Vardhman Textiles Limited (502986) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Vardhman Textiles Limited 3Q FY '22 Post Results Conference Call, hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Prerna Jhunjhunwala from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, ma'am.

Thank you, Bijal. Good evening, everyone. On behalf of B&K Securities, I would like to welcome you all for 3Q FY '22 Post Results Conference Call of Vardhman Textiles Limited. Today, we have with us the senior management of the company, including Mr. Neeraj Jain, Joint Managing Director; Mr. Sushil Jhamb, Director, Raw Materials; Mr. Mukesh Bansal, Senior Vice President, Fabric Marketing; and Mr. Akshay Jain, Head of Finance. I would now like to hand over the call to the management for initial comments. Thank you, and over to you.

Hello, and welcome to our investors and all other market participants. Welcome to the call. Just to give you some highlights on the numbers. We did about INR 2,600 crores, INR 2,700 crores of the top line for -- in this quarter, which is about a 13% jump from previous quarters last same year and about a 50% jump from the same quarter last year. We have an EBITDA of INR 800-plus crores, which is 15% higher sequentially and about 170% higher as compared to the same quarter last year. The performance has obviously been driven by a multitude of factors, which include rising yarn prices and rising raw material prices, which due to the demand scenario that is laid out and which we will talk to in greater detail, have led to -- have allowed us to pass on a considerable chunk of the raw material price increases to our customers. The numbers have already been published, so I will now hand over to Mr. Neeraj Jain for the detailed breakdown.

Good afternoon, everyone. This has been a very different quarter compared to the previous periods where the raw material prices started increasing as the new season started against the filling of most of the markets that we [indiscernible] coming in both in the U.S. and India, the prices may come down, which was actually increasing before that. But contrary to that, the international prices were for almost [indiscernible] before the quarter has started, has gone up to [indiscernible]

Sorry to interrupt you, sir. This is the operator. The audio is not clear from your line, sir, request you to please come closer to the mic.

Is it okay now?

Yes, sir, please go ahead.

Okay. So this was a quarter where the newer feature from almost $0.85, $0.87 went to as high as $1.22, $1.24 and so and so on. In [indiscernible] cotton prices, which started almost at INR 52,000, INR 53,000 a candy most part of the quarter was in the range of almost INR 65,000, INR 67,000, INR 68,000 a candy, has further increased as of now to almost INR 74,000, INR 75,000 a candy. The yarn prices in tandem with the increase in raw material prices, both international and domestic, also increased. And the earlier level of $4, $4.10 increased to -- in a period increased to almost $4.50, $4.60 and then further increased to $4.70 or $4.80 as of now. And the domestic prices also increased in the same fashion. For Vardhman, we were covered part of the cotton -- part of the quarter from the earlier cotton, which we bought last year at a much lower cost of INR 42,000, INR 43,000. But at the same time, we started buying in this period at a much significantly higher prices with subsidies in prices at that time. And since the yarn prices also increased, I think there was not really much of a difference on the margins and the [indiscernible] margins continue to be good in this period. The fabric business also improved significantly in this period in terms of the utilization, because earlier periods, there were the permit base and those kind of things. This was the first quarter after a long period of time where we could utilize almost 100% of our capacity. And though the markets still were under pressure because there's always a time gap between the [indiscernible] prices increase or decrease, which can be passed on by the fabric team, but at the same time, at least the [indiscernible] simple thought was -- between the line was utilizing full capacity in this period. And as a result, the top line and the [indiscernible] also was better in the fabric division. The prices still continues to be very high, both internationally. There are issues and concerns. People are talking more in terms of the cotton drop in India. There are issues and concerns in terms of the demand -- the supply chain management issues as of now, especially from West Africa or sometimes from the U.S.A. Those things continue to be there even today also. Having said that, I think the [indiscernible] as per our estimate or as per the industry estimates are likely to be in the range of about 34 million bales. And the convention, we have also been range about 33 million, 33.5 million bales, so which means in terms of the overall production and consumption, numbers are matching. And whatever exports happen, maybe about 3 million bales, which are estimated to be exported during the year. And 1 million bales will be imported, so the net 2 million bales we will be reducing or we can reduce from our cotton stock up of almost 7.5 million bales or so. The supply chain issues continues to be there both for cotton and for yarn. In between, things have started improving, but with the last [indiscernible] of share of deposit base, probably, again, there was a challenge in terms of availability of containers or the shipping or the number of ships available. And I think the supply chain continues to be tight even now also. So of course, we, in this space, is not really adding much to the people. There could be a possibility in our group that these things may get smoothen in the next 2 to 3 months' time. In this period, in addition to the last expansions, which were announced in the last Board meeting, so we have announced a new project with a [indiscernible] machine costing -- maybe costing around close to about INR 600 crores. But since the delivery of [indiscernible], I expect it can be commissioned for the -- only in 2024. If we are [indiscernible] into started as the delivering or most of the bankers are booked on the delivery and they are not quoting on that. So we hope that once the [indiscernible] more of an issue of the supply chain with the vendors also, I hope [indiscernible] in online, we should get a vision to finalize the machinery and by '24, this project could be fully commissioned. So this is what is our increase on our numbers on the business scenario. I think that we can open it for the question and answer, and the remaining queries or debate or discussion can be done along with the questions. Thank you.

[Operator Instructions] First question is from the line of [ Apurva Sharma ] from [ PGIM India ].

I wanted to understand any color on CapEx plans for the fabric capacity.

There is no immediate decision on that. So of course, as we are utilizing the full capacity, I think we have to sustain it for most period of time. And also, we are looking at some debottlenecking to happen, which may in terms of CapEx may not be substantial, but I think where that we are getting a challenge in terms of delivery of any particular product, we are in that debottlenecking. So as of now, we haven't decided anything on the new management CapEx plan as of now as far as fabric is concerned.

