Ladies and gentlemen, good day, and welcome to the conference call for analysts and investors for post-results discussion for quarter four of financial year 2022 and 2023, Arvind Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Samir Agarwal, Chief Strategy Officer, Arvind Limited. Thank you, and over to you, sir.
Thank you. A very warm good afternoon to all of you, and thank you for participating in this call to discuss the fourth quarter and full year results for financial year 2023 for Arvind Limited. Joining me today is Mr. Jayesh Shah, Executive Director and the Group CFO. We also have Mr. Punit Lalbhai, who is joining us today. As you know, he's a executive director as well and Vice Chairman of Arvind Limited. As you would have picked up in the briefing note, we have embarked upon a fairly ambitious program to invest and transform both our advanced materials as well as garmenting and textile businesses. Punit is the architect for many of these plans and actually has passionately built up the AMD business from scratch, as some of you may already know.
He will be sharing our thinking behind what we are planning and proceeding, and some of the priorities in the short to medium term. But before we get there, allow me a few minutes to share our observations on the macro environment in which our businesses are operating, as well as read out the summary of our results for Q4, as well as FY 2023. The demand situation in the key export markets, especially the U.S., continues to be both encouraging and challenging at the same time. The global brands and retailers have reported better than Q4, Q1 earnings, which they have wrapped up around February, March timeframe. Yet, if you read their commentary on the outlook, it continues to remain cautious.
In India as well, the consumer demand has remained relatively strong through Q4, though there are signs of sluggishness in the recent weeks of Q1. Both in domestic as well as export markets, customers continue to postpone their buying as they are tightly managing their inventory, and they are buying in small lots and buying as close to the secondary demand as possible. Further, we have talked about our disadvantage with respect to Bangladesh, because we do not have that GSP duty-free status to Europe. In addition, one recent development is the collapse of currency in Pakistan, which has started to give them a bit of an advantage, especially in the denim segment. So this cautious environment actually underpins our Q4 results, which got impacted by these factors.
Overall, for this quarter, the revenues stood at INR 1,881 crores, which was lower by 5% on a sequential basis, and compared to the Q4 of last year, it was lesser by 14%. Operating margins were almost flat, around 10% levels. Volumes in the woven segment actually continued to remain very, very strong, while denim and garments volumes saw reductions. Price realization started trending down, which reflects the lowering of RM prices in the recent quarters. For the full year numbers, the consolidated revenue stood at INR 8,382 crores, which was higher by 5% compared to last year. EBITDA margins remained flat at around 10% levels. So specifically, they were INR 800 crores as compared to INR 808 crores.
PBT stood at INR 427 crore, which was similar to the number from last year. PAT, profit after tax, stood at a robust INR 349 crore, which reflects a lower tax outflow on account of losses due to sale of subsidiary shares, as well as our migration to the 25% tax regime. Textile revenues for the year stood at INR 6,716 crore, which was mildly higher than the last year revenues of INR 6,611 crore. Volumes in woven segments increased from 120 million meters in FY 2022 to 127 million meters, so an increase of 7 million meters over the year. Denim volumes, denim fabric volumes declined from a rate of 92 million meters last year to 55 million meters. Garment volumes are also lower and stood at 32 million pieces of full garments.
Essentially, this reflects the caution among the key buyers, which I had mentioned earlier. Price realization had peaked in Q2 and started trending down. On a full year basis, the realization was higher for both denim and wovens, actually 25% higher for denim and 18% higher for wovens. And this obviously reflected the higher cotton prices, which averaged INR 214 per kg for FY 2023, as compared to INR 140 per kg for FY 2022. So textile margins overall stood at 9.8%, as against 10.7% the previous year, essentially a result of slightly lower volumes, as well as the fact that prices were higher and the denominator was larger. AMD continued to deliver on its promised growth and delivered a 22% growth, closing the year at INR 1,250 crores.
EBITDA margins for this business improved to 13.2% as compared to 12.5% last year. We continue to do a very good job on working capital, so the net working capital turns improved from 5.6 turns at the end of FY 2022 to 6.3 turns at the end of this year, and this reflects the tight operating discipline which we have been following. If you recall, we had guided for INR 300 crore reduction on our long-term debt during the year, and I'm quite happy to share that we delivered INR 304 crore of long-term debt reduction. Closing the net debt as of 31 March 2023, that stood at INR 1,327 crore, as compared to INR 1,682 crore the previous year.
In terms of a quick commentary on FY 2024, we expect the overall revenue growth to be in the modest single digits, and most of this will be powered by AMD, which we believe will deliver another year of robust 20% growth. We expect garment volumes to start improving in the second half of the year, H2, as customers become more comfortable with the economic outlook and resume some of their key buying programs. Margins can be also expected to see some improvement in tandem with the volume growth. While we are resuming our CapEx program, and we have laid that out, we will remain quite cautious and calibrated, and we'll continue our stated intent of reducing the long-term debt during the year.
During FY 2024, we intend to pay back another INR 250 crore of long-term debt and get that long-term debt level to about INR 400 crore by end of March 2024. So this concludes the first part of my opening remarks. I request Punit to now join and share his perspective on the outlook and priorities for the business in short to medium term. Over to you, Punit.
So good afternoon, everyone. It's a pleasure to be here and welcome to the call. So I'd like to sort of put into context first, the sort of context in which the results have been achieved. I think the world is facing a very uncertain situation with some of the key markets for textiles. In a situation where there is high inflation and bankers are tightening monetary policy to fight it, that is having a real effect on demand contraction. We're also in an environment where raw material remains uncertain. As we go forward, the initial forecasts for monsoon vis-à-vis, you know, the price of cotton, that remains to be seen as a big uncertainty going forward.
In the recent past, we are also seeing some sluggishness in the domestic Indian market. So given all these things, it is quite heartening to see that many of our business divisions have fought through these difficult, challenging times and still achieved relatively good business performance. If we look to the future, we seem to be improving in several respects. We have done a lot of work on efficiency and structural changes, where we should start to get more and more operational efficiency and better sort of performance on margins and on productivity. If you look at the overall textile business, there are going to be two major focuses that we will have for the year going forward. Number one, we are going to add some garment capacity.
