...Welcome to the Gokaldas Exports Limited Q3 FY 2023 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, 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. Binay Sarda from Ernst & Young. Thank you, and over to you, sir.
Thank you, Darwin. Good afternoon to all the participants on this call. Before we proceed to the call, let me remind you that the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties and other factors. It must be viewed in conjunction with our business risks that could cause future result, performance, or achievement to differ significantly from what is expressed or implied by such forward-looking statements. Please note that we have mailed the results and the presentation, and the same are available on the company's website. In case if you have not received the same, you can write to us, and we'll be happy to send the same over to you. To take us through the results and answer your questions today, we have the top management of Gokaldas Exports Limited, represented by Mr. Sivaramakrishnan Ganapathi, Vice Chairman and Managing Director.
And Mr. Sathyamurthy , Chief Financial Officer: We'll start the call with a brief overview of the quarter gone past, and then we'll conduct the Q&A session. With that said, I'll now hand over the call to Mr. Siva. Over to you, sir.
Good afternoon, everyone. Happy to have you at our earnings call for the third quarter of FY '23. We continue our exceptional trajectory, delivering performance with strength and resilience when the industry is encountering a challenging global macroeconomic environment. We reported a revenue of INR 528 crore, almost at the same levels of previous year. In contrast, the Indian apparel exports declined in the third quarter by 3.1%. Currently, major consuming markets are passing through uncertain times, and there are signs of a global economic slowdown, as macroeconomic factors and declining consumer confidence seem to undermine the past gains. Having said that, amidst these, we continue to stay focused on operational excellence and customer service, as these are cornerstones of our growth lever.
During the quarter, as volume growth remained flat, we strongly focused on improving employee and operational productivity, balanced our orders on hand with capacity well, and reduced operating expenses. We delivered a superior EBITDA margin of 13.1% after adjusting for one-off income of INR 3.3 crore. We continue to manage our working capital well and generated adequate free cash flow to support our growth ambition. While the U.S. retail and e-commerce market so far has shown resilience and have performed well in CY 2022, we anticipate a mild slowdown in the offtake going forward. This is already reflecting in our Q3 revenue. On a sequential basis, our revenue has been falling from Q1 to Q3. We expect this to have bottomed out, and we'll see the trend reversing starting Q4. We have done well in a downturn, and this is no exception.
We intend taking market share during such times and ride the growth curve in the aftermath of the downturn to deliver strong growth. We view the long-term macroeconomic factors are favorable for the growth of the business. In the short term, we are closely watching the macroeconomic environment for any developments that may be adverse to the business and further strengthen relations with the customers and ensure execution excellence and service delivery. With this in mind, we continue to explore avenues for growth. We are progressing well with our CapEx plan. The unit in Madhya Pradesh is expected to commence commercial production in first quarter of FY 2024, and our next project in Tamil Nadu, too, is progressing well, setting the stage for a strong future.
Further, we may explore other avenues of growth as well, including opportunities to invest in good assets that may fit in with the overall strategy of the company. Our growth trajectory for this financial year is intact, while we continue to build a firm foundation for strong growth in the years ahead. I thank you for listening and would be happy to address questions that you may have.
Thank you very much. We will now begin with 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. The first question is from the line of Mohit Khanna from Banyan Capital Advisors LLP. Please go ahead.
Hello, sir, and congratulations on the execution in an extremely difficult macro environment. My question is related to the fourth quarter, that you might have some visibility, because year-over-year, the last quarter, the base was very strong for you. And you have just said that we should witness some quarter-on-quarter improvement here on. So coming with that in mind, you had previously guided INR 2,200 crores of revenue for FY 2023. Do you think you might still be able to beat that? That would be our first question, and I'll come back.
No, answer is absolutely yes.
Okay.
Very confident of doing that, and definitely we'll do that. Oh, you're talking of 2,200, right?
Yes.
Yeah, yeah, definitely.
Okay. And then how do you see FY 2024 panning out? Is a 15%-20% growth over 2023 a good number to work with?
So the way, as I said earlier, you know, we've had sequential declines from Q1 onwards, right? So Q2 over Q1 and Q3 over Q2. I think we are more or less hitting the bottom, and now we will start, you know, the curve, you know, sequentially will start turning. So as we go forward, I am expecting that H1 of next year, sequentially will be slightly better than H2 of this year. And H2 of next year will... You know, we are hoping that will show a further growth. That's how I'm looking at it. So you know, overall, I think we will get back into the growth trajectory in, you know, on a sequential basis.
Understood. And in terms of margin, because this quarter has also been very strong, there is the other income has actually improved for us from INR 2 crore in a quarter to INR 9 crore in this quarter. What exactly is the reason for that, and do we see the similar trend going forward?
It has two components. One is on account of the interest income from the investments, whatever we carry, interest income and mutual fund income. The other one is about INR 3.3 crores. We got one-off income, which we have highlighted, some of them on the legal issues, which we got the settlement, which has been recognized, and another, some provision, which was not required, has been reversed. These are the two, which is, you know, about INR 3.3 crores one-off income. But otherwise, the rest is on account of the interest income arising or interest income and income arising on account of the mutual fund investment.
Very well, sir. I'll get back to you, Mohit. Thank you so much.
Thank you.
Thank you. Participants who wish to ask a question, press star and one at this time. The next question is from the line of Abhineet Anand from Emkay Global Financial Services. . Please go ahead.
Yeah, thanks for the opportunity. First, I was slightly confused. You said sequentially you should see better numbers in Q4. While commenting from U.S. retail, you have been saying that it has been resilient till now, but you expect a mild slowdown in the offtake in expected short term. This, I think those two probably doesn't match, so am I getting something wrong here?
