Welspun Living Limited (514162) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Welspun India Q1 FY '22 Conference Call hosted by Edelweiss Securities Limited. [Operator Instructions] I now hand the conference over to Mr. Nihal Jham from Edelweiss Securities. Thank you, and over to you.

Yes. Thank you, Stanford. On behalf of Edelweiss, I would like to welcome you all to the Q1 FY '22 Result Call for Welspun India. From the management today, we have Mr. Rajesh Mandawewala, Managing Director; Ms. Dipali Goenka, CEO and Joint MD; Mr. Sanjay Gupta, CFO; and Mr. Akhil Jindal, Group CFO and Head Strategy. I would now like to hand over the call to Ms. Dipali Goenka for her opening remarks. Over to you, ma'am.

Thank you, Nihal. A very warm welcome to all of you to the Welspun India Quarter 1 FY '22 Earnings Conference Call. I hope that you, your family and colleagues are well and safe and are taking the necessary precautions. I'd like to take a moment and appreciate the efforts of our employees who continue to be our anchors and serve our customers in these unprecedented times. The company continues to conduct on-site vaccination drives across its plant locations. And till date, 20,223 people have been vaccinated across our manufacturing locations in Anjar, Vapi and Hyderabad. We remain committed to our plan of administering at least first dose of vaccine to 100% of the workforce latest by 15th August 2021. Global economic activities appear to have returned sequentially in the preceding quarters owing to government policy systems and the relaxation of lockdowns in all major global economies, following the recovery trends of prior quarters. This is indeed an encouraging sign. Let me discuss the key highlights and later, Sanjay will cover the key financial highlights. We started the year on positive note by achieving the highest quarterly revenues growing at 83% year-on-year and 2.5% quarter-on-quarter. The EBITDA grew by 93% year-on-year and 28.4% quarter-on-quarter on the back of strong business growth. The Government of India's recent announcement of the extension of RoSCTL till 31st March 2024 will prove to be a level-playing field for Indian textile manufacturers and exporters while enabling them to capitalize on the recent shift in the global retail sourcing strategies. Our export sales grew by 53% year-on-year as we continued to witness an increasing demand for home textiles. This demand is driven by the rise of homebody economy and change in consumer behavior as it lays more focused on hygiene and wellness products. Coupled with this, various factors like bounce back in the hospitality sector due to increased spending on travel and holidays in Europe and U.S. regions, strong global retailers, financial performance and the plan to continue to adopt China Plus One strategy, the supply chain management would continue to drive the demand in FY '22. Our home textile plants, situated at Vapi and Anjar, operated at near-peak capacities. The capital-light expansion at both the plants is on track. And during the quarter, one such expansion of the TT capacity by 7% to reach 85,400 metric tons per annum has been completed. The benefits from this investment will start accruing in phases from quarter 2 FY '22. The capacity expansion planned for bed linen and rugs are currently underway. We should realize the benefits of the enhancement of 20% in bed linen and 80% in rugs latest by quarter 3 and quarter 4, respectively. On the back of expanded capacity, we are confident of significant top line growth over the next few years. In the last quarter, we had mentioned about aligning all our business strategies to the aspects of environment, social and governance principles. We continue to further our efforts here. I'm proud to share that Welspun Flooring Limited has become the first company to achieve certification under the SCS, new Zero Waste Standard. The first fully integrated lead-certified facility has achieved 98% diversion of waste from landfill through a combination of recycling, waste reclamation, co-processing, composting and storage. Our farm to shelf 360-degree capabilities have always resonated with our customers, and we are glad to share that more than 16,000 farmers have already benefited through our [indiscernible] program in the past quarter. We are availing complete farm management solutions today and developing agronomics know-how through our innovative products based on digital technologies and artificial intelligence, all developed in collaboration with appropriate government and technology partners. 