Vardhman Textiles Limited (502986) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '21 Earnings Conference Call of Vardhman Textiles Limited, hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I'll now hand the conference over to Ms. Prerna Jhunjhunwala from Batlivala & Karani India Private limited. Thank you, and over to you, ma'am.

Thank you, Rutuja. Good evening, everyone. On behalf of B&K Securities, I would like to welcome you all for 4Q and full year FY '21 results conference Call of Vardhman Textiles Limited. Today, we have with us the senior management, including Mr. Neeraj Jain, Joint Managing Director; Mr. Sushil Jhamb, Director, Materials; Mr. Rajeev Thapar, CFO; and 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 Mr. Akshay Jain for initial comments. Thank you, and over to you, sir.

Good afternoon, and welcome to all. I would just like to preface by saying I hope everybody is keeping safe in this environment. As far as just some key highlights of the results. As far as the full year was concerned, we did not have as bad a year as we were anticipating during the first half and the COVID crisis loomed heavily and initial impact of shutting down of business in last April. Overall, we did about INR 6,000 crore of top line, which was marginally more than last year and an EBITDA of INR 929 crore, which was also marginally lower than last year. And a PAT of INR 350 crores, this was about INR 200 crores below what we achieved in FY '20. Obviously, the performance of the first quarter has been offset by a reasonably good performance in quarter 4, where we saw almost INR 1,860 crore top line for generating an EBITDA of north of INR 400 crores. To give further color on the very challenging and good times we saw in one year, I will hand over the call to -- now, Mr. Neeraj Jain.

Good afternoon, everyone. This has been a very different year. Initially, we started talking, it has been a very difficult year. But I think slowly, as the things rolled over, we started talking -- it has been a very different year. So starting with -- in the month of March -- in the month of April, where all the industries were locked down, there was so much uncertainty everywhere, not only in textile but everywhere. And slowly things started moving up, so more and more demand was coming in, slowly the factories really geared up. So there has been an issue of workers availability in initially. And as the year passed, feed tariffs have been down in a better way. And by the end of the year, things definitely improved in a much better way. And as a result of that, the overall numbers are still reasonable compared to the initial thoughts, as mentioned by Akshay also. Specifically on the quarter 4, in this period, deep overall demand was good. Cotton, both international and domestic started picking up. The yarn demand was good, both in the exports as well as in the domestic market. And as a result of that, the prices were going up, and the overall margin was improving in a better way, which is yearly company numbers also, which has been declared. There are 2 businesses in the company, spinning, as I mentioned, the overall demand was quite good. And both in the export and the domestic market prices started improving up. And as a result of that, the margins definitely improved. So benchmark, which used to be $0.90, $1, definitely improved to better margins and which is clearly depicted in the numbers. Fabric also, as the Q started improving, so slowly the [ CapEx ] also started picking up with the factory utilization. And because earlier when the lockdowns had happened, most of the people were working from home and all the markets were closed. With the [ factory ] inflation cost because we are there primarily into the woven fabric, which is more of a formal fabric, formal wear. As things are becoming better towards the month of October, November, December, Jan, we also started improving the fabric utilizations also. And from as low as 20 lakhs, 30 lakhs meters, we improved almost about 120 lakh - 130 lakh meters also in the month of March or so, which is almost like 80%, 85% of our overall capacity. So this was after March 31 and after that, you saw the second wave of COVID into the -- especially in the Indian context. Before that, people were much more positive with all the vaccinations coming in, the number of cases had come down. There was lots of optimism had started observing by the people, and they were willing to spend money to start traveling and they were willing to look at shopping, so that the normal days back. As soon as the second wave started in India, things were very different for this country. So though outside things were better, but India came into a major difficulty. And lots of states, they started looking for the lockdowns again and the overall sentiment came down in the domestic market. It has some impact on yarn in terms of deliveries and the prices, but definitely bigger impact on the fabric. As we -- again, the format, everyone goes very, very negative and they start looking at it, there is a -- there was an apprehension in the minds of various people whether a national lockdown going to happen or what's going to happen, and all the negativity started happening again, and the demand came down in the Indian context. I think the export demand was good, especially the U.S. was doing quite good, and they were looking at much better growth first quarter of this financial year. So most of the U.S. brands were started [ asking ] more through the various parts of the world. And the demand for yarn or the textile product also improved -- kept on improving. So all the reduction, which happened in the domestic market, most of the spinners, most of the [indiscernible], they could lever those capacities to the -- for the export and the drop in prices or the consumption drop which happened here, did not impact really much, barring a period of 2, 3, 4 weeks where the sentiment was down. Slowly, I think as these things are becoming better. So the domestic demand has also started coming up. Actually the mood is in a better form today, and people have started the operations again. And it looks like -- it looks like people are much more positive compared to the mood, which was there about a month -- month and a half there. The another impact in this period is because whatever yarn is produced in India, about 30% is exported, 70% is consumed in India. And out of that, 70% are estimated another about 20% is the indirect exporters, garments, textile products or home textile, et cetera. So practically, all the spinning, which is happening, 50% material is sold in India, directly, indirectly; 50% is the exports, direct or indirect. The domestic demand came down. So it was looking like the spinning will be in an oversupply situation and the prices will start coming down. And it happened for some small period of time. But there's another impact which happened in this period, there is -- was again a shortage of labor because typically, April-May are the months where lots of labor goes back to their villages for the wedding season, or the harvesting season. And since there was the scare of corona, once again, lots of people were not coming back from the villages. And as a result of that, there has been that acute shortage of labor, most part of the country. Looks like by the various estimates done by the industry, the spinning industry also got hampered and the overall production capacity came down maybe anything between 20%, 25%. So as a result of that, it compensated the drop in demand indirectly and the tally did not come down to the same extent. As things are becoming better, workers are coming back. Production is improving. At the same time, the consumptions are also improving. And as of now, I think the overall optimism is far better in the business. And and it looks like the, as of now, things are stable. On the woven fabric side, we started achieving the good capacity utilization. As I mentioned earlier, by February, March. So the April May, things were not very good, even June, I think it's relatively strong compared to the figures we started achieving in the last quarter of financial year 2021. But the indication which we are getting maybe from July onwards, it looks like we will start improving there also. Because over there also the export demand is quite good. As the domestic ones -- most of the people are expecting maybe the first week of June, Maharashtra, Delhi, these states will start opening, it not fully, partially. Which means one, the consumption will start happening, two, remote thing also improve and the overall optimism could be there, which looks like as of now from all the indications we are getting. So I'll not speak much on the overall situation, but I think I'll cover all your questions along in the question-and-answer session. We'll try cover over there. Thank you very much.