A lot of you may be wondering that, you know, the garment volumes have been a little soft in the last couple of quarters. That has been because some of our key partner customers have been cautious because of the high inventory build-up post-COVID buying. People have bought very, very little compared to their usual buying pattern and have postponed orders. We expect that despite soft economic outlook the world over, that buying will have to resume, especially in the second half of the year. So we do expect garment volumes to start improving in the second half of the year. And the medium-term outlook for India looks quite bright. If you look at the overall pattern of buying, more and more buyers want to buy vertical packages from customers, from suppliers.
More and more people want to de-risk China, Vietnam, and Bangladesh, which are the two major beneficiaries of this change from China, are fairly saturated to the extent that buyers don't want to place too much more eggs in those two baskets. Therefore, India is very well positioned for the medium term as a sourcing destination for many of our key brand partners. So we, we are very bullish on that story, while the immediate few quarters, we remain very cautious. With that in mind, we are building capacity to take advantage when the cycle turns positive. So that's the story on garments. Cautious for a couple of quarters, and then improvement to be seen in the second half of the year, and medium term to be quite bullish and bright. The second imperative in the textile business is the sustainability journey.
Even before ESG became a big focus, we have believed in sustainability and the impact that our industry has on the world, and we are, I'm happy to report, quite ahead on the curve, which is becoming a real source of competitive advantage. For example, all our facilities don't use any fresh water. We, we recycle all the water, which is a very large footprint, and we also do a lot of water savings, with farmers. We work with about 100,000 farmers to grow sustainable cotton. We save water there, we save chemicals there, we save, save pesticides there, to create a sustainable footprint, for our main raw material, which is cotton. We are also focusing very aggressively on changing our source of energy and decarbonizing.
We are anticipating to dramatically increase the proportion of renewable energy in our portfolio, which will not only make us more sustainable, it should also make us somewhat more competitive. And we are also working on cutting-edge technologies that will help bring more and more circularity to our business, where we can take raw material from used clothing and reincorporate it into the manufacturing supply chain. So with all of this, we expect deeper relationships with many of our partner brands who value sustainability, giving us a competitive advantage. So these are the two major areas where we are going to work hard on the textile front and unlock value.
Coming to the second sort of portfolio in our group, which is the AMD portfolio, we have been showing very encouraging results for many quarters now, where the growth is satisfactory. And all three of our verticals, which are human protection, industrials, and composites, all are firing on all cylinders. And a bulk of our CapEx cycle, or a large chunk of the CapEx cycle, is going to be allocated to these three emerging businesses. And we are going to focus on getting better quality customers, more and more regulatory approvals in our home country, India, which is the real large opportunity going forward. And we are going to continue this 25% growth with overall 13.5%-14% margin profile going forward.
So this set of businesses is extremely exciting and should increasingly become a bigger and bigger part of the overall Arvind portfolio. Coming to CapEx, which is the final thing that I will talk about. The two major areas in which our major areas where our CapEx is going to be allocated is, as I mentioned, the Advanced Materials Division and our garments business. And we expect that across the next couple of years, we should be spending around INR 600 crore to ensure that we land these two growth engines at the right place when the time for taking advantage comes. Overall, if our budgets are met, we should be able to decrease long-term debt, which is the debt that has risk associated with it and a bullet, I mean, the payment timelines associated with it.
However, as we are going to see growth in this year, we may actually increase our short-term debt. So total debt may remain flat, but long-term debt will continue to come down. So overall, we the mood is cautious in the very, very short term. We expect improvement in the second half of the year, and the middle term looks extremely bright for the company. And with that, I hand it back to Samir to close the commentary, and start the question and answer round.
Oh, yeah. Thank you, Punit. And so that wraps up our opening remarks. Thank you for listening patiently. Hopefully, that already might have answered many of the questions you may have in mind, but we'll open the lines up for additional follow-ups as they may be there. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The first question is from the line of Aabhash Poddar from Aionios Alpha Investment Management. Please go ahead.
Yeah, hi. So thanks for the opportunity, and, congrats on a good set of numbers. So both my questions were around the guidance that you talked about. So first, just first off, starting on the margin bit. So you are making in AMD, your margins currently are at 14.5% EBITDA, and overall company EBITDA, 9.5%. Just wanted to understand, why are we still guiding for a flattish to a margin improvement? Because as AMD share goes up, the margin should optically be better. And two, given that EBITDA per unit could be flattish for the textile division, optically, the margin should look better on the textile side as well. So just wanted your thoughts on the margin bit, on the guidance, why we, why are we guiding this way?
The second part to that same question is, on AMD, what is the sustainable or the actual margin that we can get to? Because in FY 2023, every quarter sequentially, we've seen a margin improvement. So just your thoughts on this would be really helpful.
So, thanks for the question. So first question is about the margin, and that too, in the immediate coming year that you asked us. So let me explain to you about our margin in textile business. So currently, we are faced with two situations in, as far as margins are concerned. One is about the raw materials, where the raw material prices are, though they've come down, they are significantly higher than what they were over last several years. That has affected our contribution, growth contribution that we are on raw material to sales ratio. Though this has started to now look better, if I look at on the run rate basis, the contributions in quarter four were far better than what we earned in Q3.
However, the second issue about the margin, which is the, is relating to the capacity utilization, especially in our garments business as well as in our denim. Both being low is impacting the absorption of our overhead, fixed overhead, and as a result, the margins in textiles are currently looking a bit lower. And we are, as Punit and Samir mentioned in the earlier conversation, we are still wanting to be cautious and not guide a bullish margin or a sales environment because of the uncertainties that prevail in the market. So in the short term, we are guiding that the margin may remain more or less similar. We are not saying they will be exactly what they are. There may be a marginal improvement.
As far as AMD is concerned, you are right, our margin should be in the range of about 14% or thereabout. What you are seeing, again, more than just the margin, if you look at the ROCE in our AMD business, that's looking even better as the quarters have passed and the years have passed. As our utilization of our capacities and our overall absorptions are improving in those businesses, the margin or the ROCE profile is in fact improving as the period, as the time passes. On medium term, your answer to your questions about why we are guiding at a-- you know, we are, we are quite, you know, at this margin, if we were to forecast for next few years in textile, it doesn't make sense to make investments.
