Vardhman Textiles Limited (502986) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon, and welcome to Vardhman Textiles Limited Q2 FY '22 post results conference call organized by Batlivala and Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is recorded. I would now like to turn the conference over to Mr. Prerna Jhunjhunwala. Thank you, and over to you, ma'am.

Thank you. Good evening, everyone. On behalf of B&K Securities, I would like to welcome you all for 2Q FY '22 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, Chief Financial Officer; Mr. Mukesh Bansal, Senior Vice President, Public Marketing; and Mr. Akshay Jain, Head of Finance. I would now like to hand over the call to Mr. Akshay Jain for initial remarks. Thank you and over to you, Akshay.

Good afternoon, everyone, and welcome to our quarter 2 FY '22 con call. We are very happy to announce a very good set of numbers from Vardhman Textile side. It is one of our highest top line and PAT numbers in a quarterly context. Just for some highlights. Obviously, the y-o-y numbers are not really comparable to last year's second quarter, but even sequentially on a stand-alone basis, we are up almost 24% on offline with our EBITDA going up almost 43%, 44%. Our PAT is up 57%. To give a brief reason for this performance, I will now hand over the call to Mr. Neeraj Jain.

Good afternoon everyone. This has been a good quarter for most of the textile companies or [entincompanies. The demand of yarn was quite good, both in the export market as well as domestic market, because the first quarter, there was still the issue of [goods] which happened last year in the month of March, April, which was overhanging on the mind of people and people were not ready to spend money on the shopping, et cetera. But this quarter last we had all concerns from the COVID perspective, not only in India, I think most part of the world. So the demand was with both in the international market and domestic market, exports has been good as a result of that the margins were regionally okay. This was a period where most of the cotton was covered by us last year, so there was a trading given on account of that also, which may not be available going forward, but we had good products that Jain will explain to us as far the demand concern. [Technical Difficulty] So this was a period where because of the good demand, I think the prices were stable, and most of the spinners were making a good amount of money because of the better orders available at hand. We spoke about China plus One issue in last couple of calls. I think that demand continues to be there and lots of brands were looking at, India is also one of the possible destination where they wanted to buy from India, and they are looking India else more the perspective supplier of textile goods going forward. So I think all the Indian companies we serve at good cost to that expectation in terms of delivery, quality, times and go and survey consistently, et cetera, et cetera. Maybe this opportunity mix side, there could be a possibility that this can be a little longer or can be definitely advantageous for a medium-to-long term, rather than only living at a quarter and so on. [GST] started showing lots of improvement in the retail side, not only from the last year's perspective, but given a growth from 2019 numbers also. Europe till now was not showing the growth from 2019 numbers, but I think going forward, there also going to sum these numbers. Same way, the other parts of -- various parts of the world, I think people were much more positive. And we look like that we retail in one, the retail numbers are good, retail numbers prove not much of inventory available in the various stores, which was also pushing pressure from that perspective. Third, I think the service related which is there still be supply chain was a big concern, because of the shipping cost, shipping the containers availability and so on and so on. So I think everyone was playing a little safe, and wanted to get the material much before the time, so that there is no disruption and any increase in the retail where if it happens, it's not converting to the opportunity loss rather they can actually convert into retail numbers. From that perspective also people were ordering. And as far as we know, going by our discussion with most of the retailers, the deal was quite good and there's still short of the material, which means this currently can continued for a longer period of time as well. The Indian market started opening after the last year COVID issues of March/April. And I think last 4, 5 months have been quite good. Fortunately, the vaccination position is quite good in the country. And now we look at most of the places, markets, malls, airports, I think life is coming again and people are willing to spend more money, they started visiting local destinations or -- Indian destinations for the vacation, et cetera. And I think a lot more confidence today as a country compared to what was it 6 months or 3 months back. SLA to Vardhman, I think the we did business both in domestic and exports market, and the number of products, number of customers were very, very consistent. As a result of that, we could generate a good amount of business. And since we were covered on the cotton for -- particularly for the entire quarter, there was a trade union also which accrued and in many cases margins were good at that stage. So both the things together, I think we've shown the kind of margins, which may not be possible for us to duplicate, but definitely one of the best numbers we've ever shown. The fabric continued to improve in this period, because when we started the work from home market was very, very prominent, and the fabric continued to improve in this period also. And I'm happy to share that we have started utilizing practically with full capacity utilization on the whole process that also in the last 1, 2, 3 months, which was almost 70%, 75% than we were in the last call. And it looks like it if things goes well, we might be in a position to continue with this trend in the times to come also. On the price front, I think -- the raw material prices are also increasing, so it was both the yarn demand and the cost base from raw materials, the prices of yarn continue to increase. Fabric had some difficulty there which is solven, there will always be some time that's difficult for most of the producers to pass on those prices. But I think slowly, the product is good over there also. And with every order, every week, we are in a position to pass on partially or fully those prices also to the customer. Of course, it's still a big challenge, but I couldn't sware you things are better than before, and I'm sure if it continues in this fashion, the export demand is also quite good for the fabrics towards Bangladesh and other countries also. So I think to that extent, we are in a position to pass on those prices, which we are, as of now to quite an extent, I'm sure the business would be better in terms of margins also in the times to come. Right now cotton season has started. So we initially area under calculation in India was almost 5% lower, but it was accepted that yield is going to be very good. So people were -- we were expecting the crop price to be more than the last year, it was the initial estimation, but last couple of weeks there was been heavy rains in various parts of the country, and there's bit looking of some damage to the crop in various parts. Not only that, that could be a possibility in some of the areas, there could be some loss because of the pest effect as well So as of now, going by the estimation of the industry, I think the crop size is likely to be about 35 million bales, and even with the 35 million I think it should be sufficient for the country for the consumption, where the consumption is estimated in the range of about 34 million bales in India. And we still have a last year's closing stock of about 6.5 million, 6.7 million bales. And even if I export of 3.5 million bales, last year export was almost 7.5 million bales. So depending upon the minimum export of 3 million or 3.5 million bales, we may have a reasonable quantity of stocks available in the country. But I think a lot more depends upon how the international prices moves because the international price moves in a big way. So between a jump of almost 80%, 20% in the international prices of cotton, so it was stable for a long period around 85 to 90 per pound, this now has increased to close to about 108 to 110 per pound, and this is all happened in the last 4 weeks period only. With that kind of increased growth international prices started increasing for the yarn, and the domestic price of cotton increased, which has given a cost base to the yarn prices in India also. And as a result of that the power of yarn prices also increased. As a benchmark price normally for a [package formed] export price generated to consider the price was when we had our call the price in the range of about $3.90 or $4, which as of now will be close to about $4.30 to $4.45 and so on. So that's on the end of the -- and accordingly, the domestic prices are also aligned with that. Looking at the overall demand and overall positiveness, overall customer base which we are looking at, we've decided to expand our capacity. So there are 2 projects which are already under implementation, which is good to the investors since last fall. So one is 65,000 spindles, 100% cotton demand for projects, which is likely to be starting commercial production from the rising demand of April, and will get completed by August, September. The second project is the expansion of our [water] section, with about 20 tones per day capacity. This part is likely to start somewhere in the month of March, and this will also be completed by August, September next year. Over and above that, the Board has taken it and that we have a plan to the government for the various sanctions and we are also trying to negotiate the machinery suppliers depending upon the availability of machinery and all other required approvals. We have decided to expand the capacity of filling by 100,000 spindles, and also by close to about 5,500 which may be token on spinning. The cotton spending should be less than production of close to about 70 tones per day and the open and should give additional production of other 30 tones with me over and above the 2 projects which are under implementation, we'll be adding -- We'll be adding this additional capacity of 100 tones. In addition to that, we are also expanding our -- in the large capacities about 30,000 spindles, which will give us a production of about 15 tones. So in total, I think for the expansion plans which we have decided, it's likely to be close to about 115 or 120 tones per day. In the mean time the spindles will be close to about 165,000 equal in spindles. So it is -- and also equal in spindles will be close to 165,000. And all these projects, I expect, depending upon the delivery of machines, which is very tight as of now, it may take maybe about 2 years' time, 2, 2.5 years' time to get this projects completed. So that's what our side as of now, Mukesh, if you want to add something on the fabric, you could and then we will ask for the question and answers, and then we will then -- things we can reply at that stage.

