on consolidated basis on INR 600 crores of net worth, our net debt is less than INR 500 crores. Sir, so -- and also, sir, in great financial crisis also company didn't skip dividend. So now that things are better then, sir, you can consider giving an interim dividend?

I think I can only speak to the Board of Directors. It's up to their judgment call whether they want to consider it as of now or not. But yes, your sentiment, your idea I'll definitely share with the Board. But I think finally it's up to them to decide in their wisdom, what do they think about the same.

Definitely, sir. And also sir, regarding our subsidiary Vardhman Arcylic, sir, there was some anti-dumping duty that was expected? And so is there any update on that?

There is already an anti-dumping duty on import of acrylic fiber. In fact, the duty was much higher and the -- as per the new duty, it's going to be much lower. But still that notification has not happened. So earlier, I think the duty was $0.16, which now has come down to maybe $0.02 -- $0.015 or $.02 but that notification has not happened till now. So they are waiting. As of now, the existing arrangement continues.

Sir, so considering that, sir, what is the expected profitability because last year was the lowest EBITDA in more than a decade? So are things expected to improve going forward?

I can't really say because there are 2 factors again in that since the cotton price -- since the crude prices came down, so all the raw materials they had, they also come under -- that got devalued because they have to sell their products based upon the market price of raw materials. So whatever inventory one has when the prices comes down, that inventory has devalue. And to that extent, the losses will happen in any commodity marketing -- in a commodity manufacturing product. So I think one of the reasons for them also was since they couldn't do the full operations and they already had a huge amount of raw material, which is because it's all imported and there's a long cycle to import it. So I think those were also some of the reasons where those margins were less and so once the things should be normal, it's -- I can't really comment whether how the prices will move for that product. But yes, the last quarters had lesser utilization, better demand and the devaluation of inventories.

Okay sir. And sir, lastly, sir, is our subsidiary now operating at full capacity?

Yes, Vardhman Acrylics, it's a continuous plant, so it's running at full capacity.

We have next question from Deepsh Agarwal from UTI.

Mr. Jain, my first question is since you have already reached a peak utilization in yarn, and maybe by end of this year, at current pace of progress you will reach idle utilization in fabrics. So where are we in terms of a capacity expansion plans?

Capacity expansion plan.

This year, we are not looking at any capacity expansion plans, we are not even preparing it as of now. In general, in the fabric processing, they added some capacity in the month of December, January before pandemic. Those capacities are still unutilized as of now. So our first effort is to use that capacity, make it sustainable, continuous basis we'll use that, make some profit, then only we'll start looking at what more to do. As of now, there are clearly no plans to expand any of the business, not even [indiscernible]. So next one year, I don't think we are going to expand anything. Rather we are only looking at utilizing what all has been created, consolidating it and improving it so that we are strong enough to take care of these future expansions.

Okay. Okay. And sir, at current pace of progress, how confident are you of going back to your long-term margin average range of 18% to 22% next year?

If no artificial things happen and things work on a normal basis, there is a good possibility we may reach this. But yes, there are different issues, I mentioned about the cotton, CCI, so what prices do we keep it in India. Those are the things -- if the market operates as per the normal demand supply phenomena, I'm sure we can reach the risk level.

Okay. And sir, on the fabric side, can we actually diversify into a casual wear or the knitted side of the fabric?

Mukesh, can you reply this is?

Yes.

Mukesh?

Yes. Yes. Can you hear me? Actually I was on mute. So I'm little [indiscernible]. Your question is that on the fabric side, can we move on to casuals?

Yes. With our current capacity, can we go for the next round of expansion on the knitted garment side -- knitted fabric side, given that the demand has been much stronger there?

No, actually knitted, it requires whole lot of -- new set of machinery. It is not a natural extension of the woven business. But in the woven fabric itself, we are seeing that we are reaching at about 70% to 80% of capacity utilization in the third quarter. And the things are progressing for good. Unlikely that we will go into the knitted business. If knitted business has to be looked after, that has to be seen as a total expansion at a company level, not at a business level. But within the fabric -- within the woven fabric, whatever casual or need of the market we can serve, we are trying our level best.

