Good morning, everybody. Thank you for joining us at this extraordinary earnings investor presentation. Last evening, we concluded a definitive agreement with Atraco Group which has got manufacturing facilities in Africa and have operations in UAE, Kenya, and Ethiopia. So they are, they're headquartered in Dubai, in the United Arab Emirates. Their marketing production, production coordination, the senior leadership team, their sourcing and finance functions are all located there while the manufacturing happens out of 4 different units in Kenya and 1 unit in Ethiopia. So that's the spread of the network of this particular asset. This company was set up in 1986, so it's a very well-regarded long-established apparel manufacturing company with a solid reputation in the industry. They employ about 13,000 workers and have got fairly long-standing customer relations. Bulk of the production of this company goes to the United States.
95% of the output is exported to the U.S. And the reason, fundamentally, is that, the, access to, American market is facilitated by AGOA, which is a special treaty which allows African countries to export duty-free to the United States. So Kenya qualifies for AGOA. Ethiopia used to qualify, but, of late, since the civil war, two years ago, they have, the AGOA benefit has been suspended. Ethiopia continues to access Europe through duty-free arrangements, and it is expected sometime in the future that, the AGOA benefit for Ethiopia will also be restored. But bulk of the output of this company goes duty-free into the United States. There's also a duty-free access to the U.S. The product range, includes, you know, products for men, women, children, products across bottoms, tops, blouses, dresses, etc., and both woven and knits.
So the company is, has been eager to go private and, and for this transaction, we intend acquiring 100% of the equity of the entire company. The key advantage that I see, for, for Gokaldas from this asset is, one, we get access to low-cost locations, namely Kenya, Ethiopia, and maybe any other geographies like that in the future, a duty-free access to principal markets, which is, which is going to be a very big advantage. Duty-free locations always get priority in terms of sourcing allocation from large brands, and that's why, you know, regardless of market volatility and fluctuations, these countries don't see much drop in volumes. The production facilities that the company has are all exceptional. They're very well-run and very efficiently managed. The company has got very good track record, over the years. The relationship with the customers are solid.
So all of this gives us the confidence that we have identified a great opportunity for partnering and growing, and we will, post this acquisition, we will have one more region to leverage upon for our future growth. The company has, in 2022 calendar year, delivered a revenue of $107 million and a PAT of about $7.2 million. It had about a little over $1 million of one-time cost that got baked into its 2022 P&L on account of startup of a new unit that they set up. This will not be there going forward. So, to that extent, their PAT has been depreciated you know, has been understated. So the company has got reasonably good potential for growth as well with the new capacity that they recently put up.
You know, there is an opportunity to ramp that up going forward, in calendar 2024 and the years ahead. So we see a fairly good opportunity with Gokaldas and Atraco coming together. The customer base that we have is largely mutually exclusive. There's only one common customer that we have between us, but otherwise, you know, we get access to new ones of customers, and hopefully, we can even cross-sell. So overall, I'm enthused by the fact that we get access to a new geography. I'm enthused by the fact that we have the ability to grow in multiple geographies and service our customers better. I'm enthused that we've got a fairly strong management team in Atraco which can continue to progress this company forward.
I'm glad that, you know, we have done everything in our possibility to make sure that the acquisition works well thought out. We have a lot of cultural similarities between the two companies as well, as both of us are very conservative in our approach. I feel confident that once the acquisition closes, which will happen sometime in October after receiving all regulatory approvals, we should be able to bring, you know, bring more, you know, more cross-functional capabilities to one another and drive up the synergy. And hopefully, by, you know, if the demand in the market picks up, then we will have a fairly strong growth possible going forward. So I will stop here and pause for any questions that you all may have. Thank you.
Thank you very much. Ladies and gentlemen, we'll now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use hands up while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question. The first question is from the line of Kapil Jagasia from Nuvama Wealth. Please go ahead.
Good morning, all of you. Thank you for taking my question. So my first question is on the timing of this acquisition. Now we already witnessed a slow Q1 and probably, you know, as per your commentary, it would be a slow Q2 as well, and we are already on a massive CapEx plan. So though this acquisition is at a very good value and the synergies are there for sure, but when the timing would have been a little later when most of your CapEx plans would have been commissioned towards the Q3 or Q4, and probably, you know, there would have been some uptick in the exports because the exports month-on-month has been a decline. So, you know, just wanted your comments on it.
Sure. Going forward, you know, 'cause starting third quarter, I'm seeing an upward trend in exports. So I'm not as particularly concerned about the timing at all. On the contrary, since this asset is based out of duty-free regions, there is a strong support from the customers, as they get access to lower-cost garments from these regions. So I, you know, the order book for this company is also relatively strong from the later half of this year onwards. So I don't see any challenges in acquiring this and being able to utilize their capacities. We do have strong traction from our respective customers. As I said, the customers are also fairly mutually exclusive, and their customers are also giving them fairly good traction from a business standpoint.
Our capacities, which will come on board in, you know, towards the later half of this year and early FY 2024, all the efforts that we've been doing to fill that continues. Those are for businesses that are denominated out of this region, which is India and South Asia. Whereas the businesses that Atraco will do will be those which are denominated for the, for, you know, Middle East, Africa region. That's an incremental business that we will tap into. There also, we see strong traction from the customers. I don't see much of a problem from capacity utilization perspective going forward.
Sure, that helps. My next question is, like, could you help us with the split between woven and knits because if I see 40 million pieces for this company, so probably it would be a split of around, say, 50-40 for woven by knits . I just wanted, you know, the realization part and the.
So, you know, particularly with the, you know, capacity denominated in certain SAM values, etc., the actual number of pieces may vary depending on what are the specific styles of the garments that we make. So, you know, with that caveat, I mean, their woven-to-knit ratio is 74/26. So, almost three-fourths of their output is woven, and a quarter is knit.
Sure, sure. And, what would be the capacity utilization at Atraco currently?
Almost like, you know, a share under 90%.
Okay. Great. That helps a lot, sir. Thank you for adding the question. We have further questions. Thank you.
Thank you. Next question is from the line of Bhavin Chheda from Enam Holdings. Please go ahead.
Yeah. Congratulations on this acquisition. It looks attractive on the first glance. So a few questions. First on so this AGOA treaty is due for renewal in December 2025. And apparently, I think the acquisition looks obviously, there is a big duty advantage to U.S. with 95% of the sales that is U.S. And treaty is due for renewal next year. So what would be your thought process on the same?
So we are reasonably confident that the AGOA, you know, AGOA benefit will get extended. Usually, AGOA is given for a 10-year time frame, and that expires in 2025. In the previous period also, AGOA got extended. Kenya believes very strongly that AGOA will be extended. Kenya is also working on an FTA with the U.S. The relationship between America and Kenya is very, very strong. They have a very good ambassador in Meg Whitman. They, America is investing a lot in Kenya, and strengthening the relationship because there is also a geopolitical move between China and America to come closer in Africa. So from all of those aspects and knowing that Kenya is one of the strongest allies in the African region for United States, we have a strong belief that, you know, Kenya will continue to have preferential access to U.S. markets.
That apart, there is also a preferential access to European markets. So we take comfort from that. Not only all of this, but fundamentally, also, the assets are very efficiently run and cost-effective. So even let's assume that the entire region loses AGOA, which I don't see as a possibility at all, that the financial structures will be good enough to keep the businesses going.