Actually, we are hoping that in some time, as the demand cycle picks up and the raw materials stabilize, our margin should start looking up. Maybe a couple of hundred basis points space is there in textile margin, which we should achieve over a period of time.
Just to kind of add on to that, you know, on AMD side as well, your question is fair. I think, you know, inherently, the businesses are capable of taking the margins up to about even, I would say, 15%-17%. But understand that AMD is a portfolio of many businesses. We continue to, while a core part of the portfolio has matured and started delivering very stable set of results, we still continue to augment that, and hence, the newer part of what we experiment sometimes does kind of, you know, end up creating costs which are higher. And that's why we are right now in that 13.5%-14% zone, and gradually it will inch up to that larger level I talked about over the next 2-3 years.
Thank you.
Perfect. Perfect. That's very clear. So I think the margin commentary is more out of caution than, and clearly has room to go up further. My just second question was again on the guidance that you gave on the cash flow bit. So in the current year as well, on a consolidated basis, post net working capital and tax, we have generated around INR 650 crores of cash. Now, I understand that you will be stepping up your capacity CapEx a bit more than the current year. But I would have still thought that on an overall basis, your debt would still come down. When I say overall, I mean the long term and the short term bit of both combined. I would have thought that albeit at a lower level, but it would have still come down.
Just wanted to understand the broad math that we are having on the cash flow side, where we are saying that the debt will remain flattish.
Sure. So, you know, this year, there has been some kind of cash flows that we generated, not only operating, but otherwise from sale of certain assets that possibly augmented the cash flow a little bit. We are stepping up the investment compared to what we did last year. That is point number one. Point number two, last year and three years in the past, we had skipped the dividend, and we are now getting back to dividend. In fact, we are paying some extra special dividend as well this year, to compensate for what we did not do in the last few years.
Thirdly, we are expecting to grow, and that would require, even with a very tight net working capital cycle of almost two months, two and a half months, we still will, for the growth, will require working capital. So the working capital debt may go up. However, the long-term cash flow, as you said, INR 650 crores that we generate, would go towards, you know, paying dividend and CapEx and the repayments.
Understood, fairly clear. If I could just squeeze in one more. So if, could you just talk about the interest cost saving that you get from substituting the debt from long term to short term? What's the extent of benefit that you may get on that end? Or is there no benefit at all, which is going to come?
There is more benefit, I would say. The interest cost per se are lower by about 150 basis points. So yes, to that extent, but it will be marginal in a sense, if you do INR 200 crore fetch also, it will be like INR 3-4 crore, not much.
Perfect. Perfect. That's great. Thanks and all the very best.
Thank you.
Thank you.
Thank you. The next question is from the line of Sagar Parekh, from One-Up Financial Consultants. Please go ahead.
Yeah, thank you for taking my question, and congratulations to Punit Lalbhai and team, for dividend as well as, you know, coming back to growth, growth CapEx. My first question is on this CapEx of INR 600 crore. If you can give some sense of, you know, how much are we investing in garments and how much on the technical textile or advanced material side, and what, what could be the potential asset turns from this business, and eventually, what kind of ROI that we can generate from this? If you can give some color on that.
Yeah. So I mean, this is a very—I mean, very, very rough, sort of 30,000-foot view, but it should still be helpful. 40% around would go into AMD, around another 30% would go into garments, and 30% would be, you know, debottlenecking and maintenance CapEx across the group, most of which will go into the textile business, which requires, you know, upgradation to remain relevant and to continue generating the great cash flow that that business gives. So that's the kind of, sort of very broad thumb rule that you can go with.
Okay.
The asset to turnover ratio, that will be around 2.5-3 in both garments and AMD, which is significantly higher than textiles.
Okay. So basically, the INR 600 crore can generate additional INR 1,500- INR 1,800 crore kind of revenues?
Yes, of course, there is a ramp up, so it takes, you know, a while for this kind of, especially garments, to reach the full potential. So the 3 I'm saying is at full maturity, so it may take, you know, around 18 months, but you are right.
In short, yes. So that's the, that's the plan. And just to fill you in with some bit of a follow-on question that may come.
Yeah.
So currently, with the closure of our capacities in Ethiopia and one of the factories we did during COVID period in Ahmedabad, our current rated capacity at a reasonably high efficiency is around 42-45 million garments, which we intend to take it up to 60 million over next—invest into capacity creation up to 60 million. On, on AMD side, we do have, we do have, you know, headroom right now to grow with 10%-15% over and above what we have planned for the current year from existing available infrastructure that we have. And the current, the capacity we are creating, should give us another, you know, growth of about 25%-30% over, over this period.
In addition, the growth can come as and when with demand for denims go up, because we have capacity in fabrics. Woven is completely full, but we have capacity in denim. And happy to let you know that there are now, this, I think denim has bottomed out at 11-odd million. I think it's, it's showing signs of improvement as we progress, and I think they will—they may not go to normalcy in a short period of time, but they, you will start seeing improvements over quarters, coming quarters.
Got it. This incremental ROI perspective for this INR 600 crore of investment.
We do generally, you know, a calculation where we are at about 3-3.5, you know, paybacks, simple payback over the investment. So which will be like, you know, between INR 150 crore-INR 200 crore of generation.
Okay.
When it matures. It may take time, but when it matures.
Understood. And my second question was on this, in your opening remarks, you mentioned about this, collapse of Pakistan currency, which is helping them in terms of denim, and now you're saying that denims have bottomed out. So could you collaborate these two statements? Like how - So is Pakistan now gaining more share of denim business for global brands or because they are now more cheaper?
I think what has happened has happened over a 2-3-year period, where Pakistan currency now to the extent in-- I would argue that, you know, with the situation in Pakistan, it might be actually hurting rather than helping with, you know, such rapid sort of depreciation. But Pakistan has some very strong competitors that have been vertical from day one. So they fulfill the changing requirement of the market, where people want to buy more and more garment packages. And to that extent, because everything is under one roof, they can be faster. Because of their basic costs, they can be competitive as well, and they've done a great job in design and innovation. So we are also good on design and innovation, but we don't have that added verticality.