We have next question from Venkat Samala from Tata Asset Management.

So sir, as you pointed out that you are operating at near 100% capacity utilization level, just wanted to understand how is the industry as a whole performing? And how are, especially the smaller players doing?

There is no organized data which is available for the industry. But yes, through the different vendors or through the different processes, we do select that data. As per as our internal working, I think the industry utilization is only about 80% as of now, which used to be 92%, 93% before. So lots of smaller or the unorganized player, which couldn't restart the operation for whatever is the reason. And that is also one of the reasons why the industry is doing better in terms of the volumes, et cetera, because not everyone could restart.

Right. Right. Right. So then definitely the organized or the larger players with better balance sheet are able to sustain or do better as compared to the smaller ones, right?

That's true. That's true.

Right. Right. Sure. Sir, also, if you can help us with your yarn realization for the quarter? And what are you guys doing currently now?

We never share normally our volumes or the price realizations, but I can give you an idea on how the market is operating. So as I mentioned, we started with a price of $2.40 in the month of May. And slowly, it has improved to about $2.90, $2.95 as of now. Of course, the major increase has happened in last 3 weeks only, and that is to even for the raw cotton also. The cotton price also have increased in a big way in the last 3 weeks, 4 weeks only. So slowly starting from $2.40 reaching to almost $3, that has been the trend and where, I think, almost $0.20, $0.25 increase have happened in the month of October itself.

Right. Right. Right. So. Basically, we know that the cotton prices have gone up, but the yarn prices are also keeping up with that increase, right? So net, the profitability is not getting affected?

Yes. That's true. Sure. Okay.

And one last thing. I just wanted to understand from your Fabric segment, if we could understand, what percentage of your fabric volumes sold would be exported?

Direct and indirect. So there are 2 kind of exports we do. One is the direct fabric export, second is the indirect fabric which goes to India, but again gets -- the garment gets exported. Both things taken together, almost 65% is our volume, which used to be there before pandemic for the exports, 35% for the domestic delivery.

Sorry, now it is 65% and previously it used to be 35%, is it?

No, no. I'm saying pre-pandemic, our ratio was 65% export, 35% domestic.

Okay. Okay. And now how that has changed? It would have moved in favor of exports?

Earlier, yes, but slowly, the domestic is also improving. So I think as of now, the ratio -- because we are still not using the full volumes, but my belief, the ratio of export and domestic would be almost 30:70 or 35:65.

So it is slowly normalizing.

Normally -- because still the volumes are less. So we reached almost 70%, 80% of export faster. But now the domestic has started picking up. So in terms of whatever we are supplying in the market, the ratio will be 30:70 only. Of course, volume-wise export is a bigger volume.

We have next question from Srivatsa from UTI investments.

Sir, I had a question on the exporting of garments because whatever interactions that we have been having, most of the garment exporters are talking of a very big order book and a very good visibility for the next 2, 3 quarters. So given the fact that you have also mentioned that we also sell in form of indirect exports, are you also seeing the same level of opportunities in this segment, sir?

In the garment?

No, no, I meant whatever sale of fabric you do to a garment exporter, like say a --

Yes, definitely. In terms of -- yes, definitely both. Basically, the garments exports from India is primarily the knitted base. So that segment is doing phenomenally well. But yes, as the markets are opening elsewhere, slowly the woven garments exports also started happening. So to that extent, things are improving. But the first part which you mentioned in terms of the exporter doing very well garments, I think that's more on the knitted side.

Okay. Okay. And we don't have woven...

Denim and woven are still not in the same line as the knitting is doing today.

Okay. Okay. And sir, the other trend, which I also heard is that, especially on the garment side, as there is a lot of focus on manmade fiber. So today -- tomorrow, if there is an improvement in the manmade fabric, are we in a position to take up that opportunity because a lot of China fabric capacity is manmade is what I believe to understand. So is there an opportunity for us to shift to manmade if that demand presents a good opportunity for us?