No, that's not, you know. So what happens is the end user market influences the brand in turn to place orders on us. So the brands have been anticipating a slowdown already and had, you know, tapered down their buying even earlier. That's the reason why the brands have been buying a bit slow in Q2 and Q1. Now, so, you know, whatever happens in end user market, you know, it influences, you know, the brands have to now plan two quarters ahead. So, if we are seeing a slight uptick, then it just indicates that, you know, two quarters ahead, the brands may be seeing that, you know, the volumes may slightly pick up.
Okay. Okay. Thanks for the clarity. Second is that, you know, in terms of knits, what kind of margin versus the woven that you presently have, what could be the differential or how is it different?
So, the knits is a processing unit. So processing unit, you know, so there is a garment processing, the, the fabric processing unit, and then we will of course have some, downstream garment manufacturing also. So overall, while the, the, your CapEx investment, since we are putting a processing unit, the EBITDA margin in knits may be about, six, you know, 6% higher. But then, as a, you know, its contribution to overall revenue will, you know, to proportionately only it will contribute. You understand?
Yeah, I got you. I mean, let's assume, what is the investment at the knits factory and what's the asset component?
Little over INR 100-odd crore. It's about INR 120 crore.
The asset turns are different from a woven factory?
Yeah, it's about 3.5.
Okay, okay. And last one, for now that the MP, you know, commercial operation expected in 1Q FY 2024, what type of incremental, you know, revenue can we expect or utilization can we expect there in FY 2024?
So in FY 2024, MP will be expanding or, you know, it will start progressing. So there are two parts to it. One is the manpower ramp-up will start. So a lot of people currently, you know, we have hired, they are undergoing training, which is almost a 45-day training cycle. And then slowly they'll be inducted into trial production, commercial production, et cetera. So the manpower growth will happen through the year, and their productivity will also start growing with a phase lag. So if you ask me, you know, what is the expected revenue from MP in FY 2024, I believe it will be about INR 55-60 crores or thereabout.
Okay. So that is the, that is the only incremental, revenue apart from some modernization et cetera, that we might do in our existing units, right?
No. So we will also have, you know, that, that's not the only CapEx we are looking at. So we will also be looking at, you know, as things start, you know, opening up, we will also have other capacities come up. We may also do some brownfield capacity unlocking. So, you know, there are other avenues to grow as well.
Okay, sir. Thanks a lot.
Sure.
Thank you. The next question is from the line of Sunil Kothari from Unique Asset Management. Please go ahead.
... Thanks for operating, sir, and, congratulations for the remarkable, I mean, very respectable numbers during this very challenging time.
Thank you.
Sir, my question first is on this: Now we are reaching quarterly interest cost of around INR 9 crore-INR 10 crore. By when you feel we should be coming back to maybe the, of, four, five crore per quarter? Because I think now interest rate is also going up and our debt is also, I, I think, has increased.
No, the interest has got two components. One is on account of Ind AS, and the other one is the regular interest. If you look at it, the Ind AS interest contributes INR 4 crore during this quarter, Q3. So our real interest is only about INR 40 lakh. Rest is on account of bank charges close to about INR 1.3 crore. So totally, the interest is less than INR 6 crore, of which real interest and bank charges, if you look at it, it is almost around INR 1.7 or 1.8 crore.
So, this is some exceptional we should take as a nine-month number, whatever given, that is the run rate, we should expect, or you feel any major change in interest cost next year?
You know, in the nine-month interest rates also, our, our interest cost is close to INR 7 crore. That is about INR 1.7 crore. INR 1.4 crore is the interest. About INR 5.5 crore is on account of bank charges. Rest of the amount, almost around 14... I mean, the balance, 11 crore is on, on account of Ind AS interest.
Mm-hmm.
So the real interest, the finance charges is for nine months is only INR 7 crore, of which interest cost alone is around INR 1.4 crore.
So, sir, basically, I wanted to understand is annual interest cost, which you will be debiting to P&L?
Yeah.
What we should count? That is what my question is.
Going forward, our-
Finance cost, I mean.
There are two components. One is, real interest cost plus finance charges is not more than INR 10 crore on a run, yearly run rate.
Mm-hmm.
Interest cost is around INR 15 crore.
Okay.
So-
Roughly INR 25 crore should be the cost of finance annual around?
Correct.
Correct. So my broad question is, somebody has also tried to clarify this. Your confidence of growth seems to be coming from what? Basically, it's an expansion of products, customers, market share. If you can elaborate a little and, if you can speak more about, say, next two, three years, how you see the opportunity, after this maybe some three, six months slowdown or whatever slack?
Sure. So, so the way I see it is that, you know, the end user market in the U.S. in particular has been, by and large, resilient. Even the, February numbers seem to indicate that the market is somewhat holding up. We, we may experience a mild recession for, for a brief while, you know, maybe till Fall or, early Holiday. But at least from 2024 spring onwards, we should start seeing growth. Now, why is that? Because I, I feel that, you know, by then, the recessionary impact will be gone. The, Fed is already loosening, the interest rate hikes slowly. So, so, you know, the, the market situation may turn from 2024 onwards. So if that indeed happens, then for us, you know, we manufacture for Spring 2024 in third quarter of, FY 2024.
So we should start seeing an uptick in third quarter from an order book perspective in preparation for Spring 2024. Also remember that, you know, for Spring 2023, their purchases were muted and all of that, so there will be a base effect also. So I feel that overall, you know, there will be a growth opportunity, given that the consumption is expected to come back in 2024. So this is one narrative. The second one, of course, is that the broader picture in the minds of retailers in the U.S., and for that matter, even in Europe, is that the trend of moving away from China to other geographies is very strongly intact. They might have hit a slight pause button simply because at the moment, they may not have too much of orders to move around.
Mm-hmm.
But the secular trend of moving out of China and moving into other geographies is very strong. And what I understand from many of them is that the costs in Vietnam have become prohibitively high, and increasingly, buyers are looking at other options, and in particular, India.
Mm-hmm.
