Welspun Living Limited (514162) Earnings Call Transcript & Summary

Ladies and Gentlemen, good day and welcome to the Welspun India Q3 FY '22 Earnings Conference Call hosted by Edelweiss Securities Limited. [Operator Instructions] I now hand the conference over to Mr. Nihal Mahesh Jham from Edelweiss Securities Limited. Thank you, and over to you, sir.

Thank you, Aman. On behalf of Edelweiss, I would like to welcome you all to the Q3 FY '22 Earnings Conference Call of Welspun India Limited. I would now like to hand over the call to Mr. Abhinandan Singh, Head Group Investor Relations at Weisman Group to introduce management and take it further. Over to you, Abhinandan.

Thanks, Nihal, and good afternoon, everyone. On behalf of Welspun India, I welcome all of you on the company's Q3 FY '22 Earnings Conference Call. We have with us today Mr. Rajesh Mandawewala, Managing Director; Ms. Dipali Goenka, CEO and Joint Managing Director; Mr. Akhil Jindal, Group CFO and Head Strategy; and Mr. Sanjay Gupta, the company's Chief Financial Officer. As usual, we will start the forum with some opening remarks by our leadership team and then we'll open the floor for your questions. Once the call gets over, should you have any queries that remain unanswered post the earnings call, please feel free to reach out to us. And with that, I would like to hand over the floor to Ms. Dipali Goenka, our CEO and Joint MD. Over to you, Dipali.