So speed and you know that one-stop shop, that is where India needs to catch up, and that's where we are trying to work. I think denim sort of deteriorating to this extent is majorly a result of cotton going to where it did last year, which is, you know, at INR 1 lakh a candy. You know, a lot of that product was just outpriced, and people switched to other products that were less cotton hungry. Denim is very cotton hungry because it's a heavy bottom weight fabric, mostly. So that is the reason of overall demand destruction, you know, across the board for denim.
Now what we are seeing is at INR 60,000, INR 65,000, and, you know, the market coming back to some extent, but not to the, you know, original levels because of all these other headwinds around, you know, the global macroeconomic scenario looking a little, you know, sort of uncertain and people not spending money on discretionary items. So I think that's why the recovery hasn't happened as well as it could have. But the mitigating factor is that brands have bought so little that they are now starting to buy as the time for selling comes closer, they are placing orders to sort of shore up their inventories to whatever small extent that they need to be shoring up.
We do see things improving from here and not deteriorating further.
Sure. So the way I look at it is denims will keep growing now from here on, at least in single digit or mid, mid single digit to double digit, kind of. Garments could see substantial growth in FY 2024, given that we have capacities already there, which are underutilized. And AMD will keep growing at 20-25%, right? Correct me if I'm wrong, but these three and nonwovens we have fully utilized. So nonwovens will possibly be in low single digit kind of volume growth.
Yeah. Denim will see a cautious growth, I mean, it will not be double digits, it will probably be single digits, but consistent, you know, the trend will start looking up quarter on quarter. Garments, I would just sort of modify your statement to say that you start looking at better numbers in the H2, because where we sit now, we are discussing H2. So the, if I, if I'm booking orders today, if I'm having conversations with customers today, it is for delivery in-
Correct
... in H2. So-
Are we factoring in any kind of benefit coming from this U.K. FTA treaty, which is possible or likely now, or this is-
So that can potentially be a very big fillip to the Indian garmenting industry. And of course, once it is announced, it's going to take people some time to sort of react on it. But yes, medium term, it could have big, big benefit for India as a country, and therefore, we should also be sort of enjoying that party when it starts.
Understood. Understood. And this, firstly, congratulations on the dividend part. After four years, I think we are announcing a strong dividend. Is there like... Just wanted to check about the dividend. So going forward, will this be like a recurring factor, and is there like a dividend policy that we are coming up with or, because we are-
So-
Yeah.
So Sagar, we do have a dividend policy and which is, which is to do dividend between 20%-30% of that, which we kind of continue. This time we have done close to about 25% dividend. As you know, that would mean about INR 100 crore dividend that we should distribute.
Mm.
We have done, of course, one extra, you know, INR 2 dividend. This is, you know, what we did not do over last year. In fact, last year, we could have distributed because the year was not, you know, impacted so much, but we still, you know, refrained from declaring. So we have declared it this year. Going forward, yes, the dividend, we want to continue with the dividend, of course, looking at how we see the next coming few years, but it will be in that range of about between 20%-30% of the PAT. That's the policy actually. Yes.
... Okay, great. Just one clarification, this will be my last question. This CapEx of INR 600 crore over two years, so, is this over and above the maintenance CapEx that you usually have about INR 100 crore-INR 150 crore, or this includes?
So it is part of that, as Punit mentioned, that about 70% of this is for-
Capacity building.
AMD and garments, and 30% is for the other, CapEx.
So it includes everything, right? So it will be like more-
It includes everything. It includes everything. And some of what we say, maintenance CapEx is also, you know, innovation CapEx, de-bottlenecking CapEx. It's, it's not maintenance, maintenance that doesn't give you any advantage. It gives you advantages. It may not give you too much top line.
Okay, great, great. All the best to the team, and that's it from my side. Thanks.
Thank you.
Thank you. The next question is from the line of Prerna Jhunjhunwala from Elara Securities. Please go ahead. Ms. Jhunjhunwala, your line is in talk mode. Please go ahead with your question.
Hello, am I audible?
Yes, ma'am.
Yes, Prerna.
Yeah. Congratulations, sir, on good set of numbers. Sir, I wanted to understand two, three, main things. First being, the garments business. We are looking forward to increase our capacities. Understand that the demand is going to improve from here on, and we want to be capacity ready. I just wanted to understand the efforts taken on building on new clients, new product categories, or what categories we are focusing on to utilize our capacities better than in the past.
So thanks for this question. It's a great question, because I think the turnaround of garments depends on the factors that you mentioned. And I think the efforts to build very deep strategic relationships with customers is on in right earnest. So I think we have made some very important structural changes in the company, where we have sort of brought a lot of our textile businesses under, you know, one management and streamlined a lot of operating parameters. And we have. You know, in the short time that we've done this, we are already seeing a lot of efficiency unlock, a lot of unlock of sort of coordination, planning, and that, in turn, is leading to better performance on delivering to customers.
So working on that customer delight, both with product and service, is a key component. So that's one thing, structural changes. Number 2, we've also brought in perhaps the highest level of senior talent in the last 3 to 4 months in the company, which all have proven track records in garmenting specifically. So, with unleashing these people into the system, we expect that, you know, that service part and efficiency part should only, only go up. Thirdly, I think where we are creating capacities is where the demand and differentiation can be the highest.
So if you see our essentials business, you know, it is fairly robust even now, and that's where we are adding, you know, the most immediate new CapEx is going towards, towards that factory, which will be a LEED Platinum certified factory with full automation that will allow us in a product category where demand is not so bad for us, to be able to demonstrate, you know, the next generation of garmenting capability with automation that is not so dependent on people, where absenteeism, attrition, turnover, all of that, which, you know, plagues the industry in India, is not seen. So I think where we are investing and how we are investing, both of these things should actually change some of the way that garmenting is being done at Arvind.
And with the new people and the new structure in place, and the efforts going to sort of deepen our relationships with customers, I'm very optimistic about the medium term, in terms of garments. But with the shift, with the shift of buying, and with verticality being clearly an advantage, as we have seen, you know, in other markets, it is important that our capacities reflect the overall size of the organization. And even though there may be short-term headwinds, and our customers are not being able to commit, on the volumes that they have sort of indicated that they would need, you will see, you know, a little bit of softness. That doesn't mean that, you know, a certain level of verticality is not important for the company.