We can now open the session to Q&A, please.

[Operator Instructions] The first question is from the line of [indiscernible] from Sundaram Jain.

Congratulations for good performance in the current quarter. Sir, my question is with the existing set of assets. Assuming the current price hikes, we would be able to do a turnover of INR 8,500 crores to INR 9,000 crores on the current asset base, sir?

Yes, we have done actual turnover of about INR 1,800 crores for the quarter on a standalone basis. Utilization is full and the leasing utilization will be range of about 75% or so. So once we -- based upon our production capability, we can go up to INR 2,000 crores per quarter.

Sir, my second question is with regard to our CapEx. Currently, we are -- in the current year, we have spent around INR 265 crore, how much would be, say, replacement maintenance? Or -- and how much would be productivity enhancement CapEx in the current trend?

Most of the CapEx, which is being done is on 2 accounts. So the capacity expansion may not be there in a big way. It's more of a replacement as well as debottlenecking of assets. So I don't think their turnover may increase because of the INR 200 crore, INR 264 crore. But yes, this will support the business that in terms of whatever changes are required or whatever is required by the customer, we will be in a position to produce that. But I don't think the overall improvement on the top end can happen with this CapEx.

Okay. Sir, what is the CapEx plan going into FY '22, [ underset ] with '23? Any number, we have planned, sir?

So this year, we have taken an expansion plan in spinning business, so we are adding about 60,000 spindles on the spinning side and some rotors expansion, which is -- if I convert it to the spinning side, should be close to -- the total will be close to about 100,000 spindles or so. So this CapEx will be in the range of maybe about INR 700 crores or so. So the normal CapEx or the debottlenecking CapEx of another INR 200 crores, INR 250 crores. So the total CapEx can be in the range of about INR 1,000 crores for the current financial year.

Sir, the 100,000 spindles will add what 5 billion [indiscernible] roughly.

It will be in the range of INR 550 crores.

The next question is from the line of Pavan Ahluwalia from Laburnum Capital.

Sir, you've given us a clear sense of production capacity utilization. And basically, if I had to interpret what you're saying correctly, then some combination of domestic revival is India reopening, plus strong export demand from western economies where, obviously, as people go back to office, et cetera, an amount for woven fabrics rise should help us improve this 75% utilization at fabric side to hopefully as close to 100% as possible. So I understand what you're saying on the capacity utilization side. I had a question to you on the margin side, margins obviously healthy this quarter. We're in the mid-range overall to what you have guided is your long-term range of 18% to 22%. I'm just curious, given what you're seeing in the cotton market right now, and there are various factors at play over the Gujarat cyclone may affect us in some way, CCI, [indiscernible] obviously, affects us in some way. And when you put that together with the pricing you're seeing on the yarn front, in previous calls, you've talked about hesitation, but buyers hard in pushing prices through to their customers abroad and that is going down the supply chain. Now we're seeing across the U.S. and Europe retailers are much more willing to push pricing. So I'm curious when you put together what you're seeing on the cotton side and what you're seeing on the yarn side, is it fair to say that you will maintain these margins? Should we expect, more likely to see upside or downside to these margins in the medium term. That was one question that I had. And also, if you could give us some sense, freight costs have been going up everywhere. I'm just curious how much that has actually affected your costs and whether you're able to pass that through -- whether the industry is able to pass that through now?

First, let me just take the question on the freight. On the freight side, just to give you an idea, so let's say, from here from India to China, it used to take us about $200, $250 for a [ 40-meter ] container, which is now increased about $600. If we look at the Latin America, which is a far-off of place, so it used to be about $1,300, $1,400. So from there, it's increased to $4,000. So same way, the freight rate has been increasing every year. But at the same time, I think we could pass it. The demand of the yarn was good overall everywhere, so we could pass it on to the customer, and there's no direct impact to the supply side because of the good demand, so the customer is ready to pay that, and it's built into the system. So when we are talking about the margins, it's definitely taken care of or the additional trade, which has been -- which has induced in this period of time. On the second question of the margins, if I look at even today, on the spending side, margins are better. But again, it is -- we are not very sure how the things will be because one part is clear, the USA market is definitely very good. Most of the U.S. brands are talking of double-digit growth compared to 2019 days. So I'm not talking about 2020 days, we are talking about 2019 days. U.K. started opening, maybe Europe may take another three months, 4 months, they'll also start opening. So the overall consumption side looks like, can be good. As we see things start opening up, the travel will start happening, the people will start going to the offices. So the overall demand from textile may improve only in this period of time. The some demand reduction, which may happen, which is today coming from hospitals, bed sheeting and towels primarily, which is -- which may be in case of home textiles. But again, over there, also, people are positive where the hospital demand may come down, but the hospitality sector, which is the hotels and other things, may also improved in this period. So considering today's aspects, it looks like the margin would be better. But again, the uncertainty is so huge. We are not very sure of second wave, third wave, what happened may not happen. So I think the all signals are crossed, but if you talk to me on today's basis, it looks like a definitely situation is better.