So India seems to be a good rising star in their estimation from a future production angle. So that movement will get accelerated going forward when the volume decrease. So I see that adding to the tailwind going forward.
Okay. Sir, can you elaborate more on this Vietnam factor, which cost, you know, how competitive we are compared to Vietnam?
So, Vietnam, while, you know, people say the average labor cost is around $300 per month, vis-à-vis say in India, of about $170-$180. In India, that too, in the most expensive parts of India. I think, you know, from what I understand is that the Vietnamese cost, even at $300, they may not, they may find it a bit difficult to get employees. They're finding that the other sectors are growing well. That's an economy which is heating up, and prices are going up further. So, you know, margins for Vietnamese players will come under pressure with rising wages. So that's the wage arbitrage that we have between Vietnam and India.
Okay, okay. And, one... I think you have given some guidance for next year. I, I missed that because of some phone disconnectivity. So if you can repeat, sir, margin and, revenue guidance for next year, which you have given.
...No, no, I have not given any particular guidance. We hope to hold the margins as far as possible at current levels. That is the intent going forward. As far as the revenue is concerned, what I indicated was that sequentially we will start growing, you know, in the next financial year.
Okay. Sir, my last question is, having this new CapEx and new factories coming up over the next two, three years, what size of business we can do, given order and capability?
So, you know, we have, you know, we've already, you know, we have, you know, gotten one factory ready, which is in Bhopal, and we have the, we have the ability to start a second unit there. In addition, we have earmarked a plan to grow one more unit in the south. So all of these options we have in hand, and, we will start, start, you know, work on some of these soon. The reason I'm saying that is any new factory will take about a year to, fructify, at least a year, if not, you know, in my estimation, it will be about five quarters, before, you know, we can start ramping up, those capacities.
My belief is that, you know, given that the market is expected to come back up in the later half of next year, we should start pushing for on the CapEx as the CapEx also has a timeline to materialize.
So, what size of opportunity you will be able to cater maybe over the next two, three years? Any, any, your objective or target, which I think you were given some years back also.
So, based on the CapEx that we have planned, we are anticipating that we can deliver about INR 1,400 crore of revenue in the three- to four-year scenario, at least.
From new capacities?
From new capacities, correct.
Correct. Correct. Correct. Great, sir. Thanks a lot. Thank you very much.
Thank you.
Thank you. We have the next question from the line of Niraj Mansingka from White Pine Investment Management Private Limited. Please go ahead.
Sir, is it audible clearly?
Yes, you are audible, sir.
Yeah. Just two questions. One, what is the capacity of the company in terms of the machines that you are have, having right now, sewing machines?
Based on the sewing machines, you're talking of number of machines or you're saying?
Yes.
capacity in revenue term?
No, number of machines.
Number of machines, we may have about 13,000 - 13,500 machines.
Okay, because it is 14.5, 14,400, two quarters, three quarters back.
Yes.
Have you seen some?
You know that it is at those levels. I mean, you know, you're talking of 1,000 numbers only, right?
Yeah. And what are the number of employees that you are holding, employees?
At the moment we are still under 30K.
This is also gone down from 32,000. Have you seen a trend of reduction in employee and machines?
Only because we have let natural attrition play out, given the... You know, the correction in the revenue, right? So, we have allowed some bit of natural attrition to happen. We have not backfilled them. As soon as we start growth again, we will start building up our
Okay. Of the total ongoing CapEx that we have, one is of the Tamil Nadu unit, which is in two to three years, right? And one is of the knitting capacity. Is there anything else which is ongoing?
No. So there is a Tamil Nadu, which is a knit fabric processing unit, and there is-
Right.
one which is almost complete, which is the Madhya Pradesh
Right.
Sewing capacity or the garment manufacturing capacity.
Right.
These are the two which are actively progressing and will fructify in FY 2024. In addition, we have one more unit in Bhopal, which we can bring up at short notice because a lot of the groundwork for that has also been completed. And we can bring up, you know, a few two more units, one of course, in South India, and we are also keeping the Bangladesh option on standby, which we were holding up, given the demand scenario. We may start working on that also at the earliest, once we start getting a clarity on the demand.
Right. So, sir, we will be using our cash flows to repay the debt, entire debt, and use those cash flows to keep on growing with new capacity. Is this the right way to do it?
Can you repeat that question again? I'm sorry.
We will use our cash flows to grow and add, keep on adding CapEx as and when required.
That is correct. That is correct.
Okay. And sir, two more related questions. One on, how are you getting ready for the U.K. FTA, and, do you see a large opportunity there?
Yes. So, the way I see it, U.K. FTA is slightly on a slower track because of the change in government in U.K. and all that.
Right.
We were earlier anticipating, you know, when Boris Johnson was there to get complete, you know, this to be to fructify by December, then it got deferred to March, but I don't know, you know, it may, it may take another three months before it can fructify. But we are gearing ourselves up for it. We have already in the process of inducting one U.K.-based client, a new customer. We are talking to one of our customers also to see if we can ramp up. In the meanwhile, you know, I see that U.K. brands have two opportunities available. One is, move, you know, one is fructify away from Bangladesh. India and Bangladesh will have an identical low duty structure. So Bangladesh exports about $3.5 billion to the U.K.
So a portion of that can become available to India, simply because the lead time from Bangladesh are higher. Fabric goes from India to Bangladesh, and then it move the garments to U.K. So India can offer a superior lead time while having the similar cost structure. Second is China, which exports about $4 billion to U.K. You know, we will be about 10% or 12% cheaper than China, so some amount of those orders will also come to India. So I expect that Indian apparel industry will benefit at least by $1 billion incremental once the U.K. FTA comes. Now, you know, different operators will get a different piece of it, but that's the trajectory I'm looking at.
Okay, I think this will be, which type of general garments, like
Say that again?