5% of our current supplies are coming through this initiative, and we aim to take it to 30% by FY '25. Additionally, in the backdrop of prevailing Xinjiang cotton issues, we are witnessing a shift in our customer expectations and returns of fully integrated operations and complete transparency. In the forthcoming quarter, we'll be revisiting our investment strategies to pursue our growth targets. Welspun continues to introduce innovative customer-centric products and Nanocore technology is a result of these efforts. Our HygroCotton portfolio continues to set milestones. The recent program promotion by Scott Brothers on QVC was hugely successful, where we saw a record $5.5 million sales, that is 94% sell-through in 72 hours. Close at home, our domestic business has entered into exclusive tie-up with an international technology partner to launch antipollution home textile range, the carbon capture product technology. Our innovation product sales during the quarter were INR 553 crore, registering a growth of 64% year-on-year and contributing 29% of the sales. We expect the textile demands to grow further in H2 FY '22 as pent-up demand comes with the opening of retail offices, educational institutions and resumption of social activities. Additionally, e-commerce is no longer an alternative buying channel but has become a default of primary buying channel for many. In U.S., the significance of the online channel continues to increase as it currently accounts for 13.6% of total retail sales. Our e-commerce business also witnessed similar trends and heightened demand with growth of 45% year-on-year, contributing 5% of the sales. The e-commerce channel is on track to meet its $100 million target by '23. Our continued focus on brands, both owned and licensed, has enabled us to deepen our connection with consumers across markets and aspirational categories. Martha Stewart is on track to clock $25 million in sales this fiscal year at an estimated 79% year-on-year growth. Our iconic brand, Christy, drew over 0.5 million eyeballs, and our towels in Wimbledon were a huge success. We are confident that the strategically curated bank portfolio will deliver $100 million revenue by '24. As the supply end, logistic challenges were at the forefront globally with nonavailability of containers, delays by shipping lines, congestion at ports and nonavailability of truckers in the United States. The trend is expected to continue in the next quarter. Additionally, input cost pressures continue to hit with increase in almost all the raw materials, including cotton, yarn, dyes and chemicals. Increased demand for Indian yarn and internationally higher MSP -- internally higher MSP may result in cotton prices remaining firm for new harvest season, thereby putting pressure on margins. Emerging businesses, retail. I'm pleased to share that Manjari Upadhye has returned back to Welspun India, and she will be spearheading the domestic operations of Welspun Flooring and [indiscernible] SPACES and Welspun domestically. She brings with a 2 decades of experience of extensive work in FMCG, e-commerce business. And I'm excited about her plans for the domestic business in the coming years. As we entered FY '22 with renewed vigor, the recent second wave and surge in COVID in India hurt the numbers of India Retail business due to the localized lockdowns which had an impact on demand in Q1. Despite that, the domestic retail business recorded revenue of INR 48 crores in Q1, growing 222% year-on-year. Additionally, with an aim to be Har Ghar Welspun, we increased our nationwide print (sic) [footprint] to 4,288 outlets and 80 towns with brand Welspun in Q1. With a massive vaccination drive underway, we are confident of better quarters in terms of retail demand compared to Q1. Our domestic home textile e-commerce business, which includes brand SPACES and Welspun, doubled on year-on-year basis. Advanced Textile. Advanced Textile business revenue during the quarter stood at INR 62.5 crores, registering growth of 7.2% year-on-year. Spunlace business is witnessing major correction in demand due to material overstocking in the supply chain, and we expect the situation to ease over the next couple of quarters. Wet Wipes business saw addition to its innovative product offering by contracting cosmetic sheet mask business by large multinational brands. The industrial filtration application served by the Needlepunch business continued as per plan, with some domestic softening in demand due to the partial lockdowns in Q1. The business -- the product in the business development funnel continue to be healthy and promising in both domestic and overseas markets. Spunlace capacity at Telangana is underway and is expected to start commercial production by Q4 FY '22. Flooring business. Overall, the Flooring business stood at INR 121 crores in quarter 1 FY '22, growing by 379% year-on-year, contributing 5.4% to the top line. We are seeing significant improvement in utilization levels, primarily on account of easing lockdown in multiple geographies. While Q1 saw muted growth due to COVID-related manufacturing challenges, we are confident of a very strong Q2 backed by repeat orders from large clients across the U.S. and Middle East regions, with higher ticket size, indicating customer satisfaction and trust in our products. The global reception of products and order flows from marquee brands give us confidence that this business will be major growth driver once the project execution concludes and full capacity comes abroad. The domestic flooring business, while strong at 108% year-on-year growth, was a complete washout on account of lockdowns and customer across the country deferring home improvements. With second wave receding, we are already seeing strong green shoots in the domestic market and festive period in the country will provide on the export momentum. With the product gaining traction, the market is excited about the forthcoming quarters and is confident that we will achieve our EBITDA breakeven by the end of the financial year. Now I would like to hand over the call to Sanjay to provide updates on financial numbers. Thank you.

