Vardhman Textiles Limited (502986) Earnings Call Transcript & Summary

Good evening, everyone. On behalf of B&K Securities, I would like to welcome you all for 1Q FY '22 Post 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, Raw Materials; Mr. Rajeev Thapar, the 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 Mr. Akshay Jain for initial comments, and post which he will transfer the call to Mr. Neeraj Jain, and then we can open the floor for questions and answers. Thank you. And over to you, Akshay.

Hi, good afternoon to all. Just to provide some salient features of our quarterly results. Our stand-alone top line was INR 1,917 crores and an EBITDA of almost INR 500 crores, which translates to a margin of roughly 26%. Comparing this number, Y-o-Y would not be of any [ great use because the ] COVID affected quarter last year. But comparing it sequentially, our top line is approximately higher by 3%, EBITDA is higher by 23% and [ PAT by 55% ]. For further drill-down and reasons for behind these numbers, I hand over to Mr. Neeraj Jain.

Good afternoon, everyone. This has been quite interesting, challenging quarter. We started the quarter with a positive note. And in between the very strong second wave [ came in ] COVID-19 in India and many other parts of the world, especially in India. So the business was again a little bit into that situation. But then I think by the end of the quarter, we started improving again. The demand of yarn continues to be good from the export market. We have been discussing, we have been mentioning that the effect of China plus 1 expectation of most of the brands. I think that still continues, and they're looking at more suppliers, more vendors for their produce. In between, we understand the U.S. tenant is also possible that nothing [ known in India ] would be allowed in U.S. And I think to that extent, the people are living their diversification of [ these under bid ] where they also get the chance to supply the material to them. During the quarter, the demand of yarn was good internationally from China, Bangladesh and other parts of the world. And as a result of that, though we had a very difficult time in India in terms of second wave, at the same time, and lots of states in India were almost stopped or close down, lockdown restrictions in the country and sentiments was very much down. But at the same time, because the export demand was good, we could sell the products in the export market and continue to produce at full efficiency. And the impact to that extent on the margins did not come, where we kept on working the same passion which we [ have ]. Having said that, I think as we -- after May 6, 7, 8, the things started improving and the domestic demand also started improving. So because of the COVID: one, there was a fear factor in the mind of people; two, lots of money gets locked in the system by way of working capital cycle for garment and for retailers because the shops are closed. So they were also stuck up, which is now all these things have started rebuilding slowly and things are definitely better than India also. The domestic demand as per our estimates had come down to almost 25%, 30% of what it used to be in the month of April. But I think now slowly started reaching 70%, 80%, 90% as things are improving, as things are becoming normal, the money cycle has started improving a lot, it's 100% okay, but we are definitely far better than [ publicly speaking ]. So both domestic demand and export demand, the overall demand of yarn continues to be good. At the same time, there has been a push of raw material prices also. The raw cotton prices internationally are touching almost USD 0.90, USD 0.91 per pound. And the domestic market is also increasing rather than [ decreasing ], domestic is higher compared to the U.S., and it is now touching almost 0.95 in India. Most of the stock, which was being [ carried by Teamplay ] I think they are virtually they're exhausting most of the stock. And as a result of that because most of these tenants were willing to buy at these prices as the margin was [ good ] for them. And as a result of that, there is no spike in the cotton pricing and with 0.95 also I think the demand is good. And now once [ it is October, we ] look at how the prices of cotton behave in the -- both in international markets as well as domestic market. This has been the period where all the brands which are coming in, all the demand which is coming from Bangladesh or the demand which is coming from China also because China is very strong in the garment export. So since the European or the U.S. base, people have started asking nothing to lose [indiscernible]. So probably, it looks like that they are more interested in importing the yarn from India and other countries, converting into the fabric garmenting and then we export it to USA or the rest of world. It looks like that -- to the demand, most of the Bangladesh mills are running at full capacity. There are lots of orders we have come again from U.S. and Europe, and they were requiring more yarn so the demand of yarn has been very, very good from Bangladesh also. And as a result of that, the export normally, which is in the range of about 100 million [ bales ] per month from India, [ sorry ], touching almost 125 million, 130 million [ bales ] in this period. As a result of that, there was -- in spite of a very strong wave of COVID, the pressure was not felt in the same fashion because otherwise would have been a very, very difficult time [ for the spinning ]. All these indications looks like that the pent-up demand or the increased demand or as the markets are opening more and more, more and more shopping is happening in USA. The USA, I understand is growing by almost 14% to 15% on a base of 2019. 2020, I'm not talking about. It means most of the stores are -- the inventories are really bad. Their sales inventory [indiscernible] one of the lowest. They want to improve or they want to increase. As a result of that because of the pent-up demand or because of the increased demand, I think the business -- garmenting business continues to be quite good in USA. It is giving a pressure to most of the other countries or the supplier [indiscernible]. This is about the selling business. And I request Mukesh to give some brief on the fabric and then we can start with the QA session and the other queries we can go through at that stage. Mukesh, over to you.