Yes. me, sir, I think you already mentioned that fabric business now capacity utilization is picking up. When we were talking last time, we mentioned that the apparel -- woven apparel-based fabric is the -- probably the last starter in the textile value space. Now the demand is picking up. So it is both international as well as the Indian market. So we see some pent-up demand coming from U.S. market. Now Europe is likely to follow the shoot. Indian market is also picking up. So we expect the capacity utilization to improve in the fabric business.

[Operator Instructions] We have our first question from Mr. Naushad Chaudhary from Systematix Group.

Congrats on a very good set of number. So in the initial remarks, I missed some of the point because of the -- there was no clear -- the audio clarity was not much. So I apologize if I repeat any question which we have already answered in your opening remarks. Firstly, just wanted to understand on the marginal side, I understand the spreads were quite favorable for us this time, and we had an operating leverage benefit -- are there -- is there any other factor as well, which has helped to us in terms of margin, that's my first question.

Yes. So there is one more factor over and above the normal. So there are 3 factors to those. One is a normal margin, which were available. Second was the advantage because of lower raw cotton prices, which we covered in the last year, so that was a more of a trading gain, which was available to the company. And third was the scheme of RoDTEP, which was announced by the government of India. So there are 2 factors. One was we export during the quarter where the profit had come to us, and also since this scheme is announced with effect on January 1, '21. So there was almost INR 47 crores, INR 48 crores which were belonging to the -- for the previous 2 quarters, so which has also been defend in this quarter, which is not belonging to this quarter, but since this scheme was announced in this quarter that has been taken care in the books of accounts in this quarter.