Okay. Okay. And sir, also at the current level of cotton yarn spread, what would be the margins that the industry would be making as a whole as your sense on the same?

So the spread will be in the range of about $1, $1.15 or so the rate that we have as of now, going by today's trend.

So any calculation into, say, what kind of margins can we expect for the industry spending in?

It would be -- because the prices have increased in a big way. So a good rate to be in the range of maybe 13%, 14% as such.

13%, 14%. Okay. Okay. And sir, 1 last question on the spindle capacity, we have guided. So what -- where are we on the current spindle in terms of commissioning and future commissioning? So if you could just throw some color on that?

Yes. So the earlier 2 projects, which were equivalent to about 100,000 spindles, we are seeing those would be somewhere -- starting somewhere maybe April, may, the commercial production will start for both of them, and both are likely to be commissioned by September of 2022 itself. And after that, the expansion, which were announced, 165,000 spindles are announced in our Board meeting. There is -- we haven't found any orders of that as of now because most of the machinery suppliers are not in a position to quote the delivery and the prices as of now. So I think that can be done only once we are in a position to find it.

Okay. So September '22 is for the 100,000 spindles, right?

Yes.

[Operator Instructions] We'll take the next question from the line of Kirthi Jain from Canara HSBC Life.

Sir, in your previous question to, you had highlighted that the spreads will come down and margins will come in. What are reasons why the margins will come down to 13%, 14% levels in the coming quarter?

No, no. The margins have not come down. The margins are same, that the prices are increasing as a percentage of margins are coming down. So in some degree, that's why these margins are dropping down as of now. Otherwise, in absolute numbers, $1.20, $1.25 is still available, so absolutely not down.

[indiscernible] 13%, 14% was in general for the spinning industry, not for our company.

Sorry to interrupt you, sir. The audio is not coming clear from your line. Please use the handset mode.

Is it better?

Yes, sir.

What I'm saying is the margins quoted the number 13%, 14% that we quoted were for the spinning industry in general and not for what Vardhman Textiles.

Okay. Sure, sir. Sure, sir. So what would be -- we should expect, sir, for our company?

We typically see between the 18% to 22% number. And we hope that in the coming future also, we will be taking perhaps to the higher end of this range, but we will endeavor to stick to the range for our full year basis.

Correct, sir. So broadly, this kind of absolute EBITDA of INR 6 billion plus would be maintainable right, sir, at least in the coming some time at least for a year?

Very difficult because for a year, I can't commit depending upon what the cotton prices, what the yarn prices would be. But yes, as of now, this is -- as of now, it is being maintained.

Sure, sir. Sir, any reason why we are not allocating capital in the fabric, sir?

No. We -- it's the first time we have started utilizing the full capacity. So we want to consolidate there for a year before we want to take a [indiscernible] on the CapEx. Ultimately, if the business is good, we are in a position to sell, we'll definitely expand that business as well. But I think it's the first time we have utilized the full capacity, so we want to wait for some more time.

Sir, given the cash accruals are much stronger than what we would have thought a year back or 2 years back, will we look for further more CapEx there? Or what is the thought behind it? How much you want to leverage? Or what is the thought or thinking on, sir?

If you look at, we have always been a very conservative company, and we have always expanded slowly. But going by the cash flows and the opportunities in our view, which looks like there, that's why we have taken such a big expansion more. So we are talking of a total 100,000 spindles coming now, which is almost like INR 800 crores or so and then 165,000, which was announced INR 1,400 crores, and then for the [indiscernible] machine, which is another INR 600 crores, plus all the normal CapEx and debottlenecking. So it's already, I think the CapEx plan is in the range of INR 3,000-plus crores for the next [ 3 ] years.

Correct, sir. Cash flow is -- more than that, INR 5,000 crores cash flow will be there in 3 years?

We would like to go step by step and [indiscernible] continues to the [indiscernible]. We will relook at that, but this is what as of now has been undertaken.

Sir, we'll reconnect your line as there is a disturbance coming from your line. Request to all the participants to please stay connected while we reconnect the line for the management. Thank you. Ladies and gentlemen, thank you for patiently waiting. The line for the management is reconnected. We'll take the next question from the line of Niraj Mansingka from White Pine Investment Management.

Just 2 things. One, sir, on the margin, you speak to think about the industry while Bangladesh has not been buying much cotton from China and yarn more from India? And how is the demand-supply situation according to you in the international trade and which countries? And is there any higher cost of yarn that Bangladesh is getting vis-a-vis some time back because it might be preferring imports from India. So some thoughts on that side?

So the demand continues to be good, especially Bangladesh because we have been exporting a lot in terms of the garmenting. So there's a lot of demand for yarn from Bangladesh and other countries as well. As far as the demand is concerned, there is no issue, no concern. Yes, Bangladesh prices are higher than the Indian prices because indirectly they get some subsidy also [indiscernible] yarn plus material made in Bangladesh. So that's why their prices generally would be $0.40 to $0.50 higher than the Indian prices. So that's in the history and even today also that gap is maintained.

But is the cost to them increase because they might be buying more cotton fabrics from India compared to in the past that they might be buying from China?

Not really because at the same time, if they buy the local yarn, they get a subsidy from the government on the [indiscernible] value of garment if they buy the local yarn or a local fabric. So to that extent, they are not having any disadvantage.

Okay. And 1 in terms of your sales of yarn and fabric, can you share some color on where the demand growth is coming from? Whatever the growth is coming from? What type of customers are you really buying back mostly?

So most of the increased demand is coming from the direct brand itself. So they want to tie up both on the yarn and the fabric side. So there's more demand coming. And in terms of the various countries, I think Bangladesh -- from India's perspective, Bangladesh would be the biggest customer for yarn as of now.

And in fabric, sir, in terms of demand for fabric?

Fabrics also the same situation.