Thank you, Neeraj. Good day, everyone. For the fabric business, last couple of quarters have been a big rollercoaster. Quarter-on-quarter we have been sometimes there are peak, sometimes there are valleys. Last year, Q4, we almost recovered from pandemic and we were -- we’re at the full capacity utilization, but then we got hit by the second wave of pandemic starting from April, somewhat in the last week of March. Major retail markets in India were shut down. People were not moving out and the shops were also closed. Even today, when we are talking 100% of India is still not open. Some parts like in Maharashtra, some down south, the big malls and large shops are still not allowed to open and somewhere there are recent lockdowns. As a result, India retail is still struggling. Similarly, during the first quarter due to lockdown in Karnataka, Tamil Nadu, the garment exporters -- garment factories were not allowed to operate at 100% capacity, as a result, the garment export out of India was also impacted. Same was our fabric supplies. But now the situation seemed to be improving, particularly from the U.S., as Neeraj mentioned, there is pent-up demand. We also have sufficient orders. So sequentially, we are seeing quarter 2 to be better than Q1 as far as capacity utilization is concerned. The raw material prices, as our raw material is yarn and the yarn prices have seen a good rise because of the demand and also because of the cotton prices. So there are some slack always remains between the absorption of the full price increase into the fabrics, but we are on track. And then sequentially, we are improving our price increase absorption. So that's it from fabric side, Neeraj.

That could be answered along with the -- all the questions.

[Operator Instructions] The first question is from the line of [ Anil Kumar Sharma ], an investor.

Congrats for the great numbers. I have 2 questions. Number one, what is the raw material stock position as of now? And what is the margins -- cotton prices have increased. We have -- how much cotton stock we are having at present?

The cotton season starts in the month of October and goes up to March. So most of certainly we'd try to cover so that they can [ see ] next cotton season. So generally, we don't share the exact date wise which date we have the stock, but most of the [indiscernible] for the current cotton season we have sufficient stock.

All right. One more question, fabric sales are less than [indiscernible] compared to previous quarter, as told by the contact person, present capacity utilization, can we see -- what is the present capacity utilization of fabric?

Presently, we are at 85%.

The next question is from the line of Saurabh Patwa from HDFC Mutual Fund.

Can you hear me, sir?

Yes. Go ahead, Saurabh.

Sir, congratulation for the great set of numbers. I just wanted to understand more on -- as you highlighted in the opening comments that part of Chinese demand is led by the ban of cotton in the Xinjiang region. So how do you see the things are panning out maybe for 1 year from now? Do you believe that because there is a strong Chinese internal demand also for the April? So do you believe that what this -- maybe over a period of 1 year or so, Chinese garmenting companies will be able to divert the local demand -- meet the local demand from the cotton [ room ] in China and for the export, they will continue to buy yarn on cotton outside China?

That's possible. Because out of the total cotton consumed, almost 50% comes from India. This is a very big number. So I think there are 2 kinds of -- in my view, there are 2 different set of companies. One is which are purely based out of the export. I think for them, they will have to import more and more yarn in case they wanted to some [ indication ] that they are not using anything in their cotton. Then the other companies which are either domestic based or the companies which are mixed, they might look at sourcing from the local market also. Second, the raw price -- raw cotton prices in China are much higher than Indian prices. So the government of China, they are doing an auction every day or close to about 9,500 tonnes per day for the last almost now 2 weeks. And the average realization per day is not less than [ 1.10 ] per pound. So if we go by that cotton, I think to that extent, it is going to be much more expensive for the local yarn, even for the local market also, and that's where the some advantage may continue to be there for Indian market.