It's a fact that, as of now, the manmade demand or the blended manmade and cotton is definitely better or is improving. And to that extent, it lowers on for risk of cotton also. At the same time, if it is a permanent change, I'm sure we can remodify our factories with a small investment here and there, which can be done conveniently to take advantage of those kind of things. And we are watching it very carefully and wherever the opportunities are there, we are tapping to the same. But going forward, if this becomes -- we find this becomes a permanent challenge -- change, definitely we will be looking at how we convert those capacity. It's not really going to be very expensive or a very time-consuming time to do that. Once we take a decision, we may do it in the next 3 to 4 months' time, any time we take a decision done. But we'll do it only if we feel this is a permanent change because otherwise, we have a good set of customers for cotton, we'll lose them. Because then they will be buying from somewhere else. So if we take a decision to shift the major capacities, we'll take it very cautiously. Small capacities depending upon the opportunities, we are doing it on a daily basis even now.

Okay. Okay. And sir, just a follow-up question on the CapEx. While I do appreciate that you may not want to do anything right now, but if I just fast-forward to, say, next year or the year after that, we will be getting very good cash flows and probably we may even turn debt-free in a couple of years. So any thoughts on when do you expect or what kind of conditions you would want before you would announce the second leg of CapEx? And will that also be in your fabric? Or are you willing to look at areas such as, say, technical textile or some other high-growth areas or even yarns, especially on the M&A side because I do understand that a lot of yarn capacities have closed out, the largest being Sintex, and there is some talk of that being auctioned. So sir, I would be happy if you could address both sides?

We are open to the idea, at least, as you mentioned, at least next one year, I'm not looking at any major expansion to happen because we want to conserve the cash. But yes, beyond that, we get a right opportunity either on a fabric side or on the spinning side, the new newer areas, we are yet to finalize our mind, but definitely in the existing businesses, if we get the right opportunity and a right value proposition, we can definitely look at the same.

Okay. But sir, is there any progress on the spinning side because as I hear that lot of spinning capacities have shut down and banks have written off that...

We are...

Cash amount?

Yes. As I mentioned, at least as of now, we are not looking at it anything as of now. So at least next one year, my personal feeling is this is just like to consolidate without -- with a great difficulty, we have reached the 100% capacity utilization. And the customer behavior is changing, customer needs are changing. Everything has to be produced very fast or the turnaround times are coming down in a big way. So to keep the pace with the market, I think there's lots of internal challenges and changes which we are making. So I think it's going to be a great journey, but at the same time, a very, very challenging journey. So I think the kind -- the way markets are changing, fashion cycles are changing, customer needs are changing, we'll have to really look at to make the organization prepared for the same. And then it's only -- and two, the competence should be back that the margins are normal, things are stabilized, then only we'll look at spending in a bigger way.

Okay. And sir, final question on the fabric side. We are still working at, say, 65%, 70% utilization. So sir, to fill up the new capacity, do we need to add more clients on the fabric side? Or we believe that there is enough headroom available in our existing top 10, 15 clients for us to fill in the new capacity?

I think there are different ways to look at it. One is that it's a customer base, but I don't think this was a question on the customer base. It was basically since the events are not happening, the work-from-home is still on. So people are not buying. So once the existing customer also becomes normal, the volumes will start increasing. Two, the domestic market of woven has just started working last one month or so. Before that, it was -- virtually there was no market. So I think as the things will become normal, we have a good range of products, we have a good range of customers, both exports and domestic. So even -- and in any case, whatever is the new customer's possibility, new products possibility, the fabric marketing team, the fabric production team is working very aggressively on that. So I'm sure a product mix change, customer profile improvement and the normal demand from the existing customers, all 3 things together will take us through. So I'm not really very bearish on it as of now. And I'm sure, next 3, 4 months, we should start -- we will have a major improvement in this also. And that's my view.

Okay. And sir, I mean, some of your key big clients, like say, an H&M or a Uniqlo, I mean, I don't know if there are your clients, but they are setting up Indian operations in a very big way. So whenever they set up, is there any evidence to say that they increased their sourcing from India in a big way just to show their commitment? I mean, have you seen that in the past in any of our top clients who have set up operations in India in a big way and then suddenly, the increase were sourcing out of India?