Sure. So, second on the product segments, are there any products or segments which are common between you and them, or is this completely new segments which you were not there in? Since you also said that the customers are not common, so if you can give some idea whether are there any overlapping products, or is this completely new segments which you were not there earlier?
So we do largely women. They are 75% women. So knit is a product which is not overlapping between us and them. We also do about 40%-50% of children's garments, which is not a product category that we are present in. We do only men and women. So from that perspective, yeah, you know, our overlap is restricted to women, which is 75% of their revenue. But only on men and women, which is, again, half of their revenue, rather than children, it's a new segment for us. Knit is also a new segment for us. That's the 25% of their revenue.
Yeah. Thanks a lot, sir. Thanks a lot.
Thank you very much. Next question is from the line of Sohini from SBI Mutual Fund. Please go ahead.
Hello.
Hi. I heard your audible.
Yeah, so I wanted to get some perspective on, you know, the previous owners, from whom we've acquired this business and, why were they looking to sell this, and, in terms of, retaining, you know, the key people in that geography, what are our plans?
Okay. So the previous owner, he is aged, and he wanted to pass on the legacy to somebody who can take this asset and hopefully grow upon it, protect the legacy, and probably further the legacy. So that was the intention. It was more of passing on the asset to someone who can take care of it. That they came from that perspective. So there is going to be and holding that I will seek from the existing owners for a period of one year or so. And he is graciously consented to do that. The company itself is run by a management team. There is a CEO. There is a COO who is operating the operations of the company. And they are all very, very seasoned professionals, very well-respected in the industry as well.
So from a continuance of operational, you know, stability from a management perspective, I, we are keeping all of them. So we're keeping the top management, the middle management, the factory management, and all of that. You know, they're all solid professionals. And there will be continuity in operation from that perspective.
Sure. That is great to hear. And also wanted to check that, since you mentioned that, the operations are run almost at about 90% capacity utilization. So, when do you think would you be investing further into that geographies, and what will be the quantum? How soon we.
Sure.
Would need to do that?
This will have to be worked out going forward. But I anticipate that, you know, starting calendar 2024, we will probably start looking at planning the capacity expansion. So we should, you know, start really investing in calendar 2025 in capacity expansion. The new unit that they have set up, there is scope for additional lines to be set up in that unit as there is a space and region earmarked for further capacity expansion in the fourth unit in Kenya. So we will be investing going forward once the market conditions are also assessed and we get control over the assets sometime towards the end of October this year. So my expectation is towards end of 2024, we will be working on it, and 2025, we should have the capacity enhancements in place.
Sure. Thank you. Thank you for your explanation.
You're welcome.
Thank you. Next question is from the line of Rehan from Equitree Capital. Please go ahead.
Hi, sir. Congrats on the acquisition. My first question is, when do you see this acquisition's numbers kicking in on your P&L for the new acquisition?
So, you know, we have entered into agreements, and now these are subject to regulatory approval from, you know, respective countries. We anticipate that all of that will get concluded by end of October. Now, you know, the usual caveat remains because we are expecting, you know, the approval from government, and there could be delays. But our anticipation is end of October. So from November onward, we will start consolidating the numbers into our P&L.
Okay. And second question would be, what's the amount of debt to equity you plan to use for funding this acquisition?
So, the total cost of acquisition is $55 million for 100% of the equity. We intend using $15 million from our own, you know, our own cash on hand. And $40 million, we plan to take debt. We've already secured line of credit from banks. And that $40 million will we will deploy for the balance, you know, of acquisition cost.
Good. Thank you, sir.
You're welcome.
Thank you. Next question is from the line of Tejas Mehta from Max Life Insurance. Please go ahead.
Yeah. Hi, Siva. Thanks for taking my question. First of all, congrats on this good acquisition. Just, if you can share some, you know, some basic numbers. So you did mention that they do about $7 million of profit last year. I missed that one number which you mentioned in the one-time cost. Other than that, what's the debt percentage did they make? What sort of gross profit does this entity have? What sort of debt-based value should it have? You can throw some basic numbers to us. It would be helpful.
See, the number that I mentioned was a little over $1 million, which was a one-time cost that they had in setting up the new unit so that they took a P&L hit in calendar 2022, which we don't expect that to recur. So the $7.2 million of that is, after taking that little over $1 million of it, in that one-time cost. As far as EBITDA margin is concerned, if I adjust for all of the one-time hit in calendar 2022, this asset should have an EBITDA margin of a little over 10.5%. And I expect that as we invest in upgrade of plant and machinery, etc., we will hope and also expand the capacity there. We should have operating leverage kick in.
We should also have some efficiencies coming through, you know, further investments coming in. All of that, there is an upside potential as usual of about 1%-2%, there. And we will work towards that over the next 2-3 years to realize that. So it requires some amount of investment, some amount of expansion. It's a very well-run company, so we will have to work on improving the efficiencies, and the margins there going forward.
Perfect. Any debt which is on the balance sheet? What's the gross debt that they have today?
They currently have a $15 million working capital debt. There is no other term debt on the books of the company.
Okay. Is it a similar model as ours where they have 4x asset turns on the balance?
Sure. More or less similar model, yes.
Okay. Okay. Okay. Okay, got it. Okay. Well, yeah. And other than that is yeah. And that. Thank you so much. Thank you so much for this microphone.
Thanks. Thanks, Tejas.
Thank you. Next question is from the line of Nishit Shah from Ambika Fincap. Please go ahead.
Hi, Siva. Congratulations,
Thanks, Tejas.
support of the acquisition. A few questions, Siva.
Yes.
Additional capacity through the brownfield expansion and other things that at the new acquisition sites in Kenya as well as Ethiopia.
Nishit, sorry to interrupt you, but can I request you to speak a little louder, please? You're not overheard.
is it better now?
Yes.
Okay. So the, Siva, the additional capacity through the brownfield expansion and also the scope for cost reduction in terms of manufacturing, marketing because you have a marketing network here. You have a marketing network in this company. So obviously, there will be some synergies coming in. So basically, are we saying that 1.5%-2% efficiency coming in in EBITDA over the next 1-2 years would bring the EBITDA for the acquired unit also in line with what we are currently having right now in terms of.
Yes. I think so. I think so. You know, over, over that 2-3-year period, we should be able to bring it more or less in line with the EBITDA margins that we have here.
Super. That's very good. And on the customers, you said that it is complementing. So we also get a lot of new customers coming in through these acquisitions. Could you give some more color on that?
So, so these are all American customers that they have, and, and these customers, you know, they have had, you know, multi-decadal relationships with. Those customers, you know, there is a potential that we can take our customers. We have a much bigger customer base than they have in terms of sheer number of customers. And we can take our customers there over a period of time. Some of their customers also we can work with. So that potential exists is what I alluded to when I said that, like, you know, it's a complementary customer base where there is a possibility of cross-fertilization of customers going forward.
Siva, on the working capital, how much working capital do they have? Are we paying also for the working capital? What I'm trying to say is, we are paying $55 million for the acquisition. But how much is the working capital there, or is it in line with the working capital loan that they have? Or is it a bit higher?
About $15 million is the working capital debt what they have as of date. Their working capital cycle is a little longer than what we have. About 110 days is what their working capital cycle because of the long lead time. They have to import the material. The inventory holding is there. And for also the receivables, they continue to hold around 50 days. Although the efficiency, we will work on it because currently, their working capital cycle, I mean, payables cycle operating cycle is about 110 days.