But let me just push a little bit on that. When you say fingers are crossed, uncertainty is there. Sounds like you're worried more about demand side uncertainty and not that worried about the ability to push through pricing, or India versus U.S. cotton price or government interference to make the Indian spinning industry less competitive. Any worries on that front? Or are you quite comfortable on that front with the only variable being, could you have second wave, third wave, fourth wave -- which is basically an uncertainty, the world [indiscernible] Europe, [indiscernible]?

I think no worry is on the second part, which you are mentioning. But on the first part of the price push, et cetera, et cetera, since the U.S. demand, it looks like the brands will be in a position to pass on majority part of that.

Got it. Got it. Got it. So hopefully, over the next year or so, we return -- we get to full capacity utilization unless a massive second, third waves around the world. And if we get to INR 8,000 crores at a steady state 20% margin, based on your long-term capacity expansion, we should assume the PAT grows at 5%, 7% a year, unless there's some big inorganic opportunity on horizon. Is that a fair summary of kind of the medium-term vision for the company?

The only difference coming, by and large, yes, but it will be difference of [ Indian ] or the only concern would be as the yarn prices start improving. The margin on the fabric will always come down and vice versa. So in this period, since the yarn price has been increasing and there's always a lag, how much can be the next -- the next products can be in position to pass -- push or not to pass on these prices. Yes, there is a challenge. And since the -- if I look at entire textile chain, probably woven will be the only segment which may take maximum time to pass it on because they have been talking very badly in the past. Home textiles are running full, so there's no pressure on them. Bookings is running full, so there's no pressure on them. They will be in a position to pass it on at an early stage. Woven may take some time, but eventually get, if everything works well. So woven will also be a position to go with them. The only issue could be -- there would be that would be definitely some time lag [ for sale ]

[Operator Instructions] Next question is from the line of Deepesh Agarwal from UTI Asset management.

[indiscernible]

Sorry, Mr. Agarwal, we can't hear you.

Am I audible now?

Yes.

Congrats sir, for a great set of numbers. Sir, my first question is on the yarn spreds, the full impact of the yarn spread is reflected in this quarter? Or there is still some [indiscernible] lag out there?

No, the lag will always be there to end in the export market yarn is sold for 3 to 4 months' time. So I think there could be some lag, yes.

Okay. Okay. And sir, on the -- continuing with the previous question, on the in woven fabric, what is the extent of margin hit, which you would have taken because of your inability to pass on the higher yarn prices?

There are 2 factors. One is the capacity utilization, margins coming down because of that. Second is the increase in yarn prices, so margins coming down because there since we are not in a position to utilize the full capacity. So your capability to enhance prices also comes down because the customer always find so much of surplus capacity available every year, so it's really, really difficult to pass it on to the customer. Mukesh, can you add where we are in terms of the margin at or how much price decrease you think you could get? And what is the situation on the fabric side?

Yes. Actually, if you look at fabric being more closer to the end customers? And number one, number two, there are seasonal bookings. Unlike in yarn, yarn could be a shorter cycle of booking and delivery. In fabric, typically, the booking cycle is minimum from 3 months to 6 months. So there is always a time lag of 3 to 4 months when we really push down the prices if the situation is normal. It will be difficult to give an exact number that how much we could absorb and how much we could pass on because the quarter is a long time. And best estimate, we could have you passed on 60% to 70% of the prices, those increases will be on level.

So that 60%-70% will not get transferred into the numbers because the capacity utilization also comes. So though there would be in a position to increase the prices. But at the same time, since the capacity utilization comes down, so your fixed cost increases. So absolute numbers is definitely will be lesser than that.

Okay. Okay. Let me rephrase it. Compared to your normal margin run rate on the fabric, how far are you currently?

I'm sorry, we separately do not share the EBITA margins of [indiscernible] on the fabric side. So given the gist of where we are standing today, but I think that as such, we do not share the margin separately.

Okay. Okay. And sir, lastly, if I see other expenses. And if I adjust the hedging losses in the previous quarters, there seems to be a sharp rise in the other expenses, both on Q-o-Q, Y-o-Y basis. Any specific reason for this?

Yes. Yes, your query is regarding quarterly results or annual results..

My query is, in the fourth quarter, if I see other expenses, and I compare it with last quarter, the other expenses or even the same quarter last year. And just adjust the hedging losses which you booked in the other expenses in the last few quarters, there seems to be a sharp rise in the other expenses versus your usual run rate. So any specific reason for this?

Other expenses for Q4 '21 is INR 266 crore against INR 230 crore in Q3 and INR 225 crores last year Q4. So you were referring these figures only?

Yes, but INR 230 crore also include INR 30 crores of a hedging loss, which is just INR 3.3 crores this quarter. So actually, if you remove the hedging loss from the last quarter, your other expenses was closer to...

So in Q4, some pending machinery repair work has been carried out. So certain building repairs and other works so that has been captured in suspenses. So [indiscernible] is there over-shipping fee that's -- expenditure which were not incurred or deferred in the initial quarter that has been incurred in Q4.

Okay. So this will normalize in the forthcoming quarters, right?

Yes. Yes.

The next question is from the line of Deepesh Agarwal from UTI Asset Management. Sorry for that. The next question is from the line of Saurabh Patwa from HDFC Mutual Fund.