Okay. Can we quantify what was the cotton trading gain in terms of number, as you have mentioned, INR 48 crores from the incentives, how much would be from cotton gains?

We don't share our cotton buying, cotton consumption costs. So I think that's the estimate results.

Understood. Secondly, on the CapEx plan of INR 1,400 crores for spindles, what kind of revenue do we expect from this CapEx,that's my first question. And secondly, if I reverse calculate it, it's costing us around INR 85,000 per spindle versus the earlier we had been talking INR 70,000, INR 75,000 and some of our peers does it at INR 45,000 to INR 50,000 per spindle. So is there any differences in terms of technology, in terms of per day production from these spindles. How would you answer this sir?

On the top line, I think INR 1,400 crores capital -- CapEx will give us a revenue of close to about INR 1,100 crores to INR 1,200 crores. On the capital cost, I think there are 2 factors which will be determining the cost of the project. One is what kind of machine are we taking into, what kind of products or what kind of -- what is the formulae taking in. So in our case, most of the machines we take are the European machines or the Japanese machine, so the cost will generally be high. But at the same time though in terms of productivity, it may not be given to the pro-rata advantage, but in terms of productivity and quality both definitely give us some advantage. Two, what is the kind of fabric quality was, INR 45,000, INR 50,000 is a history now because our last project, which we announced 6 months back was the average cost of about INR 70,000. Against that, now we are talking about INR 80,000 to INR 83,000. So practically the kind of cost because all machinery manufacturers have increased the prices at least by 15% to 25% and some of them are even 30%. And the cost of construction has gone much higher because of the price of steel, cement, sand anything and everything, even the labor cost. So I think it's all related with the -- what kind of costs are prevailing in today. I'm not very sure because all the machineries are going to tie up soon. So I think this is -- these are going to be projects where the capital costs are going to be surely high going by the availability of machinery today and also going by the cost escalation which has happened across the world, because of the increase in the commodity prices every year. So INR 45,000, INR 50,000 is out of question today. Of course, yes, depending upon whether the Indian machinery, imported machinery or product mix, for example new launch. This requires a double packaging. So -- but you will be require double pattern, you require double flooring, you require double and all lots of additional expenditures to produce this product. We'll have to spend that money. So that's what on the CapEx cost.

Okay. To follow-up on this, sir, in terms of -- as you mentioned, it will be highly productive compared to the traditional machines -- So can we quantify in terms of per KG, per spindle on a daily basis, what are existing capacities and the existing spindles generate. And what kind of productivity we expect from the these new spindles?

Given our existing spindles in terms of productivity will be comparable because every year, we are doing lots of modernization of our existing factories also. We're spending almost INR 150 crores to INR 200 crores per annum on the existing manufacturing plants, so that everything is updated. So if you want to compare with our own machinery, I don't think it's going to be very, very, very different. But yes, from the general machine part of the country or work, we are definitely going to be better.

Can we quantify on a per kg basis?

With whom do you want me to quantify?

I mean, typically, the industry standard is known as per KG, per spindle per day, it generates around 0.45 to 0.5 kg of yarn. What would be our productivity and what we expect from the CapEx which we have announced?

So in our case, per spindle, it should be in the range of, I think, about instead of 0.4 or 0.5, it should be minimum 0.7.

Okay. And lastly, sir, in terms of funding, you have mentioned it would be a mix of debt and equity. What portion of debt we are planning to have for this CapEx. And if anything we have worked out on the estimated debt cost for this project?

Typically, it will be 1:1 debt equity. And we have not yet tied up the debt for this -- these announced projects. We will inform the investors once we do because we are still waiting for approvals from the government on this.

Okay. And this would be greenfield project, right?

Brownfield project.

We have our next question from Mr. Pritesh Chheda from Lucky Investment Managers.

Sir, your initial line was not audible, so I just want to ask a couple of questions from the opening comments. One, you mentioned about the cotton price rise in the last few months, and you mentioned about the 30 pound rise from $3.9 to about $4.3. And you also mentioned that Indian prices have not gone up so far on the cotton side. My first question is considering the drop in product -- the drop in output, what is your best guess on the extent of cotton price rise this time around, which is your inventory purchase. And second, do you think that the rise in price will be passed on to the consumer, which is the textile companies or there would be some reduction in gross margin is my other question. Also, if you would think that there should be some shrinkages in gross margins. So there were 2 data points. One, which is this quarter where you had the RoDTEP inclusion, and quarter 4 and quarter 1 which did not have a RoDTEP inclusion, which was pure gross margin. Do you see inclusive of RoDTEP and a higher cotton price, you would be able to sustain the margins that you saw in quarter 4 and quarter 1?