Thank you, Abhinandan. Good evening, everyone. Thank you all for joining us today. We hope that you are safe and in good health. While India has witnessed a sharp rise in COVID-19 cases in recent weeks. The impact of the third wave has been mined so far. The trajectory of the pandemic is still evolving, and the recent increase in cases has slowed the pace of economic activities in January, but we expect the economy to regain momentum as this wave abate. Our board today approved the financial results for the quarter ended December 31, 2021, and I would like to highlight some key points. The company delivered a resilient performance during the quarter. our unique value proposition to our customers right from demand planning, forecasting, logistical support, innovation, traceability to quality defining product, ensured a stellar top line performance even in these challenging times. The business continued the growth momentum that we saw in the last 2 quarters, clocking revenues of INR 2,438 crores in quarter 3 growing at 19% year-on-year and INR 7,130 crores YTD, growing at 36% year-on-year. The home textile business delivered revenues of INR 2,251 crores, growing at 14% year-on-year and INR 6,718 crores YTD, growing at 32% year-on-year, and we are well on a way to another milestone of reaching $1 billion revenues in home textiles alone this year. The U.S. economy, which is the largest market for the fund has been showing a strong comeback. Advanced estimates of U.S. retail and food services sales of 2021 were up 19% year-on-year. On the back of this growth, we saw our home textile export grew by 35% year-to-date. The market share gain and growth have been broad-based across our key businesses. Our flooring businesses grew 95% year-on-year in quarter 3 and 136% YTD. Domestic business continued its upward trend, witnessing 55% growth in Q3, year-on-year and 88% YTD. Since demand resilience has, however, been a accompanied by significant increase in energy costs, highest ever commodity prices and continued global supply chain disruptions. As per Cotlook 'A' Index, cotton prices are presently at one of its highest levels ever historically and touched USD 2.64 kilo level this month. Elevated cotton prices due to the increased demand of cotton and yarn resulting from factors, such as U.S. ban on cotton products from China and Xinjiang region which accounts for 1/3 of the global cotton production, and expected shortfall in supply continue to create serious challenges on revenue and profitability. While we have again gone back to our customers for price increases during the quarter to mitigate the quarter 3 cotton price increases, impact of which would start coming in from Q4, we are now again seeing more than 20% increase in cotton prices recently. Hence, we are watching and monitoring the current situation closely, and we may have to revisit our pricing strategy yet again. On the logistics front, the industry continues to face heat due to container shortages, port congestions, increase ocean freight rates and sailing time. Further scarcity of truckers in our key end markets, that is the U.S., is leading to see these challenges and movement of goods including last-mile deliveries to the retail stores. The partial availability of holiday season goods at shelf led to a upheaval in retail impacting demand and sales at retail levels. We currently foresee a resultant glut of stock in the supply chain and increase in prices, leading to a potential rebalancing of demand and a transitory collections going forward. We, however, continue to see positive results of a continued focus on growth drivers, innovation products, D2C initiatives and brands and E-commerce are emerging businesses and a commitment towards ESG and sustainable growth. Our innovation product sales during the quarter were INR 510 crores taking YTD sales to INR 1,636 crores, registering a YTD growth of 24% year-on-year and contributing 26% to the sales. The E-commerce and branded business at INR 388 crores grew by over 45% Y-on-Y, accounting to 18% of our revenue, with U.S. leading the growth with 157% growth in U.S. branded business sales Y-o-Y. We added 325,000 unique customers in Q3, and through Black Friday and festive period, over 15 Welspun programs were amongst the top 100 ranking across the categories. In the U.S., our licensed brands recorded 66% growth in the calendar year, and these have been taken up. These have taken up 175% over shelf space with the key retailers. We are committed to grow both E-commerce and branded business to $100 million run rate each by '23 and FY '24, respectively. ESG continues to be the focus area for us through the quarter, as we view embedded sustainability and responsibility and opportunity to reinvent our business and the textile sector. Some of the highlights of Q3 are Welspun India has been rated by Dow Jones Sustainability Index, one of the world's most announced sustainability index to the Corporate Sustainability Assessment 2021. And in this maiden assessment, Welspun India secured an ESG rating of 48%, which is 62% higher than the average industry score. Our efforts to conserve reuse and recycle water, our path breaking has led us to winning the National Award for Water announced by the Ministry of Jal Shakti. The recognition came on the back of the social and environmental impact made by Welspun’s cutting-edge sewage treatment plant in the drought-prone Kutch district. Frost & Sullivan and Energy & Resource Institute study also recognized Welspun India for our sustainability practices and impact on the environment and communities at a Sustainability 4.0 award. Sustainability remains at the core of what we do and through our Well Krishi program, we aim to build a strong set reliant and prosperous farming community that empowers over 15,000 farmers and 75,000 farm workers across more than 350 villages to sustainably produce over 15,000 metric tons a cotton from 18,000 acres. Circularity adopted across businesses is focused on use of recycled content in both textiles and packaging. Welspun joined sorting for Circularity India project anchored by Fashion for Good Amsterdam, a consortium project, which aims to build a new textile-based value chain in India. As a leader in home textile manufacturing sector, we see extraordinary possibility to increase a positive impact. Be it a aimed to be carbon and water neutral by 2030, obtain a 100% of our cotton sustainably or impact a million lives through corporate social value intervention by 2030. Our ESG efforts drive measurable results. Domestic Retail. Domestic home textile business recorded the highest ever quarterly sales of INR 127 crores, exceeding INR 100 crores sales for the first time, up 55% year-on-year and 40% quarter-on-quarter. Brand Welspun distribution now covers 470 towns and 5,424 stores with 550 store additions in the past quarter through strong acceleration plan. Spaces became the #1 brand on Myntra, while also witnessing the highest traffic on Spaces own website, in the current year of about 5 lakh plus customers in the month of November. Spaces has launched its unique Air Purifying range collections with a 360 campaign on digital OH, print and theater with 14 million unique reach. Advanced textile. Our advanced textile business revenue during the quarter stood at INR 63 crores. Spunlace business has been a revival in demand after stock correction in all markets. However, escalated sea freight continued to be challenging for Europe, South America and Far East markets. New orders are secured in North America and Wet Wipes business added an upcoming Indian brand for wet wipes and another in cosmetic sheet mark. Industrial conservation demand continued to be healthy. Spunlace capacity at Telangana is underway, and is expected to start commercial production in quarter 4 FY '22. Flooring business. We are enthused by the growth in business in flooring business, which grew 95% year-on-year and 20% quarter-on-quarter, achieving a record revenue of INR 191 crores. We continue to add additional large institutional customers in U.S. and U.K. and also made inroads in hospitality chains in the U.K. on the back of strong product differentiation. The hard flooring capacity usage has been enhanced significantly and is fully blocked now. Sales momentum is continuing on domestic flooring business seeing a healthy growth quarter-on-quarter. Digital channel sales continue to do well. Marketing festive featuring Amitabh Bachchan pre-Diwali had a reach of 103 million and post-Diwali brand participation in India and New Zealand cricket series clocked a cumulative reach of 173 million. On product assortment, we added warm wood tones and Click-N-Lock Tiles assortment. Flooring received recycled claim standards certification for recycled polyester and carpets. Our order book remains strong for exports and our domestic business is showing green shoots, and is adding to the top line of the division. 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 3 financial year '22 India earnings con call. I'll give a brief overview of the financial numbers for the quarter before we open for the question and answer. I'm delighted to share that during quarter 3, the total income grew by 19% year-on-year, and it stood at INR 2,438 crores. YTD December revenue grew by 36% to reach INR 7,130 crores. We earned an EBITDA of INR 331 crores in quarter 3 and EBITDA margin stood at 13.6% as compared to 16.9% last quarter. YTD December EBITDA stood at INR 1,178 crores, that is 16.5%, growing by 11% year-on-year. Coal price increases, higher logistics costs, including about 4x ocean freight high and jump in commodity prices, all resulted in this adverse impact. As also mentioned by Dipali, we believe this to be transitory with our fundamentals remaining strong, be it in our relationship with customers are focused on innovation, digitalization and ESG or in the increased focus on our D2C initiatives and emerging businesses, including flooring and domestic business. While the current adverse market situation may impact our earnings in the near term, our medium- to long-term outlook remain point. Also to mitigate the impact of these cost increases, we have taken several steps. Number one being we are rationalizing our fixed costs across functions and business units to partially set up the increases in power and logistic costs. And number two, working capital is being tightly monitored to ensure more liquidity and savings in finance costs. Profit after tax after minority interest stood at INR 132 crores in quarter 3 and YTD December at INR 549 crores, growing at 34% YTD year-on-year. Our consolidated EPS for quarter 3 of financial year '22 stood at INR 1.34 as compared to INR 1.80 year-on-year. YTD December EPS is at INR 5.52 as compared to INR 4.08 last year, growing by 35% year-to-date. On the ForEx front, as per practice and as mandated by Board, we continue to hedge about 65% of our future receivables. Our average exchange realization for this quarter was 76.59 versus 74.08 in the corresponding quarter last year. Net debt of the company stood at INR 2,542 crores, a marginal increase of INR 9 crore over September '21. We have in hand over INR 377 crores of RoSCTL and ROTD scripts receivables and still to be in cash. Along with this, we would have been lower in net debt position as on December '21. The expansion projects of flooring, advanced textile and home textile businesses, which was started last year are in different stages of progress. Capital strength in financial year '22 on projects is expected to be around INR 550 crores, out of which INR 450 crores is already spent YTD December '21. Coming to segmental results. Quarter 3 financial year '22 core business Home textile revenue stood at INR 2,251 crores versus INR 1,967 crores during the same period last year, growing by 14% Y-o-Y. YTD December '21, corresponding revenue was INR 6,780 crores growing by 32%. Quarter 3 EBITDA home textile stood at INR 313 crores at 13.9% as compared to INR 413 crores in quarter 2 at 17.4%. YTD Home textile EBITDA stood at INR 1,170 crores. EBITDA margin being 17.4%, growing by 5% year-on-year. During the quarter, revenue from flooring business was INR 191 crores, up by 95% and 19% Q-on-Q. YTD December Flooring revenue were at INR 472 crores, up 136% year-on-year. EBITDA was at plus INR 10 crores as compared to a loss of INR 24 crores last year. YTD December was -- EBITDA is at a loss of INR 11 crores vis-a-vis INR 80 crores last year, a substantial improvement. The business is also witnessing significant increases in input raw material costs and higher freight costs, but we are passing on the cost increase to our customers, which has a lag time of a couple of quarters. Emerging growth businesses, which includes branded business, E-commerce business, flooring and advanced textiles, cumulatively grew by 62% year-on-year and contributed 26% to the top line during the year versus 22% contribution in financial year' 21. With this, I'll leave the floor open for questions.