Two things. One is, how much of in the last quarter also, we had a discuss on the Xinjiang which has been -- because of the U.S. -- I mean the U.S. banned China imports. So how much -- in the current spread, would you attribute to that? And is this the demand coming from newer areas, as in which were earlier importing from China, or say, like Vietnam or Indonesia? Or is it that impact is yet to be seen?

That -- it's very difficult to [ measure ] any impact because of that, but definitely that has a important factor, so most of the clients, who most of the European or the U.S. brands, which are talking of sanctioning the Xinjiang cotton. They are looking at the alternate source of products. So they are coming to India, they are going to different countries. And probably it has a good impact and the best demand, which is coming in more and more [indiscernible] even to China, Bangladesh, Sri Lanka, Cambodia, et cetera, et cetera. So that the garmenting it can happen or even though to China garmenting will happen and these -- the ultimate garments will go from China to U.S. or to Europe. So it has most of the brands who started sanctioning this, they are very firm on the [indiscernible].

Okay. So can it be interpreted in a way as in like -- even though the garmenting units may not come to India, but the yarn export from India may actually grow very sharply over the next few years as things move out of China. They may not -- the final garmenting may not come to India, but the adjacent yarn demand may still come to India, right?

It could be like this because as people look at the garmenting in India, there is no increase as of now. So -- but all other neighboring countries which I have mentioned, including China, Bangladesh, Sri Lanka, Vietnam, Cambodia. So they may take up a bigger share of garmenting and the textile products, both yarn and fabric may go from these places to -- from India to these states, it may happen.

Okay. And secondly, sir, as the offset to current quarter margins, they have improved very sharply, and I think they are at a multi-quarter high. But -- and this is despite the fact that, as you said -- as you mentioned that we are operating at a lower utilization in terms of fabric and a part of fabric as spending is yet to pass on. So is it -- can we normalize, sir, since -- so my question was actually, I wanted to understand on the fact that historically, the benchmark was based on ex cotton price. Now since the cotton price itself has moved up. So that benchmark spread can move up as well?

So first question in March, the fabric utilization was not that big a concern. That concern has happened rather in the month of April and May. Okay. So the [indiscernible], charging the factory utilization on the fabric where they have started touching almost 80%, 85%. So I think that's a another very big concern at that space. 2, I think we have to wait, and it can happen that the overall margins in the kind of demand that these kind of needs continue. It may improve. But as of now, I say it's too early for us to look at this because it's another factor in this. Since last year, the supply chain has been very, very weak. So there's not really much of the material in the system. So that's why the demand is also much higher. I'm not really sure once the things become normal or the price change is normal after that, the pricing will be maintained like this or maybe getting some correction. So I think what we have shown in the fourth quarter looks like, as of today, it can be maintained, it can be better than before.

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

Sir, my first question is on our capacity, which we are putting up in spinning side. So is that capacity for our captive use or it is for our external sales?

This will be for the market.

Sorry, sir, can you please come back?

This will be for the market. This will not be our captive.

Okay. So entire 90% -100%, it will be externally sold?

Yes. Yes.

Sir, in the previous question, sir, you were mentioning something about the margin. So I could not catch-up that particular, I think you said the quarter 4 margin of around 20%, it can be maintained.

I mean, as of today, it looks like it can be maintained. The question will be, there was a question whether it can improve further or not. So that's where I said we'll have to wait and watch that looks like at least the both quarter can be maintained as on today's situation, you have the [ demand ] is good. The second factor, I'm also saying, as of now, the supply chain is very, very weak. So once the supply chain gets build up to a reasonable level, whether we'll have these kind of demands, or it will come down, we'll have to watch it -- wait and watch on that. As after that, if the demand comes down, then there would be some issue on the margins, restoring these kind of margins.

Okay, sir. Sir, regarding the spread, if you can just help and also with the current cotton price in India as compared to the U.S. cotton? That is question one. And at the current Indian cotton price, what would be the spreads?

What is the second question?

Sir, second question, based upon the current Indian cotton price, what would be the spreds?

The new year future as of now is ranging in the range of about $0.83 -- $0.82, $0.83, $0.84. And normally, the carrying cost for bringing to India will be the range of about $0.10 to $0.12, so which means the landed cost of cotton in India will be ranging between $0.93, $0.94. Against that, the today's Indian cotton prices is about $0.83, $0.84. So there is a markup of -- there's a gap of $0.10 per pound as of now.

And regarding spreads, sir?

Indian -- if you go by the Indian cotton house $0.84 in that scenario, the peak cost will be in the range of about $2.40, $2.50. So the margin will be, as of now, will be close to about $1.30, $1.35.

Okay. So one can say it was quite similar, what was there in quarter 4, actually, or there has been some increase or some decline in the spread of $1.30, $1.35 that you are mentioning?

It's still lower compared to this fourth quarter.

Fourth quarter, it was lower than $1.30, $1.35?

Yes.

Sir, you have clearly mentioned that we are seeing a good demand as far as yarn it is concerned because of the China issue. So same is being reflected for the woven fabric, can we see the similar opportunities?

It would be the only difference since the offices are not open. So this is one segment in the entire textile chain, which is not doing well as of now. But once the offices starts, once the travel starts, once the events start, I'm sure the demand will come there also. Because the pipeline over there also is absolutely empty. So it's a matter of time, when all these countries start, when people start going to offices. It looks like there could be some demand [ hamper ] may happen, because lots of offices, lots of people are still talking about working from home only. But I think majority of this [indiscernible] may be mitigated once the overall lockdowns are over.

Okay. Sir, this you're talking about the domestic market, I was talking about the export opportunity in the woven fabric. Is there any possibility on that?