Okay. So in that case, sir, it is quite possible the current spread, which is higher, which is materially higher than long-term spread in terms of yarn may continue?

Possible. So I'm not -- I mean the current margin which are available that may not continue. But yes, the margins which are normally available, the medium-term margins could be higher than that.

The next question is from the line of Alpesh Thackar from Antique Stockbroking.

Congratulations for a very good set of numbers. Sir, part of my question has been answered. Just a follow-up on that. So are we seeing any increased demand from Chinese garment of fabric manufacturers for yarn from -- imported from India or something like that because of the Xinjiang issue?

Yes. Definitely, the demand from China is good as of now, and it's increased only from the previous period.

Okay. And how much would be our exposure to the Chinese currently like to the China exports in terms of yarn?

India as a country we export close to about 35%, 40% -- 35% to China.

The next question is from the line of [ Abhishek Jhunjhunwala from Khan Capital ].

I wanted to -- can you hear me clear?

Yes, yes. Yes.

I understand are we also dealing in home linens like bedsheets and all the [indiscernible] and all we make?

Yes, we produce whatever yarn if we require even for the fine count, et cetera, depending upon the margin of our capacity. But yes, capability wise, we produce that as well.

So you are manufacturing the bedsheets and all, bed linens and all?

Only selling. So we have our [indiscernible] which is the apparel fabric only, but we can produce yarn for the [indiscernible].

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

Basically, my question was with respect to demand/supply of yarn. I understand the NTC mills of Government of India, they actually stop functioning right from the first wave of lockdown. So has it any role to play with respect to the better demand/supply for yarn in India?

Not really because the total capacity is close to about 1 million spindles or so. And for the last weeks [ month ], they have been running close to about 35%, 40% capacity. But all the mills which were modernize, they are all running for the last 6 months. So I think already 400,000 spindles are working, and it's only about another 600,000 spindles, we can do in fact, [ mobile testing ] India, which is close to about 45 million spindles. This 600,000 is only [ about half percent ] of the total capacity. So I don't think that this sole factor or is there any major role to play because of that.

And sir, just a last question. Because of the current burns in the yarn prices, do you see a substantial CapEx now coming back in the sector?

There are 2 kinds of CapEx which could come in. One is the pure expansion, the new expansion, which in my view, may not be really substantial. But at the same time, I think since the spinning [ have put ] money during this period, so my very strong belief is that lots of monetizations would happen and the CapEx will happen primarily on the monetization side, where all the mills who were really short of money for last many, many years may get some liquidity available to them, and then they may try to monetize a bit. But pure greenfield projects or the new expansion, that may really not be a very big number compared to the capacities we have.

[Operator Instructions] The next question is from the line of from Jeetu Panjabi from EM Capital Advisors.

Now I've got 3 questions, right, one, can you -- I mean I know that you were asked earlier on sustainability of margins and the fact that the margins will not sustain at these high levels, but would probably settle higher than levels. Now if you were just to calibrate that in terms of numbers, do you think what a 22%, 23% EBITDA is sustainable over the next 12 to 18 months? Or how would you think of it in numbers? What do you think is sustainable over a 18-month period?

Normally, our guidance number has always been between 18% to 22%. Good [indiscernible] both last month, 2 years were much more difficult. So I believe north of that could be possible.

North of that would be possible. Okay. Second question is in terms of volumes, right. So you alluded to U.S. demand, and you also talked about the aggregate export demand being good. What -- and let's say, last few quarters, you're running at about just under INR 2,000 crores revenues [indiscernible] months. Can this go up by 25%, 30%?

Sorry to interrupt, Mr. Panjabi. Sir, your voice is breaking up.

Sorry, is this clear?

Much better.

Okay. My apologies. So my question, regarding just under INR 2,000 crores a quarter of top line, question is, what is the ability to scale this up? Can it go up 20%, 25% over the next 12 to 18 months?