Thank you, Dipali. Good afternoon, ladies and gentlemen. Many thanks for joining the quarter 1 financial year '22 India earnings con call. I'll give a brief overview of the financial numbers for the quarter before we open for question and answers. I hope everyone must have got a chance to look at the earnings presentation and press release by now. As has been the practice for the last 2 quarters, we continue to provide greater details and regular statistics which will help you track company's progress with clear lens. I'm delighted to share that during quarter 1 the total income grew by 83% year-on-year and 2.5% quarter-on-quarter, and it stood at our quarterly best at INR 2,227 crores. Domestic business had limited contribution to this growth owing to the second wave peak in quarter 1, but we have already begun seeing progressive growth with the improvement in pandemic situation. We earned an EBITDA of INR 459.8 crores in quarter 1, growing 93% year-on-year and 28.4% quarter-on-quarter, and the EBITDA margin was 20.6%. As already mentioned, Government of India announced extension of RoSCTL till 31st March '24. Based on this, in quarter 1 financial year '22, we have booked the income of INR 198 crores. Out of INR 198 crores, INR 105 crores pertains to quarter 4 of financial year '21 exports. There was an overall positive impact of 6.4% on quarter 1 EBITDA on account of the revised RoSCTL rates. As mentioned by Dipali, we faced severe challenges in logistics, both in terms of the availability of containers and liners and higher freight cost of shipping lines, which were almost 2.5x to 3x year-on-year. Coupled with that, port congestion and nonavailability of truckers in U.S. resulted in the stocks getting stuck at port, resulting into higher inventory and demurrage charges. This had an impact on revenue and EBITDA of the current quarter. These onetime costs of higher freight demurrage and inventory carrying cost has an unfavorable EBITDA impact of 2.2%. Going forward, we don't see the situation easing. Had onetime cost not hit us, EBITDA would have still been higher. Quarter 1 profit after tax after minority interest stood at INR 218 crores, up 343% year-on-year and 84% quarter-on-quarter. On the ForEx front, we have been consistently following the Board-approved policy to sell 60% to 65% of our receivables on rolling 12-month basis. The impact of current spot will reflect in our revenue with a lag effect, that is from end of this financial year. We continue to hedge 65% of future receivables currently. Our average exchange realization for this quarter was INR 75.77 versus INR 72.66 in the corresponding quarter last year. Net debt of the company stood at INR 2,249 crores, a reduction of INR 404 crores over June 2020 and a reduction of INR 84 crores over March '21. Our net debt to equity has come down to 0.58x as on 30th June '22. Our ROCE is 16.4% in quarter 1 of financial '22, and there is continuous improvement in ROCE in spite of adding capacities in various businesses, which will yield significant cash flows in future. The business generated free cash flow of INR 83.2 crores during the quarter 1 financial year '22. Coming to segmental results. Quarter 1 financial year '22 Home Textile revenue stood at INR 2,128 crores versus INR 1,185 crores during the same period last year. growing by 80% year-on-year and 4% quarter-on-quarter. Quarter 1 EBITDA margin of Home Textile stood at 22.6% versus 18% in quarter 4 of financial year '21. During the quarter, Advanced Textile business clocked in revenue of INR 62.5 crores, up 7.2% year-on-year. Demand has muted to some extent in Advanced Textile, which we've expected to continue in quarter 2. During the quarter, revenue from Flooring business was INR 121 crores, up 379% year-on-year and 2% quarter-on-quarter. EBITDA loss during the quarter is INR 26 crores versus loss of INR 27 crores in the same period last year and INR 19 crores in quarter 4 of financial year '21. The EBITDA loss included significant increases in input raw material cost and higher freight cost. With margins being under pressure, we have already saw price increases with majority of customers and the same will reflect with a lag of 3 to 4 months. We are enthused with the growth momentum in the emerging business, and it reaffirms the confidence in our strategy. Emerging growth businesses, which includes branded business, e-comm business, Flooring and Advanced Textile cumulatively grew by 128% year-on-year and contributed 21% to the top line during the quarter versus 15% contribution in financial year '21. The expansion projects of Flooring, Advanced Textile and Home Textile businesses are in different stages of progress and they will get completed by end of financial year '22. CapEx spend in financial year '22 to complete these projects is expected to be around INR 600 crores, out of which INR 172 crores is already spent in quarter 1. In spite of the CapEx and higher outflow due to buyback and dividend, the company will continue to prepay the high cost debt as evidenced over the last 2 financial years. Over the last 2 quarters, input costs have been increasing significantly. This, coupled with uncertainty and logistics, have put further pressure on revenue and margins. With RoSCTL reinstated at the existing rate till 31st March '24 and with our continued focus towards cost optimization and improved efficiency, aided further by accelerated economic revival across geographies and robust outlook, I'm confident that we should be able to achieve EBITDA margin between 20% to 21% in financial year '22. However, quarterly margins may vary depending on the cost pressures and corresponding price revisions. With regard to the buyback, we have extinguished the 1.67 crore shares in July '21 as per the required regulatory compliance. We continue to remain focused on our strategic priorities and growth pillars. We continue to lay emphasis on our long-term goal of sustainable growth and profitability and deleveraging our balance sheet. With this, I will leave the floor open for question and answer.

[Operator Instructions] The first question is from the line of Ashutosh Somani from JM Financial.