It's same as far as the U.S. brands are concerned, they have been good. So whatever we are in a position to produce, I think that is going directly/indirectly for the U.S. brands only. So the European in the domestic market, which is also very large. It's not doing good today, and it's only a matter of time when they start opening and things start becoming better over there for the woven fabrics.

Sir, in your initial comments, you have mentioned regarding the labor issue and all. Sir, are we also facing the similar situation, whereby we have to curtail our production?

Fortunately for us, this issue is not there for two reasons. One, we have almost 60%, 70% people who are residing inside the factories. Two I'll say, even during these lockdowns, I think our people did a wonderful job, and they were in a position to sustain the labor unavailability. So there's been -- until now, fortunately for us, there is no production loss happened. Yes, there are some people who have gone for their villages, which is a normal tendency every year in the month of March, April. So I'm not finding any major deviation from what we have seen in the last couple of years as far as the share is concerned on account of COVID. So for us, we are still in a position to run our operations smoothly.

Sir, within this yarn division, so we have announced big CapEx. But at the same time, in the last year also, there has been 5% to 7% overall spindle reduction in India and not much capacity has come. Sir, do you think that apart from the export market, which is looking very strong. Sir, do you think that the patch in demand and supply is also will provide some stability to the spreads?

It can happen. As we estimated that 5%, 7% spindle capacity looks like it's already gone out of the production. I think as most of these capacities will be deemed inefficient capacities, which are running only because they -- on the marginal products and competing with the medium [ pairs ]. Since that capacity is gone, so -- and the demand will increase, this can sustain. And it will always take about a year or 2 years before the major expansion can come in. So it looks like in cases -- because my personal belief is spinning business has seen a very good margins in the last 6 months. If these factories could not start during that period for them to revise again is going to be a huge challenge. I mean, someone is not in a position to run when the margins are too good. For them to restart, it looks like a big question mark? So that capacity is gone. I'm sure the remaining capacity can be definitely better efficient capacity.

Sir, so apart from this 100,000 spindle capacity, sir, can we get something more CapEx coming on the background that our balance sheet continues to be very, very strong, and we are seeing a very good demand in both the yarn, and might be in future for the wovens?

I mean, we are looking at all options, but at the same time, I mean, Vardhman is one company, which is -- which will not take a very big decision based upon a short span of good margins -- at that margin. So we've been expanding even when the industry was not doing well as a part of our long-term strategy. So we are open to those ideas. We are evaluating all those options. But as of now, the only plant, which is under execution is that's what I shared with you.

Okay. Sir, one more question. If you just permit, me. Sir, any update on this export duty or some incentives with government, they are planning because we have been used to have this MEIS or the export incentive, apart from yarn in the entire 5% textile segment. So are you putting any case for the yarn segment also?

The industries have applied -- requested to the government. Now it's up to be government to decide finally. But as of now, there is no update, there is no rates announcement. The government is only whenever we talk to them, they are saying they're working on that. So we'll have to wait and watch only.

Okay. So because of this delay from the government side, was there any impact on the export incentive for our segment, especially in case of woven fabrics?

Woven fabric, yes, there is some impact because MEIS is not available. So it looks like -- I mean, our understanding is it will be effective or it will be available to us from January last year. Now we have to wait and watch when the actual dates come in and what is the effective dates the government will be announcing.

Okay sir. Would you mind, sir, if you can share, the export incentive, which we have forgone on in quarter 4, if it is large, if it is not, then you can skip this question.

So it's not really significant because it's only in some of the segments on the fabric side, MEIS for -- so it's not really going to make a huge difference in terms of the numbers that we have shown.

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

Yes. Thank you for opportunity and congratulations on very good numbers. Sir, I have 2 questions. First is on the CapEx, INR 700 odd crores, close INR 250 crores maintenance. And on the INR 700 crores revenue, you mentioned INR 550 crores of revenue. What kind of margin does this 100,000 spindle is going to give us on this INR 550 crores revenue approximately?

The same -- we are talking on that, say, 20% or whatever we are talking about [indiscernible]

So spinning normally -- on an integrated basis, because -- so the way things will roll out one, the spinning capacity will increase. At the same time, the weaving utilization will also improve. So my belief, whatever these additional turnover happens, our EBITDA margin would be same of what we are looking at [indiscernible].

Sir, my question is actually on that only. If you look at INR 700 crore investment, and I presume that INR 550 crores revenue will entail additional working capital investment as well. So roughly around INR 900 crore to INR 1,000 crore of capital employed. And at 20%, we'll be making -- in second or third year once the full utilization will happen, around INR 110-odd crores of EBITDA. And if you just calculate ROC -- post-debt ROC on this, this will be like 8% to 9%. So my question is, when management thinks about new CapExs, how would they think about giving back money back to shareholders to buy back or dividend versus investing in ROC, which based on what you said, is around post-debt ROC of around 9%, 10%. So if you can just explain the thought process on the capital allocation side, that would be very all helpful.