On the [ spinning ] side, we are running almost full capacity utilization. We are putting up some new expansion plans, but they will be partially available by March, April only. And from March to May, we are adding about 8%, 9% of our capacity, which would be available maybe 8 months down the line only. On the fabric side, we are -- our capacity utilization has been much less. And I'm sure as this is splitting it up, I mean, I'm saying, again the quarter as we'll be scaling it up, I'm sure there could be some scope. But to that extent, the yarn would be internally supplied to them. So the top line may not really improve or increase substantially or proportionately to the big sales because some internal sale of yarn will happen to them. But yes, the margin can improve in case the fabric business utilization improves.

Okay. The third question is, is there a way in term to reduce cyclicality of the business either through long-term contracts or moving with a value-added basket of portfolio, obviously, the longer-term things. But is there a way to reduce cyclicality in the business by doing certain things? And how do you think about that from a medium-term perspective?

In terms of the yarn or the fabric context, I think the -- most of the business happens on a month-to-month basis, whereas some of the brands may talk of a seasonal 6-month period. So depending upon the customer requirement to that extent, we are -- we keep on working with them and we are getting to look at even the long-term contracts. But I think more of a customer choice because normally customer will not buy a yarn at particular season. So to that extent, this risk would always be there. Second is, generally we feel the risk of raw materials because we have to buy most of the raw materials in the season and off season, the prices would be very different. So this year has been very, very good, where we were fortunate that we covered cotton at a much lower price, prices are very high, but it could happen otherwise -- other way around as well. So my belief is, no way as of now, we can cover the cyclical risk of Indian cotton because the only way you can hedge is through the near future and many times, the Indian market or the near future, there could not be the direct or a perfect correlation to that extent. So whenever we feel we required to have, we try to do it in that fashion. But exactly the volume [indiscernible] doesn't give any purpose to [ anything ] we are to cover out there. So frankly, both in terms of raw cotton and also in terms of the customer relation, we are open, but I think no customer, no brand is willing to commit more than 3 to 6 months [ unless ] I'm talking about the best case scenario. Otherwise, all trade base business happens on a month-to-month basis.

Okay. And the last question, if I may ask, is that there's obviously a fair amount of cash generation in the current cycle because of the last [indiscernible] and you already net cash balance sheet. Is there an intent to have increase the payout of -- through dividends or buyback or whatever to enhance shareholder value through that?

Jeetu, we currently -- this would be putting up all these cash flows everything to the Board or maybe towards the end of the year and it's up to their judgment what they intend to look at out of that.

But the articulated thinking that a certain payout ratio, 30%, 35%, 40%, otherwise, number there is, would be desired [indiscernible]. Is there something that's been articulated or thought about clearly?

No. Sure. I mean we discuss it with the Board based upon our thought process and the requirement of cash. But eventually, it's their judgment call or do they want to look at that.

Okay. And if I can ask one last question. I mean just from a senior management and Board prioritization perspective, what are the 1 or 2 most critical things that this company is focusing on over the next 18 to 24 months?

[indiscernible] If the opportunity comes to India in terms of all these brands touching India. So our priority has to be the kind of differentiated product they require to kind of service or delivery they require whether we can get in a position to sustain that. Till now we have been doing it quite well. But I think more and more business coming from the brand, their requirement, the yarn prices or the immediate turnover and the quality of the service or the sustainable quality require sustaining for all the quality required would be the one big priority which we have to look at. So we also have to continuously look at that, how do we sustain, support the technical system also. So both in terms of monetization, in terms of upgrading or in terms of the digitalization, what more, there are lots of solutions now, which have started coming to the market. So how do we engage ourselves and start learning to those projects. So in any case, in the Indian context, the one of the biggest challenges on the manpower productivity, the availability of labor and restrictions. So we have to look at [ daily ] how do we handle that? And if it's not working well, then whether you look at some kind of automization or how do we look at our availability of manpower to sustain the operations in an efficient way.

The next question is from the line of Prerna Jhunjhunwala.