Okay. The last question on the cotton side situation. The prices were -- there was less arises in the early arrival season and later on the prices have moved up. So how do you see the demand-supply equation and considering that the amount of net exports that India does has also gone down. So any color on that? Like will this put pressure on you to build on cotton at a higher price and how should the industry people -- competitors cost of acquiring cotton. Some color on that?

So I have already shared the production and supply numbers in India will be almost matching, close to about 34 million bales. And since the export will be less and imports will be there some -- so the net-net export could be in the range of about 2 million bales, 2.5 million bales, which will go out of the opening stock.

Right. Don't you see this will be first -- further pressure in the yarn margin would be there because the matching of the export versus the quantum of net exports is very low? So don't you think that would have any pressure on the yarn margins?

Sorry, I couldn't follow your question.

I think -- okay, the question is, by the way, do you think that India's cotton discount, which is [indiscernible] price of cotton of U.S. cotton that we share?

Yes. So definitely with the import duty we have in India, the discount, which was generally available on the Indian cotton has come down as of now. So our cotton is becoming more expensive because the imports cannot be done openly. So that's why the prices have gone up for the Indian cotton prices.

Okay. So do you see the import duty changes which may come in the budget or in the future, will have a slowdown in the way that you are buying cotton from the market today? Do you think have any impact on that?

If the import duty comes down, I think the only difference would be whatever parity we are used to have with USA that will be restored. As [indiscernible] prices go higher, they will be increasing the international prices. So that is where the compound for the [indiscernible]. But once the duty is not there, the normal equation will prevail because then people will have the opportunity to buy from outside in case Indian prices goes beyond a particular price.

The next question is from the line of Surabhi Saraogi from SMIFS Capital Limited.

Am I audible?

Yes.

Yes, sir. Sir, my question is that with regard to the increase in cotton prices, so I just wanted to know if you have taken any price hike in the current quarter in response to the increase in cotton prices? And if yes, then how much?

Yes. Price hike in [indiscernible] as I already mentioned, since the prices are increasing, we are also trying to pass on the same to the customer.

Okay. And sir, are there any plans of further price hikes?

No, it's not a question. We don't have a monopoly. I think the price hike can happen every spindle we try in the entire world. So depending upon the cost push and the demand. Everyone is trying to do that, but to begin yet or not, it depends upon on the demand supply situation.

The next question is from the line of Abhishek Kumar Jhunjhunwala from M Capital Services. [Operator Instructions]

Am I audible now, sir?

Yes, sir.

Yes. I wanted to ask like in the EPS, the consolidated EPS is much lower than the stand-alone EPS. What is the reason for the same?

So there has been a dividend which we have received from our subsidiary companies. In the consolidation, the dividend is not there. That's negative.

Okay. And sir, I wanted to understand, like due to high cotton prices, what is the forward inventory policy that the company is looking forward to?

We haven't decided as of now whether we're [indiscernible] but should be. Deal prices are very high. We might not cover the full season. It looks like as of now. But I think we are looking at it on a very careful basis and we'll decide in the next 1 to 2 months on how should we go on this. Because we are one of the highest, and they hold the inventory for next 9 months, it could definitely be a big concern as well. So we are looking at it very, very carefully. And I think it's only next 2 months depending upon the [indiscernible] and import duties or the other data, we'll have to take a view on that.

And will hedging help in this particular scenario of high prices and hedging on international cotton exchange?

We have done it partially to cover the risk, but at the same time, some risk has been taken on our books also. So a definite case we have to cover it, we might look at hedging as well.

And second, one more thing, sir, like the government of India has bought in the PLI scheme. So is Vardhman going to benefit or take any advantage of the PLI scheme?

That's 100% polyester based or the manmade-based fiber. So as of now, we have no plans to go in for that.

The next question is from the line of [ Smita Navani ] from Citibank.

I'm I audible?

Ma'am, the audio is low from your line. Please increase the volume of your device.

I'm I audible?

Yes.

Sir, I would like to know if [indiscernible].

[Operator Instructions]

Am I audible now?

Yes.

Okay. So sir, my question is your outlook on cotton prices for [indiscernible] like in India?

It is very difficult for Indian prices to be predicted because it all depends upon how the near future will remain. So the tenement gets whether this will sustain or will increase or will come down. The Indian prices are generally determined by the international prices, whether because what prices the export can happen or import can happen. So by and large, the national prices are determined or aligned to the international markets. And taking a view on near future, whether that will go down or will go up [indiscernible].

Or do you see an impact of [indiscernible].

[Operator Instructions]

Yes, sir. And sir, what do you think is [indiscernible] on the comparable extent [indiscernible]?

So there is no direct impact as such. So there are some of the markets in India, which are -- have the night curfew or some activities less. But by and large, on the business side, at least the buying has been a little slowdown in India, but not really a very significant difference because everyone is adequately sold in India. So I think -- and this is the impact or the fatality rate is much less. So it looks like it's not going to really have a huge issue even for the Indian market. Internationally, in any case, it has no impact.

Okay. Do you see your [indiscernible].

Sorry to interrupt you request you to please reconnect. The audio is not clear from your line.

Sir, do you see any [indiscernible].

I'm sorry to interrupt you. The audio is breaking from your line. Request you to please reconnect. The next question is from the line of Bharat Sheth from Quest Investment Advisors.

I have only 1 question. Since our power cost is very high, what are the major are we taking to reduce power costs, some kind of, I mean, our own power generating or any, if you can give some color?

So we already have our own power units, which are almost to the range of about 50 megawatts. This is a thermal-based coal, but in any case, since the cost of coal has increased in a big way, so we have stopped the one-off -- we have started one of our power plant as of now. And the other 1 also is utilizing at a lower capacity and we have started growing it from the electricity board, which is making more sense [indiscernible] as of now. And in addition to that, we have gone for a small capacity of maybe 15, 20 megawatts as of now for the solar also, and we're looking at those options as well. But our own plant, there are no plans to go for a further expansion of our own [indiscernible].