If we are investing in the sort of down cycle, you have the opportunity to take advantage of the upcycle when it comes. So this is the rationale for why we are investing, and I hope I've been able to throw some color on where we are investing, how we are investing, and why we think we will succeed.
So this is helpful. A follow-up on this garmenting piece, is how much is the revenue share of essentials today? How do you define essentials? And eventually, where do you see essential portion going to be in your portfolio?
So Prerna, as I think, Essentials, which is the, you know, the innerwear business that we run out of our facilities in Chitradurga, is about 15% of the revenue right now. We are investing in almost all the product categories that we are in, be it jeans, be it shirts, be it denim, I mean, be it knits as well as in Essentials. The first of it is coming in Essentials, but all of them are part of the investment program. So we may not have a significant changes in the Essentials, you know, share of the revenue, but it may so happen that for a year, that revenue may be higher because the capacity is coming fast. But otherwise, it's not disproportionately changing the proportion of Essentials in our overall business.
Okay, okay. Sir, my second question is on debt. You mentioned that long-term debt is going to come down, while short-term may increase because of working capital requirements. What are the efforts we are taking on reducing on our working capital per se, including our creditor days, which is very high? And second, short-term debt generally is at a higher cost than long-term debt because of the subsidies that, you know, textile segment gets. So, why do you think it is a more risky component than the short-term debt, which will actually be higher as you grow? So controlling that will be much more important than actually long-term debt, because with higher capacity utilization, long-term debt can be paid off, but working capital.
So Prerna, I'll just explain to you. So working capital, I think if you compare... So you talked about two things, working capital, creditors, which is actually in effect, reduces the working capital on paper. The number of days that we are enjoying in working capital, if you look at last year or a year before, could be different than what you will see this year, when you see the balance sheet. Last year was a typical period where we had bought very heavily the cotton in the last few months of the year, and that's how the credit level looked very, very high.
Having said that, on working capital, I think over the last five years, we have brought down working capital, or rather brought increased the working capital turns from what they used to be 3.5- 4, to now over 6. And I think it's one of the reasons why our debt levels have come down, apart from, you know, being frugal on investing in CapEx over the last few years. So working capital per se, we will continuously, of course, reduce or work to reduce the working capital. Although with the growth of working capital, to the extent of cycle, whatever may be, would increase to some extent. Now, coming to the interest rate.
So we are, you know, as a company, you know, we, our borrowing cost, actually, because of the subvention, the interest cost on working capital is significantly lower than the long-term debt. In fact, the difference between the two will be as high as 4% after taking subvention into account. So working capital will not be... In fact, one of the questions I said, we'll save the money if we borrow more working capital. Today, we have reasonably large amount of unutilized working capital line, almost INR 500 crore are unutilized because we are reasonably cash surplus today, and as a result, you know, we are not utilizing them fully. We will be... Our, our focus on keeping the debt under check doesn't go away just because we say we are going to invest. It is, it is that we want to prioritize.
We want to prioritize both growth and continue to keep an eye on our debt and the interest cost. Now, on repayments, you know, working capital cycles of anywhere, you know, you have lower sales for whatever reasons, your working capital gets released, and, and, and as a result, you can always repay that. If you, if you notice in the market, you would find that Arvind is the only company in India which works on less than 30 days of account receivable in domestic market. I don't think there is any company other than us, who would be so strict on the working capital. And we let some sales go, but not let the working capital grow. So that's the way we are performing, Prerna.
Oh, that's, that's very helpful, sir. Sir, my last question is on your EBITDA margins. With this CapEx, and the efficiencies that you are building in the system, where do we see our EBITDA margins in the next two to three years time frame, given normalcy kicks in?
Yes, I actually mentioned that there is definitely a headroom for more, but at least 200 basis points over next few years as the normalcy kicks in.
Okay. Thank you so much, sir, and all the best.
Thank you.
Congratulations on set. Yeah.
Thank you. The next question is from the line of Abhishek Nigam from B&K Securities. Please go ahead.
... Yeah, for the opportunity. So if you could give more details in terms of, you know, how much of the INR 600 crore CapEx will be spent in FY 2024 and FY 2025? And also, how much garmenting capacity in terms of, you know, say, million pieces are we adding? So that's my first question.
Sure. Sure. So, the plan is for two years, as we mentioned, and we want to calibrate investments as we see how the market situation is, you know, unfolding and the demand pattern unfolds. However, given where we are and the way we have budgeted our numbers, we are hoping that we will do almost equal investments in two years. As far as capacities are concerned, as I mentioned, actually, these numbers. So, in garments, we have two types of garments. One is full garments, which are the number we report, which is 42-45 million now. We want to take it to 60. And we have essential garments, which are small inner wear garments, which are in millions of pieces.
They are currently at about 49 million capacity, that we want to take to 60, both. So that's the capacity utilization for garments, or rather, investment. For AMD, as we said, that this is, this investment of about, you know, 40% of this will be good enough to, for us to continue growing at 25% for next, few years.
Okay. Okay, fair enough. And I'm just curious, like, you know, you are doing CapEx into garmenting. Did it cross your mind that maybe we should wait, wait for PLI 2 and then invest, or
So this program, this program is for two years, and we are not investing today. This program assumes PLI 2 coming in, and we would seriously evaluate that, and invest in PLI 2 as we are investing in PLI 1.
Fair enough. The revenue starts coming in just 2 years out, maybe FY 2025 or something, 5 or 6.
Partially coming in in 2025. Some of the AMD investments would fortify next year as well. And the balance, of course, garment, we have headroom to grow with our internal available capacity. Plus, the garment capacity should come in handy later part of next year, and of course, beginning of following year.
Fair enough. Last question from me: So AMD is doing, you know, pretty well, good growth, very stable margins, and good potential market. Is there an intent sometime in the future, maybe a couple of years out, to sort of, you know, unlock value, spin this off into a separate company? Is, is that something on your mind?