So I have 2 questions on macro perspective. Sir, I wanted to understand -- we understand the yarn business dynamics that currently is in short supply, et cetera. But now considering that the U.S. retailers looking for China plus 1 strategy and we eventually may look for sourcing from other countries than China. And even now, there are current vendors like Bangladesh, Vietnam, might be posed to source from countries other than China. There are no major viable options, in our opinion, apart from India to a very large extent. So in light of increasing opportunity in the export market and taking into account the incremental capacity that will come in to cater to the export market in our own company as well when we are talking about home textiles or garment, do you think that there will be an incremental requirement for apparel fabric in general going forward? And could you just explain us what is the demand/supply dynamics in the fabric business considering this environment? And what kind of investments India or Vardhman will be ready to take to leverage on this opportunity?

Surely, if we look at the growth model of any country, as the country has progressed, as the GDP is improving, as per capita income is improving, the fabric consumption will keep on increasing in various parts of the world. India, the fabric consumption is still about [ 3.5 million ] only, whereas the world average is much higher. And the Republic of China and USA is definitely is much, much, much higher compared to India. So our -- the business -- definitely the demand of fabric goods improved in India and the consumption of fabric goods improved in India. Having said that, that's why the last leg of fabric expansion was taken in India, which was just before COVID. Unfortunately, we were caught in the COVID situation and we had to suffer almost for 2 years because all of the business was closed, and we could not utilize our capacity. Having said that, we believe that apparel fabric demand would be good in the medium term in the times to come, and definitely both export and the domestic market, and there is a need for the better fabric requirements more and more retailers organizing -- organized -- retailing is becoming organized. People are moving towards more and more readymade garment from the tailoring, which will definitely require a better quality or good quality fabric for all the brands. So this was one of the reasons, as I mentioned, for the expansion, and we have a very strong belief that in the times to come, we would be in a position to utilize all our capacities. So that's on the overall company strategy that we should try to -- and this will give some natural sustainability also, which was asked by [ Mr. Deepesh ] before that India's fabric product mix improved and the overall sales and will give us an advantage. Two, in terms of our yarn supply situation, I think since we have already planned for the same, and given the full capacity of fabric utilization will be requiring close to about 37%, 38% yarn, total [ first quarter ] we are producing. So quite comfortable with that. And about 62%, 63%, 65%, we'll keep on exporting for [indiscernible] domestic market.

Okay. And sir, what about the demand/supply in the fabric business largely like as a country, do you think we are still having enough capacity to grab the medium-term opportunity or we will have to really expand in the fabric business? Because there is less data available in the market about woven fabric per se like fabric requirement.

Mukesh, would you like to answer that?

Especially with respect to even finished fabrics where India is considered to be weak, and there are very few large players in the organized space at a very large scale. It could be a huge opportunity due to a strong recall when large requirements of fabric are created by Bangladesh, Vietnam and other countries importers.

Mukesh, Would you like to answer that?

Yes. India has capacity. A couple of plants were not doing as well last couple of years. So the capacity is not fully utilized. For the immediate term, as the demand is coming up, those process houses, if managed well, the throughput can definitely be increased. And in the medium to long term, India would require fresh investment. So as far as Vardhman goes, we have expanded our capacity in the last 2 years. Unfortunately, we got hit by pandemic, and we are on track to increase the capacity utilization in next quarters.

Okay. And one more question on my end on different types of solutions required because when we talk to various garmenters, they are saying that the kind of garment that India is producing is largely different than the kind of opportunity that is coming up. Are you finding any opportunity in terms of fabric apart from the current product solutions also on sustainability kind of products like recycled products or something like that that is coming up in more demand?

Yes. You see one aspect to this is the [indiscernible] cyclic. So there will always be new products coming in the market and the demand suddenly picks up, everybody wants something new that has come into the market. But then you will never find enough capacity to feed that, whether it is India or elsewhere in the world. But the thing is that how quickly you can adapt to the latest requirement. Now the latest demand is for the sustainability products. So on the sustainability, as far as the raw material goes, India is well equipped whether it is the production of BCI cotton or organic cotton or the sustainable viscose products or the recycled polyester. So India is well equipped. And as far as the manufacturing of yarn or the fabric is concerned, there is not much of complexity in order to handle these products. So depending upon what garment you're talking and what opportunities they may have, India has been predominantly more strong in the cotton and cotton plants. So if somebody requires 100% synthetic or polyester, nylons or some kind of exotic terms, India may not be as strong today as compared to China. But if the demand for such products continues, then certainly, India will also build up the capacity because we already have a raw material base. That is not a challenge.