So just trying to understand the results better. So if you look at the margins adjusted for the INR 198 crores duty benefits, so the 2 parts of it. One is the part pertaining to Jan to March quarter, which was around INR 105-odd crores. So that is an extraordinary. And the INR 98 crores, if I leave that aside and compare the 2 results sequentially, then there is a drop in margins at the EBITDA level. So just wanted to understand, so we are talking about bridging the gap between, let's say, 13% to 14% EBITDA margin to fiscal '22 guidance of 20%, 21%. So what will contribute to this -- how will we bridge this gap? One, you said that the onetime cost that we faced in this quarter is not showing any signs of easing, if I heard you correctly? So can you bridge this gap? How will we move from the current 13%, 14% to 21%? And this is including the duty, right? So how will we bridge that gap?

Thank you, Ashutosh. Sanjay here. So as I mentioned earlier, so the impact of RoSCTL on the EBITDA as a percentage comes to 6.4% on the quarter 1 results. So without RoSCTL, our margins stand at 14.2%. If you add 2.2% of onetime cost that we had to incur in this quarter, we should be at about 16.5%. Going forward, every quarter, the RoSCTL will have a 4% addition on our EBITDA. So hence, we are guiding towards a 20 to 25 -- 20% to 21% EBITDA for the year.

Sure, sir. So just a clarification. The 2% that you are classifying as onetime. So we are seeing some signs of easing there going forward.

Let me take this, Sanjay. So this is Rajesh, Ashutosh. So there has been a relentless cost increase pressure on the margins of the company. So -- and all of you know that it takes us a quarter or 2 to pass on these cost increases to the clients. So we are actively engaged with our clients. And the gap that you see will hopefully get bridged with the price increases that we will get from the customer. So that's where the confidence is coming from. Some of them have been put to bed, the others are under negotiation. And the improvement will start trickling little by little from the second quarter itself.

Sure. And sir, the second part of the clarification was the 4% improvement going forward in RoSCTL. So that part, sir, if you could clarify. I thought that we sort of realized the entire benefit in terms of percentage in the 2 quarters, Jan to March and April to June. So how will the percentage increase going forward in the second quarter, from the EBITDA margin perspective?

Yes. So overall, the products that -- the products on which we get RoSCTL, if we take that and the different rates that we get, the net impact on EBITDA is 4%. For quarter 1, the impact was overall 6.4% because it has -- it included last quarter as well and there, there were some accounting impacts. Going forward, it will remain at 4%. When we had guided to a 17% to 18% EBITDA last quarter, we had taken 2% [indiscernible] in our guidance, and this is now working out to 4%. But with 4%, we are giving towards 20% to 21%, which is still higher.

The next question is from the line of Bhavin Chheda from Enam Holdings.

Congratulations to the team for the excellent results. So first question is on, if you can break up the sales [Technical Difficulty] pan India?

Mr. Chheda, we had lost you for that 5 seconds. May we request to repeat your question?

Yes. Yes. So my question was, if you can break up the sales in the quarter geography-wise, U.S., Europe, India and rest of world?

Bhavin, Sanjay here. So we don't report our sales geography-wise. We have 2 segments, which is Textile and Flooring. Textile, we had a turnover of INR 2,128 crores and Flooring, we had INR 121 crores.

If you can give rough percentage, that would be fine because my follow-up question was there are a lot of talks on, obviously, the China losing market share all across the U.S. we have seen. But Europe also, we think they are losing data. And there are some developments of some sanctions on Pakistan sales, so the markets were opening up. So what's your outlook on European market current presence of Welspun in Europe? And what is Welspun doing to increase its presence in Europe also?

So I'll take this question, Sanjay. So we actually are -- in Europe, we hold a very strong position in towels. But if anything -- any changes that happened, which we are not that aware of right now, it becomes a fair level-playing field for the Indian players who are exporting to EU. So for sure, definitely, there will be an upsurge there and for Welspun as well. But our contribution continues to grow. For example, this quarter, we have grown around 22% in Europe itself.

Okay. So you are seeing already a sales growth traction because I'm sure market has not grown 22% in Europe. So in some way, we are able to increase some market share in European market also.

Because it's a mixed product category that we talk about. We have towels, we have sheets and we also have rugs.

Let me just elaborate that. So yes, you are absolutely right. So the China Plus One factor is clearly playing out. And it is playing out not only in America, it is so in Europe as well. So it's a clear thing now we have been witnessing this for -- now this 2 or 3 quarters. And things that happened in Xinjiang, where the retailers are now just absolutely uncomfortable sourcing product which -- where the cotton or raw materials are grown in that region. And you know how the young consumers are now, so -- they are unforgiving. So the retailers are, in fact, pushing us to set up a traceability system from farm to, let's say, the retail shelves. So good, we invested in our Wel-Trak system, and so that will hold us in good stead. So it is clearly playing out and we believe it will continue to play out. Now your question on the tariffs with some of the competing countries in the EU, yes, we start with a disadvantage today. So the average rate of duty is 9%, 10% on our products in Europe. But to the best of my knowledge, those preferences, as of today, at least continue. And there is nothing so while there have been press reports but they seem to be unconfirmed, and so there's nothing official that has come out in that regard.