So 2 factors. First is the -- what will be the exact margin, it would be there on these expansions. The calculations are by and large correct. With the only defense that when we are putting up a new capacity, especially a couple of states are offering good incentives. So this capacity is coming in Madhya Pradesh and the government over there is giving a good subsidy, both capital subsidy as well as interest subsidies. So the actual cost of putting up these capacities will be there, and the margins would improve. So that's a small part, which will be available for the next 2 years, 3 years only. The largest question is because we also debate every day this question, is there a [indiscernible] capacity, if the return is really really, very very minimal. Please try to understand the concept today as more brands are coming to India, the requirement is increasing. There's a lot of consolidation happening on the supplier side by various [ plants ]. And the domestic market also, the retailing is becoming more and more organized, people are coming back. Our people are leaving the tailored segment and going in for the readymades, which means more and more brands, more and more retail outlets will be operating. And we are still -- overall retail organized retailing is on a [indiscernible] basis, which is likely to multiply in the times to come. All these brands when they come to India, very clearly looking at India, or any other markets, they are very clearly looking at -- as they are expanding their business, and to that extent, they require supplier base, which can continue to support them for the supply [ they need ] requirements they have. Now it's a [ delayed ] question, there it's difficult for me to put in a number whether I should expand the business, even if my returns are not good or if I have to continue to earn what I am earning today, as in I would have to support my customer. Many a times, we have taken this decision, in few days -- for example, there are lots of good brands there I'm supplying the material to them. Their requirement is increasing. In case I do not come up to their expectation of increased requirements. I will have to give them or and have to allow them to go to my competitors, either in India or outside India. So many a times, the decision taken based upon the customer requirement, product requirement, possibility of value addition of older capacity and creating new capacity for the basic products. And it is not driven by the numbers only that we have to earn 12%, 15%, so we have to allocate capital or not. But it is driven by the overall business sense, that it has to retain customer even in my product basket has to be all right because. We have to take advantage of all the -- all the opportunities which are coming in. And even small numbers, margins could be a little lower, looking like for the expansion, but we still might have to do it. So this is the way a decision is taken, but considering all the subsidies and interest subsidies, which we'll be getting, the expansion, the new expansions, which are coming in will make sense over the so that's what if I if could explain to you.

Yes, sir. So actually, my second question is, even if you look at, let's say, slightly longer term, FY '21, let's say, we consider the last quarter's revenue and INR 8,000 crores of peak revenue. And if you look at FY '18 number of around INR 6,000-odd crores of revenue, we did almost INR 3,000-plus crore of CapEx during this period of 7 years, and our revenue has increased by just around INR 1,800, INR 1,900 crore, even during this good cycle. That's what I'm thinking about that when such a large CapEx is being carried out over a period of time and our ROC overall on the incremental capital deployed is significantly lower. And given that what valuation company is trading at, doing buyback makes more sense in terms of allocating that capital rather than doing CapEx, which is giving suboptimal returns. So just from allocation perspective, me, including a lot of other investors, we keep requesting this and I wanted to understand more on this part.

Okay. So let's say, out of the INR 3,000 crores we would have done in last 5 years, almost more than INR 1,000 crores would be the adjustment CapEx only INR 200 crores a year. Now that we will have to do whether we like it or not and there's not likely to be any top line improvement because of that. So it's basically just to keep your product quality to the mark where with the new capacities which are coming in today because otherwise, over a period of time, customers would not buy your material. So INR 200 crores per year, INR 250 crores per year in the CapEx, which is not going to delay anything than the -- just to maintain the quality, which is required as per the need as of now. And if you look at the remaining CapEx, then I'm sure the ratio would be over a period of 3 to 5 years, in the range of about 1:1, the capital output ratio. And over there, the logic would be whether you want to expand your customer base? Or how do you support them and how do you satisfy them? Because in case you are not in a position to meet their capacity requirements, they will not be coming to a country like India. Today, we are talking about China plus 1. China is the biggest exporter of garments in the entire world. Their capacities are huge. They're doing almost $270 billion million, $275 billion of exports. India, we are talking about the $30 billion only. And it's not only the number, but whenever they are talking about, if they want to talk to or they want to work with the a larger-sized companies or the capacities which are available, I think over there, as companies, we are nowhere, we are nowhere. So I think that's where the -- most of these brands, the larger brands, they hesitate coming to India. And I think unless we can create capacities which can help them, and their margins will definitely be available, they'll come. But question will be, egg or a chicken story. All these brands did not come to you, India today, we should look at the garmenting in India, there are handful of 4 or 5 people only who will be doing more than INR 1,500 crore, INR 2,000 crores of exports today. Whereas these brands, they are not interested for these only 4, 5, 6 players to operate on this. Now unless the entire cluster, so same is our spinning capacity. We are the largest in India, 1.1 million spindles on the spinning side, still, it is considered to be a decent capacity. As in China, you have companies working with a 5 million spindles, 6 million spindles also. So I think when we are talking about the very large brands to come to India, we'll have to offer them big capacity. We'll have to offer them the delivery period of whatever they require for the garmenting or the textile products and for that, the larger capacities would be required without that, it will be impossible to [indiscernible].

The next question is from the line of Anil Kumar Sharma, an individual investor.

Congratulations for the good numbers. Sir, my question is on the inventory side. Inventories of around INR 2,500 crores, out of which can you give the detail of the raw material and finished goods? Number one. Number two, receivables are around INR 1,000 crores. And what are the numbers beyond 90 days?

Yes, yes. So on the inventory side, maintain in the raw materials, which is about INR 1,800 crores. And the finish goods are about INR 450 crores. The remaining is a small item of WIP and store-ins there. This is a composition of inventories.

Yes. And sir, the receivables? There an increase in receivables also, actually our cash accruals have diminished...

Yes, increase in the fuel is there to the extent of about INR 200 crores because major export business has taken place has again sustained as [indiscernible] it's the way, so export there is -- [indiscernible], which is usually for a period of 90 to 120 days. So debtors are higher to that extent in domestic, the contracts are for 30 to 45 days only. Also, the sale prices are also higher to some extent. That's the reason.

All right. Okay. Sir, I and last question is that regarding this INR 1,800 crore, raw material what is the cost -- present cost of the cotton that is -- our cost is lesser than that or higher than that?