No. I'm just trying to understand the numbers. Working capital debt is how much? How much is the working capital?
Working capital is, you see, it's about $35 million is the working capital. They have a debt of only $15 million.
O-okay.
$15 million is the debt. Correct.
$50 is the debt?
15. 15. 15.
15. So if I adjust for it, we are actually enjoying another $15 million coming out of working capital, isn't it, Siva? You understood what I'm asking.
35 net currently. So it's INR 15 million. Net value INR 20 million is currently.
Yeah. Yeah. So $20 million actually, is the working capital I'm gaining, net of the working capital debt that I have.
Yes. Correct.
So then we are actually getting it for a very reasonable valuation. Okay. And Siva, the last question from my side, this makes us not just an India-centric global garment manufacturer. We will now be truly going global with Africa. And also, you have already a move on to Bangladesh. So, are we gearing up to become a global, truly global, garment exporter? So the intention is that, you know, while that's the you know, that's a means to achieve an end. The real objective is to have a very strong customer base, a company that can provide, you know, extensive solutions to our customers. And having global execution is one part of that equation. We should also have a stronger design capability. We should have a stronger marketing capability.
So we'll have to have front-end offices, more, more investment in design and all of that. So all of those, parts also, we need to build out. But definitely, this is a big step because setting up manufacturing units globally is not easy. And it takes a lot of time before they can mature to be very efficient. This acquisition shortens the process, the time taken in the process, and gives us a good asset to start working with.
Thank you. I think this is a very good acquisition. All the very best. Thank you very much.
My pleasure.
Thank you. Next question is from the line of Vikram Suryavanshi from PhillipCapital. Please go ahead.
Yeah. Good morning and congratulations, sir. Most of the questions answered. But just to break up the capacity between Kenya and Ethiopia, can you share that number?
It's 87% is Kenya. As of last in 2023, they are 2022. About 13% of the business came from Ethiopia unit because in Ethiopia, we have only one unit, four units in Kenya.
Okay. Is there material difference between these, Ethiopia and Kenya products, or more or less similar?
Products are similar.
Okay. So our realization was there is not much difference,
Not much of a difference at all, yes.
Okay. And, in terms of labor efficiency or productivity, if you compare with India, how these are in the numbers or, in terms of cost advantage, if you can give some reference?
So, you know, in terms of efficiency, they are a very well efficiently run business. And I see that the efficiency of the labor force, at least that I have seen in their units, are as good as India, maybe even a lot better. So that goes as far as the efficiencies are concerned. As far as the labor costs are concerned, in Kenya, the labor cost is approximately $190-$210 odd dollars per month, and which is not higher than that of India. But then, obviously, you know, the efficiency compensates for it. And the falling Kenyan shilling also helps in reducing the cost. The Ethiopian costs are a lot lower. The total cost, you know, comes to about $110-$120 dollars of, you know, per month for labor. They are much cheaper than India or Kenya for that matter.
Okay. Got it. Thank you, Surya.
You're welcome.
Thank you. Next question is from the line of Vikalp Jain from Equitas Securities. Please go ahead.
Thank you, sir. Thank you so much for the opportunity. First of all, sir, congrats for a very great acquisition, I would say.
Thank you. Sir, my first question is, please speak to me. Operations at our both Kenya and Ethiopia facilities means, as per your assessment, how easy or difficult is managing the labor there, most importantly with respect to either bringing them to the factories or either with respect to handling the acquisition rate or managing the productivity? Any use with respect to that and any measures that they're taking to scale up, or they have plans to scale up their efficiency there?
Vikalp, sorry, but we are losing your audience.
Hello? Sir, any better now?
Yeah.
Yeah. I could hear the question and from, you know, from the gap. I could fill in the gaps as well. So let me answer this question. The Kenyan operations there are very efficient. In fact, manpower availability is also good both in Kenya and in Ethiopia. The, you know, the new unit that got set up, there's a, you know, abundance of manpower available. The acquisition rates are slightly better than that of India but not a whole lot better. The manpower productivity in both Kenya and Ethiopia is strong. I feel Kenya is a little better than Ethiopia. You know, it's Ethiopian culture, being what it is, is somewhat like India. So they also take a lot of festival holidays and all of that stuff.
But by and large, I think, you know, from a manpower management perspective, I don't see any problem whatsoever because these companies have been run there for years together. So, you know, whatever issues they have had, they have ironed it out over a period of time, managed to find the formula to run it. So, we don't see a problem in managing the labor or even expanding for future growth because, you know, the ability to manage the labor force in both these countries exists.
Correct. Correct. Oh, got it, sir.
So my second question is with respect to our clientele, where while we also derive almost 85% of our revenues from North America, and they also have around 95% coming from the America side, but then you're saying that except for one or two retailers, we do not have any overlaps. So it makes me—can you, like, name who are all the top 4, 5 retailer client base for Atraco Group?
At this point, I'm not at liberty to name the customers. We have not yet, you know, we need permission from the customers. We concluded the deal just yesterday. So we have not gone through all that process. So I'll ask you to, you know, kindly bear with me on the names.
But then, you know, the fundamental factor is that they go duty-free to the U.S., and that is the reason why they have American customers largely. Going forward, if FTA and all happens between India and U.K., we will, you know, try to balance our customer base and take our business a little more, you know, and shift that towards Europe, from a very, very strong, you know, relying on the U.S. market. So that will happen over a period of time on the Gokaldas side. The African assets will, at least for now, continue to be facing United States.
Understood. Understood. Understood. All right, sir. Thank you so much. Thank you for answering.
You're welcome.
Thank you. Next question is from the line of Harendar from Goldman Sachs. Please go ahead.
Hi, Siva. Deepest congratulations. I mean,
Thank you, then.
Great deal. Just wondering, like, it's a well-managed operation, reasonable profitable margin. Labor productivity is not very different. So, I mean, the succession was the only reason for the owners to sell out?
That is correct. Yes.
Okay. I mean, would you expand the capacities more in those geographies only where the current management teams still have the expertise to run the, you know, labor-intensive operations, or how do you?
No, no. The senior management sits out of Dubai. And so we can we probably can target a larger swath of East Africa for now. And while the initial focus will be on the two countries, particularly more so in Kenya than Ethiopia, but still Kenya and Ethiopia, we will also explore other opportunities going forward. The management team in the past have run operations in Egypt, Madagascar, and all these places. They used to have factories in those regions as well about 20 years ago, 25 years ago. In fact, they started by having some units in UAE itself. So there are options, you know. This, this management has the ability to handle multiple units in multiple geographies. The model allows us to do that because, you know, all the businesses are booked in UAE and then it's manufactured in the respective geographies.
So, the way the operations are set up is that it is scalable. We can also tap into new countries, new geographies, set up new units, work with third-party units if the need arises, even though I am very reluctant to go down that path as well. Even there are multiple options for exploring other adjacent geographies. We'll be careful in entering newer regions, and we'll do our strong due diligence before we commit to any geographies that, you know, we were either too not present.
So even now, we did a strong diligence on Kenya. We did a diligence on Ethiopia. The factory that they have is present in Addis Ababa, so which is in the capital city and is well protected. So all of those diligences have been done. You know, we've looked at manpower linkages. All those diligences will continue when we look at future expansions with this asset as well.