The next question is from the line of [ Krishna Kumar ] from [ Limiar Capital ].

Sir, in your press release, there is a clear receive in terms of processed fabric production and sales vis-a-vis the second quarter from INR 36 million to INR 44 million. Any reason for that? Is it because of some cost stabilizing? Or what demand in the situation?

Sorry, what is your question?

In terms of grey fabric to processed fabric production and sales, if you compare second quarter to third quarter, there's been a substantial increase in processed fabric production and sales. So is there any strategic shift? Or is it just that any possible ....?

No, the process capacity was being underutilized because there was no demand. And as I mentioned to you, during this period since the offices were opening and things were becoming better, so we started utilizing a better capacity utilization on the processing side. And grey is -- basically we want to sell grey only if the processing demand is not there. So as we are in a position to utilize the process, that's the first opportunity or the first choice we have. So that's what is happening this quarter.

Okay. So you [ won't disclose ] split of margins on the fabric [indiscernible], but is it right to understand that the industry is going through lower spreads on the fabric side vis-a-vis the spinning sites, is my best understanding.

Yes, that is true.

And is it improving as a trend now? Or are we still similar situation?

No, it is definitely improving because it's more related with the capacity utilization also. As your capacity utilization improves, definitely, your cost come down. So to that extent, it's improving, but otherwise, if margins are improving on a similar basis or on the same volume basis, it may not be doing. But as we are utilizing more and more full capacity utilization, the costs are coming down. So that's how the margins are improving.

Sure. So on the management, sir, when you look at return ratios and payback, is it good to have more spinning or fabric capacity in the current cycle? What is your real...?

If you look at the immediate situation, spinning may make more sense. But definitely, because as of now, the selling margins are too good because of the demand-supply situation. But I think definitely, if the fabric capacity is expanded at some stage, it will -- for the company's margin, it will definitely be better in the medium term. Yes, [indiscernible] spinning is making more sense. That's why we are allocating more capital to the spinning as of now.

Okay. And in terms of export benefits, so you [indiscernible] there has been a weakening trend that you mentioned with the third quarter. How is the market now? And is there an improvement in the value of the benefits that you are selling in the fourth quarter? What's the trend you expect?

Normally, these licenses, which we are selling are in the rate of about 75% to 80% as of now. So I think that's what it continues. So this is where we have taken a hit also. And we have marked -- on a mark-to-market basis to look at the current selling price rather than the -- only the book value of that.

Sure, sir. Lastly, in terms of [indiscernible] top Q expenditure, you mentioned that you now tied up the spinning machinery, et cetera, with the vendors. Could you just elaborate the reason, sir, you're talking very briefly. So what are the issues? Why are we began to tie up with the vendor, sir?

Because they themselves are not very clear on the deliveries available on the price availability. So I think they also want to take a little more time before they can pick up their vendors. So they've only as maybe they'll take another 2, 3 weeks to come back to us, both on the delivery and the pricing front.

Okay. So lastly, on the logistics cost on the overseas, is that impacting margins of any form across the value chain, sir?

Not really. They are not impacting the margins. But yes, we -- it's a pain point as of now for the customer as we delay their earnings. Of course, cost is also increased in a big way. But at the same time, that's also passed on to the customers as of now because it's all based upon the demand supply. The spinners are in a position to pass it on to the customers as of now.

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

Sir, just a couple of bookkeeping questions. First is, what is the gross debt and the net debt we have as on the quarter end, consolidated?

Sir, gross debt consolidated would be in the range of INR 2,000 crores quarter end.

And net?

Net would be close to maybe INR 1,300 crores -- INR 1,200 crores to INR 1,300 crores.

Okay. Sir, my second question -- sorry, are you saying anything?

No.

Okay, sorry. So the second question is on the new CapEx, which you are doing. Are we borrowing also for those new CapEx? Or are we using our internal accruals only for the new expansion?

Typically, our borrowing for any new project is 1:1 debt equity, and we hope to continue with that particular ratio. Obviously, it may change slightly depending on the ratio of machine cost to other expenses. But typically, it will range between 50% to 55% debt and the rest at equity. And that is where we are.

So just based on the typical cash flows and all, would you like -- will there be -- are you thinking about like a maximum level of cash or treasury you will be maintaining? Because with the current CapEx announced, let's say, over the next 2 years and the cash flows, possibly your treasury may surpass your previous averages over the last 3, 4 years. So is there any strategic treasury decisions which the board and the management has taken?

There is no absolute value number that we have in mind, but we do have a benchmark that we follow internally to keep the kind of cash. Of course, there may be short-term deviation basis, sudden inflow or sudden influx of cash that we have seen over the last 1, 1.5 years. But we do not -- we know that the amount of cash on our balance sheet will impact various ratios on our return on equity and the turn network and we will not, of course -- we make -- we will make sure that cash does not exceed -- become disproportionately higher compared to the best of our gross block and other productive assets. But having a little cash or some cash on our balance sheet has been hugely beneficial for us because it helps us. It derisks the volatile nature of the business model. So we intend to keep some but obviously not take it to a level that it becomes counterproductive to our return ratios.

Understood. And lastly, 1 bookkeeping question. What is the total inventory value as on December end, closing inventory?

Total inventory, you're talking about raw material?

Consolidated.

As a whole [indiscernible].

INR 2,200 crores?

INR 2,500 crores; INR 2,400 crores something.

[Operator Instructions] We'll take the next question from the line of Rishabh Shah from R S Capitals.

Sir, [indiscernible], we have mentioned that there is some realization loss in [indiscernible]. So can you just say is it a cash loss or is it a nominal [indiscernible] entry, if you can explain at this point.

No, it's a nominal loss. So we are marked to -- we have done it on a mark-to-market basis.

So in the end, we realize full amount whenever that happens?

[indiscernible] so it is based upon today's quotation, whatever is salable, so that's what we have done it to make it mark-to-market. But eventually, if we go by today's market, that is what we are going to realize. So the remaining loss we have already [indiscernible].