[Operator Instructions] First question is from the line of Riddhesh Gandhi from Discovery Capital.

So we've been hearing kind of positive commentary on the overall export and textile business from all of the players out there. Just wanted to get your own sense, is this a demand because end market is growing and then in turn, how long is it then sustainable? Is it India that is -- you actually going to continue to gain share and how large do you -- like we could ultimately end up if given how shares already been quite high? Or is it some inventory issues? Or how should we be thinking about the long-term growth prospects of the export business?

Yes. So I'll just give a perspective. I think we have talked about the supply chain block that is in there. And the goods, I mean I would just give you a perspective that a good -- in fact, the Christmas season also haven't reached the shores of America. So there has been a complete delay on the East and the West Coast. And the Home textile and the holiday season reported a growth of 14%, though in the holiday -- in the -- in December. But however, with the commodity challenges, the retail correction that we are seeing in the terms of prices, we definitely will see some correction happening in the quarter 1 and quarter 2. . So though the long-term plan for Home textile looks good. But as of now, there would be an interim blip because of the supply chain issues, the commodity and the price corrections that we see going forward.

Looking slightly ahead on -- I think 2 to 3 years ahead, maybe even 5 years ahead. Given you guys are obviously the largest exporter out of India and major exporter in America, how do you see overall end market growth, kind of leaving aside any like quarterly [indiscernible] blips which may happen in the 6 to 9 months?

I still didn't get your question. Could you just clarify that, please?