Sure. My other question was on the target, I think all...

Mr. Chheda, may we request you to come back in the queue for a follow-up, please. The next question is from the line of Prerna Jhunjhunwala from B&K Securities.

Congratulations on good set of results. Sir, I just wanted to -- taking forward the previous participant's question, I had the same query. Could you just help us understand how is the U.S. market growing in terms of consumption? And do we see the consumption rate -- growth rate improving than pre-COVID levels in terms of growth? That is from U.S. And a related question to this would be, now that India has a very strong market share in the bedsheet and towel market in U.S. market, do we see improving bargaining power to pass on the cost increase to customers? And how far we can go in attaining better market share in the U.S. market?

I'll take this question. So this year, I think this quarter, our sales have grown by 53% year-on-year. And U.S. being an integral part of it, definitely, the demand continues to grow strong, Prerna, here, with the homebody economy and the consumer behavior, focus on health and hygiene. And also actually the bounce back in the hospitality sector, that has increased because the travel and the holiday spend have definitely had an upsurge. So -- and of course, the global retailers' financial performances have been very strong and the plans to continue to adopt the China Plus One strategy has definitely also played a very important part. Your question on the cost part, we have taken that out. And as RRM has pointed out and it comes in at a lag of around 3 to 4 months. So definitely, that is something that we have seen growing. Anything else?

Yes, one question was on -- how far in terms of market share gain do you believe that India as a country can actually reach now that we have a 61% market share in bedsheet and 46% market share in the towels business?

So I think -- I would just say, Prerna, I can't give you a number here. But definitely, our China share is dropping from 2020. And we see that India is near to gain because of a strong integrated supply chain that we have. Apart from that, of course, the cotton -- we are a cotton producing country as well and the largest exporter of cotton as well and yarn, too. So I think that actually holds us strong. And the mention on Xinjiang Cotton has been as it holds very, very true, Prerna. So definitely, these factors are going to play, and India seems to be in a very good position.

Let me just add to that, Prerna now. So there is a 1% to 3% market share gain for India over this -- in the current year. So product by product, but it is between 1% and 3%. Already, there is a market share gain. And Sanjay will be happy to share the details off-line with you.

Sure, sir. Sir, my second question would be -- was on the margin guidance. As a company, what your -- have you increased the margin guidance for 21%, 22% or is this for Home Textiles business only?

It's for Home Textiles. It's for Home Textiles, Prerna.

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

Congratulations for a very good set of numbers. One from Xinjiang cotton issue. So definitely, this is like in the news that the U.S. is definitely taking up this very seriously. But a few days back I was reading that even Japan was getting serious about this issue. So just wanted to understand so are we getting any sort of business inquiries from rest of the world or Japan because I understand that China is a major exporter of cotton made up through the Japan? So any thoughts on that would be useful.

I'll just say that the overall the Xinjiang cotton has been playing on the retailers' mind, whether it is U.S. or whether it is -- U.S. has taken an action on it. But globally also, it has been playing on everyone's mind. So everybody is looking at it and looking at a plan B, for sure. So definitely, whether it's Japan or whether it's Europe or ROW, it is playing on everybody's top of the mind, for sure.

Sure. Sure. Fair enough. And second, there has been a change in the ministry level and there's a lot of impetus or the positivity around -- because of the strong name in the ministry now. So any thoughts on like -- is there any talks regarding the free trade agreements with EU that we can have going ahead? Or anything on that would be helpful.

Right now, I think we can't comment on it. We'll wait [indiscernible]. But yes, definitely, it will be positive for India as a country.

Sure. And last one, if I may. On the Flooring business, so what was the CapEx that was envisaged and what has been spent until now? And what kind of asset turnover can one expect in that business? That's it from my side.

I'll take that question. So we had almost INR 1,300 crores of capital spend planned. We are almost through the tax over the next 2 quarters, say another INR 100-odd crores is still remaining to the capitalized so -- which will happen over the next -- definitely through the course of this year. So we'll get past the CapEx. And we are looking at peak utilization of, let's say, this close to 1.75x to 2x turn. So the benefit between INR 2,200 crores to INR 2,500 crores in peak revenue when everything is going full throttle.

The next question is from the line of [ Khushbu Mistry from Quant ].