Mukesh, can you reply that?

Yes. It doesn't happen this way. Whatever they source, they source for the international markets. And for the quarter, India is also covered under that. For India retail, they will not separately source from India or anywhere. So the sourcing is international.

Okay. Okay. No, no, my meant was -- sorry, my question was more on the fact that because they are aggressively expanding in India. So are there any commitment to improve the sourcing from India? I mean, is there any evidence you've seen because some of your customers would have come and aggressively expanded in India? That was more of my question.

They have done that. But still, if you look at the overall size, still the Indian share of retail is hardly a peanut in their overall retail operations. But nevertheless, there is a condition on the retail FDI that certain percentage of whatever the retail in India has to be sourced from India. But that doesn't hamper their strategy -- sourcing strategy in a big way.

We have next question from Hemang Khanna from Kotak Securities.

Sir, I just wanted to understand from the second half of this year's perspective. Obviously, you know as yarn numbers are increasing....

Would you speak up please. We can't hear your question.

Am I audible now?

Yes.

Yes. Sir, I just wanted to understand from the second half of this year's perspective. Now that our yarn utilizations are pretty strong. Would it fair to say that our margins, when we look at the second half of this year should not be too far off from the previous year's level on second half Y-o-Y comparison basis? And in terms of that, even our yarn sales in terms of volumes at least, I mean, barring the first quarter, which was said, the rest of the year should at least sort of be at a steady level?

Yes, the business is normal. And I hope second quarter -- third quarter for second half should be normal as far as the business operations are concerned. But I think the way markets are changing, the way things are improving are changing in the European countries, just looking at a second base. So if everything remains what it is today, then probably these things will be stable. But anything -- I mean, the kind of changes which are happening or which are visible in the world today, it's very difficult to say stability or not stability. So I can only say, if we go back to this scenario, yes, things are far better.

Sure sir. And just one other question. Comparing the second half of last year's gross margins versus this year, at least with the visibility that we have right now, would we sort of be at steady levels considering the yarn cotton spreads which are available as of today?

The only challenge is, the cotton season has just started, we are still not sure how the prices will turn into the world markets or Indian markets and what will be the CCI's actions, support, et cetera, et cetera, on that. Also, we have still not made up in mind, how do we want to have the stock policies or what will we do in terms of the overall stocking, et cetera. So it's too preliminary because season has just started last week, the cotton has started coming in slowly. So I think maybe next 1 month, 1.5 months we'll be more clear in terms of how the raw material prices are behaving and about -- and also on the yarn prices, the view of future prices, the huge movement happened in last 2 weeks, 3 weeks. So I'm not sure whether that gets sustained or what happened. So I let the market get stabilized. Then only there could be a possibility for anyone to make a prediction. The way market has increased or improved, whether it gets sustained or not, I mean, it's very, very difficult as of now to commit on to that.

We have a next question, which is a follow-up question from Venkat Samala from Tata Asset Management.

Sir my question is just an extension of the previous speaker's question. Sir, just wanted to understand from whatever visibility and order book that you might have, how confident are you about maintaining the Yarn segment's current capacity utilization level?

My personal belief is the yarn capacity utilization should not be a challenge. We should be in a position to maintain whatever we are producing today in the next couple of months, should not be an issue.

Right. Right. Sure. Understood. So then we could well expect a year-on-year growth, right? Because your internal consumption would be lower than what it is in the base quarter?

Yes. Sure. Sure. Right.

And one more question was with respect to the receivables, so your receivables have inched up slightly. Any idea as to when they could normalize?

No, it's already normalized. So the increase [Technical Difficulty]. The increase is only -- it's only because there's a huge amount of yarn which is getting exported. So normally in the export market, the realization comes after 90 days to 120 days, though it's all backed by the letter of credits. But in terms of the balance sheet, it looks like a debtor in this system. If we sell the same material in India, probably we get the money after 30 days or so. So that's why the debtors are looking like much more increased, but it's all secured, LC based, the money will come in, in the normal course of time.