So, I think we will do what is, you know, good for the business, and of course, what is logical for either focusing on different businesses or capital. As of today, there is no such discussion in the board to unlock that. And then when it happens, of course, you will be the first people to know.
Okay, okay, perfect. Thank you so much. That's very helpful.
Thank you. The next question is from the line of Vikas from NT Asset. Please go ahead.
Yeah, hi. A couple of questions. One is that, what is the outlook on the tax rate for next year now?
22%.
Okay. So still lower than the statutory 25%? And why is it?
Yes. So, you know, we have a few subsidiary companies, where in the COVID period, we had made losses, where now the profits are coming in the garment factories, so we don't have tax there. So as a result, it is slightly lower than the overall statutory tax rate.
Understood. And, what's the scope of further sale of land on the real estate?
Yeah, so it is an ongoing program. We would be doing between INR 50 and 75 crores this year as well.
Okay. So, your guidance includes the cash flow coming in from that this year?
Yes.
All right. And just to clarify, you said that the garmenting capacity will increase to 60 million pieces, so that's in the next two years' time, right, with the INR 600 crore CapEx?
That's right.
All right. And just a final question, I mean, what is the outlook for the first half? Because you said now the discussions are taking place for the second half, but so how does the first half looks like?
I think they will be very similar to where we are in the second half of this year, which is like a, you know, more or less constant, number that you are seeing of our volumes in, fabrics, wovens, denims, marginal improvement in denim. Little bit of improvement in garment as well, you will see. Not much, but little bit improvement. And AMD should continue to grow the speed at which we have been doing, so.
Understand. And the denim volumes this year is like at a much lower level than even the COVID year. So-
Yes.
In what timeframe do you think they will come back, and what kind of a drag is it? It's there on your margins as of now from that?
So, you know, for denim volumes, I will not be able to say when they will come back to normalcy. However, they will start looking up from, I think, Q2 of this year. See the denim per se, even because the assets are almost written off per se, it is not a drag on the return to us. Although margins are in single digit, because, because the volumes are low and overall absorption is not happening. And I think, as you see the volume growing, especially, you know, Q2, Q3, you will start seeing, its, marginal uptake on the, on the overall, textile margin. I should mention to you that denim has become a much smaller percentage of our sales as compared to overall textile business. It used to be-
Mm-hmm.
You know, five years ago, more than 50%. It is today about 20 or less. So, you know, to that extent, its impact as of today is much lower on the overall margin. However, it should marginally improve as the quarters pass.
Understood. Thank you very much.
Thank you.
Thank you. The next question is from the line of Yogesh Patil from Sequent Investment. Please go ahead.
Hi. Congratulations, sir, on very good set of numbers. I have this question for Mr. Punit. Sir, actually, you have, you know, developed this business from INR 400 crore-INR 500 crore to INR 1,200 crores, the AMD business. Can you give some sense on how large is this opportunity, for us? And this is my first question. And second question is, sir, with the existing capacity in AMD, what is the capacity utilization level, you know, at INR 1,200 crore turnover right now?
So, I think, you know, all three segments, if you look at world over, there are billion-dollar companies existing in each of the segments we are present in. Plus, we are only scratching the surface in India for the adoption of these and use of these products. We are at a very low per capita usage of AMD-type products in India, and every country goes through that S-curve, beyond which, you know, the consumption goes up dramatically. So all these things are to happen. So the long-term view is that, you know, this can be a very large opportunity. It's not a niche, tiny, small opportunity that will sort of plateau out anytime soon.
Of course, we will have to do different things and invest differently in different phases of that journey between now to multiple, you know, thousands of INR crores. But if you look closer to home, we can say that we can try and double this business in about 4 years. That is the kind of target that we are taking, 3-4 years, or you can say 25% CAGR. There is clear line of sight as to how we can achieve that.
Sir, would it be right to say that you are probably one of the largest advanced textile players in India, advanced material players in India?
Yes. There aren't very many of us, and many, many of the players currently are very small. Of course, we are also a portfolio of businesses. But put together, if you look at the INR 1,200 crores of turnover, yes, we would feature amongst the largest.
Okay. Okay. Sir, my second question was, with the existing, what is the capacity utilization in advanced?
Yes. So see, we've been investing every year. So with the investments already done, there's always a lag between investment and full utilization. So with the investments already done, there's a headroom of 10%, plus the investments that we are doing will allow us to keep growing to that 25%, right? So everything that is being done is to be able to continue to grow at 25%.
Sure. Sure. Thank you, sir. That, that's all. Thank you.
Thank you.
Thank you. The next question is from the line of Surya Nayak from Sunidhi Securities and Finance. Please go ahead.
Yeah. Yeah, congrats, Punit for good set of numbers. And just my question is that follow-up questions to the AMD is that, if we go by the, the ministry or government's, you know, textile missions, policies and their guidelines, we are seeing a very great opportunity, whereas our, portfolios are quite limited to, only you have categorized the three segments, but I believe, those are, catering to around 12 segments, what the ministry has categorized. But, if we, if we let's say, take out 50% of that, from, for the, Protech business or the human protection business, around 50%. So if we-- and we can get hardly anything, out of other rest, I mean, from the industrial and composite. So my point is...
And secondly, we are getting maximum from the U.S., and 75% is export-oriented, and we are not looking at the domestic opportunity as of now, because... Of course, you know, as you rightly said, the gap has to be bridged and that will take time. But why we are going slow on cashing on this opportunity? So that is the first question, sir.
No, I don't think we are going slow. I think, you know, the kind of growth that we've been able to show over the last few years has been quite significant. If you, I think, if you, if you understand the nature of this business, this business is not something that you can put capacity today and switch on, and it gets fully utilized. You know, many years go in sort of qualification, product spec writing, field testing. So, you know, the life cycle of a product to get into a customer takes two years. And once you are in, of course, you are in. So you have to factor that gestation period to open new avenues.
So, I think in this segment, a 25% growth is, if you are looking at an organic way, looking fairly robust. Also, I think all three segments are growing quite well. Of course, they have been started at different points in time, and human protection was the first one to get started, and so it is the most mature, and therefore it has the highest share of the overall portfolio. But the others are catching up, and so as we go forward, you know, you will see good expansion. I mean, the relative percentage may continue to remain similar because, you know, even human protection is growing quite fast. But you will see the other two segments also become larger, larger and larger in absolute terms.