And when Vardhman look at such opportunities going forward?

Suddenly, we are always looking for -- there is no constraint as far as the exploration of opportunity is concerned. The Board will take appropriate decision that's required.

The next question is from the line of Abhilasha Satale from Dalal & Broacha Stock Broking. [Technical Difficulty] Sorry to interrupt, Abhilasha, we're not able to hear you.

Is it...

I'm so sorry, sir, your voice is breaking up. As we’re unable to hear the current participant, we will move on to the next question. That is from the line of Naushad Chaudhary from Systematix Shares.

Congrats on a good set of numbers. On industry side, sir, I just wanted to understand, apart from China incentives of visibility and FDA. Is there anything else in terms of doing business has changed over the past few years which we are missing and you would like to share with us?

Not really.

Perfect. In terms of cost of debt to our business, how it was 2 years back versus now considering all the incentives, if we receive any?

So as far as the cost of debt is concerned, we have [indiscernible] the effect that have been lower industries that have prevailed over the last 2 years had helped us. Maybe not in a 1:1 ratio simply because most of our debt is subsidized by the subsidy. But it has been -- we can say maybe 50% to 60% of the lower interest rates have accrued to our balance sheet as well.

In the last 2 years?

Yes.

Okay. In terms of ROC, apart from you increasing your utilization, is there any other way or area you see and it goes for improvement, then we can work on it to improve our ROC as well?

So since we are operating at almost full utilization in both of our businesses, ROC can improve due to higher utilization that you correctly pointed out, but also due to increasing prices. Since most of our raw materials for the time being, at least for the -- until the end of quarter 2 and slightly beyond in the next quarter, given we already have our raw materials purchased. So increasing prices of our finished goods will obviously add to our return on capital. But on a sustainable or a medium-term perspective, there is nothing that we can add that will enhance ROC.

Sir, if you can quantify your cost of debt in terms of percentage. So that we can, in that context, we can understand at what level of ROC we'll be happy and make money if we can kind of [ grow debt -- cost of debt plus ]...

So in fact, our numbers in FY '21 or even this year, our long-term cost of debt should be in the range of 4% plus/minus.

Perfect. And lastly, in terms of our pricing model, especially in both the businesses in yarn and fabric, do we largely work on spot price basis? Or is there any mix of export and contractual in yarn and fabric, both?

So as I mentioned, most of the business happened on a 1- to 2-month basis, except a couple of brands where it could be depending upon the customer requirement 3 to 6 months.

Okay. One last question in terms of cost of spinning which, I believe, currently is around INR 45,000 to INR 50,000 per spindle. How this cost was 5 years back and 10 years back?

INR 40,000 to INR 50,000?

What is the cost per spindle today versus 5 years back?

Today's cost will be close to about INR 70,000 to INR 75,000 per spindle. It used to be about INR 45,000 4, 5 years back?

This is for both knitted and weaving both [indiscernible]?

Yes, for knitting yarn or weaving yarn, it's almost same because most of these spinning even for [ retailers ] along with the [ compaction ] as of now.

The next question is from the line of Abhilasha Satale from Dalal & Broacha Stock Broking.

Now am I audible? Is this clear?

Yes, ma'am. Please go ahead.

Sir, I just wanted to know that how the spreads have moved? Like if you could just give us a sense last year in the same quarter. And in the previous quarter, how it has moved on a quarter-on-quarter basis and year-on-year basis, yarn and cotton prices, if you could just tell us.

So obviously, Q -- a couple of Y-o-Y rates are not really comparable. Last quarter, we saw spreads of nearly 0.75 to 0.80 between the spot cotton and spot yarn prices. But current quarter, they are close to the 1.50, 1.40 average. Sequentially last quarter, it is similar, maybe higher or lower by about 0.05 on an average.

