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Gokaldas Exports Ltd
Earnings Call Analysis
Summary
Q1-2025
Gokaldas Exports saw a significant 80% Y-o-Y increase in consolidated revenue, reaching INR 940 crores, fueled partly by newly acquired entities. Despite headwinds from U.S. retail market challenges, production disruptions, and higher airfreight costs, the company expects to overcome these impacts. Strategic integration and full capacity utilization in upcoming quarters are anticipated to boost margins and strengthen market position. Investments in new facilities in Madhya Pradesh and Tamil Nadu are set to ramp up, enhancing vertical integration and operating leverage. The company remains cautiously optimistic about achieving strong margin improvements above 10% in the second half of FY '25.
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Ladies and gentlemen, good day, and welcome to Gokaldas Exports Limited Q1 FY '25 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded.
I now hand the conference over to Mr. Binay Sarda from Ernst And Young. Thank you, and over to you, sir.
Thank you, Steve. Good morning 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 risk 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 conduct Q&A session.
With that said, I'll now hand over the call to Mr. Siva. Over to you, sir.
Thank you, Binay. Good morning, everyone. Happy to have you at our earnings call for the first quarter of FY '25. This was the first quarter where the full results of our newly acquired entities were included. In the first quarter, the consolidated revenue grew by 80% Y-o-Y to INR 940 crores. Revenue, excluding the acquired entities grew by 11.2% year-on-year, indicating a recovery in demand from the customers. During this period, India's exports grew by 4.2%, implying a market share gain for the company.
While the revenue growth has been strong, we experienced a series of foreseeable but unavoidable headwinds. The U.S. retail market remained resilient in the first half of '24. During this period, retail sales in the U.S. continued to grow Y-o-Y by about 3%. Most of the growth has been price led, while volume has been flat. Retailers have optimized their inventory holding levels with early signs of recovery as the decline in imports subsided for the U.S., EU and U.K. in recent months. Retailers are still cautious as they align their inventories to a volatile market in the near future. We continue to anticipate the industry demand to be sluggish for H1 FY '24 with momentum picking up subsequently.
We witnessed several challenges, starting from a disruption of production, leading to delays in shipment, huge ramp-up of employees in anticipation of volume growth, slower ramp-up of our new units and continuing airfreight cost at Atraco, the recently acquired entity in Africa. Some of these impacts will be offset in the quarters ahead.
The business in the company, excluding acquisitions, that is the stand-alone entity of Gokaldas Exports, was severely impacted in April and May this year. There was a huge shortfall in manpower availability and this resulted in production reschedulings, overtime work, delayed shipments, order cancellation, and airfreight to compensate the customers. The impact of this on EBITDA was to the extent of INR 12.6 crores. Some of it was on account of airfreight. Some of it was on account of lost production as well as overtime charges.
Atraco also had a continuing impact from Q4 of FY '24, resulting in a nonrecurring airfreight cost of INR 8.6 crores. The company is seeing strong traction for business volume in the coming quarters and expect the capacity across all acquired and expanded apparel units to be fully utilized for the year ahead.
Our new manufacturing unit in Madhya Pradesh is ramping up to full capacity and will reach optimal levels by Q3 FY '25. The fabric processing unit in Tamil Nadu will start commercial production sometime soon in this quarter in Q2 FY '25. Results of trial production is encouraging, and we are hopeful of this unit ramping up by Q4 FY '25.
We are making good progress towards integrating the operations of our newly acquired entities to secure better operating leverage. Our strategic investment in BTPL, a fabric processing unit allows us to derive utmost benefit through vertical integration into critical raw materials, adding an edge in terms of speed, quality and cost. After completing all the acquisitions, the company is currently at a net cash of INR 58 crores as of June 30, 2024.
With several investments underway, there has been an impact on the ROCE as many of the investments are yet to yield their full payoff. The stand-alone business, excluding acquisitions and new business is operating at about 25% ROCE. It is the endeavor of the company to strengthen the ROCE of the consolidated company over the next 2 years.
To prepare for the next phase of growth, the company has strengthened its management talent at multiple levels. Our performance endorses the belief in our ability to sustain continued operating performance gains in a sluggish macroeconomic environment. A quick analysis of our revenue indicators indicate that we continue to gain market share by building on our execution strength. The company is hopeful of achieving strong improvements in the quarters ahead, particularly in the second half of the current year and continuing into the next financial year.
I thank you for listening, and would be happy to address any questions that you may have.
[Operator Instructions]. The first question is from the line of Ayush Dandia from Dandia Trading.
Sir, I wanted to ask that given the recent developments in Bangladesh, do we....
Mr. Ayush, just a second. Hello, from the management, can you hear me?
Yes, I can hear you.
Yes, Mr. Ayush, please go ahead.
Yes. So given the recent developments in Bangladesh, do we expect any business to come to India? And can we capitalize on that opportunity? Or is it that Bangladesh competitive edge is a lot given their lower export duties -- sorry, lower import duty in developed countries. Can we capitalize on that.
Simple answer is yes. However, it's a long-term structural adjustment. If you look at the problems in Bangladesh, this has been brewing for quite some time, and it reached a flash point a week ago. So we have been anticipating this and have been also shying away from creating capacities in Bangladesh, worrying about the safety and security and the business environment there.