Okay. So on the cotton prices, Indian prices have sort of followed international prices, interactive prices led from the front with enough future surging $1.10. as long as the month back. But this differentiate or the gap in prices of the Indian and foreign cotton has not lasted. Indian prices have caught up. So by the large extent and the gap has significantly reduced. As we have said that in the last 3 months, yarn prices have followed -- have taken few from raw material prices moving up by almost 10% to 12%, given that raw material is roughly 50%, a 10%, 15% rise in cotton prices has led to a proportional increase in yarn prices, and evidence -- giving evidence to the fact that manufacturers are being able to pass on raw material costs to their buyers. Regarding the RoDTEP I think we gave out our numbers. I mean, I just -- that out of the total infusion that we have operated, we have done for RoDTEP this quarter, INR 47 crores to INR 48 crores is for the previous 2 quarters. So that is roughly INR 24 crores, INR 25 crores. So total provisioning has been INR 71 crores, out of that INR 48 has been for the previous 2 quarters, so roughly INR 24-odd crores per quarter. If we remove this also maintaining margin for quarter 1 and quarter 2 -- quarter 4 and quarter 1 is a difficult call to make simply because we are unaware of what our purchase price of raw material over the next 3 to 5 months is going to be. And so we would not like to speculate on that. And also, there was clearly an advantage of our old cotton, which we bought last year and the prices in the previous year was -- our average cost was, I think, INR 43,000, INR 44,000, INR 45,000 a candy. And during the period, most of the period the cotton cost was in the range of about INR 54,000, INR 55,000, INR 56,000, INR 58,000 a candy. So there was definitely a trading gain which may not be available going forward, at least next 2 to 4 months. After that, it'll depend upon what pricing we purchase and how do we price it 6 months down the lane, which is very, very -- which is not possible for anyone to predict a company.

But this movement from INR 44,000, INR 45,000 a candy to INR 50-plus thousand a candy, which is a new purchase price inventory. There has -- do you think that this particular gap will get eaten away in the spreads that we make or you are in a position to correspondingly increase the yarn prices by another 15%, 20% versus INR 300, it moves higher.

So the -- So the cotton prices as on today in India is further moved to INR 64,000 a candy. So it's not now INR 55,000, INR 56,000, the current prices are INR 64,000 a candy. So one, if we look it will be increased in cotton prices on a month-to-month basis because of the increase in yarn that is, I think, as of now, we are in a position to pass it on. But I am trying again trying to explain we bought our cotton at a much lower prices last year, we were giving that there the market prices have already moved. So that advantage which the company bought may not be available going forward even though we should be in a position to pass on the current price increase of cotton by thereof increase in yarn prices.

So I'll just sum up here lastly. How much of that cotton inventory gain, do you think should be there in your gross margin number?

We do not share those numbers. We will have to work it out based upon our numbers, consumption numbers, we generally do not share that this is the inventory gain number which has come in

And last seasons' cotton, you have exhausted in this quarter, you have some more cotton of the last season's quarter.

Generally, I think the cotton season and by the month of -- by the end of October. So there was some small quantities which are still available.

[Operator Instructions] We have a question from Amit Khetan from Laburnum Capital.

First, could you give some color on 2 issues which are impacting the industry? One is the logistics kiosk, which shows no sign of abating. And second is the more recent power issues, especially in China. While it appears that Vardhman is relatively better placed, there would be some knock-on effects in the form of demand or the ability to pass on higher prices to brands. So if you could throw some color and light here, that would be really helpful.

So the -- since we are consistent to be there, the cost of shipping internationally was quite high. But the only good news last 1 week or 10 days' time, I think there have been some respite on the shipping costs. So from the fleet, it has come down by about 10% or so in selected areas, but still it will be almost 7x to 8x compared to what it used to be before. So the only thing is, at least as of today, we increased the stock, and this is not happening. At the same time, there has been some decrease also. We are not very sure how the situation will going forward, but this is what it is as on today. Second, I think, yes, there is definitely a concern in the mind of customers for Chinese prices of the electricity, coal and et cetera. and they are looking at other destinations more seriously where they seem to look at their smooth supply chain. They are looking at India also as one of the possible destination. So it's been very, very difficult for us to say the business is coming of a bed or business in general brands are looking at India as a market, because last 8, 9 months, there's been a good amount of business which is coming in, which continues. Of course, a lot of customers share that they have a more concern or this concern is increasing as they are finding more and more bad news of the power crisis coming from China.

Understood. And just a follow-up to that, we've been reading reports of demand being pulled forward because of these logistics issues. So is there a risk of some kind of an inventory recession where brands have over-ordered and now they could to -- like they have over ordered and now going forward, the demand could be much lower?

Doesn't look like still the demand, which is coming from brands are very, very good. And especially with the kind of retail sales, they are looking at. I don't think and they are still -- the inventory ratio to their sales is one of the lowest in most of the Europe and U.S.A. brands. Jain,do you have the latest number of their inventory to these sales. Jain, you have the numbers of inventory for the retail sales?

Yes, actually if you look at in general in U.S., the macro level inventory to sales ratio, if you look at you at, if you look at the long-term average, the inventory to sales ratio used to be 2.4x, means the inventory is to be 2.4x as compared to the monthly sales. This as of today is in the range of 1.9 or 1.8. So the depletion of the inventory happened during the over time because the online sales were still taking place, but the replenishment was not time out, number one. Number two, you find that over-ordering, it is not over-ordering, it is pre-ordering. So the -- they want to -- they have excess in the additional logistics time and that next time, we have done the pre-ordering. It is not over-ordering. As of now, this seems to be concerned till the time the inventory to sales ratios are much lower or lower than the historic perspective. So I don't think that's looking like a over-order situation as on today.