So, I think that concern should not be there, that the other things that we are doing other than human protection are not relevant. They are quite relevant, and we have a big vision for them, as well. So, I hope that clarifies.
I mean, you have mentioned-
Yes.
You have mentioned in your PPT that you are going to introduce new product segments and expand the scope of work that is there. But certain segments, like, you know, Sportech and all, you know, though we are present, but there are a lot of opportunities to capture. So and even, sir, just to get your understanding, there are certain subsidiaries or JV with less, like, take the case of, let's say, Adient in the auto seating, you know, segment. There, we have not started yet, I mean, in fully. So why different subsidiaries and the JVs are yet to take off?
So are we still experimenting on the kilo basis, I mean, on the pharma side, you know, kilo basis, and yet to touch the ton kind of basis fully? That is my understanding. Just know, I just your understanding, sir.
I think, I think as you very rightly say, the advanced material or technical textiles is a very large field, and we have just about begun, it's a five-year-old business with us. And we have started from the strength that we had, which is using the textile as a strength, and our infrastructure and knowledge of textile as a strength to develop the lines of businesses that we are in. So they are more starting from weaving technologies and spinning technologies, where we are and of course, finishing technologies, where we are already have. It's a unique situation that we are in. I don't think anywhere in the world you will see textile company graduating into advanced material, but we have used our infrastructure of textiles to grow this business.
Now, today, as Punit said, there is, I know, and as we have mentioned in our presentation, that, you know, there are two ways to grow. One is to grow existing lines of business, which are where we will want to take higher share of wallet from each of our developed customer, and that's happening, and that's where the maximum growth is coming, as you see the 25% growth that we are doing. Going forward, at some point, and that's why, you know, we kind of spend quite amount of money, and it actually impacts our overall margins that we declare for AMD business.
On various initiatives that we are doing, be it Adient and initiative, be it several other things that we are doing as a division, where we are doing the new product categories can get introduced. And it's a constant activity where we would want to experiment. If we fail, we'll not do it. If we succeed, we'll start. And the next, as the presentation also shows, the next line of growth from where we are, would be to get into newer categories, and that's what Government of India is also given larger number of categories, and same are the two categories for us. So this is the beginning for our company.
I think we are in the first decade of our AMD business, and I think as Punit said, it is, in a way, very large opportunity and will continue to grow and not be slow, but not rush into something and not being successful, you know? So.
But just by hearing what Punit Bhai said, that despite our collaborations with the leading, you know, innovators of the world, like, you know, PD Group or OG Group, you know, Adient, all those, you know, why it will take time to get our product approved in the international market, especially developed market, why it should not be hastened out? So that is my question. So what Punit Bhai said, no-
No, so it is not automatic, because we have the collaborations, it is helping us to get into the segments with the customers, but it doesn't mean that we get immediate PQ, or a qualification just because we have a collaboration. It helps, but it doesn't mean, because it is produced in a different environment, in a different country, under different regime, so it does take time. I mean,
It has to go through a cycle of-
Cycle of-
Testing, customer approvals, standardization, and so on.
Products that we are doing are something to do with managing human life. So if you see in pharmaceutical, every plant gets qualification. That doesn't mean that if a company produces product in one plant, then automatically second time can plant can produce. So every plant has an FDA approval. Similarly, for us, for every product, for every customer, there is a approval process, which we cannot, I mean, do anything about.
Except for the PD subsidiary, we have any traction in other subsidiaries, OG, Polser?
We have only two joint ventures-
Right now.
Which are functional and which we intend to both grow. One is OG, Arvind OG Nonwovens, which is growing extremely well. We've added a second line there, so we have almost doubled our capacity. And PD, which is doing year-on-year improvement. So both these are very robust, growth is very healthy, and profitability is also very good.
Okay. And sir, regarding the Arvind Envisol, you know, the peer groups are growing, especially in the annuity phase. So why we are not able to grow to that level? So, is there any issue or our focus is not there at the moment, and it is actually not actually profitable like other verticals? And-
No, I think we are growing at a healthy pace there. I think, you know, this business being a project business, we have decided to, you know, sort of grow it, you know, at an even pace and not focus disproportionate time, CapEx, and take disproportionate risk in this business. But whatever we are doing is shaping up quite well. It's generating positive cash flow, and it's helping us build a good sort of name in the marketplace.
Okay. Sir, regarding the capacity announcement, you know, our current capacity is around 50 million pieces. So is it going to rise by only 10 million with the expansion, or as you said?
Capacity is around more like 40, 45, 44-
48.
45 million pieces.
Yeah
It will go to about 61. So that's almost like a 16 million pieces on this base. That's quite a large expansion.
Similarly, for innerwear, we are adding from 40- 60. Both are getting added over the next 2 years.
Okay, sir. With the denim bottoming out, so can we assume that the current quarterly run rate to be sustained, and it can improve? Maybe, I mean, I agree with Punit Bhai that, you know, the near term, there is some challenges. But now, can we expect that the current run rate-
To answer this question, I am not sure whether you were there at that point in time.
I think it will improve. Going forward, you will see small but steady improvement.
Okay. Thank you, sir. Thank you.
Thank you.
Thank you. The next question is from the line of Mithun Aswath from Kivah Advisors. Kindly proceed.
Hi, sir. Good regards. Just wanted to understand, on this AMD business, you mentioned there are several, billion-dollar company globally in this space. I just wanted to understand, for a customer in the U.S., why would he choose, Indian companies to, supply to them? Is it the cost efficiency, and how are we competing in this market? Because despite the global, slowdown or turbulence, this is one segment which, you continue to be quite positive on. So I just want to understand, what is driving this, demand. Is it, substitution, or is there an overall growth in the market? What is this, sir?