I can't give you my exact cost, but I can only say our cost is surely lesser than we today's market price.

All right. Okay. And wish you a good coming year. I hope the next year, you don't give the estimate. But the -- can you give the estimates for this coming year, full year?

No, we don't give any guidance on the estimate numbers. But I can tell you that -- people tell me the numbers which is pretty close to most of the times, close to what we keep in the [ cash even ].

Thank you. Thank you. The next question is from the line of Keshav Garg from CCIPL.

So very good afternoon to you, and congratulations for great results. Sir, unfortunately, sir, your subsidiary Vardhman Acrylics, this time you didn't forgot to declare dividend. And sir, now the cash on the books of Vardhman Acrylics around INR 350 crore, and market cap is also the same. So until there is some dividend, there's nothing forward to look for the shareholders for that subsidiary. And so this time, Vardhman Textile also gave healthy dividends. So you could just have -- Vardhman Acrylics could also have paid out, and there would have been no tax implication unlike last year. So can we look forward in future for some kind of dividend?

I'm sorry, I can't really comment on because that was the judgment was taken by the Vardhman Acrylics' Board of Directors. So I can only pass on the message, or the teachings of shareholders to them, but rest, it is their decision whether they want to declare or not. So as a joint MD of Vardhman Textiles, I have nothing to really really look at that.

Sir, and also, there was some announcement in that the workers had not reported to work. So has that issue been resolved out?

Not really. So that it should still continue, and the plant is closed. And as of now nothing is happening there.

Sir, and also recently in the newspapers it came that for fintechs industry Vardhman Textile was also better but it backed out, sir. So could you share with us that, I mean, like what was the apprehension? I mean, was the quality of assets not good enough or the pricing was not up to your expectations?

No, we have never shown any keen interest to buy that asset. We have never bidded for that. So it's not we have backed out. But yes, we look at the assets, we try to understand, but we have never looked at it seriously that we want to acquire it or not none. So it's not that we are backed out, we never gave any intention also to buy that.

Okay. Okay. And also, so I wanted to understand that, sir, some garmenting companies recently in their concalls, they have said that in first quarter, the yarn prices is coming down, it's in downward trend from Q4 level, but you are saying that it might actually be either same or better than Q4. So is it because of your low-cost inventory that you were saying this or the rates have actually reduced? Which one of it is the case?

The yarn prices started coming down about a month back or so, when the lockdown started happening. So in the last 2 weeks after now -- once the -- because at that space, the COVID cases were increasing. There were lots of uncertainties in mind of people. So yarn prices started coming down. But as the things are now stabilized, the cases have come down, people are hoping the lockdowns to start opening soon. So the prices have again started going up, and it is now as of now stabilized to what was there towards the end of March prices.

The next question is from the line of Nirmal Shah from Seraphic Management.

Sir, my question was more on the supply side. You have mentioned in the earlier replied that the supply side is getting consolidated. But just to follow up that, don't you think the margin profile of this industry needs to little bit improve to compensate for a better return for the CapEx. Do you see that as a possibility or you don't?

The -- yes, it is a low-margin industry. I think the margins can improve only either with the higher demand for the products or the supply side coming down. So both way and two, this is a industry where the -- it's a very unconsolidated industry, almost 2,500 companies competing with each other. Unless some amount of consolidation happens or unless some demand improves, [indiscernible] that our some supply side cuts happen, the margin would not improve. And anyone working in the industry will like margins to improve, but whether we can do something or not. So it's always considered spinning on a very, very low-margin industry. And this is probably one of the years where I think things have started looking up. We'll have to really watchful whether this can be a permanent change or this is only a temporary change. It looks like as of now this continues, but let's wait and watch.

Sir, just follow-up to that. Basically, if you look at the CapEx intensity in the sector and traditionally the way this sector has become an issue for bankers, do you see now that in our forthcoming CapEx, the larger and the better consolidated companies would only be in a position to do a big CapEx compared to the situation what was there decades back.

My personal feeling is, yes. [indiscernible] context of these smaller companies where we -- over the NPAs have been huge. So the banks have also become very choosy, and it may happen that more and more consolidation or more and more CapEx happen, where this is more on the next year.

So effectively then, does it mean that it would in some way or other should also play out in margins. Though right now, you are skeptical about that. But if it gets consolidated in hands of few people, does it give you a better confidence than what it used to be?

It will give but it's a long journey. Today, we are talking about 2,500 units in the company -- in the country. So it will take a long time. But yes, if these consolidation starts happening and more organization there start working definitely their capabilities, their costing, their product quality or the competition will be better and margins may improve. So that's a long journey.

Sir, just last question from my side. How do you think this fintech industry capacity would have played any role because they had some 700,000 spindles, if I'm not wrong, it would have played out in someway or other. Do you think that has also helped to the overall industry?

I think yes, any company which is not operating at a full level will help the remaining players peers to do better. But if I look at the overall capacity in India is almost 50 million spindles. So 700,000 [indiscernible] spindles are only 1.4%. So from that perspective, it's not really big. But at the same time, any capacity, which is not operating well, helps the industries -- the remaining industry to get okay.

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

Thank to the management for sharing very, very deep insights on the subject of capital allocation and return expectations, a wonderful discussion. I would like to basically take it forward by gunning the aspect of spinning versus the textile capacity, that is the woven capacity. Vardhman, is one of the most efficient players in the -- again has consistently grown and has, in the past, reported like operating margins of over 20%, 25% as well. However, with the textile -- with the woven capacity is coming up and the fabric side of your business coming up, we note that the margins at an overall level have been coming down. I wanted the management's kind perspective on the way they see this aspect, and maybe it's a good idea to become amongst the largest yarn player rather than going up the value chain, but supposedly, or maybe a better idea, but may not be. Because the fabric side actually, it seems that since the time things have come up, the margins have come down. If I could have your perspective on that, sir.