So normally, how much percent loss do we have to face in this?

Almost a range of about 20% to 25%.

And sir, this CapEx, what you are doing, so everything is demand driven, right? Going for whenever the CapEx happens, if all the capacity will be absorbed over time.

We feel the same because it's a good demand. That's why we are looking at this.

And this extra selling capacity, is it towards value-added yarn? Or is it the existing accounts, what you are doing?

No, this will be for the existing accounts what we are doing.

So the margin should be same only. So there has not been any major impact?

Should be.

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

Sir, wanted to understand that after the disruption and -- I mean relating lockdown, COVID and supply chain, sir, has there ought to be some restocking. So is the high demand, which is leading to increase in yarn prices, are they related to that restocking or that restocking is already done and now this is steady state demand which is leading to increase in yarn prices?

As of now on related with the sale demand only because the demand is good, especially in the western part of the world. So that is where this demand is coming from more and more garmenting. And that's where -- in the domestic market also the demand is good. So the restocking is not happening. Now it is more of a lower demand and supply for the consumption.

Sir, what I meant that, sir, I'm not talking only about the restocking of yarn, but also garment since all the inventory in retail...

That's what I'm also mentioning. So all the garmenting which is happening today is going for the ultimate consumption only.

Okay. Okay, sir. So that is really reassuring. And sir, also, sir, on the supply side now, sir, how much capacity in your estimate is stuck in bankruptcy proceedings? And with these higher spreads now that might soon come on stream?

See, whatever is the number of plants which are stuck up in the insolvency process now, since the margins have been quite good in the last 1 month and half year. So whatever could have been restarted, they have been restarted. And whatever could not be started until now, it's going to be very, very difficult to restart that. So I think as of now, India's capacity utilization, whatever we are doing probably on the existing spindle, it seems to be the best case scenario certainly. I'm not likely to look at a more increase in the capacity utilization going forward with the existing spindles. Whatever new capacity comes in, that comes in.

And sir, finally, so sir, basically, sir, what -- like you mentioned, whatever had to start has already started. So now the only thing that remains is that for new supply to come on stream. So how much time will it take like since you said that your vendors are also facing supply chain issues and any way they are already booked. So in that case, how soon can the supply come -- significant supply come so that the spreads can again go back to normal levels?

The capacity, the disruption of the new business we are talking of is for the new plants, which will be ordered today. But the existing parts, which would have been ordered, let's say, a year before or so, that capacity or do in India, almost we are getting almost 150,000 to 200,000 spindles every month.

Sir, this is new capacity you are saying that every month, 2 lakh spindles are being added in India?

Yes.

Okay, sir. So with this trend of 2 lakh addition per month, sir, how soon do you think that supply will exceed or match demand?

There are 2 factors to this. One is that India adds 2 million spindles, that's not really very big because at the same time, the capacity utilization in China has been coming down in the last many years. So China is still the biggest spinner in the world. And in case they had some part of the spinning, probably then for the entire world, the increase may not happen significantly. But because that's what is happening in last couple of years, China spinning capacity has been coming down only.

So despite the increase in spreads, still Chinese capacity is coming down?

It can come down because that's a different reason there because 80% of the Chinese cotton comes from Xinjiang area and all U.S. and Europe taking a view that they will not buy anything which is coming from the Xinjiang cotton. Probably, I think, on the cotton spinning sector, it could be difficult for them to get raw material. And to that extent, I think there could be concerns and issues on their spending capacity as far as 100% cotton is concerned.

So candy is improved both cotton and make yarn and [indiscernible]?

We can do that. But I think going by the rebate or the overall cost, whether it will make them sense to going for the basic operations like spinning or they'd like to concentrate more on the value-added products.

The next question is from the line of Amit Khetan from Laburnum Capital.

Yes, sorry. Just 1 question from my side. What would be our realized spread for the quarter? And could you give some sense of -- I assume that some of the cotton that we used last quarter was from last year. How much would that be roughly half or 1/3?

We typically don't give out a spread of individual businesses, but it would be broadly maybe slightly better than the industry average. And as far as cotton is concerned that we were carrying over from last season, it can be in the range of maybe 1/3 to 1/2.

The next question is from the line of Parin Gala from SageOne Investments.

Sir, one of the questions was actually answered. Sir, going by the numbers of production and sales that is given for the yarn especially for sequential and year-on-year, is it safe because we are right now utilizing 100% capacity of spindles?

Yes, we've been using 100% capacity of our spindles for quite some time now.

So sir, in that case, your new 100,000 spindles only come in September. So safe to assume that whatever growth is coming in yarn is the only price led instead of volume led? Or some stock improve also and trading volumes are lower?

So on the spinning side, whatever increase is happening, that has been primarily on account of prices only. And on the fabric side, actually, the volume growth has happened.

The next question is from the line of [ Nitin Borja ] from [ Sequent Investments ].

Sir, most of my questions has been answered already. I have just 1 question. You mentioned the spread number between cotton and yarn. So can you help us with this again with current quarter and for last quarter as well? What was it in Q2?

So current spread are ranging around $1.20 [ plus/minus ] $0.05. This is spot cotton to spot yarn prices. Last quarter also, it would have been the average in the same ballpark, maybe $0.05 higher.

$1.20. Okay. And what was it in last year, sir, Q3 FY '21?

Would be around $1.

The next question is from the line of Shradha Saraogi Garg from India Ratings & Research.

I just wanted to understand that recently, the Ministry of Commerce had launched negotiations under -- for free trade agreements with U.K., which is likely to boost exports for India. So is Vardhman also likely to benefit in terms of any boost that you're expecting in terms of your export dynamics to change after this FDA agreements with U.K.?