Understood. And second question is, in the past, I think in the last quarter or the quarter before that, you had guided to a long-term margin guidance of 18% to 22%. Do you still hold on to that? Or are you willing to revise this a little upwards given the recent performance?

I think it would be better us to look at it, because last year, we had -- last quarter, we had the old cotton numbers were good. I think it will be better to wait for this cotton season, how does it operate and how does the prices move. And more confident maybe by the next quarter whether the plan should change for a medium term or we should stick to this and we look at the new we start touching the upper band -- upper side of the brand.

We have next question from Resham Jain from DSP Mutual Funds.

Sorry, I couldn't hear a lot of things in between because of quality of voice. But just on the cotton front, even that prices are significantly elevated levels, what will be your strategy, because every year your strategy is to buy during the season, but even that we are at all-time high level of cotton prices, will there be any change there?

It's a difficult question for me to answer at this stage. So there are 2 aspects of this. One is the commercial, second is the quality of cotton. Our philosophy is always been where you should buy cotton when the full arrivals are coming in. So you are in a position to get a better quality cotton, which will help you to sustain your product quality, which ultimately is going to the customers. So our general thought process I believe is always to cover the cotton, not only from the commercial perspective only, but from the color/quality perspective also. Having said that, the second part of the commercial, now if we find now the prices are going to be maybe, maybe much less, if I do this by the time we start stocking. We'll have to take breathe whether we reduced our cotton coverage or we look at some kind of a heading strategy, whatever is available in the given circumstances and take -- try to buy this cotton. So I think maybe next 1 to 2 months will be more clear how the prices of cotton weather they sustained or what happened. But typically -- generally, we go with the quality and the commercial definitely is very, very important. And we might have to look at whether we take it on our books or we try to hedge it by some instrument outside the U.S. I'm not very sure on that, but yes, most of the time we try to cover it.

And sir, my second question is with respect to the overall margins and spreads. If we exclude the 2 gains which we had this quarter, the RoDTEP and the inventory gain. If we remove that, are your margins in line at the 65,000 kind of cotton prices currently? Or are they materially different if you exclude those 2 gains?

So Resham, the current spread that we talk about when we talk about -- we didn't talk about cotton and yarn spreads, we talk from a spot-to-spot perspective. And if we see current spreads of $1.20, $1.30 sustaining, I believe we would be comfortably be able to make our 18% to 22% kind of numbers. Given that pre-COVID, we were looking at margin levels of anywhere between $0.85 to $0.90, with the numbers dropping to as low as $0.65 during the U.S.-China trade war, which was not in the very, very historic, in the recent past, not very long ago. So I think if the $1.20, $1.30 spreads continue even with current cotton prices, we will be able to see good margin in line with what we are guiding. But if we see very volatile cotton prices of -- by fluctuations in the adverse direction, we will overtake inventory mix. But on a spot-to-spot basis, the big margins, I think I believe will be fairly comfortable on the margin front.

Okay. That's quite encouraging to know. One last question. Has there been any change in the mix in terms of your revenue, given that there are a lot of the shipping challenges which we are seeing. And yes, that was the other question?

Not really, I think the last -- the dispatches to the export and domestic are in line, it's only on account of the shipping costs, et cetera, that will be good as happened. Otherwise, in terms of the customer base or the market base, not really much of it.

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

My question has been partly answered in the sense that I just wanted to understand the kind of margins that we expect to make based on the current yarn prices and the current cotton prices, you did mention that we are comfortably above the long-term average, right -- if I'm right.

Yes. So it will be towards the upper band of that upper side of that band, which we generally plays.

Okay. Okay. So it will be closer to 22%. Yes, it's just that the prices have been so volatile in both the directions. So it gets a little difficult to sort of understand, right? And that is the reason that I'm trying to -- thought of second guess kind of margin.

Today' prices, I think it could be even higher than previous, we are looking for a period, we will like to maintain that.

[Operator Instructions] We have a question from Pulkit Singhal from Delmas Capital Management.

Congrats on a good set of numbers. Just trying to understand the asset term. So your existing business is doing a 1:1 asset terms, if I were to take a INR 2,000 crore kind of revenue run rate. But your incremental CapEx of INR 1,400 crores is earning only, I mean, much less or asset terms. What is the reason for that?

So when we quote a asset term for a project, we do not rely or do not quote with this current prices. As Mr. Jain clearly said, the operating or the fundamental North star for us is the production volume and not the value you generate because the value is dependent on very fluctuating prices. So at current prices out asset turn on of these projects really significantly more than the numbers we have indicated. But we are talking about long-term prices of yarn that we have used to model the asset term.

Right, right. But on current prices, will it be 1:1 or it will be much higher than that?