Okay. Okay. So the working capital days for exports should be reasonably higher than what it would be in the domestic, is it?

Yes, that's true.

No. Domestic also. Again, there are different segments. So even export also, there are customers who will buy on a 30 days LC, 60 days LC, 90 days and 120. But most of the international markets business happens at 90 days LC. Domestic also, the credit terms vary from 10 days to about 3 months. But more of our segment was in about 40 -- 30 to 45 days. So that's why it's looking a little higher. Two, since the fabric is not utilizing the full capacity. So to that extent, we are exporting yarn. So more yarn export because as of now, the selling of yarn is higher in the market compared to the captive. So whatever is the additional exports happening, that's on a 90 days basis. So that's where the debtors are a little higher.

Right. Sure, sir. And one last question, sir, if I may squeeze in. Sir, what would be your premium now versus the industry? I mean, with respect to yarn realization at a blended level?

It's very, very difficult to say whether I am better or I am lower than the market or what is happening because depending upon whether you sold 2 months before, 3 months before, 1 month before, because the market -- the prices are changing in a very, very big way or a fast way. But normally, we feel that at any stage, we generally get a premium of $0.03 to $0.05, $0.07 compared to our competitors at any one stage. Now it depends upon my competitor has sold earlier or I have sold earlier or what the customer demand is. It's very difficult to predict that I will be better in terms of realization compared to my competitors or not, very difficult. But yes, whenever we are selling, normally we get a premium between $0.03 to $0.07 per kg of yarn.

Sure. And the reason also, I was asking that because you do a lot of value-added yarn as well, right? And most of them...

No, I'm talking about-- yes, this I'm talking of the basic yarn. So depending upon the value addition, definitely, we could be -- I mean, our overall kitty is definitely better than most of the competitors we have.

Right. Yes, yes. So that is what I was just trying to understand, at a blended level, considering both, I mean, basic plus value-added yarn. So what could be the premium, sir, versus the industry yarn realization?

I mean, depending upon how much volume we are in a position to do value-added because this has been a period where lots of basic products are also going in. Generally, for basic product, I can give you an industry data. If a basic product is at INR 200 a kg, value-added average will be about INR 270, INR 280 kg. But at the same time, the cost of manufacturing the value-added will also be much higher. So it's not that it's going to be only -- everything is going into the margins. But yes, however the cost will also be higher.

Right. Right. Right. And what could be your proportion basic versus value-added?

No, this year, more of a basic type of number.

. Okay. So more in the sense would be like 70:30?

Sorry, I'll not be in a position to share that.

We have next question from Rishabh Shah from R S Capital.

I just wanted your perspective on the textile industry next 2, 3 years down the line, which the subsegment of the textile, whether it is your segment, woven fabrics or knitted garments or say, home textile or say, branded apparel, which subsegment may benefit disproportionately or say may do relatively better in the next 2 to 3 years, whether due to pandemic or export opportunity, whatever the reason may be and why?

We are already finding home textile got a great opportunity because of pandemic, the demand of sheeting, the demand of towels increased worldwide. So that segment of the industry is doing very well as of now. In terms of all other products, the apparel garments, apparel fabrics and the yarn related to that, that's spinning, weaving, processing, knitting and the garmenting segment, I think, my belief is, in case we get an opportunity as a country that some of the orders get shifted from China because our capacities are miniscule compared to China. So even if we get a small percentage from China, I think the opportunities are going to be great. The only thing as a country, whether we'll be in a position to capitalize that, whether we'll be in a position to deliver that, whether we'll have those kind of capacities to give the right product and the right subjects to the customer. But yes, the amount of inquiries, the amount of communication today most of the brands are having. In case we are in a position to capitalize a part of that in next 2 years, I think it's -- for a country, it's going to be a really, really, very big opportunity.

Okay. Okay. And sir, one last question. Can you give an update on the latest government export incentive scheme, which is yet come out and what is the expected rate versus the earlier rate which is almost for the industry?

We haven't indicated anything. So they have asked the industry to provide them the data, et cetera. So those things are on. But as of now, they have not indicated what they're going to give and when they're going to give.