Having said all of this, the cost economics as well as duty-free access to Europe makes Bangladesh a continuing attractive region. The garment industry in Bangladesh is a significant industry and the government will do everything in their power to make sure that the garment industry functions well. I have a lot of contacts in Bangladesh, and we have checked with them, most of the factories have come back into operation, but they did suffer over the last 7 to 10 days and the whole country is not out of the woods yet.
So given all of this, most of the brands will try to not put too many eggs in the Bangladesh basket, so to speak, and would look at diversification as long as it doesn't increase their costs too much. I think this trend has started almost 1 year, 1.5 years back. Probably it will accelerate going forward. As far as Gokaldas is concerned, our order book is pretty much full for the quarters ahead, that we may not stand to benefit too much immediately as we don't have any more capacity to accept orders within our system.
Having said that, a directional shift to more sourcing from India will definitely happen, and that augurs well for us from a capacity creation standpoint. So we are open-minded about it. We are also looking at adding capacity in low-cost regions. As you are aware, we have a factory in operation in Madhya Pradesh and through our Matrix acquisition, we have a factory in operation in Ranchi in Jharkhand. Both of these are low-cost locations, and it is our endeavor to expand in these areas. In fact, those areas can probably compete well with Bangladesh as well.
So to give you a long answer to your question, I think the long-term prospects are -- was good, and it has become slightly better and India can take some of the incremental growth if it comes our way. Stronger players will always tend to benefit more as the volumes in Bangladesh are high, volumes in China are high, and stronger players will be in a much better position to leverage the benefits coming out of this.
The next question is from the line of Aashish Upganlawar from InvesQ PMS.
Sir, a couple of questions. One is I would like to understand what are you hearing from your customers given the market basically is hearing a lot of noises on how the U.S. economy is shaping up, the inflation and stuff. So is the scenario all good? That's one thing. And you highlighted in your presentation regarding the freight rate issues...
Sorry to interrupt, sir, Mr. Aashish, the management has been disconnected. Please wait while we reconnect them back, okay?
Ladies and gentlemen, the management line has been reconnected back with us. Please go ahead.
Sorry, Aashish, I think the line dropped. So you may have to ask the question again.
Yes, no problem, sir. Sir, what I was trying to understand is there are again kind of noises of maybe recession or maybe unemployment rising in the U.S. and stuff. So what are you kind of anticipating or hearing from the customers. And secondly, the freight cost increase that you've also highlighted in your presentation, is the curve still looking steep upwards? Or is it flattening or going down as such, these 2 things I wanted to understand.
Okay. So to answer your first question, most of the brands have mentally prepared for some sort of a slow market uptake. So I don't see us having too much of a problem unless the recession is very sharp and deep and all of that. So none of us can be prepared for all the economic possibilities that may arise in the future. But as far as Gokaldas is concerned, we have diversified our customer base very, very significantly that unless there is a secular global trend of recession and all retailers are significantly impacted, I don't foresee a big problem hitting us.
When I look at our own order book well into Q3 and early Q4, it seems to be pretty strong for us, and we are working at full capacity utilization. Having said that, we are always open to any potential risk in the horizon, and we will take appropriate actions as and when we see some of those coming up. For now all my discussions with my customers, especially when I look at fast fashion customers or even outerwear customers, they seem to be operating at fairly low inventories and are indicating a robust order placement season going forward.
We are also diversifying into Europe as a precautionary measure and have started pulling more business from that region. In fact, 2 of our European customers are expanding sharply as we speak. So we are reasonably diversified, well poised to handle any demand fluctuations barring some major economic meltdown, which affects the entire market secularly. So that's as far as your first question is concerned, I'm happy to elaborate if you want any more clarity on the first question.
Regarding your logistics question. So logistics costs went up in recent times, particularly because there was a lot of logistics between China and the U.S. in anticipation of a duty increase. So there was a shortfall of containers, shortfall of shipping and logistics costs in general rolled up. I think that will settle down as we go forward. Most of the logistics costs are borne by our customers. So we sell FOB. We don't sell CIF. So in our case, we don't pay for logistics, except for incoming logistics for fabric that we import. And to that extent, we have had some increase in costs, but they are all pass-through for us. So we have been able to push it back to the customers. So I don't see logistics impacting us, but industry as a whole is -- which is the retailers are paying a higher price for logistics.
Okay. Sir, in the slide that you've given in the presentation, I could understand that there are certain one-off items in the current quarter, which you have shown adjusted EBITDA. So how is the integration going on? And should we see normalization to maybe 10%, 11% margins maybe going into maybe Q3 type of scenario? Is that more reasonable? And are there any teething issues or something which is glaring in the integration overall, if you could highlight that? And so are we smoothly going to see Gokaldas integrating or is there any -- are there any hassles as such?
Sure. So let me give you a detailed answer. When we acquired the Atraco entity, we had some worker unrest in the early part of acquisition. We had bought the assets on a -- we have bought the company on an asset transfer basis. So when the employees got rebadged to us, there were some demand for incremental wages, et cetera. Anyway, those resulted in production disruption, which we have now come out of. So there is a consequent air freighting, which happened because of a massive delay in production and consequently, air shipments impacted us and that, in fact, continued in Q1 of FY '25. I don't foresee that happening in Q2 or from Q2 onwards.
As far as all other aspects of integration is concerned, it is going very well. In fact, we have integrated the finance function. We have integrated the sourcing function, we are working on with both Atraco and Matrix, and we are also working on integrating operational best practices, and last but not the least, we are working on marketing integration as well. So every aspect is being worked on. The integration in my mind, is going ahead of schedule, not behind schedule. And whatever problems that we've had, consequent to some strong decisions that we took, so that we secure long-term future of the company, and not came into some unreasonable demand, will pay off in the quarters ahead.