Which type of garment generally are imported from Bangladesh to U.K.?
So, Bangladesh does a lot of, you know, men's shirt, bottoms, all kinds of garments. Those, you know, some of those garments will also come to India.
Okay. So last question: You said Vietnam, its opportunity is open for India. What I understand is Vietnam is more on non-cotton side. And, do you see India getting those non-cotton opportunities? Because what I knew was India was not so attractive destination from non-cotton side.
You're right. Vietnam, you know, Vietnam does not only do non-cotton, Vietnam also does cotton. It gets cotton from other places and do it.
Yeah.
But the non-cotton opportunity will be harder, but we ourselves are doing a lot of non-cotton, where we are competing with Vietnam-based players. So we buy fabric from China, Taiwan, Korea, and all of that. So as the labor cost goes up, the labor arbitrage increases, so you know, to the extent that it can even offset the transportation costs from East Asia of fabric into India.
So just, on this related question only, do you see India has become very attractive to outsource for non-cotton, fast fashion, women wear, the fast fashion products?
Fast fashion will be difficult because of lead time related issues.
Turkey will still dominate that area. Is that right, do you think?
China, Vietnam could dominate until and unless some synthetic fabric ecosystem develops closer to India.
Right.
But it all depends on the cost structures, right? At some cost level, things will have to give way.
Yeah. Okay, got it. Thank you very much.
Uh-huh.
Thank you. The next question is from the line of Nirav Savai from Abakkus Asset Management Company. Please go ahead.
Thanks for the opportunity, sir. I actually missed your initial remarks. I just wanted to understand about this employee expenses this quarter. Sequentially, there's a dip of around INR 10 crore. So what has changed on that side?
So, you know, there are two things. One is, of course, we let some bit of natural attrition play, aligning it to the order volume that we had. So if you have seen, sequentially, there's a bit of a volume revenue drop as well. Now, having said that, even as a percentage of revenue, we have improved, our employee costs have gone down. And the reason for that is because we have worked hard on productivity improvement. That is what you're seeing there.
Okay, so this kind of a number is sustainable, or would it go higher on the fourth quarter?
Productivity level, productivity improvement, related, is sustainable.
This MP phase one would be what capacity? You said about INR 50 crores of revenue, which will be then FY 2024 is only from phase one, right? INR 55 crores-INR 60 crores.
Exactly, exactly. But, you know, INR 50-60 crores will be in FY 2024. But as it fully ramps up, we will have INR 175 crores worth of revenue coming from that unit.
So you're saying only from phase one, and what will be the optimal if we see second phase or even third phase?
Second phase will be of an identical type.
Okay. So roughly about INR 400 crores or INR 370 odd crores we can get from this MP facility.
INR 350 crores, right? 175 times two.
Yeah. So that we can get from this MP facility, and we see that happening in FY 2025 or maybe later.
Yes. Uh-huh. Correct. So the phase two will, will, you know, construction will start somewhere in the next financial year, so FY 2025. Correct.
Right. Got it. That's it from us. Thank you.
Thank you.
Thank you. The next question is from the line of Aashish Upganlawar from InvesQ Investment Advisors Private Limited. Please go ahead.
Yeah, thank you for the opportunity. So, wanted to understand, I mean, I heard your initial comments on how you see things panning out over the next four quarters. So, you said it would be probably flattish, maybe couple of quarters on the revenue side, and then it would pick up in the second half of 2024, I guess. So, given the numbers that we have, I think we were closer to INR 600 crore in Q4 and Q1 of next year, so the base is relatively higher. So does it mean that we will be flat on those numbers, or you think that it will be lower than those numbers then, on the sales side?
No, so, you know, while a lot depends on how the market turns, my assessment is that we should, you know, we should eventually work towards, you know, getting there or better, right?
Yeah. Okay. But the visibility that you have right now, I mean, there should not be a problem kind of meeting those last year numbers on the sales, right? I mean-
So, as I said, sequentially, we will start climbing back. And, you know, the assumption we are making is that by early 2024, the markets in the States, and, for that matter, Europe, should start picking up and doing better. And if that indeed happens, then, you know, we should have no problem in doing it.
Okay. Okay. But, given your dialogues with your customers and reading of the entire situation, is it still very hazy kind of outlook on how things are going to pan out or?
The haziness is for near term, you know. So when I look at something like Spring 2024, I don't think, you know, general consensus is that it should be strong across a large number of industry observers, people who are in the business in retail in the U.S. So that's the, you know, those are people who have been in the industry for years. So that's the expectation from such guys. But in the short term, you know, the economic indicators are all over the map. So there are some indicators which are favorable, some indicators which are not so favorable, so people are becoming a bit risk-averse.
But if, let us say, the recessionary trends are not protracted, then we may start seeing even a earlier uptick.
So the, in your business, basically, from a retailer's perspective, the inventory, kind of drawdown, is that, I mean, the, what has been playing over the past maybe couple of quarters? And is it, does it work that way, in bringing down the inventory in these times and then probably take a call?
Yeah. So they tend to bring down the inventory. So, you know, they are sitting with a little higher inventory because they went into an overbought situation last year.
Yeah.
So, they're working their inventory out as we speak, and many brands are at different stages of working that inventory out. So, some of them will work their inventory out in a quarter or two at most, and then they will, you know, they will realign and start buying.
Okay. Finally, one more thing, I mean, from your balance sheet that you've reported right now, I don't see any issue on the working capital or receivables as such, but anything on the recoveries, any stress there, or is it all normal?
None whatsoever. We are closely tracking all of our customers, and none of our customers seem to have a... You know, we closely track their financials and all of that. We don't anticipate any problem whatsoever there.
Oh, okay. Okay. Thank you so much, sir. Yeah.
You're welcome.
Thank you. The next question is from the line of Anush Kumar from Spark Asia Impact Managers Private Limited. Please go ahead.