Excellent. So there are many things. So let me answer this, taking the example of human protection, so that, you know, many points get made clear. So one, I think the overall market is growing. This is, you know, growing better than, say, a conventional textile market. So there is room for, for, for newer capacity to come in, and it's not just taking away market share from incumbents. Though, I would say that we are very successful in even taking away market share from some of the best players in the world. And there are two reasons for that. The first reason, of course, is the one you mentioned, that there is definitely a cost arbitrage....
from India, and that cost arbitrage is significant, because nobody would change only for few cents on the dollar, when a product is, you know, very critical to an operation or critical to human life. So there has to be a significant delta, and there is a significant delta. But that's not the main reason. The main reason is, that our ability to innovate in this sector is probably better than anybody else. Because if you look at the pure human protection players, that don't have a textile backbone like we do, we have probably every textile machine known to man. And with that asset base, I'm able to create yarns, I'm able to create finishes, and I'm able to create products that my other competitors are unable to create. So there is true innovation that's going on.
We have several products that are globally patented, and some of these patented products have won awards in international shows as well. So there is a very positive relationship. It's not a sourcing relationship, it's a co-creation relationship that we have with many of the safety brands globally. Where we sit together, we design a product that is specifically made for the customer they have in mind. So I think both these factors allow us to be sort of winning in the marketplace. And I think this trend should continue, because to replicate our kind of cost and innovation sort of formula is going to be not so easy.
Okay, sir. That sounds very positive. So are other players also in India sensing this opportunity and capitalizing on the same or?
People will sense, but it took us a better part of a decade to sort of become significant players in this, and that is with the kind of textile backbone and financial power that we have. So, for anybody who's starting this journey out now, it's going to take a better part of a decade to reach there. Because it will require winning trust of very discerning customers. It would require huge amount of upfront spend on product development. There is a huge learning curve. Okay, that can be shortened by looking at somebody else's experience, but it will still not be insignificant in terms of actually manufacturing the products that you can trust somebody's life on. So I think it's not so easy as just spending the money and you are able to create this market.
There is a lot more that goes on, on product development, on trust building, on developing systems and processes, and on sort of tweaking your capabilities from textiles, which is a very different mindset to advanced materials.
Right. If you can just explain to us, in terms of a global context, is the human protection business the largest in this sort of space, or is it just that you've entered this, and this is your,
We would definitely feature on, in the top 10 globally. But there is, of course, considerable distance between us and the number one. And the big difference is that a lot of this product is still protected. I'm talking about human protection specifically. It's protected by law that, you know, union workers have to be sort of clothed in made in US product, or army contracts are restricted to certain suppliers only, and some of these army contracts are massive. They run into $hundreds of millions, just one contract. So those kind of companies are there that are bigger than us. But I think, an export-driven company, we would feature amongst, you know, some of the prominent names now, at least in human protection.
Of course, there's still a long way to go, and there is a long, big, bigger potential for us to also tap and, and to bridge that gap between us and the, the largest player. To answer your question, we are now a significant player, but to become one of the largest, there is still some distance to cover.
No, sorry. I also wanted to understand, is human protection in the advanced materials globally the biggest opportunity, or industrial and composites also a very significant pie, which you think-
I think all, all of them are very large. So if you take the example of composites, if you get into aerospace, for example, that's a huge... I mean, you're making 777 Dreamliner for Airbus. That's a massive, you know, size of— You know, each order would run into, you know, $ hundreds of millions. So, there is... You know, it depends on what route you take. So all of them can be quite large. And our, our sort of focus area, if you look at, if you look at— If I go segment by segment, human protection is clear, because I just spoke about it.
But if you look at industrial, we are in a slightly more niche space, where we are doing very high margin products that have a slightly slower growth than, say, composites and human protection. But that said, it will still be pretty robust growth. So there the end goal will probably not be as large as human protection or composites. But composites, with sports, with mass transportation and with industrial composites, all three, we can be again, you know, very fast and large growth there. So each of these have a different profile and a different end use, and each of them can be quite sizable at the endpoint or at maturity, let's say.
Right. Just the last one. I just wanted to understand if, you know, if you can share more material on this business next time in your presentation, it'd be great to understand this specific business in greater depth. Also wanted to know, maybe once in two, three years' time, when this becomes that INR 2,500 crore sort of business, do you look, are you looking at spinning this off into a separate company? Because obviously it could be more valuable if listed separately. So those are the two questions.
So obviously, you know, we will do whatever is in the best interest of shareholders to unlock value at the right time. So, for now, we are just focusing on sort of building this business to something that, you know, can deliver the promise in the next three years that we are trying to guide the market towards. So, while we've not thought about it, of course, we will consider it at the appropriate time.
Okay. Thank you, sir.
Thank you. The next question is from the line of Vimal Sampath, an individual investor. Kindly proceed.
Yeah, good evening. So I just wanted to understand, you know, from our textile production, denim, how much are we converting to garments?
About 15%.
15%. We also have a retail initiative now. I mean, I just read in Bangalore, you have opened a big retail store for fabric and all. So how much is fabric retailing?
Oh, I think we have to talk about the B2C business as a whole. So there is about a 500-600 crore business that sells fabric over the counter, that goes to 10,000 different mom-and-pop type of shops, small, small, small stores across the country, plus another- .
INR 150 crore-INR 200 crore
Outlet, Arvind Store.
100 to-
Yeah, Arvind Store.
Arvind Store.
I'm asking specifically. I am specifically asking about Arvind Store.
Okay. So, Jayesh, can you just speak a little bit about the size of Arvind Store and-
Sure. So our retail pure retail business is about INR 100 crore now. Overall, B2C business is about INR 600 crore, as Punit mentioned, and it is growing at about 20%.
Okay. So slowly, I mean, we will be more of a B2C company. At least I'm talking about our textile and garments.
The component of B2C business will keep rising, but as you know, it is a INR 7,000-8,000 crore business.
Correct. No, I'm only talking about the textile.
It is a relatively small number-
Small, yes.
We are focused on making this business fairly large over a period of time and continue to grow on at 20-25%.
Right. Thank you. Thank you very much.
Thank you.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Samir Agarwal for closing comments.
Yeah, thank you, everybody, for joining us today and for a very rich and engaging discussion. We'll meet you all in one more quarter from now. Thanks, and have a good evening now.
Thank you. On behalf of Arvind Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.