We are the textile material producers, so unless the U.K. will not be buying any fabric or any yarn from us, but U.K. will be buying more of a garment. So if [indiscernible] gets preferential treatment or a better FDA with U.K. that's going to get -- that's going to give advantage to the -- to our Indian garment makers. And if the Indian garment makers has an advantage and they'll be growing, definitely our materials will be going to them. So indirectly, we have a huge advantage. But directly, Vardhman will not be exporting anything to them or hardly exporting anything to them.

Okay. And sir, in terms of numbers, like how much do you see the exports are likely to go up after this in case you can give some sense on that?

Not possible for this to estimate. But definitely, wherever the FDAs have happened, any preferential country which gets, I think it's a huge advantage which comes for the country. But to give it a number, it won't be possible that how much substitution will be in a position to do from Bangladesh and these other countries as far as the government is concerned.

The next question is from the line of Bajrang Bafna from Sunidhi Securities & Finance.

So sir, just the spread that you talked about $1.2, which you managed last quarter. So in the last quarter, you were having some old stock also which you mentioned about half. So now you are working with this quarter of close to, let's say, INR 70,000, INR 75,000 per candy [indiscernible] the current season. So would that be safe to assume that this $1.2 is still manageable in the month of January, February and March going by the current bookings and trends that you are seeing?

Whenever we talk of spreads, we always talk of spreads based upon the current cost of cotton and not what any spinning mill will be holding. So if a spinning mill has a older stock, which is cheaper or expensive, their margins or the spreads will be readjusted accordingly. This spread is always calculated based upon the current prices of yarn and the current prices of cotton.

Okay. So in last quarter, since there was some old stock was existing. So that is why I'm just trying to understand that what could be our spreads in this quarter, considering that fact. Will that come down in terms of -- due to this particular reason, since we are working with new cotton right now?

Because season has just started. So the current spread will be within the provision of about $1.20 or so depending upon how the yarn prices be adjusted to this increase which has happened recently. That will depend upon these spreads. So I've given you because the cotton prices have increased much sharper given the spread as of now, but I think it will get readjusted based upon the prices, maybe next couple of weeks.

Okay. And sir, one more sense, which you are getting from the ground research that this time because of the higher cotton prices and the arrival of cotton is also pretty less as compared to last year, when we got almost 2 lakhs and till date, I think 1.40 lakhs bales have only arrived in the market, which is far lower. So what sort of inventory that we built up vis-a-vis historical levels? And what is your sense going ahead?

I have answered this question earlier also. Normally, typically, we try to cover most of our cotton by the end of April, which is the end of season. But this time, since the prices are too high, we will have to redefine or relook at whether we should really go for the full season or we should reduce our inventory. So as of now, we haven't taken a final view on that. But I think next 1 to 2 months will determine that what kind of a cotton stocking policy which should happen this year. On a digital cotton too, in case we require to build up a physical cotton, whether how should we have it by selling in the near future if we want to do that, 2. Three, of course, the arrival as of now is flat. But at the same time, it is also because the farmer is bringing the crop slowly. At the same time, the crop seems to be reasonable. So the season, which normally ends in the month of April, this year, the market estimates can go up to June, July as well, so third. Fourth, since the prices in India are much higher, we will export what can -- it looks like export won't happen more than maybe 3 million bales or so, which normally can happen up to 4.5 million or 5 million bales. So to that extent, cotton will be available in India. So we'll have to take a view depending upon our commercial [indiscernible], whether we should really carry everything on our balance sheet or we should look at if the cotton is available in India, we can buy for maybe 1 or 2 or 3 months on a month-to-month basis rather than keeping it on our books. So we haven't taken any view on that. But yes, as the time passes, we'll take a final view on that.

Okay. And currently, we are holding 2,400 crores of inventory. That is the right, if I heard it correct.

Yes. That's the total inventory that we close our [indiscernible] everything.

The next question is from the line of [indiscernible] from Ventura Securities.

You're mentioning that the demand is good recently, but with the [indiscernible] can be for 2022 there's expense or actually, including readymade garments are having to maybe 12% of the GST. So don't you think that will affect the sales or the revenue of the textile products in the upcoming quarter?

No. There's a decision for increase in GST was withhold by the government, and we are under the same old region as of now.

The next question is from the line of Pulkit Singhal from Dalmus Capital Management.

Sir, if you could just mention what are the current yarn and processed fabric prices that you are witnessing versus what has been booked in season. How much -- what percentage higher is it right now?

So the current prices of, that is from the yarn on a China basis will be in the range of about $4.85 or so.

And how much have you booked in 3Q? I mean, I'm saying versus your realization in 3Q, where the price is standing now. How much higher is it?

Sir, we don't give out the prices of our individual products. But whenever reports price or anything, we are talking about the market for a standard yarn product or a standard fabric product.

Right. And so that percentage increase, will it be similar to what you also -- I mean, around that range that you might also look?

Of course, the price of the same standard products, but demand supply will come into play when it comes to value-added products. It's the demand for the particular value add while it is lower or on the higher side increase or may be higher than or lower than normal. But the fact [indiscernible].

Right. So on the standard product itself, I mean what percentage higher is the current yarn price versus what it was in the full quarter is what I'm trying to ask.

So this disclaimer that this data is compiled through various sources, and there is no official data on this. But for example, last December on the quarter 3 of last year, we were in the range of $3.20 to $3.30. And today, we are around the $4.60, $4.70.

This is December 2021?

Yes. December '20 was $3.30 and December '21 can be the range of $4.60. This is [indiscernible].

Okay. Okay. And in terms of our capacity addition plans, if the incremental addition is at around 2 lakh spindles every month, and our addition is just 1 lakh coming in September, don't you think we have added at a much slower pace and what the industry is at?

Considering that India has about 50 million, 55 million spindles and Vardhman is 2% of the Indian industry. And we are still adding close to 5% of the India industry addition. So I think we are growing faster than the rest of the industry put together.

But there's no visibility on the 1.65 lakh, right? I mean -- so 1 lakh we understand, but the 1.65 lakh is not...