Sure. Given slightly longer-term outlook, 5 years out, how do see overall growth in the Indian industry being per se as an export?

So I think for us, definitely, U.S.A. has been growing and will continue to grow. And U.K., Europe and rest of the world will contribute. But for Welspun, as a company, we will have a domestic play that is going to be very, very strong because -- as we see the Indian economy also growing, very robust, we will definitely see a contribution of the Indian economy and the Indian brand, Spaces and Welspun, coming into play here. And definitely that is going to be a very big play for Welspun. So overarching, yes, to your question, the geographies will grow, but for Welspun the focus on our Emerging businesses, like our brands in India, Spaces and Welspun, our Flooring business will definitely be something that we will see a lot of impacts as contributing to our top line as well.

Let me add to that. And so overall see there is the consumption is growing. So there's no doubt. And through this COVID period, it has gotten reinforced. And just like Dipali said, there's almost a 15%, 20% year-on-year growth during this Christmas holiday season. So -- and this I'm talking about America. So there is robustness in demand, which we have seen over the last 2 years. Also, clearly, now with this Indian cotton situation, so it makes it that much more difficult from China now to export particularly cotton products and sheets from India predominantly cotton. So that also is clearly playing to India's favor, and the leading players here in India. So while there is this -- I agree there is a disproportionate share of India within this particularly category for sheets and towels, but there is room for that share to grow. So that is one. And two is, it clearly opens up possibilities in other categories where China historically has been very, very dominant. And things like fashion bedding, where India has got an insignificant market share and China is north of 70% of all imports into the U.S. So -- and likewise, let's say, the rugs and flooring products where China has got a very decent share. So these are categories which could actually end up growing much faster. So even if you take a, let's say, 5-year view, our thinking is that India's market share will continue to grow, both in cotton products and there'll be also acceleration on non-cotton products because of the China plus 1 factor.

Sir, anything on the FDA updates with regards to EU FDA or an FDA with actually U.K.?

So Riddhesh, there are 3 FDAs currently under discussion. And they have been under discussion for donkey's years now. But what we know is being, let's say, this part of the association and policymaking process. So there is very serious intent now that we see from our Indian government to actually see these agreements through. So there is an agreement with EU. There's one getting discussed with Australia. There's one getting discussed with Canada. So I think there is a renewed vigor, but these things are easier said than done. So while we are seeing energy, we'll have to wait and see by when they actually materialize.

Our next question is from the line of Prathamesh from Axis Securities.

I want to shed some light on your flooring business. So what exactly is our current capacity utilization? And when will we reach -- so is the CapEx completely done? And now what's the market synergy like? I think we are largely catering to the U.S. market. So any light on that.

So as Dipali mentioned, we are -- so there are several parts to our flooring business. So our hard flooring business has picked up very well. And our primary market of course is America, which picked up well. Having said that, this rising commodity prices and the supply chain, ocean freight prices. So the margins are not where we would like them to see and we'll -- and we are making best endeavor to pass on all cost increases to the customers. But it takes some time lag. And also see that there is a sensitivity involved when you discuss pricing with the customer. So you go to aggressive. You'll go out, get your price increases, but then the consumption starts deflecting and reducing. So we are moving in a very calibrated manner. We are not so happy with our progress on the soft flooring side, because we can do much better than where we are. But obviously, the offices remaining closed for a better part of the last 2 years due to COVID and our fundamental -- our biggest product being carpet tiles, the demand was very slack. And so it's -- the numbers are not where we want to see them. And the other part is, of course, the wall-to-wall carpet area, where we are seeing better traction than carpet tiles. But again, not as much as one would like to see. Having said that, over the last 3, 4 months, some significant progress on business development has been made. We believe these developments will get fruition over the next couple of quarters. And we will see this healthier capacity utilizations on the soft flooring side. And I'm talking about the international markets here. And for the domestic business, it's the same story. So this -- for the better part of the last 2 years, offices remained closed. There were certain set -- of this attitude of people to let people into their houses to get their floors done and so on and so forth. Having said that, last quarter, we achieved where we were pre-COVID. So the Jan to March 2020, this -- our October to December numbers in the domestic market are by and large, is better than where we were in that quarter. So we've reached there. And now we are seeing, let's say, traction coming in, in the domestic market as well. And these efforts are being made to become more penetrated with our distribution network. Also this -- we are discovering, let's say, just what is the right channel of marketing and so on and so forth. So all in all, I think as a company, we are making good progress. So we've done about INR 190 crores in revenue and growing and counting. In terms of capacity utilization, we are at about 40-odd percent. And this also -- within this idle capacity that we have, we try and make product for our rug units, so we made great rolls and send it out to our rug business. So we try and keep some equipment occupied from that perspective. But from a hard, let's say, this flooring business intent perspective, we are at about 40% and there's a large room to grow. Also this -- our products are now distributed in 10, 12 countries on a regular basis all over the world, both hard and soft flooring. So rapid progress is getting made and we are hoping to see better traction coming in the ensuing -- this financial year. So in summary, we are not too happy with the progress we are making on the soft flooring side, where we believe the traction will start coming in a couple of quarters. On the hard flooring, while this good progress is being made on the top line, our good efforts are in a way getting negated by the constant increase in commodity prices. And -- but having said that, we are all very happy and enthused with the way our business has come about despite the COVID situation. We believe, we have a winner in our hand. We believe, this business will grow to achieve potential, which we have been talking about for the last 3, 4, 5 years. And we also believe that the margins that we are aspiring will also come, albeit, will take a couple of years for the margins to rectify. But this all in all, I think that we are seeing enough in the marketplace to give us the enthusiasm and confidence that we'll eventually hit the numbers and the glory that we all set out for when we actually started this business.