Okay. So Q4 FY '21, it was in the range of 0.70 to 0.80 per kg?

Quarter 1 FY '21, which was a COVID quarter of April to June '20, 0.75 to 0.80. But quarter 4 and quarter 1 of FY '22, they are similar to the tune of between 1.40 and 1.50.

Okay. And sir, what has been the highest spread we have entered, I think, in the year of, say, '16, '17 -- sorry, '14, '15, the spreads had moved up to around $1.8 to $2 per kg also. So do we see, I mean, that scenario in the current situation as the [ BCI ] cotton is really in such a demand in the international market and the demand scenario is also good?

On a sustainable basis or on a periodic basis, we have never seen $1.8, $2 kind of spread available. Yes, for a small period of time, it's available. It could be. But generally, the spread available as of now would be one of the highest spreads in last many, many years.

Okay. Okay. And on a year-on-year basis, how much is the cotton price increase?

Cotton, last year before pandemic, in the month of February, March was close to about INR 44,000 [indiscernible], which came down to during pandemic almost INR 33,000, INR 34,000 and then slowly started again going up. So as of now, the cotton prices are almost INR 56,000 [ within the band ]. So from INR 44,000 to INR 34,000 to INR 56,000, so there's almost 60%, 70% increase from the lowest level to the today's prices in the last 7 months' time.

[Operator Instructions] The next question is from the line of Alpesh Thacker from Antique Stockbroking.

Just an industry perspective question. So in the polyester also, we have a fairly good raw material base with being the second-largest producer in the world. But we are still not as strong as we are in cotton as a country in the synthetic. So what -- I just want to understand what is the missing link there? And what are few of the challenges? Is it on the capability side or the government support side? I just want to understand that.

My belief is as far as spinning is concerned, the spinning system remains same whether we produce cotton yarn or we produce polyester cotton yarn. And second part is in case we are competitive in the cotton export, why are we not competitive in the polyester or polyester cotton? So our thought process or our feeling is or the industry feels that the polyester prices in India are higher because they are generally benchmarked as per the landed cost of polyester, whereas the cotton prices definitely will be lower 0.02, 0.03, whereas the polyester will be higher. So our biggest competition in the polyester cotton yarn is Vietnam, Indonesia, where they have a huge capacity of polyester internally also. And I think that's the only reason to us that we are not competitive. Hopefully, there's lots of good demand of polyester cotton also from India. And unfortunately, the numbers are not separately available, but I'm sure going by the current export of polyester cotton, there's a good amount of yarn, which is getting exported on the polyester cotton also as there's the overall requirement of yarn in the various world market.

[Operator Instructions] The next question is from the line of Akhil Kalluri from Franklin Templeton.

Sir, a couple of questions from my side. First one, again, what's happening in China at this particular point in time? You did indicate that there is possibility that there's lot of demand for Indian yarn because FX spreads can remain high. But given that the entire issues around cotton, how are you thinking about the competitiveness of domestic cotton vis-a-vis international prices? Is there a possibility that demand for Indian cotton will also grow up materially because of either domestic cotton prices could rise a bit more going forward? I just wanted to understand your thoughts on that.

[ India, as of this time ], already lots of exports are happening, and we understand this year, the export could be as good as 7 million bales, though the prices are very high in the off-peak Indian market. So there are a couple of markets like Bangladesh, they'll keep on buying almost 2.5 lakh, 3 lakh bales every month with respect to the price. But at the same time, now the Pakistan is not in a position to buy the Indian cotton because of the issues they had with -- there's no trade that's allowed between the 2 countries. China is another buyer, which they'll keep on buying some Indian cotton. But considering the overall requirement, I think the -- generally, the Indian cotton exports will happen 0.03 to 0.04 lower than -- 0.03 to 0.04 if we get the higher price in the domestic market, which at times when the total gap with the U.S. cotton and Indian cotton today is about 0.11, 0.10. So the moment this gap starts shrinking, I think people start [ opting ] Australian or the U.S. cotton. But until that time, India's price gap is almost 0.10 -- 0.12 -- 0.15 lower than the U.S. cotton's blended cost, then the export of Indian cotton would happen. So probably that benchmark of that advantage -- extra advantage will be available to Indian between about 0.04 to 0.05 over and above the normal spread of 0.05 for Indian cotton. If prices go below that for Indian cotton, cotton will start getting exported much faster.