Okay. Can it be at least at par of the previous one or it will be less than the previous one?

No. My personal belief is it will be less than the previous one. I mean, I am no one to comment upon that. So I think it's the government who would take a view on.

We have next question from Deepak Mehta, an individual investor.

So my question is around the export business, sir. So how competitive is our company or any Indian textile company as compared to Bangladesh and Vietnam as we expect that the textile industry will move out from China due to negative sentiment, sir?

In terms of spinning, we are competitive to any part of the world, whether that's China, Vietnam or any part. So as a spinners, India as a country is competitive worldwide. So there's no issue in terms of the cost. There's no issue in terms of the capacities. There's no issue in terms of the product quality. On the fabric side, especially knitting side, our capacity in India are too small compared to what China or Vietnam or Bangladesh has created. So that's why I'm asking this, that in case we get this opportunity, whether we'll have those capacities or we can create those capacities to really deliver, that would be a big question mark. In terms of woven, I think still our parts are world-class, both in terms of size, technology and the overall processing. So woven, since it's relatively much better organized, so there's no issue in that. But yes, knitting garmenting are bigger challenges the -- in terms of the capacities, also in terms of the cost factor because garmenting, the biggest cost is the labor cost. And Bangladesh's labor cost is much less compared to the Indian cost. So I think those challenges -- of course, some of the states have given incentives where they're giving the advantages for the garmenting in case the production starts in their states. But really, this is one factor where I think if we have to take the opportunity, so the entire value chain has to work together in terms of not only supply chain, but in terms of creating that atmosphere, that culture, that clusters the thought process, then only we can make it a success. Raw materials are available in this country, both polyester as well as cotton. Spinning is word class, woven is world-class. Knitting, yes, there is improvement for. And the garmenting definitely is relatively much weaker in terms of the size, et cetera, which are required for the export market. So depending upon the opportunities, I'm sure the country can create those capacities. But as of now, if the order starts coming in, there will be a challenge for the industry to implement the same. But if they continue to get the orders, probably they can create those capacities in the next 2 years or so. Our -- I mean, our own textile capacities are, again, large, world-class. So they are also competitive as of now.

And my follow-up question is around the order. Are we in any talk or in participating any RFP from large U.S. retailer or apparel company?

Mukesh ji?

Yes, sorry, can you repeat the question, please?

Are we in any talk with any apparel or retailer from U.S. or any part of the world, large order sales? Any order, sir?

Yes. At the moment, we are developing our product portfolio. We are widening our product portfolio. And in this time, we have captured some new programs, which we were not doing before. In aggregate, those may help the company in the long run when the situation normalizes. Is that your question?

Okay. Sir, my basic question is around the new talks with -- for any new big order from large retailer or apparel company. So I think if you develop new portfolios...

Yes. There is -- yes, it is no such big order worth mentioning here. But it's a continuous process, we keep on hunting for the new businesses.

And sir, we are already running at a 100% utilization -- near to 100% utilization. So if we get new pent-up demand or new order. So what time period it will take our company to ramp up and for expansion for new manufacturing capacity, sir?

I don't think -- I haven't -- on the spinning side, we are not really looking at expanding it immediately. So we might have to play with our product mix or with our customer mix only if we get more orders. So we are not really, really inclined to take a very big spending expansion as of now. Fabric, we still have a lots of scope for the capacity utilization in case we get the order, I'm sure we'll keep on increasing.

Question from Ritesh Badjatya from Asian Markets.

So sir, my question is more regarding your understanding at the management level. So like after this pandemic, lot many changes has happened across the industries, across the consumer behavior and all, like you also mentioned in your -- all the commentary and responses to the various participants. So at the management level compared to the pre-pandemic -- after this pandemic, is it become easy for you to make a business plan in the terms of taking the capital allocation in the terms of selecting the geographies to which your focus is in terms of product categories you want to focus in? And has it become difficult now in the post-pandemic world or is it worse compared to the pre-pandemic? So your thoughts on that.