Got it. And you're reasonably locking in the senior management with appropriate incentives and all that accordingly?
Yes. Yes. Yes. Correct.
Okay. Okay. And, finally, just to clarify, are you saying that Kenya labor cost, even on a productivity-adjusted basis, is slightly higher than India?
Productivity-adjusted may be more on the Pakistan-India level. We are, you know, thankfully, the Kenyan shilling has fallen, which has helped to that extent. So I would say they're coming at India cost level. So my cost in Madhya Pradesh probably will be a shade cheaper. But, you know, what we look at is landed duty-paid cost to the customers. So their duty-free access, you know, the American duties can go as high as 28% for synthetics. So that's a huge play that exists there. So overall, I think, you know, there is that benefit more than offsets any other incremental. Yes, within Kenya, where the labor costs are lower, which is as you go away from cities of Kenya, Nairobi and Mombasa. So, those are all areas that we can tap into also going forward.
Great. Congratulations once again, and thanks for the opportunity.
Thank you, then.
Thank you. Next question is from the line of Niraj from White Pine. Please go ahead.
Sir, thank you. I have only two questions. One was on the revenue growth. You had said that the Kenya actually has a $30 million growth potential. Can you elaborate on that?
So, you know, there is a new factory that has been set up by them in Kenya. There is an expansion potential available there. So we can add extra lines there going forward in the future, once we take control over the asset. And we will probably plan that sometime in the next calendar year, that is 2024. So we do have the opportunity to take the revenue up by $20 million or even probably more.
Okay. The time to bring into revenue will be how much, how many months or in the?
I think this will probably be closer to 25 or so. Calendar, huh?
Okay. So basically, the growth in Kenya will only come in FY 25 because we are running at almost 90% utilization in that. Or you can see some more utilization growth.
So we will have to add those plus, you know, machinery, then, you know, recruit the workers, train them. So there's a process of 6 months to 1 year which we go through to deliver all of that.
How easy or difficult is it to hire people in that location?
It's not at all difficult. Not at all difficult. There is an abundance of people available. The reputation of the company is good, so people would like to join them and work. The track record of treating people well and paying them salaries, etc., is strong. So, so not at all difficult.
Okay. And the last question is on the EBITDA, you said, that EBITDA margin is accretive, but the company is only doing 10.5%. So, is there some immediate-term margin growth that you will see coming in, or you just two-year period that you're talking of 1.5%?
Two years. We need the two-year period to do that.
Okay. Okay. Great. Thank you.
Thank you.
Thank you. Next question is from the line of Kaustubh Pawaskar from Sharekhan. Please go ahead.
Yeah. Thanks for giving me the opportunity. Most of my questions have been answered. Sir, on the margin plan, again, I just want to understand. Our margins are a bit the Kenyan, the African asset margins are slightly lower than what we are currently, you know, have at around 11.5%-12%. Is it mainly because of the lower realization what we are getting over there, or because, as you said, that labor cost or operating efficiency has been led to what the Indian assets currently have? So is it more to do with the product profile, what they are currently selling to the US market?
So it's product profile, regional profile, customer profile. There's a lot of all that going on there. So yeah, it's a bit of a combination of all of those. There's also a factor that, you know, not too much of investments in plant and machinery over the period has happened, which also will drive some incremental productivity improvements and which can then help shore up the EBITDA. So all of that may happen going forward. But yeah, it's largely currently a result of the product and customer profile.
Thank you. So any thoughts you have, like, any kind of investment, you know, or thoughts you have that you are planning to do, beyond, you know, the capacity ambition what you are planning to do, for the assets?
Sir, so I don't intend doing anything immediately, at least for next one year, except for absolutely critical CapExes, which are in the nature of replacement CapExes or improvement CapExes. But we will do the plan sometime in 2024, and then probably 2025, we may want to do some upgrade CapExes.
Right. And the last one on the debt part, you just specified that you have already arranged for the $40 million debt you are planning to, you know, take for the acquisition. So, what would be the cost of debt, you know, or you are looking for the funding of the acquisition?
It's in the region of around 250 basis points over SOFR , all-inclusive cost.
Okay. 250 basis points over?
Over SOFR .
Do we have any tax benefit over there?
I'm sorry. Repeat the question. Do we have what?
tax benefits,
Yes. Yes, we do have. So in Kenya, we are setting it up as an EPZ, so we will enjoy a 10-year tax holiday. And the business is largely denominated in UAE. So all the revenues are booked in UAE, and then the manufacturing operations are done in the respective entities, in respective countries. And those entities are paid certain transfer prices for carrying out the manufacturing. So the working capital is also held in the UAE entities. So the profits are largely booked there. And UAE being a tax-efficient region, there will be tax benefits.
Okay. Okay. Thank you. Thank you, and on to the questions.
You're welcome.
Thank you very much. A request to all the participants, please use hand raise while asking questions. Next question is from the line of Varun from Omkara Capital. Please go ahead.
Hi, Sir. Congratulations on the acquisition. So you mentioned that there will be a revenue addition of around $20 million over the next two years from this particular entity. Also, what is the impact that you're looking at?
How will that better look like a year or two down the line then?
We are losing your audio. Can you come in a better reception area, please?
Yeah. I'm, I'm sorry. Yes. Give me a second. No audio now?
Yes.
Okay. So, I suppose you just mentioned that we will be adding another $20 million in terms of revenues and effort over the next two years from the acquisition. So also, what is the CapEx that you're looking at, or what is the capacity addition that you're looking at there in that particular region?
I see the CapEx, in my opinion, will be about $4 million, in that region. You know, it and there'll be some incremental working capital as well, which will be required for delivering the incremental $20 million there as well.
Right. So it's a four-site asset plan, here?
That's correct.
Right. And just a small clarification to how will the.
Increased productivity because, you know, the deal to expansion will happen in an existing facility. So incremental cost of building out the facility and all will be not there as far as this particular asset concerns. So there may be a little more efficiency in revenue to CapEx.
Right. So, probably towards the end of FY 2025, what will a cash or debt and debt-to-debt position look like post this or post completing all your CapExes and everything else?
At the group level you're talking about? At the group, Gokaldas?
Yeah, yeah. Yeah. At the group level.
We anticipate the net debt, including all this, at an annual average around INR 150 crores-INR 200 crores.
Right. Okay. This is post all the work that you're adding on it. That's correct, right?
Sorry. But once again, we are losing your audio.
Yeah. An audio now? Better?
Yeah. Yeah.
This particular debt position will be post all the CapEx that you might be doing at Atraco, right?
Yeah. Atraco debt mostly will come in the Q4 of this financial year or later part of next year. However, you know, that will not be much. Our, what we talked about, Gokaldas group level debt is after taking care of the expansion activities happening in India as well as the investment what we are intending to do and the acquisition of the working capital funding, whatever is happening. All put together, the net level what we anticipate is about INR 150 crore is the estimated net level after the acquisition is over and the expansion is completed here for this financial year at the end of FY 2024.
Thank you. Varun, sorry to interrupt you. I'll request to join with you again for a follow-up question. Next question is from the line of Jatin Chheda from RTL Investments. Please go ahead. Jatin, we have requested to unmute your line and go ahead with your question, please. If you do not respond, we move on to the next participant. Next question is from the line of Arvind Kothari from Niveshaay. Please go ahead.