But specifically from China as well, right, because we understand there will be a lot of Chinese spinners who would currently be depending on Chinese cotton. But with whatever is happening with -- in China at this point in time, that maybe the demand for yarn imports is going up. Do you see a possibility that China will start importing a lot of cotton as well?

I'll request Sushil Jhamb, Director of Raw Materials, to give you a specific answer on this.

As far as China is concerned, this year, China has been the biggest importer of Indian cotton. They have imported around 2.3 million bales from India. Because Indian's cotton was very cheap, in fact, cheapest in the world. At the moment, yes, the prices of Indian cotton has gone up, therefore, the demand from China at the moment is not there, but Bangladesh is buying, importing cotton.

Sure. The other question was around the CapEx and you did indicate that you see a possibility of modernization happening in India. The question that I had is, would you have any estimate of how much incremental production can be [indiscernible] -- incremental production of yarn because of this modernization that can happen? I mean what kind of capacity currently operating at about [indiscernible]? Any indications we might have based on this?

Very difficult to say because modernization may not be improvement only in the production system, but it may be because of the labor availability. People are going for the [ other offers ] because people are -- labor are not available. So it's not only the increase in the production, but it may be more because of the utility cost or the availability of people. So generally, to be able to modernize the entire system, then you require appropriately also [indiscernible]. Those kind of modernization generally will not be viable. So I think the people going for the modernization on a section-by-section basis, starting with the availability of people. [ These are ] the first one to get modernized. And to that extent, the productivity may not increase more than 5%, 7% for those new [indiscernible].

The next question is from the line of [ Abhishek Jhunjhunwala from Khan Capital ].

Sir, I wanted to ask like how are we proceeding with the garmenting of business segments? Are we going ahead with an expansion? Or we are on a wait-and-watch mode?

We are still looking at how do we sustain these operations because this period has been very tough for us also again. [ We're the only producer of this ] and because of the closure of offices, schools and everything, we have a very tough time. So I think we still like to wait and watch.

Ladies and gentlemen, that is the last question. I now hand the conference over to Mr. Neeraj Jain for his closing comments.

Yes. So of course, the numbers are very good. And as we discussed, there could be a possibility going forward that the margins could be better than the historic margins which were available. But at the same time, after I think November, December, once the new cotton comes in depending upon the cotton prices, the margin could not be the same what we are looking at today. Because today, it has an advantage of raw material availability also of the business. Two, in our case, specifically, as part of [indiscernible] we are in a position to improve. I'm sure the operations would improve [ for March, April ]. April, May, June was really a tough time for the fabric regions. And I think they may take another 1, 2, 3 months to improve their capacity utilization and taking it to 85%, 90% in the next 2, 3 months. In case -- and I'm sure going by, as the openings are happening, things are improving, there is a very strong possibility going forward for [ the same ]. So one is the margin. Second is, I think, all our efforts are to look at how -- what modernizations of the equipments are required if you have to cater to the increased demand which is coming from various customers. So all the -- I mean we are gearing up for this change. And how the quality or how the service level improvement is required, how fast your response is required to cater to all these customers because these would be pretty large customers and the requirement of both quality materials, large size target could be very, very different. So we are internally believe in all our people to look at how do we prepare ourselves. And I'm sure that things are going in the right direction. Till now, we have handled it very, very efficiently, and we'll continue to do the same. So both, okay, margins are very good. So -- but at the same time internally, we always look at how the organization should continue to [ strengthen ], how the people should be engaged so that more and more improvement both in terms of the processes as well as the products would continue to improve. And I'm sure we are working very hard to look at that, we take full advantage of the situation or the opportunity, which is available. Thanks, everyone, for being with us, for investing in our company. And I'm sure as management we’ll really work hard to come up with the expectations of all of you. Thank you very much.

Thank you. Ladies and... [Audio Gap]