As far as India is concerned, we had a disruption in April and May when we lost a lot of productive manpower on account of the elections in India, et cetera, which resulted in people getting paid well sort of participating in campaigns and rallies and all of that. So we lost a lot of production capacity during that period of time. This was an unusually high impact that we faced at that point in time. We have since recovered, but we did pay a huge penalty on account of that lost production. In fact, just in GE the cost of overtime plus air freight plus loss of production itself in the quarter came to about INR 12 crores.
So it is a massive hit, as a onetime hit, but I guess most of it will be behind us. And when I look at the quarters ahead with both Atraco and Matrix kicking in strongly from -- in the second half, I am very confident that our margin will go to double digits and not just 10%, but even higher from the second half onwards. I can literally see it because the order books are all full, the production is reaching that rhythm and things are falling in place very strongly.
Okay. Sir, you used to give some guidance on what we are targeting in terms of sales, if everything is normal and also some guidance on the margins. Are we looking at, as you said, 12% kind of a normalized margin? Or would it be higher than that, maybe FY '26 would be better year to give some guidance.
Historically, we don't give guidance. But as a general term, if we talk of FY '26, I'm very confident that the margins will come back up very, very strongly. In fact, I see that coming up in H2 itself. But in FY '26, we should start seeing overall margins go to the region that you indicated.
The next question is from the line of Pulkit Singhal from Dalmus Capital Management.
First question was this -- the kind of arrangement we have with Bombay Rayon, can you elaborate as to the amount of funds we are paying and what kind of financials one can expect from this, because looking at the past history, it doesn't seem that great. So if you could just elaborate a bit on that.
Okay. So the strategic rationale for that investment was to make sure that as we grow and we've grown considerably, and as we start talking at strategic level to our customers, most of them are seeking a stronger relationship than either to -- you send us -- you send me the garments that I need. So we are working with them on reducing lead times. We are working with them on much stronger partnerships, multi-geographic delivery, et cetera. And for that, I think one important component that we felt missing in our portfolio, was the access to fabrics at a short lead time and also access to a lot of fabric development. In fact, on the garment side, we have started engaging with many customers on a lot of co-creation.
So we're doing a lot of design and development for our customers and now seeing -- having fabric development will be the next step in that direction. So we felt the need, given our size and scale, given the customer requirements and given the strength of the engagement that we are having with the customers.
So Bombay Rayon is a unit which has got a very large capacity. It's one of the finest in terms of quality of machines that it has, most of them European machine of a very high quality and has got a generally good reputation as far as its production quality. Company itself went through difficult times because of its financial challenges and management challenges. And we thought that after doing enough due diligence that is something which is rectifiable. The machines are of good quality. And if we handhold it by making investments and supporting it, we should be able to get what we want out of that.
So with that in mind, we entered into an agreement with the company to invest up to INR 350 crores. Our intention is to only invest what is really required for its capital expenditure requirement, for some working capital, et cetera, et cetera. And that investment has gone through an OCD structure. So the OCD itself carries an interest coupon of about 20%. And we will have the ability to work closely with the unit.
The intention is, if all things go well, and we feel comfortable, we will initiate a merger sometime in the next financial year, culminating into a proper merger by FY '27. So the effective merger through an NCLT process may take a year, so it will happen sometime 2 years from now, say, June, July, August 2026. So that's the process, if all goes well and if we intent going down that path of having a full loan acquisition or merger of that entity with ours.
So the strategic rationale is strong. We also feel confident that we ourselves can buy a lot of fabric given our huge fabric consumption between all our units from BRFL. So we should be able to at least secure like 15% to 25% of BRFL production through demand generated by ourselves. So there are a lot of compelling strategic reasons. Of course, it depends on how soon we can get the unit back on track. It would involve getting the machinery up and running to full capacity, building up an order book, strengthening the management, et cetera. It's all work in progress as we continue to handhold and work with the management team there.
I'm pretty confident in this relationship being allowing us to punch way above our weight in the market. And when I have talked to most of our large customers, they have endorsed it fully. They have been very supportive of this. So that gives me added confidence that we are on right track.
In case of this acquisition, how much is the peak investment for us in terms of to be able to acquire, what is the broad range? And what is the peak turnover that this entity can do if everything was to be externally sold and not to Gokaldas. So just to get a sense of how much you're paying and what we are getting.
Are you saying what is the peak revenue from this asset if we acquire, is that the question?
Yes. That is one and how much are we paying for that? I mean overall, if you were to acquire.
So this is all speculative as we speak because we don't know whether we will acquire them. We have invested in an OCD in them. And this allows us to work closely with them and also place orders on them to secure our supply. Having said that, if we do acquire then the acquisition price is about INR 580-odd crores, which we had mentioned in the filing at that point in time, about INR 585 crores.
In addition to that, we had indicated that we will ourselves through OCD invest about up to INR 350 crores, but I don't anticipate it going all the way to that level, it will be somewhere in between, anywhere between -- anywhere up to INR 200 crores, INR 250 crores, maybe even less if we can tightly optimally, if that unit can manage itself.