Hi. Congratulations on a great acquisition. I wanted to understand that, you know, we also wanted to expand in Bangladesh as well. What are our plans going forward now with this acquisition? Will we go ahead with that? Because there's also a talk of the Bangladesh wages, minimum wages going up by 70%-80% by the year-end. Wanted to understand on that part.
So, good question. We had suspended the Bangladesh expansion till we had a better read on the market condition from a demand perspective. Now, with this asset in place, we still have the opportunity to invest in Bangladesh. We will continue to be, you know, open-minded about it. And if the opportunity exists and if there is a customer attraction for it, we will look at it. But we will review the decision and take a decision closer to date. You know, when we took that Bangladesh decision, obviously, this asset was not in play. Now that this asset is in play, we can take a look at it. We're not ruling it out at all. In fact.
Go ahead.
Bangladesh's attractiveness, thanks to duty-free access to Europe, continues. Having said all of that, their cost prices are also going up, and there is a mood amongst buyers to diversify out of Bangladesh. But despite all this talk, you should realize that Bangladesh exports about $42 billion compared to India's $16 billion. So Bangladesh, over the last few years, have continued to grow, and that's a region which is still favored by the brand. So we're not ruling that place out at all. We will keep that in play, for the foreseeable future.
Awesome. So in that context, I just wanted to understand if the minimum wage bill was to be passed in Bangladesh, have you made some assessment of how it will affect the business volumes in India? Because, I mean, that will do away with the tax advantage that they might have, right?
So yeah. I mean, you know, if the minimum wage goes up by 40%-50%, which is also a good likelihood, and Bangladesh does this once every five years or so. So after that, you know, this minimum wage will just stay put. So we first like to assess the quantum of minimum wage increase. You should also keep in mind that Bangladeshi taka in the last one year depreciated by 13%, whereas the Indian rupee depreciated by 3%.
So there is an incremental depreciation of Bangladeshi taka by 10%. So that also has got a counterweighing impact on all of this. So let's say a 40% increase in wages translates to about 10% decrease in the EBITDA margin, assuming its wage is 25%. But a 10% relative, you know, depreciation offsets that. We like to keep all of these factors in mind when we do the calculation.
Got it. Got it. And then finally, can you name some clients, or the last top five clients, that the new entity would be having to just understand their relationship with them?
So we just had a you know agreement with the buyer with the seller yesterday. We haven't really sought permission from the client at the moment. It's a bit too premature, and we haven't had the time to seek the necessary permission to you know disclose their names. And I want to respect that you know these are this asset is still not in our hands. All this is subjective processing. So I don't want to speak out anything in public till we have the clearances for that.
Okay. Thanks. But in our due diligence, have we made an analysis of what is the contribution of the largest buyers, in their sales?
Their top three customers collectively have, you know, contributed to about 65% of the revenue. They do have a significant concentration of customers.
Got it. Got it. Thanks a lot. Thank you so much. All the best.
Thank you.
Thank you. Next question is from the line of Apurva Shah from PhillipCapital. Please go ahead.
Yes, sir. Thank you so much. And congratulations to you and your entire team for the fantastic acquisition. So.
Thank you.
Just on the continuing with the last question, sir, just wanted to understand your thought process or is there any change in the strategy? Because in the last conversation, if I remember clearly, we have never spoken about Kenya or Ethiopia, but we were more focused towards Bangladesh. So what has changed your thought process or strategy, which has led to a sudden acquisition, which seems to be a kind of it seems to be a very good acquisition for you as well? So what has changed in the thought process or strategy?
So, so the strategy remains the same. The reason for choosing Bangladesh was because it had a duty-free access to the Western market, which is Europe. Kenya has a duty-free access to the US market. So, so, you know, it is always looking at low-cost regions for manufacturing because my belief is if you are in a low-cost region, your sustainability of the business is much longer. So we will continue to explore low-cost regions. We got an opportunity in, you know, to tap this region by acquiring a very well-run company. There was meeting of minds, etc., that happened here. It could have happened in Bangladesh for all we care. So, you know, at this point in time, it, the opportunity presented itself in another geography. But the attractiveness of the geography was fairly similar. That's the reason why we chose this one.
Got it. And sir, we have discussed the like, in Bangladesh, we have finalized some JV partner, and we were in advanced discussion as well. So based on your, like, like, statement, I think it's that that JV is no more at a progressing level, or what is the current status of that JV? So and what could be your plan for Bangladesh would be over the next two years?
It's the JV is intact. The relationship is intact. We just decided that we will sign it appropriately when the market conditions improve. Last 6 months of 8, you know, 9 months, the markets were not that great. Then both of us were not very comfortable going ahead and putting in CapEx, and building capacity. This we were taking over an existing capacity through a receiver which was under receivership with a bank. So the capacity would have come up on stream pretty quickly. And then ramping up in Bangladesh also doesn't take time as, you know, talented labor is available. So we didn't want to make huge investments till we were sure of the market. That's why we put that on hold. And it continues to be on hold. And we will review it and take a call going forward.
Got it. And sir, just last question on the CapEx side. So except this changing from Bangladesh because of the ongoing situation, there is no change in the CapEx plan for the, like, domestic operation. So whatever we have done, that is just top-up of your domestic expenses. Is that clear understanding, sir?
Correct.
Great, sir. Thank you very much, and all the best.
Thank you.
Thank you. Next question is from the line of Gaurav Sood from Kanav Capital. Please go ahead.
Yeah. Thanks for the opportunity. Congrats for a great acquisition.
Thank you.
One thing I wanted to know was, in terms of the product breakup for the new company, what's the breakup between synthetic and cotton yarn?
I think it is about 50/50 between Synthetic and Cotton. Probably a little higher on Synthetic, maybe even 60/40. It's a little more synthetic-weighted.
Okay. So where is the fabric sourced from, in these countries?
It's largely China. Synthetic fabrics are mostly sourced from China there.
Okay. And the cotton part?
Cotton part from China and India, Pakistan, all these regions.
Would there be an opportunity for you to see sourcing came to India and you could use the scale economies in order to reduce these procurement costs here?
We will explore all of that, you know, being a standalone region, if they have a superior sourcing ability from China or some other regions, if the pricing is better, we will continue to explore all those options. For Synthetic, anyway, we will continue to focus on China.
Okay. And last question from Varun. On a year-on-year basis, do you expect the revenues to grow there, or they'll be stagnant, or they grow? Where is the current run rate today?
So, you know, I think they are currently on a calendar year, you know, book closing. So, I don't expect much growth in calendar 2023 given the global market conditions. But calendar 2024 onwards, we anticipate growth, good growth.
Okay. Thank you, sir.
You're welcome.
Thank you. Next question is from the line of Priyadarshini from Fidelity International. Please go ahead.
Hello, sir. Thank you for taking my question. And congratulations.
Thank you.
Yeah. My question was more around the risks behind this acquisition. You know, that we are entering a different territory. Some of the Indian players have had problems in Ethiopia in the past. So I would like to understand the political stability and business environment in these places that we are getting into and what gives us the confidence that there would never be disruption in these places.