Good afternoon, sir. Congratulations on a decent set of numbers on a difficult environment. My first question is a data-taking question. Basically, if you could give the CapEx breakdown for FY 2023 among the existing facilities at Krishnagiri, Bhopal, and Perundurai, could be helpful.
We have, for the year FY 2023, about INR 84 crore is being spent in Perundurai unit. Another 32 crore, whatever we have highlighted, that is, that is, for Bhopal project. Krishnagiri project has been implemented last year itself, and that is completed last year.
Okay. Okay, sir. So, the sustainability of the margin, considering the fact that the productivity is improved, can we expect about 25-30 basis points improvement in the margin for FY 2024?
Over the current levels, you are saying?
Yeah, over the current levels.
No, I don't think so, because FY 2024 will have all kinds of, you know, headwinds and challenges in terms, you know, in the early phase. There will be price pressures, so you might have seen that our gross margin slightly dropped in Q3, but we more than offset it by productivity improvement in the quarter. So there will be those kind of headwinds, which may have a countervailing effect. So an improvement in margin of 3% or 4% above current levels probably is not sustainable. Right?
Yeah. Fine. Okay, sir. Thank you. Thank you so much.
Our overall effort will always be to continue to improve productivity and thereby work on margin improvement. But, you know, to deliver a 3% improvement in one year is not possible. We'll try our best to see how much of productivity gains that we can drive through.
Okay, sir. So actually, my question was, I was asking about 30 bps or 3%, so it was 11.9%, for Q3, so anywhere between 12, 12.2, 12.3.
Yeah, that is possible. 30 basis points is all.
Yeah. Yeah. Okay. Question. Sorry. Thank you, sir. Thank you.
You're welcome.
Thank you. The next question is from the line of Atul Mehra from Motilal Oswal Asset Management. Please go ahead.
Yeah. Hi, good evening, and thanks for the opportunity. Congratulations on the good set of results. So just a couple of questions. One is that next financial year, FY 2024, what is the revenue that we can do at, assuming that we can achieve the highest capacity utilization?
... Okay. So, so that's a theoretical question because, you know, we, we need orders to deliver those revenues, right? So we-
Correct. Correct.
In the first quarter of this year, we did a revenue of about INR 600-odd crore. So with, with our capacity, we will be—with our machine capacity, we should be able to do that kind of a revenue if theoretically, that those were the orders that are available today, without those incremental capacities coming on stream like Bhopal, et cetera. Having said that, we, you know, the manpower capacity has been realigned to current revenue levels, and we will, you know, if the revenue picks up, we will realign the manpower to, to those levels.
Right. So sir, INR 2,400 crore of the current capacity, and what you were mentioning is the new facility that will come on stream. In year one, we can do about INR 60 crore of revenues or something, correct?
That is correct. By the time we hit year two, it will be INR 175 crore.
Right. Right. Right. Got it. And sir, secondly, like, one of the things about the slowdown and demand slowdown and so on and so forth, like, what, what I understand is, like, it is more to do with global environment and... If we are able to plan capacities better in terms of overbooking and so on, like, like, we can basically make sure that we try and achieve our capacity to the fullest extent. So given that we have some time on our side for 2024, would it be, like, reasonable to assume that, like, we will be trying our best to utilize the INR 2,400 crore-INR 2,500 crore threshold despite the macro environment? Because while the macro environment is there, but for our size of the company, the construct of the size of the market, it is not that big a constraint.
Very good question.
Yes.
Very good question. What happens is that, you know, if you look at the global markets, right? The top three markets are U.S., Europe, and China. And all the three of them put together have 43% of global market share. Okay, so the garments sold in these three country, these three regions, are 43% of world consumption. And all of these three markets are, at the moment, underperforming for various reasons, right? U.S. on a kind of a little bit of an overbought situation, excess inventory, and a mild recession expected. U.S., Europe because of the war, but that also now, you know, seems to get baked into their equation, and, you know, we may start seeing growth going forward. And China because of the COVID-related slowdown in buying from end consumers.
So what has happened is that there's a global demand-supply mismatch, which is what has currently resulted in the order book slowdown. Now, theoretically, if we start pumping for incremental growth, one has to now start offering cut rate and, you know, bring down the rates and all of that. We have historically been extraordinarily reluctant to-
Mm.
-compromise margin and give an illusion of lower price, et cetera, to win the business, because that would compromise us over the longer term. You know, people will start resetting their price points with us to a lower level, which we are, you know, totally reluctant on. So I can, I can compromise margins to drive revenue growth, but we have so far held back on that count.
Got it.
That's why we are more profit-driven than simply top-line driven.
Makes sense. Makes sense. Sir, one final question: in terms of with all the expansions that we have under plan, you were, you mentioned earlier INR 1,400 crores in incremental revenue. So if you were to combine everything, all combined, then as of now, the capacities that we are having under plan can can do a theoretical revenue of about INR 4,000 crores over the next two to three years' time.
2,400+ 1,400, right? 38.
Yeah, INR 3,800 crore. Got it. And this is by FY 25 end?
This would be by FY 2026.
By FY 26. Got it. Got it, got it.
Uh-
Then one other thing, I think you also, in, as part of your commentary or in answer to some of the questions, said that we are also opportunistically looking at any, brownfield assets or, like, would this, would this be in the form of any M&A or any, asset purchase that you have in mind, or, or it is-
No, no.
More to do with the existing capacity in brownfield?
No, no. So existing capacity, brownfield is anyway there.
Yes.
You know, if there are opportunities, we are not averse to it. We, you know, as and when an opportunity comes to the table, we don't mind looking at those as well.
From an M&A perspective?
That's right.
Right. Right. Right. All right, sir. Thank you very much, and wish you all the best.
Thank you.
Thank you. The next question is from the line of Arvind Kothari from Niveshaay. Please go ahead.