At $4.40, it may be slightly higher than 1:1 also, but that's not the number we are hope to sustain over a long period of time.

Sure, sir. And how much is the mix in this, you assume from fabric versus yarn?

So this current expansion that you are talking about is completely for yarn, as I said 1,65,000 spindle equivalents. So this is completely for yarn.

So now the fabric is running -- already running at full capacity. So whatever yarn they require, we are already in the process of supplying to them. There is no plan to expand the fabric capacity immediately or there could be some plans, we say, with the fabric team is looking at for the debottlenecking, but that may not happen in this year or they knew that may not happen in the next couple of months. So practically, all this yarn, which will get adding into the system will be for the market initially.

Right. And can you break down this CapEx between this year and next year? I mean if I just look at FY '22 and FY '23, how do I look at the CapEx figure?

The FX '22 numbers are -- this year, this is not going to be any significant CapEx out of this INR 1,400 crores because the small CapEx will come by way of construction costs, et cetera only. Most of the machinery,most of the CapEx comes in when the machines start coming in. So I think a major part of that will happen only '22, '23.

Right. So -- but the overall CapEx figure for this year would be how much? I mean if I exclude, I'm just asking at the company level?

This year, I think we would have -- had close to INR 700 crores, INR 800 crores on CapEx.

INR 700 crores to INR 800 crores, and next year could be INR 1,400 plus whatever INR 150 crores of regular kind of thing?

Sorry?

For FY '23, the CapEx figure could be closer to INR 1,500 crore, including the maintenance CapEx?

Yes, that probably -- definitely higher than INR 1,000 crores.

Okay. And the peak revenue, the way to look at it, I mean, obviously, '23 seems quite high. But on a INR 8,000 crores, do we assume an incremental INR 1,200 crores? Is that how one should look at it? Or am I missing some piece in the calculation?

No, you're -- once these projects are fully operational, it will add roughly INR 1,200 crores to our top line

So there are 2 projects which are already going on. So which will delay the top line of, I think, about INR 500 crores, INR 600 crores. And these projects should add another INR 1,200 crores. So by the time these projects gets completed, the total top line should increase on today's prices almost close to about INR 2,000 crores.

Okay. And that will be by FY '24?

We are taking FY '24?

The INR 2,000 crores will be by FY '24, basically.

Yes. That's true.

Okay. Okay. Got it. Got it. Just one other thing. How do you look at -- I mean, one is obviously, you're adding capacities now. I mean -- I'm just looking from your CapEx intensity last 6, 7 years versus the next 4, 5 years. Do you see the company is going to embark on a much higher CapEx than they have been? And your debt equity ratio even in the future, it could be higher than what you have so far done.

Generally, our thought process is to put up -- if you look at last 15 years basically, we have had 3 clusters where suddenly a big CapEx to come in, because the larger capacity projects are coming. And then for the next 2 years, 3 years, we will like to consolidate, bring back -- bring in all the efficiency, bring back the debt equity to the levels we got and then we will expand it. The last 4, 5 years, I think, was more of a consolidation period for us. And now we want to take up these projects. And once these are implemented, the long-term debt equity thought process, whatever we have, we still believe that's reasonably good. But it's only sense as of now, the opportunity is there. The company's debt equity is virtually going into the negative side. And also last couple of years, we have not expanded in a bigger way since the customers are there, the product need is there, opportunity looks like. So we have decided to put up this project. And after that, we'll take up huge for next 1 to 2 years to consolidate and then we take a further view on the expansion.

Right. So what is -- wanted to understand was you have operated at -- debt equity ratio is 1:1 8, 7 years ago. and now you're very, very comfortably placed. So even after whatever expansions you do, do you have a cap in mind that you will not go beyond 50% or you may still living up to back to the 100%.

I think the last many years, we have never touched 1:1 on a company basis debt to equity. And I still believe our debt equity overall over a period of any 3 years should not be more than 0.5:1 as on today. So we still have benchmark, we are still at 0.5:1 at the maximum debt equity, just for a year or 2, depending upon the project side, it could exceed. But any period of 3 to 4 years will likely be that -- within the track.

Right. And last question. I mean, so obviously, the margins have expanded last few quarters, and you seem to suggest in your opening commentary, some more optimism that this is not just a quarterly phenomenon, but it could be slightly longer. Any sense of the duration we're talking about, the new phase is slightly longer, we're talking about just the next 1 year or maybe more structural 2, 3 years?

It could be more structured 2, 3 years because if the brand continues to look at China plus One policy, China has a huge capacity. Even in mini-fuel collected from China going to the other countries, I think everyone will have a huge -- the piece of K2. So I think this looks like if this trend continues, this could definitely be a medium term mostly 5 years kind of a situation even longer than that as well.

Right, right. Sir, just one quick final question. You have a INR 7,000 crore equity base. You could very easily able to INR 2,000 crores, INR 3,000 crores of CapEx, and a even then you would probably not reach our 0.5 debt to equity. What is preventing a much more aggressive stance here given the kind of China profile opportunity, et cetera, that you're talking about?