So as I can see from the financials for the Flooring business, the capacity utilization has been increased from 6% last quarter to 30%. So I want to understand that what is the driving force behind this increase? And are there the plans to increase further utilization? And also the current contribution to the revenue is only 5%. So are you planning to increase its contribution to the revenue? And as mentioned, the high material cost in the Flooring business, how long do you expect this to continue? So any...

Good question. I will take that. So yes, you're absolutely right. The utilization levels have been steadily improving. And mind you, they have been improving without our people being able to travel. And ever since we started in the fourth month, we as a country got into lockdown. And so our people have not visited international customers. And despite that, we have a reasonable -- let's say, there's about 25%, 30% utilization levels. So obviously, the seasoned customers see us as a long-term player, as a sustainable player. And this -- we have been giving virtual tours to the customers. And this level of utilization will continue to grow. So we are seeing good traction in parts of our business, and in other parts also the traction will build up. So all in all, we feel pretty confident about growing the business. Now at peak, as I said, this could do about INR 2,200 crores to INR 2,500 crores in revenue. But it might take us a few years to get there. So it's a young business, and there's a learning curve that we have to follow as a company, which we are doing very strictly. But it's a few years down the road, but we believe that we have a good enough business to do INR 2,200 crores to INR 2,500 crores in revenue over the next maybe 3 to 5 years. Coming to your question on increased costs. So yes, the costs have increased. They have moderated a little bit. But -- so we are not waiting for the cost to moderate. We have almost passed on significant increases of the cost already to the customers. So all the new business that we are contracting is at higher prices, taking into account the increased cost. So -- and there's enough throttle in the business. And customers also realize this -- the raw materials like PVC and these are all internationally quoted, dollar-denominated commodity. So it's an open book. The customers understand the costs are going up, customers understand rates are going up. So there have been this quite, let's say, cooperating in terms of accepting the reasonable price increases. So -- and which will manifest itself, hopefully, in the back half of the year in half 2 where we are hoping that we'll see some improvement in margins along with volume growth as well.

The next question is from the line of Sumant Kumar from Motilal Oswal.

So my question regarding the overall -- the demand -- impending demand what we are sensing. And so how well prepared we are to grab the opportunity in terms of capacity additions in next couple of years if -- we know we -- you have -- you are going to increase the capacity? But the way -- and we are sensing the higher demand going to come because of -- maybe that tomorrow we'll hear the news of -- again, on the GST and I guess suddenly we have a requirement of the CapEx. So how are we going to do that? And what is the duration of that?

So we are looking at a brownfield as we spoke about that we were looking at a capital-light expansion. And we already have an expansion in TT capacity, which is around 7%. And in the sheets, we'll be enhancing it by 20% and rugs in -- by 80% by quarter 4. So definitely, that will take its kind of -- it will take care of the rising demand for the next 1 year or 2. But definitely, there will be opportunities. As I spoke about -- we spoke about the Xinjiang cotton. And there, the retailers are talking about the whole transparency in terms of supply chain and complete integrated facilities. So there would be some opportunities there to explore for sure. And India being...

And my second question -- yes, go ahead.

Yes. India will be seeing -- will be at the epicenter for demand. So definitely, there could be opportunities to explore.

Talking about the cotton price, we have seen in India the cotton sowing is still lagging and U.S. also is not [indiscernible]. So assuming that, what's your view on cotton price?

So right now, we know that yesterday, the cotton prices were absolutely at the peak at around INR 53,000 to INR 54,000. But this is the fag end of the cotton. The cotton in India starts coming in by October where there'll be higher moisture. And by October end, November is the time where you'll be able to see what cotton prices look like. So let's wait and watch for that and see. And the cotton crop has been relatively decent. Though there were talks about that the cotton crop will be lower, but the West and the South have been pretty okay. So definitely, we'll be able to -- the cotton supply is pretty decent. And so we'll wait and watch till October end how the cotton prices go.

The next question is from the line of Naushad Chaudhary from Systematix.

Just a few things on Flooring business development. So if you share the domestic and export mix in this business, it will be great. Second thing, I wanted to understand, in previous quarters we had mentioned that we were in talk with some of the Canadian or Middle East client for our soft flooring and it was expected to be a big ticket size client. So what is the development on that side? Then I'll ask after these 2 questions.

RRM?