Thanks for the opportunity and an excellent performance, given the situation, sir. I had a question that from the standpoint of the U.K., $1 billion, you know, opportunity that you said could open up, how are we planning? What portion of, you know, that, pie you, you think we'll be able to cater? And going forward, maybe, the whole Eurozone might get opened up for our country. So what share of our total revenue do we plan to have Europe, Eurozone, going forward?
Eurozone plus U.K. put together currently contributes to 4% of our revenue.
Okay.
Historically, we have operated... When I say historically, even five years back, we were at about 20%.
Okay.
Our ability to ratchet up European share exists. That will not come at the cost of U.S. It will be an incremental growth.
Mm-hmm.
So we are open to doing more business as long as they are margin accretive and all of that.... At the moment, since FTA with U.K. is being planned, we have-
Mm-hmm.
-opened up more dialogues with U.K.-based customers, and I have identified opportunities to expand in early FY 2024 with U.K.-based customers.
Yeah.
So, those discussions are going on specific styles, et cetera. So, you know, we will be ramping up U.K.-based revenue to start with.
Mm-hmm.
As and when European FTA is signed, you know, then we will go all out after Europe. At the moment, we are going slow with Europe.
Okay, okay. And so the next part of the question is that, you know, the ramp-up that happened, you know, in China was basically, you know, they're having more of a OpEx kind of a model, where CapEx was almost funded by the government, where the land was basically provided by the government, and hence the scale-up happened very fast. So the tailwinds that our country has, maybe in terms of the, you know, the labor wages, do you think a CapEx bottleneck can maybe have the growth to be slow, or, or how do you see that part?
Okay. So, so it really depends on, the company rather than industry as a whole, right? So people like us, we are not CapEx shy, and if we see an opportunity, we will go with CapEx. That is point number one.
Mm-hmm.
We have the cash flows and the cash holdings to go for CapEx.
Mm-hmm.
Second, is that there are certain states in north of India, MP being a case in point-
Mm-hmm
... which are actively encouraging us with a lot of incentives, which will allow us to recover our CapEx investments also at the earliest.
Mm-hmm.
Next, while, you know, CapEx funding like China may not be possible by-
Mm
... but the macroeconomic conditions now that exist in India is also moving in that direction. So it's a little more favorable to setting up CapEx these days in northern geography. That's the reason why we chose Madhya Pradesh to expand.
Got it. Got it. Perfect. Thank you so much, sir.
You're welcome.
Thank you. The next question is from the line of Danesh Mistry from Investor First Advisors. Please go ahead.
Hello? Hello.
We can hear you.
Yes. Yes, hi. Good afternoon, sir, and thank you for taking the time out. I just had two questions. One, I think you alluded to the fact that gross margins have been lower this quarter. I think roughly about four and five. So is that a function of our product mix? You know, we are making more, I don't know, like T-shirts versus jackets. That's question number one. And question number two is that, sir, regarding your other expenses this quarter, it's come down year-over-year by quite a bit, from about INR 45 crore to about INR 36 crore. So is this number sustainable, and what could be the components in it that have actually been used? Is it shipping, transport, or something else? And do you see this kind of number sustaining going forward, sir?
Thank you very much.
Let me answer the first part on gross margin.
All right.
You know, let me answer the first part on gross margin.
Yes, yes.
The gross margin reduction is on account of two things. One is, of course, the product mix in the third quarter, changing from outerwear to fashion wear, because in third quarter, we produce more of, you know, spring wear. And you know, the garments are largely cotton and you know cotton viscose based. So the margins are slightly lower there.
Mm-hmm.
Historically. But in this particular scenario, because in the third quarter we also had a fairly heavy you know headwinds on order placements, et cetera, we also saw that the brands were willing to place orders only at a on a tighter margin. So while we let the margins at you know slide a bit, you know making sure that we can overcome with better productivity, we did not allow it to slide even more, so you know we stopped there. So part of the gross margin reduction is on account of product mix, part of it is because of the market condition.
Understood.
As far as the other expenses are concerned, Sathya, you may...
Other expenses, it is primarily on account of the supply chain-related costs, air freight costs, which we had last year, almost close to around INR 7 crore. That was the one, the one-off item-
Okay.
which we ensured that this quarter it is not there, and that is the reason. This is sustainable, more sustainable going forward also.
Got it, sir. And sir, if I may squeeze in one more question. So, going forward, I heard you on the call saying that, you know, essentially, because we are working on season, we essentially would not be too impacted by the inventory destocking at the customer end. So is it correct to assume that going forward, at least, whatever headwinds were there, especially on volume, are now past, whilst margins will take time to catch up?
Sir, so my expectation is that the volume impact has more or less is bottoming out and will start improving. Margins also, in my opinion, you know, will be bottoming out in this quarter or next quarter, and then, you know, hopefully, you know, our productivity gains will be here to stay. So we should, you know, we should start... You know, as the volumes return back, that is the business volumes return back, some of the productivity improvements that we have put in place will be there to stay, and hopefully, we should be able to improve our gross margins as well.
Got it, sir. So in that case, then the employee costs may not come back in the same fashion as the volumes would?
Correct. Correct.
Got it, sir. Okay. Thank you very much, sir, and wish you the very best of luck.
Thank you, sir.
Thank you.
Thank you. The next question is from the line of Pulkit Singhal from Dalmus Capital Management. Please go ahead.
...Thank you for the opportunity, and congrats on a good set of numbers in a tough environment.
Thank you, Pulkit.
First question is just to understand the inventory correction bit. My understanding is that it has been going on for last nine months odd, the restocking. So when you look at your top four, five customers, which are the largest chunk of your revenues, roughly what number of days of inventory were they sitting at, say, nine months ago versus now?
So they, many of them are sitting on three months of excess inventory. So if they have sitting on—they were sitting on three months inventory, they were sitting on three months inventory in the past. I think now they would have, you know, reduced half of that excess inventory or, more, depending on the brand.