That 1 lakh this year, we hope to add the balance 2 lakh around in the next -- in the 2 years after this one. So I think we'll be adding approximately 1 lakh per year. So by that approximate calculation I'm computing.

Right. And so the revenues should grow in FY '24 for the addition after this 1 lakh or will it be FY '25?

The full year impact will be felt in FY '25. Partial might come in 2024 depending on delivery conditions.

Right, right. And whatever you're indicating on spreads seems to suggest a compression in terms of the absolute value. I mean there's $1.25, I understand it's based on current spot prices, but then you had low cost inventory as well. So your 3Q numbers would have been much higher because of that low cost inventory. And going ahead, that will compress. So does that -- does your absolute EBITDA come down as a result of that?

No. As Mr. Jain also explained that low cost inventory is a relative term. If we bought cotton at -- in the beginning of the season, [ INR 60,000, INR 65,000 ], and today it's [ INR 75,000 ], then we are already -- we already have low cost inventory for the next quarter as well. So it's difficult to extrapolate any trend and a margin basis that. So we will have to see how it pans out. If cotton prices continue to scale higher like they have, the margins stay the same. But if they crash or they moderate considerably, we may be looking at a different vector. Very difficult to forecast commodity prices and forecast margin based on that.

Right, right. And last, your ability to pass on yarn prices, I mean, as you mentioned, cotton prices were suddenly higher, much higher than the increase in yarn. So how much -- how do you ascertain your own ability to pass on yarn price increase in the next 2, 3, 4 weeks?

As of now it is passed on to date. Going forward, I can't say, but as of now, I think to quite an extent, it's impossible.

The next question is from the line of Biplab Debbarma from Antique Stock Broking.

Just first, I just wanted to understand whether I have understood what you said correctly, so -- whether I have understood correctly. So spinning sector is seeing heightened demand because there is Xinjiang issue. And as well as there is an increased captive consumption of yarn in Bangladesh and Vietnam. Am I correct, sir? Is that the reason why we are seeing this heightened demand for yarn?

Yes, those are 2 of -- 2 reasons.

Okay. Okay. Now my questions are 2 questions. First of all, sir, just trying to understand what would be the capacity utilization currently in the country? Any -- just rough numbers? And because why I'm asking is this, how is the opportunity in outsourcing the capacity? Instead of putting high CapEx, if there would be some players who won't have that kind of balance sheet that you have. So they may not be -- their capacity may not be fully utilized. So how is the capacity utilization country-wise and how is the opportunity in outsourcing the demand -- the yarn demand.

So I mentioned earlier also, in our view, whatever capacity can be workable, I think the people are in a position to utilize that. Beyond that, the existing capacity may not be workable even if -- because the margins have been quite good in the last 2 years. So if it is not common season now, that is -- it's for sure, it will not come on [indiscernible] even in the times to come.

Okay. Okay. That's great. And my second question is on -- you have mentioned that Bangladesh is one of the largest -- I mean, export largely to Bangladesh. But if Vardhman country-wise, could you just give us some insight on country-wise which country percentage-wise we export yarn and fabric. And so if you could give some distribution of those exports of yarn and fabric country-wise, that would be great, sir.

So as of now, I think the total yarn and fabric export, which is happening from India, almost 25%, 30% would be going to Bangladesh, which is the biggest country as of now for the export of Indian products.

And the remaining countries would be Vietnam?

Vietnam -- Bangladesh, China, Vietnam, Sri Lanka, Central America, Latin America; these would be the other major countries.

By Vardhman or by the -- I mean, country-wise I'm aware. By Vardhman?

I'm talking about the India exports.

Okay. Just wanted to understand what would be the Vardhman distribution.

This will also be in line with the trends [indiscernible].

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

So just 1 observation from the market participants. Given the current cotton prices and all, it seems that possibly in the upcoming season, which will start from May, June, you may see significantly higher acreages of cotton. And typically, by the end -- second of the season, we typically see an increase in cotton prices. But this year, do you think that given that with an expectation of higher acreage and stuff like that, actually, prices may fall from the current levels?

Yes, there can be this scenario, we can't rule out. Actually, the intention would start coming in somewhere in the month of March, April. And the actual acreage, we will be known by May, June that this is an increase which is happening on the acreage side, which should be good considering the kind of prices we are looking at both in the U.S. and in India. So there could be -- we can't do this possibility that people may try to hold less inventory in anticipation of a very good crop coming into the next year and the prices actually start going down from August, September. There could be a possibility of this as well.

Okay. Got it, sir. Sir, just 1 additional thing on this is, typically, when do you think market will start reacting based on your last -- many years of experience, with this increase in acreage, when do you think will it be -- will people react in July, August kind of scenario when they will get more clarity or can happen before they get?

Normally, the intention, especially in the U.S. starts coming towards the -- I think in the month of April, et cetera. So that's the time where people will start looking at the intention, but at the same time, the typical availability or the typical challenges could be there. And that's why the prices are much higher because the -- because cotton is not in a position to -- the commodities are not in a position to move freely because of supply chain issues as well. So the local demand -- the EBITDA demand could be one. The intention could be 2. And going by the intention, I think by April, those intentions starts coming into the system.

[Operator Instructions] The next question is from the line of Parin Gala from SageOne Investments.

Sir, very basic question. Typically, what is the life cycle of a particular spindle? I mean after you install, when do you need to replace it?

I mean, normally 15 to 20 years is a comfortable life.

Okay. So sir, in your opinion, when India is adding about 1.5 to 2 lakhs spindles every month, what would be our approximate estimate, sir. How much goes into replacement of old spindles and how many new comes? Just [indiscernible] everything would be new capacity.

My belief is that the total supply in India will be close to about spindles. And out of that, about 500,000 to 700,000 will be going for replacement. That's why we are talking about the net expansion of 1.5 lakh to 2 lakh spindles per month.