I think this question was raised in last meeting also, and we were quite conservative, and we're still not very sure the management that really we should plan a day and once the margins are normal or the situation becomes normal, lots of capacity will get added into the system. So I think it's better to really take a view for a year or so, and if this continues, we are more sure of the outcome. I think -- I mean, the expansion could be taken at any state, but once if it is taken, there's no way you could come back. So I think there's more of a confidence building if this opportunity continues, the margin continues. I'm sure, I mean, we have taken this INR 2,000 crore project, where INR 600 is already going on, INR 1,400 on it. So if you -- had you spoken to me 8 months back, I was not very comfortable on this also. As the things are going, as we are getting more and more clarity, I think we will take a view on that also.

We have our next question from Kumar Saumya from Ambit Capital.

My question is regarding the ongoing project that you said that would add around 5 billion to 6 billion in revenues. So if you could give us throw us some light on that?

So I said the 2 projects are going on. One will start commercial production somewhere in March will get completed by August this year -- August next year. And the second will be starting commercial production, I think, somewhere in the month of April, March/April, and that will also get completed by September '22. So these 2 projects by September '22, which is 7, 8 months from today, will be fully commissioned where the partial production will start coming in by March/April and so and so.

[Operator Instructions] We have a follow-up from Mr. Naushad Chaudhary from Systematix Group.

My question has been answered. I just wanted to check on one thing. As we are very optimistic on the industry side, sir, but if we look at in terms of overall percentage of capacity addition, there is the recent announcement is adding only 14% -- 13%, 14% on the existing base, though it is coming in next 2, 3 years. So looking at the kind of optimism we have from the volume point of view, are we going slow in terms of capacity addition to gain the maximum, what is coming to us? Or what is your thought process on this sir?

Hello. Yes, I think you're point is valid, but I think it's always important to be a little -- as you get more confidence because very, very heavy capital program always been there. You, I think more of a customer base and the product mix also value and not. So are we -- as we get more and more confident, we can add to the capacity, but I think to start with I thought was suddenly adding the -- adding a 20% capacity on our PT also reasonably a good figure. So from today's capacity, we'll be adding 20% in next 2 years. So whatever we have done in the last 55 years, we're talking of adding 20% of that in the next 2 years. which is not bad at my perspective.

Lastly, just a clarification. The ongoing CapEx for spindles, you mentioned it will come in September '22, if I heard it correctly.

Yes. Full production will be from August, September '22.

Okay. So INR 500 crores, INR 600 crores are you investing in this and the remaining INR 200 crores is the maintenance cost, which...

You mean -- cost INR 700 crores for this -- and it is -- into a top line of anywhere would be INR 500 crores to INR 600 crores as per long-term average in that current price that number will be slightly higher.

All right. And there is no thought as of now to invest anything in the fabric though it is utilizing at full capacity now.

These bottlenecks will happen there also some monetization debottlenecking will continue there also because it's not only the expansion, but I think to update the machinery and need for the customer requirements will continue in every business. So close to about INR 100 crores in any case, they'll keep on spending every year for their balancing as well as the modernization for a long-term basis.

We have our next question from Mr. Sandeep Ved.

Congratulations on a very good set of numbers. My first question was on the inventory. If I look at your balance sheet as of September 30, your stand-alone inventory is about INR 1,600 crores and consolidated inventory is INR 1,700 crores. While you spent about INR 1,100 of raw material in the September quarter. So does -- won't that mean that you have enough inventory to last this quarter at least and maybe some of it will go into the next quarter as well?

The inventory that you are seeing our balance sheet is not just raw material. It will consist of multiple other things such as finished goods, our working process. So when we talk about our inventory and we have referred to inventory in this call is typically only to -- only about the raw material inventory, which anywhere been 6 to 8 months -- -

Sorry, of this INR 1,700 crores of total inventory, how much would be raw material inventory and how much would be working process and finished goods?

So typically, whatever is the finished goods in inventory, you look at the March figures or the WIP or the stores, they'll remain constant by and large. You can easily do that math to calculate the raw material inventory.

Also, Raw material variance, it's not just cotton. We also have pipes, fiber, et cetera, that we import, and that may -- those numbers will be slightly on the higher side and not just 1 month otherwise delivery period of but 5% sometimes be longer later. So quarter typically lasts somewhere in the middle of this quarter. It may be 1 month, it may be one month and a half. So we are there only not much variation from that.

Okay. Secondly, Niraj, you mentioned that you do about INR 150 crores, INR 200 crores of upgradation CapEx every year for keeping your plants up to date. So is that INR 150 crores to INR 200 crores capitalized? Or do you expense it in your profit and loss account?

No, no, no, that's all capitalized because it's a change of machine.

Okay. So a change of machine. Okay. And lastly, you mentioned that the relatively higher margins are likely to continue in the medium term as well. So would you see that the..