No, I think the overall complexity in the business has increased because, as I mentioned in one of the earlier questions also, customer expectation of delivery times are changing. Their expectation of differentiated products are increasing. So to that extent, we have to keep on looking at gearing up our manufacturing sector -- setup, that how do we supply to them the differentiated products with a faster delivery base. Two, I think it's been -- always been an ongoing process that wherever the margins are better on a sustainable basis, unless it's a steady customer or a steady product or a market, we have always been evaluating our product mix customer base. So it's not something pandemic or non-pandemic. Last 20, 30 years, we have been doing, we'll continue to do the same. Because on the spinning side, our capacity utilization has always been 100%. So to that extent, whenever we get more customers, new orders, we always have to look at vacating something. So that's a continuous process. I don't think there's any major change in our thought process during this pandemic time. The only thing is, yes, customer expectation, his product needs, his delivery times have changed. So to that extent, wherever we find merits in dealing to the customers where the margins could improve with a little more complexity, which is -- which may not be possible for many other spinners to do that. So we are willing to look at that, and we are working on that.

[Operator Instructions] We have next question from Gagan Thareja from Kotak Mahindra.

Just one question. Since you indicated that for the next year or so, at least, you're not really thinking about capacity expansion. Would you, therefore, be in the next, let's say, 3 years' time frame, more focused on the margin side of the business, more on value addition and extracting more value out of your capacity time? And if so, what are your aspirations in margins? And how do you intend to implement this?

Definitely, all efforts are to look at how the margins could be improved. We do not have a number in mind that this is the margin we want to have, but we keep on evaluating the different product categories, the different customers that what is the amount of margin we are getting in the different products and the different customers. So wherever the margins are better, we are moving on to those products and customers. And I'm sure if we are in a position to keep on making the efforts and delivering the same to the customer, the margins will definitely improve on. We never look at that we want to earn 12%, 14%, 10%, 15%. We always look at these are the basket of products today. So which are the products which are giving me the least profitability and how some part of that capacity could be shifted to something which can give me a better margin.

And looking at the quarter end of the year, the coming second half or maybe starting of next year, would you be able to restore yourself back to your normal margin band, at least, the lower end of that normal margin band that will you focus on?

This year may not be possible because I think it's only maybe the second half where we will start utilizing our full capacity utilization. The margins will not be -- we will not be in a position to restore till the time our fabric is utilizing the full capacity. But as soon as they are in a position to do that, I'm sure, we'll start looking at those ranges as well. But as I mentioned, since they are improving every month, so it may take us maybe another 4, 5 months before we reach almost the previous levels of fabric deliveries.

Next, we have a follow-up question from Mr. Keshav from Counter Cyclical Investments.

Sir, in last con call, you mentioned that you were expecting around 10% to 15% of the yarn -- of the yarn capacity in India to shut down. So what is the latest on that, sir? Maybe -- I mean, some of them might have reopened? And so what part is permanently shut?

It's very difficult for me to say whether they have shut or not. As I mentioned in one of the earlier questions also, there is no organized data available on that. As per our own estimates, we estimate as of now, about 80% spinning capacity is running, which used to be earlier 92%, 93%. So my belief is, today, the margin of the spinning are reasonably okay. If someone is not in a position to operate on today's time, I'm not very sure whether he can really operate after that. So I'm not really, really, very sure, but it looks like the unutilized capacity as of now, maybe most of it may not get revamped again unless there are some entrepreneurs who can come up. But 12% is a good gap and in case this gap continues. I mean, the demand of the yarn is very good as of now. The margins are reasonably okay. So still somewhat not running. That means it's becoming difficult for them to reorganize their operations. That's the only logic I can find in my mind. So we really do not know beyond that.

Sir so keeping that in mind, sir, since pricing is a factor of demand supply. And sir, since demand is reasonably okay and so now it's been a long while in FY '11 and FY '14 were very good years for the yarn industry. So it's been like now over 6 years now. So you think that in FY '22, the profitability of yarn industry can be above average?