The next question is from the line of Gunjan Kabra from Niveshaay.

So 1 question which I had is [indiscernible] expansion happening in the spinning sector, like also small spinners as well as the large spinners, the existing spinners are expanding at a rapid scale and expansions would come up online in the next 2 to 3 years. So can you share how -- what is driving such high expansion? Like will we not have any like oversupply kind of a situation after like 3 years? Is there the spreads which are driving with high capacity expansion or the sector tailwind that we are seeing currently in last 8 quarters that this is going to be a structural change like what is the percentage that is the thought process of this.

So as of now, the biggest thought process is coming from the Xinjiang cotton issue. There, since the U.S and Europe will not be buying material from that side. That means that opportunity will [indiscernible] the cost will be low. So the only change in the basic thought process is coming from there. And that's where we -- everyone sees to China [indiscernible] partially there's going to be a huge pile for the remaining part of the Asian countries to take even a part of that.

Okay. So that's the major idea behind, right? I mean that's the focus.

[ Yes ].

The next question is from the line of Bajrang Bafna from Sunidhi Securities.

Sir, we are -- I want to put up new capacity of -- if I had it right, 3 lakhs binder. So why when we can expect this to come on stream?

As we said, 1 lakh spindles we expect to come online completely by this September, which is September 2022. And on the balance to that, we are -- we have less clarity, but we expect it in sometime in 2024 depending on the delivery schedule.

Okay. And sir, in the new PLI scheme, which is being calculated by the government right now, which is purely for manmade fiber and technical textiles. Are you seeing some investment in that category also because currently, I think we are more or less concentrated on this side, cotton and all? So are we thinking to do some CapEx on that side, where the return on capital employed is expected to be better?

At the moment, we have no plans of expanding it to the manmade fiber or the technical textile side. We continue to monitor opportunity. But at the moment, no decisions have been made.

Okay, okay. And what is your thought process, sir, in terms of this PLI and all, how do you see that? Whether it will definitely create some bigger infrastructure for the country in terms of MITRA parks and all, what is your sense on the overall sector from that perspective?

This should make sense both MITRA and PLI [indiscernible] think is how do people go for the technical textiles. As we continue to develop, as per capita income improves, the scope of technical textile definitely improves in every country, which is growing. So India from that perspective, today, the conventions are minuscule, and we are in a position to grow continuously for the next 10 years, 15 years. I'm sure there will be a huge demand for the technical textile. But as of now, the demand is too less. But at the same time, these are the areas where with the growth the consumption increases. So I'm sure there could be a possibility for a country to grow better in these segments as well.

And sir, just 1 humble request from, you could say, from my side or maybe from the analyst community side. So to my mind for the first time maybe in last 20 years of my career, I'm seeing this kind of structural change that is happening in the Indian textiles, where the government has come up with so many sops and the situation is completely changing from China perspective also. So we are seeing huge riveting, which is happening for the sector. But somehow, Vardhman is not able to keep pace with the relating -- still on the historical numbers. We are trading at 6x EBITDA multiple, whereas your closest competitor, KPR is moving towards almost 25x on 3-year forward earnings, and we are just at the next. And this is precisely, I just want to highlight that if you could give us more clarity in terms of where our ROEs are going to be and which segment we're going to move up in terms of vertical integration. And I think some clarity on that emerges, I think we are also headed for that kind of relation, which is still not happening for us. So it is just a humble submission, and you could consider it as a suggestion from my side. So if we could do something on this vertical integration side to take advantage of complete value chain will be really helpful for the analyst community to give this kind of relating to you also. Because you are the second player to whom we can look at when the government is talking about making global champions in our country. So it's just a humble submission, and we'll be happy to hear some future statements, may not be in this call, but maybe going ahead in a couple of other calls. If you guide us in that sense, it will be really helpful, sir.

Sure. We'll definitely put up to the management. Thank you for your suggestion.

The next question is from the line of Parin Gala from SageOne Investments.

Sir, very honestly just want to understand, in your opinion, the Xinjiang ban, which has happened on cotton. Sir, how powerful it is to be implemented? I mean how is it not easy for garment of anybody procure some and there is a middleman in between from some other regions and then he supplies actually where the foreign player buy from them. You think that this is actually getting enforced in the true spirit?

It will. To quite some extent for a simple reason, because the Chinese cotton whatever they produce, 80% comes from that area only. Add in the 20%, 30%, then your question would have been more valid that how they are going to monitor it since the biggest cotton hub is Xinjiang only. So it's going to be very difficult for the Chinese government or the fabric manufacturer to really manipulate on that. Some manipulation may still happen. But I think there's the kind of penalties or the kind of stringency with the U.S. or the Europe will be putting in. It's definitely a bigger concern for all the big exporters from China and whether they really like to go in for that or not. So to my mind, I think this fear is definitely there in the mind of good exporters from China as of now.

Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.

Thank you very much and been pleased to all of you have on the call. And from the management side, we have always been saying whatever are the opportunities or the best options available to us, we are looking at that. Business has become more and more -- it's becoming more and more dynamic. And within that, I think there's lots of opportunities also, lots of issues and concerns also. So we are very, very vigilant on all the opportunities and concerns and definitely try to do best, which is best suitable for the company in the given situation. And I'm sure the numbers have been quite good, and we'll try to look at how more or what best could be done in the near future and what is the medium term as well. The cotton prices are, yes, definitely one of the big concern. But at the same time, since the yarn prices are also supporting as of now, so it's taking a bit. But going forward, [indiscernible] what happens towards the end of the next season and how do we mitigate that risk, which we are looking at it very cautiously. So thank you very much for all of you to show interest in us, to continue to invest in us. And I'm sure, going forward, we'll definitely will be in a position to come up to the -- we'll be in a position to maintain the expectations, which you all of you have from us. Thank you. Good day.

Thank you.

Ladies and gentlemen, on behalf of Batlivala & Karani Securities India Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.