Sure. So the difference is that we have not, we are not setting up a new unit. We are buying a well-run, continuing operation in that region. 87% of the revenue comes from Kenya, 13% comes from Ethiopia. There was civil war in Ethiopia, which ran between October 2021 and November 2022, I think, during that time frame. And during that period, the, you know, some of the operators in Ethiopia saw some disturbance to their business. These were people who were located in far-flung regions of Ethiopia, closer to Tigray or in other parts of Ethiopia where there were troubles. The unit of this particular company is located in Addis Ababa, the capital, where there were no problems, and that was a well-protected area. So it continues, it continued to run through all the civil war-related, you know, problems as well during those periods.
We went and due diligenced that as well. There are other units running in the same industrial park where they are located, and they are also running quite well in that particular region. So I don't see any problem in an ongoing, continuing operation. Their Ethiopian operations are old and are very well-run, have no disruption whatsoever. The other challenges of having access to ports, etc., continue to remain the same for all Ethiopian operators as Ethiopia is landlocked, and they have access to both ports. The AGOA benefit has been suspended for Ethiopia since the civil war. There is a talk that AGOA could be restored sometime next year, but we will have to wait and watch how and when it will happen. In the meanwhile, Ethiopia continues to have duty-free access to Europe.
The cost of labor in Ethiopia is much lower, and, you know, it continues to be very attractive. So there are pluses and minuses for Ethiopia, which is 13% of the overall volume. And I think at the moment, while all the minuses have played out, pluses are yet to play out. So I feel that, you know, it's not a bad option, you know, given all the circumstances that have played out in Ethiopia.
That's great. Thanks a lot. Second question was more around how much of EPS acquisition do you expect from this, if you could revise the interest cost increase once again and also give us a sense of how much EPS acquisition would come in a couple of years?
So we did that analysis on calendar 2022 numbers of the company and put that in our, you know, in that presentation, which is available on our website, where we are showing based on 2022 numbers itself, an EPS acquisition of about INR 4.6, you know, in rupees, right? EPS acquisition. But you know, anyway, I think going forward, we anticipate that the performance of the company should be even stronger. And you know, the acquisition to our EPS should be stronger as well.
So we are expecting this, roughly INR 5 EPS acquisition in, I mean, next year, right? So FY 2025 for us?
No, it is based on FY 2022 numbers. But FY 2025 numbers, what Mr. Sathyamurthy explained, that, you know, it is based on the normal increase and volume increase. We anticipate much better EPS acquisition. Whatever I said was based on FY 2022 CY 2022 numbers. Hopefully, with the performance improvement, it should be better.
That's excellent. Thanks a lot. That's all from my side.
Thank you. Next question is from the line of Mithun from Kivah Advisors. Please go ahead.
Yeah. Hi. My question was on the AGOA benefits in Ethiopia. There's been talk that, from 2024, this would be renewed. If this was to be renewed, what could the addition to profitability be?
I'll go over the question to you. So it's obviously there's a positive impact. It while it cannot not be substantial because Ethiopia's contribution to overall revenue is only 13%. So on that 13%, we may see some incremental margin of 2%-3% or even higher. In my opinion, it depends on how the pricing is structured, etc., etc., and how much of it the company has taken versus the buyer, on account of loss of Ethiopian duty-free access. So, you know, even let's assume, say, take 5% as the advantage, 5%, and then take 13% or 5%. We are, you know, you can do the math. That's the only improvement in the return margin that can be possible. So it'll be about 0.6%-0.7% improvement.
Right. And I just wanted to understand, since the benefits in Ethiopia went away in 2022, has there been utilization which has dropped in CY 2023? So I just wanted to understand for the company, you know, CY 2022, the revenues moved up from $86 million to $107 million on an overall entity. And how is CY 2023 looking? Has there been some impact because of the Ethiopian issue, and what about the Kenyan operation? So I just want to get a sense on how CY 2023 2023 is looking so far.
So CY 2023 so far has been the first half, they have been running more or less on track with the last year's revenue run rate given the adverse market conditions, which is a global phenomenon. The Ethiopian operations have been scaled back slightly more than that of Kenya simply because, you know, Kenya enjoys duty-free advantage whereas Ethiopia doesn't. So it made logical sense for both the customer and the operator to prefer Kenya over Ethiopia. So relatively speaking, Ethiopia got scaled back slightly more. But as we speak, since the volumes we anticipate to come back, both the regions are being scaled up.
So, just in terms of at least, can you give us some sort of guidance on terms of revenues for CY 2023? Should we get to the similar $107 million, or would be a tad lower than that?
I can't predict the number given all the market conditions that we are. If we could assume a tad lower than that, our hope is that we will come as far.
Right. Just one last one, if I can squeeze in. Just wanted to understand, since Gokaldas is a much bigger company than this company, are there any sourcing benefits, in terms of raw materials that you could help this company with? Just wanted to get a sense on that as well.
Yep. Yes. Yes, to an extent. They, you know, to the extent that they play in synthetics, and they, you know, they buy; they have access to other regions to buy them. There, there is no fabric ecosystem or no significant fabric ecosystem in Kenya unlike India. So in India, we prefer more of Indian sourcing simply because the transportation costs and duty all those benefits start kicking in and the and the lead times kick in to our advantage sourcing from India. Being in Africa, you again have the opportunity to source from the lowest cost sources in the world. So to the extent there are synergies in suppliers, definitely there will be a buying strength that we can demonstrate and take advantage of. But to the extent that they are buying from China, we may not have as much of an advantage.
The current sourcing, which they are doing, may be the way. May just continue.
Thank you. Mithun, sorry to interrupt you. I'll look to rejoin the queue again for a follow-up question. Next question is from the line of Avneet from MJ Global. Please go ahead.
Yeah. Just wanted to know CY 2022 numbers, you know, we have put in perspective, and you have also stated. I mean, from a medium-term perspective, let's say in the past three years, how has the sales and margin behaved for the company?
Past three years?
Yeah.
So in CY 2022, the company did $107 million revenue. In 2021, it did $86 million. And in 2020, the company did $70 million in top-line revenue. So $70 million, $86 million, $107 million. That's how they've grown between. And, and remember, 2020 calendar year was impacted by COVID. So if you go back to 2019, they were $78 million. So $78 million, $70 million, $86 million, $107 million. You get the numbers, right?
Mm-hmm.
That's how they have grown. EBITDA margins have been in the range of about 9%-10% during this period.
Okay. Finally, this, you talked about working capital of around $35 million on the books of the company and $15 million as the debt. There is a $20 million working capital that is there on the books, and we are paying $55 million for the whole entity.
Correct.
These numbers are correct, right? So indirectly adjusted for the working capital, it is, you know, 55 minus 20, only $45 million.
Correct. We also get the assets—no, the movable assets and the four factories. That also comes up with the value. That's about, and we get a land owned in Kenya, about 13-acre plot and a building. So that's valued. And all put together, that's about $11 million is the valuation for those assets as it stands in the books.
Okay. And just last one more too. What is the exact U.S. benefit that Kenya gets?
They get duty-free access to the U.S. market.
Oh, so what's that number in terms of? Let us assume you make a margin of 10%. And what is that benefit in terms of?
That margin is subject to negotiation between buyer and seller. What happens assuming that we just take a worst-case assumption, which is not necessarily true, that all the benefits and the duty extends from, say, 16% to almost 20-28% depending, you know, in the case of synthetics. So synthetics has got a higher duty entering the U.S. So that's the reason why the company prefers products in the synthetic, you know, in the synthetic part of the value chain. Now, assuming all the benefits of duty are taken by the buyer, you still will have the benefit of being a low-cost supplier for the buyer because landed duty paid, you know, these limits will be the lowest and will get preferential allocation in, you know, in case of any business volatility.