Understood. Okay. So because of my understanding, so therefore, I would think, from their perspective, I mean, the demand that you generate for your products, the worst is behind from that aspect, right? I mean, incrementally-
That-
China Plus- One.
That is correct. That is correct. But so far, the retail market has not slowed down much in the U.S. If that slows down, then, you know, the inventory, while they have reduced it, you know, they that inventory may bloat a bit. Though I'm not so sure that that will happen because so far the U.S. market still has been resilient.
I understand. But we also. One more thing was that during the last nine months, so China was closed. So I don't know whether it was an easier period for us to gain orders, whether there was a supply issue from Chinese suppliers, and how does that impact going ahead?
That's a misconception. Last nine months, China was closed from a market standpoint, so people were not buying garments. However, the Chinese suppliers were all functioning. So, you know-
Okay.
So Chinese capacities were fairly intact. So what we had was the Chinese capacity also coming and fighting in the global market. So a lot of Chinese capacity is directed towards China as a market. So we've had situations in the recent past where Chinese capacity were also trying to, you know, which were domestic capacity, were fighting in the international market. We may see some of that, you know, going away going forward because the Chinese markets are now opening up.
Okay, so it's a good thing for you in that case.
That is correct.
Okay. And, and from a pricing aspect, like-to-like pricing, because our RM prices have also corrected, and therefore, asset turns assumptions would change. What would be the like-to-like pricing decline you would think, you know, for a product which you sold in Q1 FY 2023 versus what you might sell next year, that one should believe?
It is a very, very difficult question to answer because, you know, let's say Q1 to next Q1, you know, I would say the orders are still coming up. But let's assume that if I look at it from last Q1 to the current Q1, right, the Q1 FY 2024-
Yeah.
I would, I would think that, you know, the raw material prices have come down. Raw material prices have come down by about 6%-7%, and our, our realization or, you know, the, the price realization also has come down by about a similar margin. Usually, we should have price realization come down to lesser than the raw material price decrease, but it has been a little more than that this time, given the softness of market. We hope that we will be able to recover, recover that incremental going forward.
Understood. The full benefit of China Plus- One would play out more in a scenario when once the end market starts growing and you see higher share of incremental orders and not necessarily on the existing-
That is correct.
- business.
That is correct. That is correct.
Okay, understood. Great. Thank you and all the best.
You're welcome.
Thank you. The next question is from the line of Surya Narayan from Sunidhi Securities. Please go ahead.
Am I audible, sir?
Yes, you are, sir. Please go ahead.
Yeah. Congratulations, sir. Thank you for giving the opportunity. Just to understand from the working of the, you know, your, you know, operational point of view, the job work charges have been substantially, you know, declined by around 1%, if you see nine months to year-ending. And so is the three and a half percent, so the employee charges. Just to understand whether, you know, how much out of the 30,000 employees, you know, we have casual laborers and the regular employees, if you can give by bifurcation. And, you know, why the job charges, job work charges have declined significantly? That is really the first part. Thank you. I'll come next.
100% of the employees are on roll. There are no, you know, no temp labor that we hire for, compliance-related reasons. The job work charges are when we have very specialized tasks for which we may not have the capacity, we give out and get it manufactured. Second is, sometimes when there are very tight deadlines, et cetera, then, you know, we may outsource or something like that for completion. But, you know, at the moment, you know, as we have improved productivity and, you know, capacity utilizations, et cetera, we are trying to reduce the job work charges. It has always been our endeavor, and we have been able to control it quite a bit.
Okay. Sir, another critical question, just now, just to... If you can give answer out of INR 500 crore of revenue, just to, if you can give a figure, then how much of, let's say, potential orders we might have rejected due to our unacceptance ?
How much of orders we would have rejected due to what?
... due to our kind of, critical benchmark of, you know, margin and all?
Oh, you know, there is, you know, it's a little hypothetical because, you know, we just don't bid on those projects. So if I want to drop margins, I can get any amount of orders. So you see, it's a bit of a hypothetical question. We don't pick those orders. So, you know, it's not like I reject it. When the customer solicits orders, we, you know, we'll only bid at those which we feel, you know, we can make the money. Make, make-
Okay.
Yeah.
Okay. And, and what is about the status about our operations or our plan towards the going to Bangladesh partner? Because we are not discussing anymore. So are we dropping that?
No, Bangladesh is very much in the play. In fact-
Sorry.
The asset has been identified also. We... I have deliberately slowed down the start of the work on that asset, primarily because of the current market conditions. We are actively considering whether we should now quickly you know start working on commissioning the works on that project, as there will be a lead time to construction as well, and that can time well with the markets turning. So you know that is where we are. So Bangladesh is very much in the play from a observation perspective.
And so last year, in the fourth quarter, we saw some hike in the, you know, employee costs. So, is that, will that be repeated this year, for the older plants? I mean, I'm not including the MP plant. I believe that in MP, the, the employees will be on the learning curve phase, and, you know, definitely the productivity will definitely drop there. Am I right, sir?
Yeah. So employee costs in MP as a percentage will be higher in the initial period because the productivity will be lower. As far as year-on-year is concerned, there will be wage hikes, et cetera. So there will be wage cost increases in line with minimum wages going up and the DA, which is inflation linked, going up. So wages do go up, and we will have to absorb those wage increases. So there will always be a pressure on wages going up, and that will have to be offset by productivity.
So all those things, the wage hike will happen in fourth quarter?
So we have, you know, the DA hike going up in the first quarter of next year. We have already had a wage hike in the fourth quarter, this year. So those are all, you know, factored in.
Okay. Okay. Thank you, sir. Thank you.
Thank you. The next question is from the line of Jagdish Sharma S, an Individual Investor. Please go ahead.