Okay. And sir, my second question is regarding the P&L, there is one exceptional item. And also your interest cost has reduced the increase in your debt. So just clarity on these 2 things.

Yes. So the exceptional item that you see in the P&L is for the quarter 3 of about INR 36 crores. We have taken provision because of the reduction in the realizability of our splits in RoSCTL and RoDTEP. So that is the exceptional item that we have taken. Interest cost, yes, it's slightly down because we got some interest incentives from the government and in this quarter, and that was accounted for in -- only in this quarter, and that is why it has reduced our total overall interest cost. The interest is related to also flooring division, the incentive that we see.

Okay. So do we expect these incentives to be continued in near future? And also regarding the INR 377 crores of e-scripts left with us, do we see any further exceptional charges coming in from those as well?

So interest -- first question, the interest incentive would continue, but not to that limit. So it will now normalize to quarterly even. And as far as INR 377 crores of scripts in hand, we believe that we will be able to not incur a higher cost than what we have provided for. We would try to achieve within that.

So let me just clarify. So the benefits that we have with our flooring business will continue, by and large, through the tenure of the loan. So the reason why we got a disproportionate credit this quarter is because this is the first time this incentive got received. So whatever got received and, in fact, the provisions that we had made for interest incentive are lesser, and we ended up, let's say, this getting more eligibility and -- which was, of course, entitled. So -- and we were conservative in making these projected gains. So that is -- there is a disproportionate gain, which has come in this quarter. But the interest incentive will continue through the tenure of the loan as per the state policy that -- the state policy credit and the policy benefits that have been allowed to us. So I hope that answers your question. And the rates of the scripts are actually moving up now and not down. So we believe that there's no further provisioning that will be required on this account.

[Operator Instructions] The next question is from the line of Aman Madrecha from Augmenta Research Private Limited.

Yes. Actually, I have 2 questions. The first one is regarding, like, can you explain the reason why there was different margins of the home textile business quarter-on-quarter, because in quarter 2 we're standing at around 15% to 18% EBITDA margin and the margins have come down to 14% currently? And also what is the exponential range of margins we are looking at the home textile business, because Y-o-Y in Q3 FY '21 we did margin of 32% from that time it's coming down only? So are we not able to pass on the increased raw materials to the customers? Or what is the scenario happening in the space?

So I just want to add on. I think that's the question, or anything else?

Yes, that's the question.

So commodities are at the historical highest ever. And starting -- it started from 47 to 55 to 65. And we took -- we have taken 2 price increases, one in June, July, and the second was as close to November and December. But even to the extent of just yesterday, the prices have gone up again by 20%. So fundamentally, it takes time for the prices to be passed on to the customers. And it is a consumer market that we must appreciate. And definitely, the retail prices can definitely get impacted and, hence, the buying also gets impacted of the consumer. So we are all -- let's not forget, we are at the record highest of prices in the terms of cotton, in terms of coal, power that is -- and energy and supply chain upheaval. So definitely, it definitely has reflected in our margins. And we have managed to pass on the prices in November and December. And now we are exploring what needs to be done in the next one, because maybe want to pass on any loss, it's going to definitely impact the retail as well. So -- however, we have really had 2 price increases.