It can definitely be better margin. But again, as I mentioned, depending upon -- because as of now, there lots of increase happened in terms of the New York Future of the cotton prices also. So whether we'll be in a position to take advantage of that or part of that or most of that will be taken away by the -- in the cotton prices. So I can't say that, but yes, if the raw material doesn't behave in a different way, probably, there could be a possibility that the margins in the spinning side can improve as well. It's too early to say.

Okay. And sir lastly...

Even cotton season has just started, so I can't really commit as of now.

Sir, lastly, wanted to understand, sir, you mentioned that you are only in woven fabric. So what is stop -- and since you have no plans to enter the garmenting, so any plans to enter knitting fabric?

As of now, we don't have a plan. Because knitting was -- for a very, very long period, it was reserved for the unorganized sector, small scale. So there are hardly handful of people who are organized on the knitting side. Yes, there could be an opportunity. But at the same time, since we expanded our woven capacity last year. So our all efforts are to make sure that we utilize that capacity and then only we look at diversifying our business in case we think that.

Sir, so if provided opportunities there, sir, I mean, are we capable to get into knitting? Or I mean, is there some constraint...

No, there's is no -- it's an absolutely separate business, different technology, different mindset. So we'll have to start from scratch only. There's no common thought process as woven processing, there'll be no knitting process, I think, no. So it's all together a different mindset.

Next, we have a follow-up question from Krishna Nagpal from Latin Manharlal Securities.

So one last question, sir. With the festive season coming up, how do you see the change which is happening? Just wanted to get just a brief view on it somewhat?

The sentiment is definitely very much positive. You go to market, you go to -- I mean, you look at all the traffic at every places, all the cars moving, people moving. So sentiment is definitely far better than what it was 2, 3, 4 months before. So my belief, and you go to the shop, you go to the malls, I think the footfall is definitely reaching 50%, 60%. And moreover, lots of shopping happening on the online basis also. So my feeling is talking to these various retailers or our customer base, sentiment as of now is definitely better than what it was before.

The last question for today comes from [Naman Jain] from Passive Investors.

My question is regarding the inventory. Since prices are quite volatile for cotton, are moving up or down, I mean, are -- is VTL booking any inventory losses? And what's the future trend? I mean, what's the current status of inventory?

No, we have not booked any inventory losses as such. So whatever is the inventory cost, we are consuming the same every month. So it's not that one time we have taken an inventory loss or we have taken a gain. So basis -- I mean, whatever is our actual cost, we are charging the same to P&L on a monthly basis. In terms of our stocking policies, I have already replied. It will depend upon our commercial thoughts at that stage. As of now, the season has just started. So we are not -- I mean, we have just started buying the last 2 days, very small quantities. So depending upon our commercial call, once the full arrival comes in, we'll make a mind. But as of now, I mean, it's too early to say whether we are going to add stock or not add stock.

That would be the last question for the day. So I hand over the floor to Mr. Neeraj Jain for closing comments. Over to you, sir.

Yes. Thank you very much. So I thank all the investors for being with us and having patience to look at what all we have been doing. So as management of the company, I can only assure all of you that, yes, things are difficult, things are odd, especially for textile, spinning has been passing through a difficult time, weaving has been passing through a difficult time. But we are doing our level best to look at that this difficult time has passed through comfortably with the success. All our efforts to improve upon the customer base, product mix, I think they're working very hard on that to reduce cost and to look at alternate ways of buying. So we are really, really working and trying to generate ideas and trying to make money wherever possible by way of improvement processes. It was really a challenging time. In spite of that, our operations team, our technical team, our marketing team have done a great job in terms of restoring the capacity at a very fast pace. And the fabric is also working hard, but in spite of the sale of only leisure wear they're still working hard to make sure that they make some success. And I'm sure once things become normal, we'll be back soon with our earlier performance numbers. I once again, thank you -- thanks, all of you to be with the company, to have faith on us, and I'm sure we'll work hard, we'll work all the -- we'll make all the efforts to come up to the expectations of the investors. Thank you very much.

Thank you, sir. Ladies and gentlemen, this concludes your conference for today. Thank you for your participation and for using Door Sabah's Conference Call Service. You may disconnect your lines now. Thank you, and have a pleasant evening.