So any reduction in buying may have a much lower impact when it comes to sourcing from duty-free regions. Now, that's, you know, again, it never is 0 and 100% in favor of buyers. Some amount of benefit can be negotiated back from the buyer. So that all depends on how the operators conduct themselves with the brand and how, you know, what kind of competitive dynamics exist in that region.
Yes. No, what I was trying to understand, sir, was that, you know, if the benefits go away, where can this 10% margin go?
So, I don't anticipate the benefit going away. As I said earlier, Kenya has a special relationship with the U.S. That special relationship is, you know, Kenya is geopolitically very, very important for the States for United States. And they have cooperation across a wide range of subjects, which is why we believe that even hypothetically, if AGOA goes at the end of 2025, that is from 2026 onward, Kenya will still get an FTA benefit going entering the U.S. We don't anticipate AGOA going away. We have had multiple conversations with various stakeholders, and we are reasonably confident that AGOA will be continued going forward, post-2025. The renewal will happen only somewhere during 2025 because it's as it stands, it's currently valid until December 2025.
Well, in case it goes away, standalone, the business itself is still cost-effective and quite comparable to India. And we don't, you know, so we still, the customer will have to bear the incremental duty if, if at all that event happens. And they will still, you know, they may lose access to an ultra-low-cost region. The US doesn't have access to low-cost regions much. There aren't very many regions worldwide which go duty-free to the US. CAFTA is one area, which is Central America. But the cost of labor is ridiculously high. It's about $700-$800 a month compared to, say, $200 or thereabouts in Kenya. So, you know, the competitiveness, which is so heavily weighted in favor of this region may come down. But I don't think, you know, the region will go away.
The margins are a function of, you know, how you negotiate. I feel we can still defend the margin. That should not be a problem. But coming back to AGOA itself, I for now don't see any logic for AGOA to be pulled out after 2025.
Thanks a lot. Thanks a lot.
Thank you. Next question is from the line of Akhil Parekh from ICICI Prudential. Please go ahead.
Yeah. Thanks for the opportunity, sir. So my question was, while you acquired this asset, can you throw some light on who all were the competitive bidders, or was there any bidding at all happening in the first place, or how did we scout this asset? Some color on that?
No, it was you know, there was no process, or it was not done through a bidding process. We knew the promoters well. And it was mainly a succession planning. And, you know, the promoters felt confident that with Gokaldas, the legacy can be preserved. And we respect that, we respect the promoters very, very much. I have a personal regard and very high respect for the individual, which is why, you know, we intend to make sure that the legacy of the promoters over the last 35 years will be continued, and we will protect that. So, so we will make sure that the business is well run, and we will expand upon whatever he has built. So it was it was not through a competitive bidding process, long story short.
Sure. Thanks. My other questions have been answered. Thank you.
Thank you.
Thank you. Next question is from Pralin Nandu from Goldfish Capital. Please go ahead.
Hey, Shiva. Thanks a lot for giving me this opportunity. So, so Ashila, I mean, just to conclude, right, in some sense, you talked about one of the reasons for acquisition was duty benefit. But that is essentially what is passed on to the customer, right, in some sense. I mean, depends on negotiations. The customer also knows that the company is operating from a duty-free zone. So accordingly, pricing will be negotiated. So are we then essentially buying growth at a very low valuation because I mean, let's say, for example, if you talk about 2023 also, it's been a very volatile year.
So that's only one part, buying growth at low valuation, right? The fundamental part is if your manufacturing exists in low-cost regions, you are less susceptible to volatility in business volumes.
Yeah. So, Shiva, just coming to that.
Low-cost regions will face the asks first, and the low-cost regions will be the last one to stand. You know, you know, we will not have any problems in terms of access to business. So it's, it's really, you know, positive from a volatility perspective. Business volatility will be minimal there.
Sure. But I mean, so in that context, 2023 has been a very volatile year. You mentioned that 2023 will be largely flat for this company, right, in some sense. For a company like us who is operating out of India, who does not have any duty benefit or higher margin, we are probably aiming at a growth, right, in some sense. So that also, you know, in terms of this, tough market condition, they should have grown, and we should have shown a decline, right, in some sense. I'm just trying to figure out, you know, I mean, how should one gauge less volatility, during tough market condition given the fact that FY 2023 for them would be flat despite the capacity expansion that they're doing?
So yeah, a lot depends on the individual company as well, right? We are a much bigger company, and we are a force to reckon with in India. Having said all of that, we also faced the brunt. Despite a huge growth last year, we also could not grow much given the demand volatility this year, right? We did face severe headwinds. Them being a smaller company in a region which is not as big as India at the moment, you know, the fact that they have weathered this storm very well, they have a fairly robust order book, which carries forward well into early 2024, indicates that, you know, they are enjoying the benefit of being in a duty-free region and low-cost region.
So, Shiva, as of now, when I look at their order book, they seem to have a fairly good order book all the way through to April 2024. Now, that's something which says a lot about how customers view such assets and customers view the benefits of being in a duty-free region. So going forward, if when, you know, we combine with them, we should be hopefully able to bring a little more trust to growth, and with the right investments in that region.
Sure. Incrementally, Shiva, I mean, let's say, for example, from your own, if I were to ask you that out of INR 100 of capital that you were to allocate between three regions, right, which we have talked about, India, Kenya, and then Bangladesh, right, in some sense, how will this allocation look like hypothetically going forward in the next 5-10 years given the fact that, again, I mean, we are competing with the same I mean, in the same geography, earning higher margins than them, right, in some sense despite not having any duty benefit?
You have talked about the potential that India itself has, right, in some sense. There are not many I mean, within the country, we can control lots of things, right, versus sitting out of UAE and controlling a unit in Kenya. So, I mean, you know, in terms of capital allocation going forward, how will things look like between these three geographies going forward?
So I mean, I will not bring Bangladesh into the big ask as yet because we have, you know, we still have to decide on Bangladesh at the moment. You know, there are a few variables there, which is, you know, how does the minimum wage play out? And, you know, all of those will get factored into the equation. And we will wait to see now, you know, what is the percentage of minimum wage hike, etc., that happens in Bangladesh. So, we'll park that for a moment. Between India and Kenya, I would say, you know, both of these regions are attractive. It will all depend on what kind of traction we get from the customers. For synthetics, I will continue to play Kenya because the duties for synthetics are well in excess of 20% and go higher by 25%, 28%, 26%.
So synthetic production, you know, focusing on Kenya makes more sense as there's a massive arbitrage available. In India, our growth will continue in lower-cost regions. So when I look at multiplication, etc., the cost factors are low. And we will have the benefit of better, you know, managing it here. So you know, it will be more balanced. I wouldn't say I will go India-weighted. I wouldn't say I will go Kenya-weighted. Probably, the weightage will be in the ratio of revenue between these two regions. So you know, going forward, there will be about 40% of the combined company. And I think that, you know, about 35%-40%, that is the ratio in which the CapExes will grow. I don't want to underinvest in one region or the other. I still see a lot of potential in that region, particularly from a synthetic standpoint.
Thank you. Roland, I will request you to come back in the question queue for a follow-up question. The next question is from the line of Vishal from Aditya Birla Sun Life Mutual Fund. Please go ahead.