So to clarify, this all cost by and large that increase until November were passed on, and they were costed through 2 price increases to clients. And so it's not about the ability to pass on the cost increases to the clients. So -- but we need to be sensitive and being -- if we rush things through, it might actually affect sales and negatively impact top line. So we need to be mindful of that. Also, the prices of cotton have gone to now INR 77,000 a candy. So if you compare this to November, we are already 35% higher from that point. Now these kinds of increases will certainly take a -- first thing as we need to see how long are they sustainable, are these prices going to stay, are these prices going to react, come back to more realistic levels. So we can't just jump the gun and start shooting from the head the next day the price of cotton goes up, because -- so we need to allow it some time. We believe this we need to allow another month or 2 before this -- before the cotton prices really settled down. And then go back to our clients asking for this -- the increased cost back to them. So that is the intent. And as I said, there is a need to calibrate because back to that knee-jerk, this significant -- these price increases could severely dent this top line as well. So we need to calibrate. This is not new to us, and we have done this. The last time around when cotton prices actually just crossed $1 and we did it over 3 price increases, we have gone through two this time. Hopefully, if there is a need, we will go back to the clients with the third one. And to a very important question that you asked, what do we believe is our sustainable margin. So gentlemen, this over the last 10, 15 years, this company over any 5-year period, has delivered a 20% EBITDA margin. The business is strong enough, good enough to continue to sustain those levels of margins. Unfortunately, you will not see that over the next couple of quarters. But eventually, this -- we will pass through everything, and there's hopefully some cost, this benefit will revert back. And the rest of it, we will pass it on to the clients. Again, we have historically done it for 10, 15 years and there's no reason why we should not be able to do it again. And the clients are all receptive. We are in this together. These are strategic relationships. So as I said, we are calibrating the whole approach. And mind you. when we get a tailwind, so as a company we've also did 25%, 26%, 27% margin, so this is a necessary evil. The cotton prices will keep going up and down. Unfortunately, this time, they are up 65%, 70% and continue to rise. So it's taking a taking its toll on the margin. But we have seen this all in the past, this is nothing new. And this -- eventually we will get back to our historical level of margins and which is around the 20% mark. Now it could be a percentage here and there, those things can happen. But eventually, we will get there, but I'm afraid it won't happen in the next 2 quarters.

And sir, I had one more question. I just wanted to know what level we are integrated in terms of backward integration from the yarn, what portion of the yarn, like what portion of the yarn is contracted and in house just a comparative number on that side, if you can hit?

So good question. And so historically, is if you look at, let's say this -- our CapEx plan. So we have actually not invested much in spinning over the last 8, 10 years. And at current consumption levels, we are almost 40% of sourcing of yarns and other materials from the outside, and we produce 60% of the yarns for -- of the consumption that we need. So -- and this has served very well for us. We believe that this historically, that spinning is the lowest process, let's say, within the value chain of textiles. It's of course different the last couple of years where the margins have shot up. And candidly, that is reflected on our margins as well. So -- but this being light on spinning has served us well for 15, 20 years. And this -- and we think this -- give or take a few quarters, but the spinning margins will return back to normal. And when that happens, this we are comfortable with our current -- this blended strategy of making it in-house and continuing to source yarn and fabric from the outside. So -- but I candidly confess that, at this moment, it is hurting us. Perhaps this is the first year when it has hurt us over the last 15 years, I believe we have always gained by sourcing yarn from the outside.

So just to clarify, 60% is sourced from outside, right?

40% is sourced from the outside, 60% is made -- yes.

Okay. And sir, just one more addition to this. Like are we seeing any supply side issue from the yarn? Like is there any supply side issue on the cotton yarn front or it's easily available?

I can take that one. The supply chain is -- the challenges are in the costs and the prices. That definitely is -- that's where we definitely see kind of a challenge for sure. However, while we might be looking at the availability of fine yarn, the coarser yarn have been a challenge. Somewhere, I think there has been the supply chain disruption, and also in principle, the availability of cotton in the scenario. So yes, there has been a little disruption on that side. But I think going forward, we'll be able to -- I think it is going to be mobilized.

Our next question is from the line of Dhimant Shah from Mana Finance.

Just delving a little bit on the previous question. If one sees the drop in the margins from 21%, 22% to -- I mean I'm talking about Y-o-Y. And if you juxtapose the capacity utilization, you have also gained from the operating leverage, so-called, on an overall basis. So if one has to kind of dissect, cotton sourcing as well within you, the logistics cost, which is possibly exogenous to the company, and the third part is the operating leverage. So you have already also gained a prima facie, I would presume so, from operating leverage, which means the margin dilapidation has been slightly higher. So how much do you hope to recover over next few quarters? And especially, this is a repetition because from the other textile companies that we have interacted, their ability to pass on somebody like Arvind -- of course the segment is different, but their ability to pass on has been much higher. So is -- and given that in home textile, the value per se is much higher than garment, is there some resistance to the price changes or our ability to kind of take on price increases because this is a phenomena which the buyer would be knowing very openly?