Good afternoon, sir. Congratulations on encouraging set of numbers . Just want to know your perspective on our exposure to the Turkey country. Like, as the country has went through the natural disaster and crisis, what are our exposure to Turkey, and how are we gonna overcome that?
Our exposure to Turkey is zero. We don't supply anything to Turkey. In fact-
Okay.
Turkish manufacturers supply to Europe.
Okay.
The U.S. market, so, you know, on their customer side also, we don't compete much. So from an opportunity perspective, also, pretty much happening unless, you know, those guys come specifically for a certain specific technical capability we have.
Okay.
Exposure to Turkey, zero.
Okay. Can I ask you some questions which is not related to? Like, what are our Indian markets exposure to Turkey, if you can explain it, please?
What are Indian markets exposure to Turkey?
Yeah, yeah, like, anything we are exporting from Turkey and something like that.
Of course, of course, there will be, you know, spinners who are selling yarn to Turkey. There will be people who are selling fabric to Turkey. We are only in the garment manufacturing phase, which what-
Yeah.
So
Okay.
There definitely other people may have exposure to Turkey, which I'm, you know, which you have to go after the individual player.
Okay, okay, okay. So also, when will our debt be like come down from like from... It will be like in a break of like zero? Okay, will it come to zero or something like that level?
Our debt?
Yes, sir.
Our debt is at near zero levels only.
Ah, okay. So I'm, I'm asking also, any guidance can you give for the next quarter and?
I request you to rejoin the question queue if you have further questions.
Okay. Thank you, thank you, thank you, sir. Thank you for taking my question.
Thank you. The next question is from the line of Sunil Kothari from Unique Asset Management. Please go ahead.
Just one question to understand. You have moved from Karnataka to Tamil Nadu, which is having a very good supply chain and ecosystem for garment manufacturing. But Bhopal and MP is new. So how you what is your experience? Which are the challenges you face, and how what is your thought process for a future garment industry expansion from Gokaldas's point of view and at large also?
So from our standpoint, we have to expand in places which are low cost in the long run. From that perspective, we have identified Madhya Pradesh as a place to grow, and we have also identified other places in India which are sustainable in the long run. The wage cost in the south eventually will grow, and so will the availability of employees, you know, while the condition in the, in certain other regions of India may be more favorable. That's why we intend creating incremental capacities in those regions. My early experience in Madhya Pradesh, like we've just started hiring trainees for training purposes, have given me the confidence that there is enough of labor available, and they have started joining. The training absenteeisms are very low.
The enthusiasm to work is very high because, you know, there is not enough of competing jobs available to them. So I think some of our assumptions are playing out as expected. So, you know, if further we are convinced that, you know, we are getting a good employee flow, then we should expand more and more in Madhya Pradesh and such regions in the north of India.
Okay. But do you feel there is a good ecosystem for, I mean, in terms of say, transportation, supply chain?
No, that is not a problem at all. Fabric and all is available in the north. There are several mills like Arvind in Gujarat, Vardhman in Madhya Pradesh itself, and so on and so forth. So mills are available for, from a fabric, fabric standpoint. Access to ports from Bangalore to Mumbai or Madhya Pradesh to Mumbai are all more or less equivalent. Labor availability is good, so we don't see much of a problem from any of these perspectives.
Great, sir. Thanks a lot. Wish you good luck.
Thank you.
Thank you. The next question is from the line of Abhineet Anand from Emkay Global Financial Services . Please go ahead.
Yeah, just on the tax rate, seems to be, you know, every quarter has been quite different. So for 2023 and 2024, what could be the numbers one should be looking at?
Mainly on account of recognizing the liabilities which are available for you to claim the deduction at a later point of time, and so you recognize the deferred tax as of during this year. So this year, our average deferred effective tax rate, you can assume between 17.75%-18%. Going forward, effective rate of 25.17% will play out, and we should be seeing a number around 23% is what is our estimation at this point of time.
Thank you. The next question is from the line of Anush Kumar from Spark Asia Impact Managers Private Limited. Please go ahead.
Sir, what sort of currency assumptions have you taken for FY '23? And in case if you have hedged, what is the average rate at which you've done that?
Sir, so we book forward cover to the extent of about, you know, 60% of our revenues for the year ahead, and we have a formula for rolling four quarters. So that's how we have done. And we normally, you know, book the currency at, you know, at the, based on forward cover, we would have the dollar sold at a marginal premium over the current rates. So then that's the forward premium rate. And we also tend to book our orders based on those rates.
Thank you.
Yes. Thank you, sir. Thank you.
Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments. Over to you, sir.
Thank you so much for all your questions. You know, as a company, we continue to be focused on developing the market. We continue to be focused on delivering tight productivity, you know, level, so that our margins can constantly be improved. We are margin-conscious and profit-conscious company. While we go after growth, we would prefer not to compromise on margins at any cost. The market conditions are what they are, but despite that, we have been able to hold on to our market, and we intend growing further. I see a downturn as an opportunity for Gokaldas more than anything else. Whenever there is a downturn and overall demand from apparel manufacturers come down, we tend to hold the market share at our level from a revenue standpoint.
Then when you know, when the demand climbs up, you know, we will be able to ride the gains, the consolidation gains that we have got. So we tend to consolidate suppliers, we tend to take share from other suppliers, which we have been doing at every downturn. Then once in the aftermath of the downturn, we will start seeing a disproportionate growth. We hope to continue that journey going forward, and in the meanwhile, weather the downturn a bit, we will, you know, hold on to the margins through all of this and hope that by the second half of the year, we should start seeing solid growth. But in the run-up to that also, we will start seeing some growth. Thank you so much for being with us at Gokaldas Exports.
We will continue to work for the benefit of all our shareholders.
Thank you. On behalf of Gokaldas Exports Limited, that concludes this conference. Thank you for joining us. You may now disconnect your line.