Hello? Sorry, sorry, I was -- I muted myself. So I'll take this question. So Naushad, in the first quarter for the Flooring business, the domestic market was a washout. So this -- we were in single digits in revenues in the first quarter in the domestic market, and understandably slow because homes were -- these people wouldn't allow anybody to get into their homes due to the COVID second wave and our product. Unfortunately, we have to get into the homes of the people to install that. But having said that, now the markets have started to open up, so -- and we get an instant sense because of, let's say, this -- us being active on the social media and digital communication with the customer. So it's growing again. And hopefully, the second quarter onwards we should start seeing sales getting back in the domestic market. As regards the softer -- soft flooring side of our business, so we are now engaged with not 1 but at least 3 seasoned large-sized players. We are at advanced stage of discussions with them. And conversion does take a little time because there's a product development, there's a product approval trial process that you undergo with the client. So it takes a little longer, and as we are also learning along the way. But the list of clients and the list of large clients is only growing. And as I speak, there are at least 3, if not 4, large customers that we are very actively engaged with. And hopefully, we'll convert with -- at least a couple of them very soon.

Okay. Sir, just a clarification. In domestic business, what -- I have understood domestic would be through distributor and there would be a diversified set of customers because of distributor network, whereas in export business we would be concentrated with few clients and we'll work on a contractual basis. Is my understanding correct on the flooring business, sir?

Yes, you are absolutely right. That is the intent. So at this juncture, we want to keep our international business simple. And so we have sales team -- sales, marketing and development teams in the major markets already appointed, and it's not new to us. So -- we are used to doing that in our home business and so we got the same approach here. So that will be our intent. And in the domestic market, it will be door-to-door through distributors, through dealers. And also through -- honestly, through digital means. So out of this, whatever INR 8 crores, INR 9 crores of revenue that we did, almost 25% was actually achieved through digital engagement with the end consumer. So that also is going to be a -- play a big part in the domestic market.

Right. So in terms of distributor count, sir, what is the development and at what number we are today versus last -- previous quarter?

So we added about 15, 16 channel partners not more this quarter. So we have, let's say, 400 -- north of 400 active point of sales now. And we were up to about -- we are available at about 550, 600. But we are now measuring this active doors, which means, let's say, this channel partners who are invoicing for us and so, we are close to the 400 mark. Unfortunately, this quarter, we haven't added much due to the lockdown situation. And also distributors, we are in excess of 75 distributors because the commercial products, the hospitality products, products like artificial grass, they all move through -- most of it moves through the distribution channel. So we have about 75 distributor partners across all product categories.

The next question is from the line of Jigar Shah from Maybank.

Congratulations for a strong performance. My question pertains to the plans to invest substantially in the renewable energy. So is there any update on that?

So Jigar, I think I'll take this question. We have been working on this, and there are a couple of plans that we are still exploring. So I think we'll be able to solidify those in the next quarter. And you can appreciate that being kind of a very massive operation, it will take that much of time and window. So we are just evaluating a few opportunities here, Jigar?

Okay. Okay. And can I ask one more follow-up question?

Sure. Sure, Jigar.

Yes. This is about the flooring unit. So I believe at full capacity, it can do INR 2,000 crore plus revenue. But when do you expect the utilization to improve? I mean in the next 2, 3 years, will it reach that level? I mean is there any time frame?

It is going to take -- as RRM had pointed out, it's definitely going to take 2 to 3 years where it's going to reach that peak capacity of around INR 2,300 crores or INR 2,400 crores.

Let me be a little more cautious here. So it's a 3- to 5-year journey, guys. And so -- but for this COVID situation, we would have -- it's gotten there a little faster. But it's a 3- to 5-year journey, and it's a young business. So I want to sound a little bit cautious. But I think we have gained enough confidence in the business now to stick our neck out and say that in that time frame we should be able to get there.

The next question is from the line of Chetan Shah from Jeet Capital.

Just one quick question. This is with reference to opening remarks. Dipali talked about changing the CapEx model for the business the way things are evolving in the global market and also in the domestic market. So if you can kindly elaborate what exactly you mean by that? Is it mean that we may end up spending some more money trying to be more integrated player or we'll do some sort of things outsourcing and some within -- if you can give some idea or some elaboration on that, please?

So let me take that, Dipali. So I think this is a heads-up. So there's clearly with the Xinjiang situation, this integration is at a premium. And the consequence of that is for everyone to see with the yarn spinning margins shooting through the roof, and that is something that -- so, a, there is a traceability challenge which our customers are throwing at us and also, on the other hand, let's say, there's this very high delta between cotton and the yarn prices now. So this -- we are thinking about it. As I said, we are engaged with our customers. We want to be cautious with whatever decisions that we take. But -- so there is some change in thinking that is happening, and we thought it proper to call this thing out over this call. And I think we'll be better prepared to answer this question over, hopefully, the next quarter call. So there's some thinking going on. We want to go back to our customers. We want to do some more homework and then arrive at the right solutions and conclusions for the company.