So I'll pitch in here and, Adam, if you can just pick in later also surely. I think one thing when you're talking about Arvind, they are very seasonal in the terms of garments. It's fashion-oriented and the season-oriented. For home textile, it is core and 70% of our business is replenishment business. And this is core business. And hence, the pricing plays a very key role in the terms of a unit cost called for a retailer. So it's very, very different. So while an apparel manufacturer or a government manufacturer, it's easier for them to pass because it's a season to season that we can take on that price. So that impact doesn't show and reflect that much. Vis-a-vis, our core business, which is a replenishment program year-on-year, our programs are going on for now over 5 to 6 years. So that definitely does impact on the retail as well. So that definitely is a key thing comparing it to garments. However, I think even looking at -- and we spoke about it, our relationships with our customers is very, very strategic. And we have managed to pass on 2 price increases. And if we can literally say that that's -- if you talk about a towel or a sheet, you -- and if you increase the retail prices to that extent where you're seeing the cotton index go up by over 60% to 70% in the past 7, 8 months, I think it is a tremendous impact for the consumer. So there would be a very calibrated reaction to that, I must say that.

Agreed. I mean just to recalibrate that question, what is the amount of price increases you need to take to -- if you have to be in line for the previous margins that you have just done? So what is the percentage margin -- or percentage hike that you would need to take just to be in line with the last year, for example?

So let me take this, Dipali. So this is a constantly moving goalpost...

No, if you freeze the cotton prices to the current prices, which is what you mentioned about INR 77,000 a candy.

Correct. So this is exactly what I was saying previously, that everything until November was passed on, gentlemen, through the 2 price increases that we gained, by and large, everything got passed on to the customer. So it's not about the ability of the company to pass this thing on and -- because we have great and strategic relationship with our clients, and there's a fair degree of transparency in the way the product gets costed. The question is that how swiftly do you want to go back to your clients, in November [Foreign Language] again, we go back and sit in front of them in January. So the business, there is a risk of the business getting disrupted. And what I mean by that is that sales could just nose dive if we don't be careful in this area. So the company is now 25 years into this business and understand, let's say, the consumer behavior. And so this -- it needs to be handled very delicately, very sensitively and some patience needs to get exercised. Now unfortunately, we get measured quarter-on-quarter, but businesses cannot be run quarter-on-quarter. So we have long-term relationships and we need to calibrate our approach and the way we move on these headwinds and cost increases to the clients. So I don't think there is any doubt on the ability to do it, the question here is that what is the rational and logical way of doing it and when do you time it. So we need to be very sensitive and careful on that area, and which is what we are trying to do. So at these levels, we need to pass on 7%, 8% to answer your question. So it's another 7%, 8% of price increases or thereabouts should get us back to, let's say, those 80%, 20% margin levels. But the thing is we have done the last increase at those products that we are shipping with the increased prices have not even hit the shelf. Now before that, you go back and sit with the customer [Foreign Language] business doesn't happen that way. And unfortunately, we have to take a slightly longer-term view than there's our measurement criteria, which is a quarter. So, so be it, but we got to protect the long-term, let's say, this the sanctity of the business. And also, our credibility and the times of crisis, you need to stand with your clients and be collaborative rather than pushing through this every single increase that comes your way. So as I said, there have been instances when they have allowed us higher margins. So it's hard to pay back, and this will take a few quarters of pain, that we can calibrate this whole thing. But eventually, we'll get there. For 15 years, we have done this, and we believe that the company's business is strong enough to do it one more time.

Yes. Two ancillary questions on the same parallel, you mentioned that about 60% is in-house. That 60% in-house would mean how many months of inventory of cotton that we normally kind of store?

So in a normal situation, quarterly seasonal, yes. So the season is October to September, normally you tank up on cotton in December and Jan, that's when the arrivals maximize. But unfortunately, arrivals have not surged to the levels this year as one would have wanted and which is why the spike in current prices. So right now, this -- we are not sitting on big stocks. And to be honest, at these prices, we are not comfortable to build stocks as well. So and these have been -- as Dipali rightly said, these are all-time high prices. And there's one thing like a government intervention and the whole thing could come tumbling down or there's a ban on export of cotton. It happened about 8, 10 years back or something. So it could come tumbling down and you have been left with -- settled with very high cost inventory in your system. So we are certainly as a company not comfortable building stocks at these levels, and we will not build. I'm not saying that the prices can't go up, but as a company, we are not comfortable building at these levels.

No, sir. What I meant was that if normal situations would have prevailed, then this 60% would mean how many months of inventory of cotton at your end?