So that's the kind of investment we are looking at. And the company itself has a debt of currently about INR 100 crores -- INR 150 crores. So that's the nature of that entity. If and when we acquire, we will have all these investments going in, which means INR 585 crores, say INR 600 crores plus a debt of INR 150 crore, INR 750 crore. And then we ourselves would have invested through OCD an additional debt of about, say, INR 200 crores.
I'm just giving you a very, very macro math. These numbers can change by INR 50 crores, INR 100 crores here or there. So that itself makes it INR 750 plus INR 200 crores, INR 950 crores, say ballpark INR 1,000 crores. That will be the enterprise value of the entity, if and when we acquired. So -- and merge with it 2 years from now.
So this gives an optionality for us to go down that path and have a fairly large fabric capacity in our portfolio. the revenue itself at its peak, could be about INR 1,800 crores. If all goes well, and it works at full capacity and it should work at an EBITDA margin of, say, the industry levels, which is about 12% for the fabric companies maybe given the specialty fabrics that it produces, it should even probably do better than that, but that's the kind of expectation that we have.
Understood. Next question is just on the Bangladesh situation. They just seem too big to fail in the overall garmenting sourcing piece globally right. But at the same time, I'm just wondering whether customers are already talking to you about having to diversify a bit and how sustainable is that? Is it possible for us, for instance, at this point, secure longer-term contracts with some customers rather than some knee-jerk orders for just 1 or 2 quarters and them going back to Bangladesh.
So, customers are very, very smart and they have been sensing this for almost a 1 year, 1.5 years. In fact, many of the customers have talked to us almost a year back saying that we want to diversify away from Bangladesh. So customers who are, let's say, heavily weighted towards Bangladesh have had come to us and talked about incremental capacity here. So all of that encouraged us to set up new capacities. And I think that customers will diversify away.
It is -- I don't foresee any short-term knee-jerk reaction. First of all, for short-term movements, you need capacities in Bangladesh to be shut for a longer time. That's not the case, they have mostly opened up. Secondly, we should have capacity in the short term. And I don't think we look at business in the short term either. If you ask me, medium to long term, I think people would have come -- people would have found that their hypothesis that Bangladesh is risky is getting more and more confirmed. And hence, they would try to incrementally allocate more growth to other regions.
So I think in the longer run, it is good for us. In the short run to expect any major knee-jerk reaction probably is super ambitious. Almost somebody who is essentially in fast fashion, who has got a major delivery problem, will automatically ask us for some support, and we will extend that from time to time. But I'm more keen on the long-term movement. And I believe that in the long term, with so much going on in Bangladesh, Srilanka, et cetera, there is a little more comfort in sourcing out of India. If we are able to develop lower cost locations in India, which is the endeavor that we have embarked on, I think that will accelerate and support this trend.
But can the reverse happen, if Bangladesh currently given that situation were to depreciate by a sudden 15%, 20%, in fact, it will just become even more attractive. So can the reverse trend actually happen and it would make sense to be present there.
I think that's a very theoretical thing. And when I talk to customers, nobody is going in there just because there is going to be a massive currency arbitrage that is available to them because there are also risks ahead. I have talked to one large customer, a fairly large customers with whom we still don't work and they are knocking on the door, they want us to start, but we don't have the capacity to see if they can move some things out of Bangladesh to India. So I don't see people taking such very, very short-term view.
Secondly, I am also not so sure that Bangladesh can afford to weaken their currency that much. And I'm not an economist, but keep in mind, Bangladesh imports most of their goods and a lot of consumable goods and consumer -- FMCG goods, et cetera, go from India. So if the currency depreciates, their cost of living, which is already high in taka terms, will just shoot through the roof, creating more unrest in that economy.
One of the biggest challenges that Bangladesh faces, the restless population is impacted by high inflation. So if you -- if they depreciate their currency sharply, there could be even bigger problem. I'm not so sure that that's what the doctor has ordered for that economy, but then that's for an economist to answer.
[Operator Instructions]. The next question is from the line of Jignesh Kamani from Nippon Mutual Funds.
Just on the Bombay Rayon, so if you take about elemental view when you mentioned that if we decide to acquire...
Sorry to interrupt, Jignesh sir, your voice is very low. Could you please use your handset?
Am I audible?
Yes, sir. Loud and clear.
Just on the Bomber Rayon, you mentioned that we have to acquire if we want to, through NCLT. So in that case, NCLT has the power to decide I can say whom they want to sell. And in that case, we have to bid it again or there's a possibility that it may be another bidder instead of us? And if yes, then what will happen to our investment of INR 200 crores, which we made. And in case we don't want to acquire it, then what is the recourse you can say of INR 200 crore investment offer of NCD, which we are planning to make right now?
Okay. Good question. Just to clarify, this is not an asset under NCLT. So this unit is not part of BRFL. This is called BRFL Textile Private Limited, which is outside of NCLT. When we talk of NCLT, it's just the merger process which will be passed through NCLT because any merger in India goes through an NCLT driven process for concluding the merger. So we are only talking about that. The principal shareholders in this case, in this entity, are JM Financials plus a whole cluster of various other investors who total 100% of the company. And we have a shareholder -- we have an agreement with all of them so that in case we decide to go ahead, they will sell the shares at such and such price which we had indicated. So the merger will go through an NCLT route for consummating the merger, but it's not an NCLT process where NCLT is calling in bidders and investors and all of that. I hope that clarifies.