Hi. Good afternoon. So my question is on the electricity cost in Kenya, which seems to be 2X of the cost in India or China. So while it may not be a, so just trying to understand, what is electricity as a percentage of total cost?
Our electricity cost is about 1.5%. So it's, it's really insignificant.
Okay. Okay. Got it. Yeah. That's all. Thank you.
Thank you.
Thank you. Next question is from the line of Naveen Vijay from NS Capital. Please go ahead.
Thank you for the opportunity, and congrats on a great deal. Just wanted to check on the clients. Without giving you all your names, sir, what are the client profiles like? Are they big-box retailers like how we do, or are they predominantly working through importers?
The primary relationship—almost 75%-80% of the revenues are directly through big-box retailers. About 15%-20% will be through some importers and others. Eventually, our intention is to expand it all to big-box retailers.
Great. Great. And in terms of the product capabilities, sir, are they predominantly an undergarments player or a payments player or oh, if you could give some color on that, that would be helpful, sir.
50% is children. And the balance are men and women, top, a little more weighted to bottom. So almost like 70%, you know, 60%, 70%, 80% of the men and women will be bottom-weighted, bottom-oriented, bottoms-oriented, like trousers, chinos, shorts, etc.
Great. Great. Thank you, sir. Thanks once again.
Welcome.
Thank you. Next question is from the line of Siddharth Purohit from InvesQ Investment Advisors Pvt Ltd . Please go ahead.
Hello. Yeah. Yes, sir. Most of the question has been answered. Just one clarification, sir. Based on the EBITDA margins and the PAT margins the acquired company has given, and if I assume a normal depreciation rate, probably you are you are paying a low single-digit tax rate, effective tax rate. Is it correct? Pardon?
You are talking of tax rate for that asset?
Yes. Yes, sir.
It is in a low-tax zone, right? It is based out of UAE. So, at the moment, they enjoy duty, I mean, tax-free earnings. Tax-free earnings on the offshore earnings because this entity is in the free zone area, and the business is generated outside UAE. So any profit earned out of that business as per the current tax law, it is not taxable.
Okay. Okay. Fair enough. So one more clarification. In the PPD, you have mentioned that, you know, like $15 million, that is, to be paid from internal net worth as part of equity. So there will be no equity dilution from our end as such?
That is correct. There's no yeah, that is correct.
Yeah. Okay. Thank you, sir. That's all.
Thank you. Next question is from the line of Jignesh Kamani from GMO. Please go ahead.
Yeah. Hi. Just want to understand, it's close to around 20% kind of ROC business, like $35 million working capital, assuming 1:4 asset and so $100 million should have a planned capacity of $24 million. So capital employed close to $50-$55 million on EBITDA of $11 million?
I mean, no, no. You are the current, the you are talking about 4x for the revenue working?
Yeah. Yeah.
No. Currently, the working capital is a little high. This is about $35 million at this point. I mean, that is because they are importing the goods. They are 110 days, as we explained, whereas we operate almost 60-65 days. So the same option cannot be applied in terms of the, you know, when you want to really apply the revenue projections. So you'll have to really reduce at least 1x because of that on account of working capital. On, in terms of the assets, it's about $11 million. So 11 plus 35, then you can apply whatever the multiple additionally because the working capital is a little higher because of the, structure, the business structure, because everything has to be imported, and so they hold a little higher inventory as well as on the receivables management.
They do not have the, you know, current arrangement what we have here. So that those, you know, inefficiencies, whatever is there, currently, they are living with. So because of that, that 4X application is not right.
Understood. So for the $45 million capital employed, it is earning $11 million of EBITDA?
Yeah.
Okay. Understood. Thank you very much.
Thank you. Next question is from the line of Harsh Mittal from ICICI Securities. Please go ahead.
Yeah, hi Siva. Thank you for taking my question. Most of my questions have been answered. Just one query. Is it possible to share the half-yearly numbers of CY23?
It's unaudited, so at this point, I'm not sure if it makes sense.
Oh, okay. Sure. Thank you.
They have been added for the first half. They have been tracking to last year's number.
Okay. Okay.
Thank you. Next question is from the line of Aman from Goldman Sachs. Please go ahead.
Yes. Just wanted to understand, from the presentation, it seems, both the Kenya and Ethiopian operations.
Aman, sorry to interrupt you, but it's not clear. Can you please speak through the handset?
Yes. Yes, sir. So, so it's not clear, so it's clear now?
Yes.
Hello? Yeah. So just wanted to understand this, presentation says that there are some tax benefits for Europe as well for both the operations, that we have very small-scale business from Europe. So what's the reason for that, and could that be an opportunity going forward?
Yes, it is an opportunity going forward. Historically, since both Kenya and Ethiopia had duty-free access to the U.S., the company had a focus almost entirely on the U.S. market. And remember, the largest part of their capacity is in Kenya, which continues to enjoy the U.S. duty-free access. So even for Ethiopia, they were focusing on the U.S. market. Going forward, there is an opportunity to also target the European market. And Ethiopia does have that benefit. There is a discussion going on, in that, you know, in that direction. So definitely, it's an area of focus.
Got it. And you also said you are kind of well-run operations. So for the next, let's say, after the acquisition, next 18, 24 months, what's the focus for you? Drive revenue growth, drive margin growth, drive working efficiency? What would be the first to three focus areas?
So you know, there will be the focus actually to, you know, drive up the production efficiency even more. And that will require some investment in automation, etc., in the factories. So some amount of CapEx will go in that. And I really prefer those kind of CapExes because the payoffs coming from that is very, very high as productivity improvements immediately fall through the bottom line. You know, these investments can start yielding benefits right away, as opposed to setting up a greenfield unit. So you know, we intend to deliver at least 1.5% or 2% over the next 2-3 years through incremental revenues as well as unlocking some extra efficiencies in the existing operations through investment in automation. So that's how we look at it.
As far as the growth is concerned, we are hoping that, you know, we should drive about 20% odd growth, you know, in FY 2020 in calendar 2024. Sorry. I'm sorry. Calendar 2024, which will be our FY 2025. Let's see how that pans out. We will have a better handle over all these things once we get control over the operations.
Got it. Thanks. Thanks, Willis.
Thank you very much. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.
Thank you so much, you know, for all the questions that you had. And, you know, please feel free to reach out to us in case you have any further questions on our acquisition. We continue to remain focused on delivering exceptional performance. And we are execution-oriented when it comes to running businesses. We are very conservative in how we approach business and how we, you know, take over assets and run them. We have done our fair amount of diligence on this company. We have drawn enough comfort through due diligences by our business partners. So we got BDO to do due diligence on the accounting taxation side. We had Khaitan & Co , which did legal due diligence. And we had JM supporting us through the transaction.
So, you know, with all of these, you know, external scrutiny, we have gone ahead and concluded this transaction. This is subject to regulatory approvals. And the regulatory approvals we are anticipating will happen by end of October. So really, the asset will come to our control only from November onwards. That's the earliest we anticipate. If there are any delays, then, you know, it may go further.
We will continue to engage with the company and work on a smooth transition. The management team is well-aligned, and it's got a very good team there. So we hope that we can build upon it. And hopefully, together, Gokaldas and Atraco can have a great future. Thank you so much for your understanding. Thank you so much for all the questions. We remain available for any clarifications that you may need going forward. Thank you so much.
Thank you very much. On behalf of Gokaldas Exports, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.