Just one small follow-up on that. Will you have any internal target in terms of IRR or ROCs as and when we decide in whichever side of the CapEx model so that as the investors/shareholders we know that the capital allocation is more prudent rather than -- definitely, it has to be with the long-term business prospects. But still at the end of the day, the financial returns really matters.

Yes, yes, yes. Look, it's a fair question. And let me just go back and say that the capital expenditure, IRR loans goals always been between 16% and 20%. Currently, the business is delivering about 16%, 17% of return on capital employed, slightly higher on equity. So that has been our guiding principle ever since and the last -- definitely the last, let's say, in this 4 or 5 years. And that is what will continue as our guiding principle going forward as well. And everything that what -- even now whatever we are doing, we are keeping that 16% to 20% goal in our mind as we invest capital. So we are very mindful of that.

The next question is from the line of Vivek Gautam from [ GS ] Investment.

This is the last question we will take, gentlemen.

Yes, sir. Sir, this is -- I just wanted to know about the sustainability of the current improved margin of the sector. And is it going to be a permanent sort of rerating, or again, sort of a one-off because of the incentives given by government? And what is the moat for us, our company and India, in this textile sector, sir, for which we operate in?

So let me say that -- if you look at Welspun India as a company, you take up any 5-year period and as a company, we have delivered a 20% return on our -- 20% EBITDA margin or just around that. You take any 5-year period and you will see that. So business has consistently delivered those kinds of margins. And it has weathered exchange rate, it has weathered cotton movements, it has weathered refund of duties, it has weathered drawback. So we have gone through, let's say, this all rain, sun, winter, snow, everything. But over a period of time, our business actually settles down at that range. So -- and we believe that our business is good for a 20% good year, slightly north of that in a year where you have headwinds, slightly less like it was last year and particularly the last couple of quarters. And -- but over a period of, let's say, 2 or 3 quarters, we are able to pass on everything to the clients, and that is the moat of the business. So you asked me a question. So, a, this Welspun India is an innovative company. It is a strategic vendor to almost all the clients, at least the top 10, 12 clients that we work with. And we own 25% to 33% of their wallet and Dipali herself sits on various consultative panels with a lot of our customers. So our approach is 360 degrees as we look at our business not as selling, let's say, towels and sheets, but we are in the business of improving our customers' business. And if their business improves, our business improves. And that is our moat. And even as a country, you will appreciate and agree with me that no country can get a 50%, 55%, 45% market share in a country like U.S. if you don't have a moat. So we have a country advantage. Welspun India has got a company advantage because of its innovative solution that it offers in terms of product and the 360-degree solution it gives. And while we are running, let's say, is a product business, but we look at our business as an FMCG business, as a consumer business with all developments actually made insight of what the consumer is telling us through the constant researches that we do with the consumer. So I think the moat is fairly well established. So as a company, we have weathered all the storms. As I told you, you take up any 5-year period and you will see this margin. So we are business people. We run companies. We have a longer horizon. And our horizon will always be 10, 20, 30 years. And sometimes decisions have to be made to protect your future, which might not look very good in the current stage and vice versa, But we have to look at our business as a long-term thing because we are around for 20, 30, 40 years. And we will continue to do that so that we are able to maintain the edge that or, in your language, the moat that we have in the market.

And sir, looking into the future part, I believe the scope of rerating is there due to the U.S. ban on Xinjiang Cotton and Pakistan -- we are hearing the news that Pakistan has also been banned due to that 20% additional benefit. Bangladesh also...

If you are asking our opinion, see, we feel very positive. And this -- and look, there's stability now. So you are at a stage where cotton prices are almost at an all-time high. The uncertainty around refund of taxes, whether it is RoSCTL or whatever, so you don't have that uncertainty anymore, so it's behind us until 2024. So I think -- so the -- and let's say, with all this thing happening around Xinjiang and everything, so as a company, we feel very confident. And I think this is a serious opportunity that there's countries like us are looking at and also as a country, I think we are looking at. So this -- we believe that this is a decisive opportunity.

Ladies and gentlemen, that was the last question. I now hand the conference over to Ms. Dipali Goenka for closing comments.

So many thanks for joining the call today, and I'd like to share my closing thoughts on the company's performance and our outlook for the future. Our core textile business continues to enjoy robust growth momentum driven by a significant uptick in global growing demand across geographies and structural changes in our customer sourcing and supply chain strategies. As envisaged, the emerging business' portfolio is a strong pillar of growth and is now prime to play a key role in driving business profitability for Welspun India. We have consistently delivered a solid performance, and we continue to be optimistic in our revenue growth and margins despite pandemic-related hiccups. And we are witnessing a transformational growth, and are confident of delivering consistent performance quarter-on-quarter. Thank you.

Thank you very much. Ladies and gentlemen, on behalf of Edelweiss Securities, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.