As far as your second part of the question, which is in the event we don't like this asset. Now we have done enormous amount of due diligence, checked with our customers, seen what we -- what kind of fabrics that we are placing orders on, what is the future trend, et cetera, et cetera, and done all the due diligence before entering into this arrangement. In the rarest of rare event, we don't want to go ahead, we will have to deal with that process. We will probably stay invested with the OCD structure and continue to get dividends, et cetera, but we will deal with that situation as appropriate at that point in time.
We have a feeling that there is a high likelihood that we may take a call on going ahead if all goes well. But then that is something I will reserve for a year from now.
Understood. And just a follow-up question on that, as you mentioned, close to around INR 800 crores kind of revenue they do at peak. So what would be our fabric requirement out of this INR 800 crore. And second thing, are we trying to appoint any Board member or you can say as of now or that will take a call only once you can see we decide to go ahead with the merger.
So it is not INR 800 crore, it is INR 1,800 crore. As far as if we take a call, then obviously, the unit gets into a merger with the parent company with Gokaldas. So then there is no question of a new board, et cetera, et cetera. It will just merge into us. At that point in time, we may decide if we want to stuff the board with our people or whatever, but we have not taken those calls.
And out of this INR 1,800 crores, what is our captive need as of now?
So let me give you in terms of meters of production, right? So for example, the unit at full capacity. And today, it is by no means operating at full capacity because several machines are not in a state of production. We need to put in CapEx to restore them back to full capacity. But its full capacity is about 4 lakh meters a day, which translates to about 1 crore meter a month. Our own fabric consumption in Gokaldas is 55 lakh meters a month. If I add Atraco to it, it will add to another 15 to 20 lakh meters a month. So that is about 75 lakh meters a month, whereas its capacity is 1 crore.
Not all of what we buy will be made -- can be made by BRFL because we buy a wide variety of fabrics, including synthetics, et cetera, some of which are imported. But that's why I said I'm very confident that at its peak, we can at least meet 25% of the 1 crore meters per month of demand. Maybe more, our endeavor is to do as much as we possibly can. But that itself gives us a huge amount of security to -- in terms of demand for that entity.
The next question is from the line of Monish Ghodke from HDFC Mutual Funds.
So out of our total capacity of 87 million pieces, what is the split between GOKEX, Atraco and Matrix? And could you also share average realization per piece for these 3 entities as well as average utilization levels?
At Gokaldas, it is about 30 million pieces, and Atraco can produce about another 35 million pieces. Gokaldas is 40 million pieces, including the new investment what we made. I mean, 35 million pieces is for Atraco. And another 1 million -- I mean, 10 million pieces can come from Matrix.
Okay. And sir, what are the utilization levels currently?
Currently, I can give you the number of pieces for you to get some understanding. Gokaldas has done 6.6 million pieces at an average realization of INR 781. 8.78 million pieces in Atraco at INR 285. Matrix, we have done about 1.7 million pieces, it's about INR 618 is average realization. Total, we have done 17 million pieces for the quarter, average price is INR 510. Again, the pieces is quite a misnomer because again, depending upon the product mix, the number of pieces will come down. That's what also builds up...
Depending on...
Depending on valuation.
Yes. And sir, could you also share in these pieces, what is the mix of, let's say, co-creation versus customer-given designs?
So it varies from customer to customer. For somebody -- certain customers are co-creation almost going up to 60%. And on an average across all customers, we are operating at about 15% to 17%.
Okay. And sir, this realizations also include our duty advantages, right, duty drawback which we get?
This is our net realization at our ex-factory level.
Okay. And typically, what percent of -- let's say, our realization is 100, what percent do we get as a duty target or incentives?
So just to clarify the realization, what we said, per garment it does not include all the incentives and other stuff.
No, no, I'm saying when I'm seeing EBITDA margin, it would be including incentives, right?
Correct.
So typically, what percent of our sales are our incentives.
What percent. So we have duty drawback, which amounts to about 1.5% or 1.3% somewhere in that ballpark. And RoSCTL, which is the refund of state and central levies, which work between 3%, 3.5% level. Again, depending on the garment, product type, et cetera. .
And this is available for whatever our sales from India. For overseas entities, it is not applicable.
Keep in mind that the brands also know these are available. So all this gets factored into the pricing.
The next question is from the line of Bijal Shah from RTL Investments.
Thanks a lot for explaining Baroda Rayon. But I'm still not able to understand strategic rational as well as financial rational for this. So if you can elaborate on a couple of points. Number one, so you are saying that eventually whenever everything is at a best performance level, you will be taking maybe 25% or maybe 30% of total output of Baroda Rayon. So just to understand what is the reason for 30% of your requirement. You want to buy something which is like 3 to 4 acre size and which will put you in a position where you have to sell another 75% of the output to outside world. So -- and that is very different from your existing business, and investors are investing in you because of China plus 1 story, not that 70% of fabric you go and sell in the market. So that is one thing which I'm unable to understand.
And within that last call, you talked about the guardrails for acquisition that we will not be looking at companies which are not making profit. We will be looking at companies which are operationally amazingly run. So how do you reconcile that with your potential acquisition which you made it clear that in the rarest of the rare occasion this acquisition will not go through. So how do you reconcile that with your previous commentary?
The second question is that even if I look at the numbers at INR 1,800 crores and you get 12% margin on that, so maybe around -- somewhere around INR 210 crores of EBITDA. And that would translate into roughly 21% pretax ROCE. So in terms of return profile also, this is pretax and there will be tax on that. So -- and of course, interest depreciation. So in terms of return profile, also, it looks not really that great. So how do you think that financially it would make lot of sense for Gokaldas to invest in it?