The important point would be, it's not only Vardhman. I think we'll have to look at what is the margins of the competition also. So as the competition will keep on improving or increasing, I think the margins overall will keep on coming down only. So it's not only that the Vardhman margin earlier were this and after weaving capacity has come down. I think the better way of looking at is where the competition is starting. So is it a case where the spinning margin of the only spinners are better or they are maintained, but the Vardhman margins have come down because of weaving capacity. I think that's not the case. So we'll have to look at it relatively for a year at what is the margin of other players for a stand-alone spinners, vis-à-vis the anyone who is the forward integrated. So I think if you look at or you do your analysis with that, I'm sure you'll get an answer to that. 2, I think there are some segments which has to be excluded, which are doing extremely well. For example, home textiles has done extremely well as of now. The knitting garment is doing extremely, because of work-from-home. So if you exclude those exceptions, I'm sure you -- the medium-term analysis will give you some idea on that.

If I could just -- if I could have your view that going forward, Vardhman will likely be more of a fabric seller to the market or also a yarn seller.

We have always been a yarn seller. So out of the total spinning capacity we have, our allocation to internal leasing is only 1/3. So we've always been setting anything between 60% to 70% of the market, which will continue.

The next question is from the line of Riddhima Chandak from Roha Asset Management.

Sir, my question is on the CapEx part. So the INR 700 crore -- INR 1,000 crore CapEx, it would be from the debt or from the internal accruals, how much it would be?

Ma'am, roughly INR 450 crores would be funded through debt and the rest would be own accruals.

Okay. Okay. And in terms of EBITDA margin, so as you said that yarn prices are again started improving -- increasing basically. So are we passing on these increasing yarn prices to our customers? And stick of our, current EBITDA margins of 18% to 22% guidance?

Ma'am, since we are selling the yarn, improving prices are actually helping -- we are talking about prices that we're able to pass on to customers. But -- so yes, these prices are what are accruing to the company.

Okay. Okay. And in terms of -- out of your total textile revenue, what is your yarn and fabric revenue contribution in FY '21?

Ma'am, we are not giving out the breakup.

The next question is from the mine of Nagraj Chandrasekar from Laburnum.

Great numbers. Just wanted to get a sense of our current cotton inventories, given my INR 1,800 crores raw materials, it looks somewhat similar Y-o-Y at a much higher cotton cost, obviously, last year around this time, cotton prices at maybe $0.65. Right now, I'm guessing your average cotton inventory cost is around $0.75 to $0.80. So how many months of production are we covered for now given since we are now going to produce at 100% as well for the foreseeable future? And where do you see global cotton prices also trending in the next few months given that the future prices have been coming down partly because speculation has been curtailed by a bit in China and other places. But how is production looking in various geographies? And where do you see this -- both of these things came down.

Sir, we didn't quite get the second part of the question, so I'm asking to repeat. Let me just answer the first part. Our inventory policy for cotton remains similar to last year, where we keep roughly between 6 to 8 months of cotton on our books, from March 31. And there has been no marked change in that policy between last year and this year. If you could just repeat the second part of the question that you were asking on the supply side of cotton, we kind of missed that.

Just a follow-up, we typically buy in November for a 7, 8, 9-month period, you're saying you're covered for -- till this September, October as well?

Yes.

Okay. The second question was outlook on global cotton prices, delivered cotton prices, given futures have been coming down, how is production in different geographies looking, or what is your sense?

Next year, next quarter season also, the production of cotton would remain same as for last year, but the consumption would definitely go up. This can lead to increase in COVID prices in the next season.

The next question is from the line of Rishabh Makhija, an individual investor.

Most of my questions have been answered. Just a little bit on the debt that will be used to fund our CapEx next year. What was that debt be at approximate rates, the rate of interest? And what is our current average cost of debt?

The debt will be raised in the range of somewhere between 5% to 6% for a 6.5 to -- 6 to 7-year period.

Okay. And the current cost of debt?

Sir, overall, I think, net of the subsidies, I think the cost of debt should be in the range of 3% to 4%.

Okay. And I just want to understand our future debt plans and not just a sense on when that will peak out? And has there been any thoughts on that?

I -- see, even if we assume the -- whatever, say, INR 400 crore, INR 450 crores that we are raising, we believe that during the year, our cash approvals will be significantly higher than that. So I don't think the debt will significant -- or at least on a net level, the debt will not increase significantly during the coming years. And obviously, the debt profile beyond that will depend on the kind of growth plan, the company will have beyond FY '22.

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Ms. Prerna Jhunjhunwala for closing comments.

Thank you, sir. Thank you, Rutuja. I will now like to transfer the call to the management for the closing comments.

So thank you very much for all of you to join this call, and we could explain our perspective as well as could answer your questions. We've always been maintaining that this [indiscernible] of uncertainty. And every day, we think changing in a big way, good bad. So I think the uncertainty as of now is huge. And we'll have to look at what kind of things will happen in future and how do we prepare ourself to take care of the things. Having said that, I've always been mentioning that internally the management is really, really, very, very active on looking at all these issues, concerns, crisis and the opportunities, and we are working really hard to take advantage of whatever is best possible in this scenario. So I can only assure you, as management, we are alert of our responsibilities and duties and really in trying working hard to achieve the maximum results for the organization. So thank you very much for all of you who joined this call. And looking forward to meet you, to talk to you as again during the next call. Thank you very much.

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