We would have been carrying 5, 6 months of cotton by the middle of February. So this -- in a normal season, we would have covered this half -- maybe 5, 6 months of cotton by this time.

Sure. Sure. And coming to the flooring business, I think 2 quick things. There is a massive ramp-up and we are close to breakeven. How do -- can you give some guidance how would you ramp up this business in the current year and next year? And are the distribution channels and all of that kind of almost in place?

So good question. And thank you for acknowledging the good work that the company has done. We believe we are going to be -- just in terms of top line, this quarter should be steady and we should be steady. And the reason why we are not in a hurry to ramp up is again the sale, the commodity price surge and so -- to get logged in on larger volumes of business where enough margins are not getting made. So we are not in a hurry to do that. We are waiting for the markets to stabilize. On this side, we believe they should stabilize in the next 2 or 3 months, where we believe that the commodity prices should definitely stabilize in this quarter and -- which is when we will negotiate long-term businesses with our client. And hopefully, the volumes will also start surging. We are not even halfway through. So with what we can do in terms of capacity, we are not even halfway with the current volume. So there's a long way to go. There's a long way to go on the soft flooring side also. But what I can tell you is that despite COVID, this -- we are very proud of the work that our teams have done. So for 18 straight months in a new business, there was no face-to-face meeting with the client. And with those constraints, with the hands tied to the back, we have built this business. Now the clients have started traveling and face-to-face meetings have started happening, so this will result into a faster business development. I think internationally, we have progressed very well. In the domestic market, I think we have progressed well. So there's more than 1,000 outlets today for our products to -- for customers to buy from. But to be very honest, there is calibration that needs to get done. So I mean the route outlets, is our display right. So it's a learning curve. We are going through all that. What I know is we are in very, very capable hands with Manjari leading this domestic charge in the business. Symptoms are good. Margins are definitely under pressure. But as I said, we have gotten back to pre-COVID levels. And the improvement in the domestic market we are counting. And thankfully, all parts of our business are firing in the domestic market. So whether it be office space, commercial space carpet tile, wall to wall in hotels and cinemas, artificial grass or the luxury tiles in the residences of the people. So sales are coming through now in all the areas, all the products that we are currently doing. Of course, nowhere close to where we aspire them to be, but definitely, the traction is improving. And if you would ask me, are you satisfied? No, there is a lot more work to be done. Have you done enough? I think, yes. So considering that it's a new product, relatively lesser understood. I think the team has done a fine job and the calibration process will keep happening over the next few years. But what I can tell you is the product is well accepted in the market. We are doing almost INR 1 crore on digital leads already. So this -- and that can -- with an average ticket size of 90,000, 1 lakh. So you can imagine that if such a young company with such a young product and a relatively lesser known product, so we've already hit a INR 1 crore run rate. So I think calibrations are happening on the product placement positioning as well as price in all the areas. And this what I believe now is that this all of us will see constant improvement in this area, and we are enough excited. Not so excited with the current margins that we are currently operating in. But as things stabilize with the commodities, I think margins will also come, and I think the top line will also continue to improve in the ensuing quarters and the years.

And one last question, if I can squeeze in, how do you accrue and book the RoSCTL and scripts in the books of accounts? So you have some pending INR 377 crores, you said. So how does it get?

So the booking of RoSCTL is based on the actual exports. So once the port is done on that basis -- on the basis of that bill of lading, you account for it.

So where there is certainty, we account for it. If there is uncertainty, we become circumspect like we were in the flooring business. So until such time we got the eligibility certificates from the government and there was certainty within account for it and the interest gain is demonstration of that. So generally, as a company, we are very conservative, recognizing revenue. If there is an expenditure risk, we would instantly take it on books, and we've been following this now for almost 15 years. So we have been conservative with our accounting, and we want to continue to remain so.

Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Dipali Goenka, CEO and Joint MD, Welspun India, for closing comments. Thank you and over to you.

So I just want to conclude by saying that in the near term, I expect the operating environment will continue to remain challenging and inflation is likely to impact the volumes in moderate growth. Commodities remain volatile and elevated, witnessing further sequential inflation in the coming quarters. We will continue to work with our customers on different measures, and that will help mitigate the cost pressures, while driving operational efficiencies and cost savings initiatives at our end. As we successfully transitioned from being a manufacturer to being the FMCG of home textiles, our investments in our D2C initiatives, digitalization and analytics are helping us in understanding consumer behavior and forecasting demand, thereby enabling us to serve our customers better. So I would end here by saying thank you for being there today, and I hope you stay safe. Thank you.

Thank you.

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