Okay. So there are several question. Let me try to answer all of them. And if I miss something, please remind me and I will address that. So the first part is you indicated that we are -- 75% of it will have to be sold outside. Now what I said was that's the worst case. I had indicated to you that we ourselves buy 55 million and Atraco will add another 15 million to 20 million. So that itself will make it about 75 million meters out of, say, 1 crore meters that the company produces. Over a period of this, 25% I said is the worst case, not the best case. So the worst case we cater to 25% of the demand, 15% to 25% initially starting 15%, ramping it up to 25%.
And our endeavor will be to buy as much in-house, why will I buy outside. And if I start buying in-house, my margins will go up, right, even though the revenues may get knocked up in consolidation, the margins will go up. But the key point here is that our garment business will continue to grow. So this is our current situation. Average unit capacity is what it is. And if the garment unit continues to grow at 15%, 20% year-on-year, the fabric demand will also go up in proportion. So on an incremental go-forward basis, we will continue to take on more and more from that unit. This is number one.
Number two, we can orient that you need to produce more and more garments for our requirement. That's a possibility which will also help us to respond faster to customers. So one of the things that's going on in the market is how do you reduce the lead time of delivery. And if I have to do that, then I need to have fabrics coming in at a faster pace. I need to be able to work with customers on orders, which either to -- let's assume that somebody is making something out of Bangladesh and the fabric lead time is very, very long. I can combat it with saying that, look, I can turn things around in 3 weeks shorter, but you had to work at the price I dictate. These are new possibilities, which will open up for us.
And keep in mind that as we approach larger and larger size, and as we approach $1 billion kind of revenue, we will need to be a little more vertically integrated to take command and control over our destiny, our own raw material sources so that we are not denied raw materials or we struggle with raw material product development. Fabric is an important component of a garment. So if there is a garment development that we do, fabric development is an integral portion of it. And that's the reason why we are not saying we want to go into spinning and weaving and all of that because on that end we believe it's all commodity.
But we want to be in fabric processing because that also is made to order, not made to stock, and we will be working with the customer being a garment -- being a major garment producer we are very close to our customers. We know exactly what they are seeking and what is it that they are looking for, which will allow us to steer the fabric company to be responsive to the customer, as opposed to a standalone fabric company.
So we see a lot of strategic advantages, a lot of advantages that a garment company is running a fabric unit as opposed to a fabric company standing alone on its own. So our DNA will be garment first, so that's the strategic rationale clarified for you.
As far as your next question, what was that again? I'm sorry. You had said what is the price, why we paid this kind of a price or something to that effect.
You had outlined guardrails that you will not go and acquire a company which is already in a...
I thought I'd come to that last. But since you brought it up, the..
The second question is that if I look at ROCE on INR 1,000 crores on an EBITDA, if I work out EBITDA, it will be around INR 210 crores on the numbers you suggested and that is the best case and your capital investment would be INR 1,000 crores. So it is like translating into kind of 21% on a pretax basis, pre-depreciation pre-interest. So that is much lower than the return profile, which you have for your company, it will bring down return overall. And your total capital employed is right now, INR 1,600 crores, INR 1,000 crores will be going into this. So it will be a very substantial portion, so how do you think about the returns from this investment?
Let me explain that, right? So some of it has to be also taken in the right spirit. So if we look at the amount that we will pay, if we go down the acquisition path, the amount of the payout that we said, which is shared under INR 600 crores, is to be paid 2 years from now, not now. There's a time value of money for that. And if I apply some reasonable interest rates and look at that INR 600 crores in today's value, it will be probably INR 500 crores or even less. So that's something for you to keep in mind that there is -- the actual investment has to be considered appropriately.
Also, this company has accumulated losses to the tune of INR 400 crores. So that also brings -- in the event we merge finally and go ahead with the transaction, we may stand to gain from accumulated losses in that entity, which will help Gokaldas. So there are other mitigating factors as well, which I'm sure you can do the math and understand that the final effective capital employed will be very different given some of the extra benefits that come with it. But it's not just about ROCE.
See, what happens is, I can be a very high ROC and small and not grow. If I have to balance growth with ROCE, then I need to compromise on ROC at the initial phase and then catch up on ROCE. I cannot just grow fast by holding on to my ROC. So if I want to grow at 15%, 20%. And remember, I mean, look at the revenue this year, right, through the acquisitions, we have grown even faster. So if I want to grow and have a dominant presence in the industry, I may have to compromise on ROCE, but it is definitely not for the long term. We are extremely conscious on margins and we are extremely conscious of ROC. That's why all the internal discussions are, how do we get it back? How do we get our margins back. How do we leverage our position so that we are able to recover some of these.
And it will happen in the next several quarters. A lot of things are happening well for India as well, given the geopolitical situation. And the fact that we are a little more vertically integrated means we are attracting customers which were either not really working with us. Our entry into low-cost geography is also being supported by some of these fabric investments. All of this will support the growth, and we have to now improve profitability by -- which will help us in ROCE improvement.
Okay. Got it. And the last, I mean...
I will -- so let me come to that part, which is, we are very clear that we will only acquire companies which are profitable. We don't want to acquire companies which are loss-making that's the reason why we invested in BPPL and not go into an acquisition upfront. We could have done that as well. But we did not want to do that because that's against our philosophy. So if we feel that this company can turn around financially in a year, is then when we do what we do. Otherwise, we would -- I would be not so keen.