Sorry, I'm not saying the margins are likely to be higher in the given term. I'm only saying that the trend of customers coming to India looks like this could be in the medium term available to us. Margin will depend upon prices in the cotton, which is yarn, we need to think what could it be. But yes, whatever the customer is looking at China plus One, that plan may continue to look like for a longer period of time.

Exactly. So from a debt perspective, where India is being looked at favorably in terms of China plus One. Would you say that structurally, the industry -- the entire yarn industry is on better pedestal today than it was a couple of years back. And that may continue on for a few years at least?

Sure, yes.

Okay. And lastly, on the fabric side, I understand we have about 180 million meters of capacity, right?

Yes.

And you did about 37, 38 and I assume that you would have reached through the 200% towards September. So going forward, it would be possible to do more than 40 million meters of quarter going forward?

Yes, because our process capacity is close to about 40 million meters per month, and great capacity is 80 million meters. Per month is our competitive April.

Process would be about 45 million meters a quarter, right?

Yes, it should be possible 40-plus million meter would be possible.

Right. And that will -- so even today, you would be the largest fabric manufacturer in the country, right?

I would say yes, capital side yes.

Right. And any plans of taking advantage of this government scheme on the textile. Are you looking at setting up a facility there in loose textile front?

We are still evaluating that, yet to announce the final destination where these mega parts are coming in. So I think once the government announces everything because it's more related, it looks like it's more related with the government thing to happen there, there they want to allocate some space for the integrated players for the textile producers also. So we're still waiting once the final announcement comes in, the final pot size comes in then we'll take a final view.

We have our next question from Resham Jain from DSP Mutual Fund.

Yes. Sir, just one question on the overall CapEx going forward. Are we also thinking and planning for some diversification away from spinning and fabric or within spinning and fabric, for example, you're already doing like new launch, for example, within spinning in fabric, can you do beyond woven, which you are currently doing? Anything on the diversification plans?

As of now, no because we feel there's much more to do in our existing businesses as we are finding lots of opportunities for differentiated products, both within spinning as well as the beading. So there are no plans to diversify on an immediate basis. I think we'll continue to look at how do we keep on improving our customer base and product mix within these 2 segments.

We have our next question from Naushad Chaudhary from Systematix Group.

Just a clarification, sir, on the fabric capacity, you mentioned processed fabric is 45 million-meter per quarter. And what is for gray fabric, sir?

Gray will be close to about 54 million meter per quarter.

Now there are no more questions. So I would hand over the call to the management team for closing comments. Over to you, sir.

Thank you very much. So I think this had been a very exceptional quarter where -- because of the various reasons going on in the market, be in raw cotton prices available to us at a much better price. And all these changes which we could do both in terms of the customer base as well as the product mix base, these numbers are possible. Also, we have declared a onetime special dividend of INR 34 a share, which was basically since we got a dividend from our subsidiary company, so the same amount of dividend we have distributed as an interim dividend on a onetime basis. Otherwise just to relate shares of this company also as we were getting the dividend. However, it's still -- we are confident the opportunity looks like there. But again, it has to be looked at how much can it continue to be in terms of the -- not only the selling the product, but we'll continue to look at better margins as well. Right or wrong the cotton has being at very differently in last 4 weeks we are yet to look at because this is a time next 3 to 4 months are going to be very critical for most of the spinning market, where they'll have to build up these raw cotton stocks. And depending upon the prices, we'll have to look at their strategies whether they want to really cover in a long way or they want to restrict to the lower quantity and which is -- which will be determined the profit and loss in order for the next 6 months after that. But as the operations as the controllable cost, I can assure you that level best to look at whatever is best opportunity available, we look at that, and we are trying to look at improvement in the every aspect of our business, day-in and day-out we are working those ideas as a very, very vibrant management. This question has always been there for the growth that the company is not doing. So we have -- I also feel personally that these to gain oppurtunity, so we have drawn this optimistic plan of 20% growth. So it could be not as opportunities from the perspective of some of you, where we are used to have a much larger expansions of the numbers. And to some extent, on the financial numbers, I do agree that the balance sheet can support a much bigger expansion. But I think more than the leverage only we are looking at the internal operations and internal efficiencies also, which are integral part of our own culture. Though as I mentioned, it may not be possible for us to reveal these numbers because of the availability of raw cotton at a cheaper price this quarter, but I can assure you that the business overall as on today looks good. and the long-term -- the longterm business visibility looks good as of now. Rest I think lot will depend upon or buying soft cotton and the behaviour of cotton, not only in the Asia, but also the international market, which is very, very critical for our business. The fabric business has done a great job, internally we are still working and they are reaching now the full capacity and I'm sure with their full capacity -- with out full capacity utilization we will be doing better in the times to come. So thanks once again for support, you have always been given to us as management. And I can assure you on behalf of management, we'll try our level best to come up with the expectations. And we will keep on sharing our thought process with all of you as and when the opportunity arises. Thanks, once again. Have a good day.

Ladies and gentlemen, this does conclude your conference for today. We thank you for your participation and for using iJunction Conference Service. You may please disconnect your lines now. Thank you, and have a great evening.