And again, based on the diligence that we have done, we feel reasonably confident that we can turn this around, especially given that the business, we are a big consumer ourselves and we know the quality of the asset that exists there. So given all of this, I believe that we can turn this around in a year and that's the endeavor. And that's the reason why this acquisition if it goes through, will happen in 2026 and not 2024, because by then, it should be well way profitable from the current situation where it's bleeding or loss-making.
Got it. And just if it is possible, I'm not sure, but if it is possible if you can share the revenue or some details on their performance in upcoming quarters, it will be really helpful.
Yes, we will see how much we can share and keep you posted. But that's a separate entity where we just have mere investment. So I'm not sure of how much we can talk about that. But let me see.
The next question is from the line of [ Ivan Matreja ] from PH Finance Limited.
I have just one quick question. So recently, last week, there was a report that came in the Times of India about the textile industry and foreign companies investing in Tirupur and using the suppliers from Tirupur. The top companies include Remark, GAAP and many more. And also, there are quite a lot of government incentives towards Tirupur in terms of developing infrastructure and giving companies loans at a lower interest rate and also simultaneously countries like the U.S. and the majority of the European countries are deinvesting from China and plan on investing in India, specifically with respect to the textile industry. So I would like to know the benefit that a company like Gokaldas would get through this incredible opportunity of investing in Tirupur and taking advantage of this.
So there's nothing specific for Tirupur. It's all for India. And there are certain low-cost regions in India, especially if you look at states like Madhya Pradesh, Jharkhand, Odisha et cetera, which are giving special incentives to set up more capacities in their area to create jobs. If you look at the labor force in India, most of them, if you look at Tirupur, if you look at Bangalore, if you look at NCR, which are major garment manufacturing clusters in India, the labor force is all coming from outside. We even in Bangalore, we struggle for labor force and a lot of incremental labor force is coming from the eastern part of India and northern part of India. So that is where the industry will gravitate towards. Even Tirupur has got a large labor force coming from east and north of India rather than from the local region.
So as far as incentives are concerned, the government incentives are there for MSMEs, there are extra incentives. So regardless of where you are, you get your investment, whatever else you said about units, companies from -- who are sourcing from China, looking to India, we've sourced a large order, which were either to being destined in that region, we keep getting that, and we keep doing that all the time, that's a secular trend which will come towards India, no doubt about it.
But I'm not sure if there is anything very specific about Tirupur. We ourselves are not in Tirupur, and we find that going into Northern India or those regions make more sense. The only unit that we have, which is our knit fabric unit, which is in a place called Perundurai, in Erode district, which is near Tirupur, but that's a fabric processing unit that we have, which is our own greenfield fabric processing for knit fabric and that's closer to that region. But we are not really dependent on Tirupur or we don't intend going further there.
The next question is from the line of Vikas Jain from Equirus.
My first question is with respect to the Tamil Nadu facility, sir what are the plans with respect to -- are you planning to use the fabric internally only or the plan remains the same where we sell it out initially to other units and then add garmenting units aside and then probably book it, want your comment as to what is the view for the output that comes from this Tamil Nadu facility.
Got it. We probably will need about 50% of that output at least in the near term, we will consume in-house because we have both in Gokaldas and in Matrix. Matrix is 100% knit, and Gokaldas also does some amount of knit. We have went up...
Sorry to interrupt sir, we have lost the management line. Please wait for a moment while we reconnect them back.
Ladies and gentlemen, thank you for patiently holding. The management line has been connected back with us.
Vikas and everybody, sincere apologies. I don't know what is happening today. This is the first time that we've had some call drops like this, apologies for that. Coming back to answering the question, the capacity there is approximately 400 tonnes a month. And I think more than half of it we can consume internally. We are working towards that. We are getting all the buyer approvals for that factory's output to be confirmed. All of that is work in progress. And we are very confident because all the initial trials have gone out very, very well. We are currently doing trial production and we'll be starting job work and all of that soon.
All the indications are it's going well and by let's assume that end of this year, we should have a substantial part of that output being consumed internally. And then as we grow, we will start consuming even more. But the rest of it anyway, we will sell in the market because we can't -- capacity comes in step curves and as we continue to grow, setting up more and more knit business. In fact, there's a lot of requirements or requests from customers to expand our knit business. And we are not as largely exposed in that area. But with this fabric unit, we may be able to accelerate that as well. So it's step in the right direction Assumption or the intention will be to try to consume as much in-house.
All right. All right. Sir, secondly, with respect to our MP facility, can you give some comments with respect to how is the ramp up? You did mention the utilization rate but the ramp-up expected -- when do we expect the full ramp-up of Phase 1 and the commencement of -- or probably investments in Phase 2 of that facility?
Good question. So MP did take some time. We, in fact, started MP last June. So it's been a little over a year. We started production with domestic customers just to set the factory, the lines, the quality, the standards and compliances, et cetera. We have now had 2 international customers already placed orders on MP, such that the full capacity will be taken up by these 2 international customers, both of them will ramp to full capacity by Q3, which is another 2 months -- 1.5 months from now. So the orders are there. We are working on ramping up -- ramping them up to full capacity level. So the current unit is fully booked, which is Unit 1. And we have already done the work for the Unit 2.
So all the planning is ready. Post monsoon, we will start construction. So vendors are being finalized and all of that, we will be starting construction of Unit 2, which is in the same campus in an adjacent land. So that will start. We are confident that with these 2 customers and some more in the pipeline, we should be able to quickly fill up Unit 2 as well. The time taken to ramp up Unit 2 will be a lot less because the ecosystem is already set. So we have entire compliances, which we have got. When I say compliance is not just social compliance or environmental compliance, even technical, quality compliances, quality approvals, all of those have been secured in place. Now it's only a question of training the manpower and ramping. And with this first experience of the first unit, the second unit should go through on a pretty straight line quick basis.
So construction will commence post monsoon. We are hoping that the construction will take anywhere up to 9 months. Post that, we will start ramping that unit as well. So overall, MP unit took a little longer. But I think when I look at the cost structure, when I look at the availability of manpower and when I look at how it has worked so far, I'm very confident that we have found the right location where manpower availability is still good and costs are moderate or low relative to where we are. So that's the commentary for MP.
Right, right, sir. And then just if you could comment on the capacity wise, Unit 1 and Unit 2. What is the installed capacity if you can reiterate.
Each at a peak revenue will be INR 175 crores annually.
Right. And sir, the last question...
Sorry to interrupt. Mr. Vikas, could you please fall back on the question queue for further questions. The next question is from the line of Palash Kawale from Nuvama Wealth.
Sir, my question is related to -- you mentioned that there was a price-led growth in U.S. So do you foresee any gross margin benefits on account of that for the full year?
I'm sorry, what growth in the U.S.
Price-led growth.
So price-led growth is for retail. So retail consumers, when I said that 3% of U.S. in CY '24 versus the same period CY '23, U.S. retail sales -- apparel sales has grown by 3%. I am saying the volumes stagnated, all the 3% was price led. That is retail as far as that is concerned.
As far as the orders that we are getting there's a huge amount of price pressure because unlike the rest of the industry, if you look at U.S. imports, it is still negative 6% for CY. And so -- this is true for U.K. and Europe as well. So the larger industry is not out of the woods yet. And there is a demand-supply mismatch. We are seeing strong demand ourselves, and that's helping us to fill up our incremental capacity as well. But the pricing power has not really come back. I anticipate that coming sometime starting next year.
So for now, the pricing remains sharp as usual because there are other suppliers in the rest of the world who are willing to operate at shop prices as well because of demand supply mismatch.
And sir, related to Bangladesh issue. So which country do you think gets to benefit more? Is it India? Or the country like Vietnam or other would benefit more in the, yes, diversification of supply chain happens?
So first is we should not bank too much on things moving out of Bangladesh. Bangladesh has enormous resilience and they will find a way out because this is too critical an industry for that country for them to let go. So we should look at it more as a secular long-term trend where businesses will try to diversify away from a risky hot spot area. Now having said this, where will they go to a high likelihood is India. I don't know whether Pakistan still falls in that bracket where capacities can go there because that's another country which is low cost and goes duty free into Europe and all of that. But I think the larger opportunity for moving -- export sourcing out of should come to India rather than a Vietnam or China. Those regions have really maxed out their potential. There is no more scope to grow there.
Okay, sir. Sir, I missed on the volume and realization terms. So could you just mention the numbers again?
For -- I mean we have done 17 million pieces at an average of INR 510 at the consolidated level. At Gokaldas, it is 6.6 million, INR 781. Atraco is 8.78 million at the rate of INR 285. Matrix is at 1.68 million pieces, INR 618.
This is for Q1.
Just for Q1.
The next question is from the line of Cheragh Sidhwa from Bajaj Finserv.
I just want to -- can you say about...
Sorry to interrupt, sir. Your voice is very low. Could you use the handset?
Is it better now?
Yes, sir, better.
Just one question, in second half when we say that our order book is pretty much at full capacity utilization, do we mean across all the 3 divisions that is GOKEX stand-alone, Atraco and Matrix?
Yes.
Okay. Okay. And what would be -- at the current gross block, what would be the peak quarterly run rate. So this quarter, we did grow to around INR 940-odd crores. So it is fair to assume close to around quarterly rate in second half should be close to around say INR 1,000 or INR 1,100 crores.
Yes, I think we should be topping up INR 1,000 crores.
Topping up INR 1,000 crores.
Already we are at full capacity.
Okay. So for the full year, one could expect close to around INR 3,900 crores to INR 4,000 crores kind of top line given the current order book status.
You can do the math, yes.
Okay. Okay. And for the next financial year then, given that we are already at optimum levels, apart from the MP Phase II, which would yield another INR 175-odd crores kind of incremental revenue what would be the other key triggers for the revenue growth for, say, FY '26 on the base of FY '25.
We will continuously look to debottleneck our current facilities, number one. Second, we will look at increasing productivity and productivity itself should give us a few percentage points in capacity on the existing base. Third, we are looking at incremental expansion in Ranchi in Jharkhand because that's, again, a low-cost region. So that's work in progress, and we will take a decision sometime soon, but we are now more and more inclined to go into these areas.
Third, we are looking at some incremental expansion in Africa as well in Mombasa, where we have the ability to expand capacity, a fair amount of capacity there. So we will be triggering all of these sometime during the second half of this year, which will help us in the next year. Plus, as I mentioned earlier, that we will also be starting work on Bhopal Unit 2, which will probably start contributing from the later part of next financial year.
The next question is from the line of Miten Shweta. Sorry to interrupt, sir, the current participant has been disconnected. We will move on to the next question. It's from the line of Bijal Shah from RTL Investments.
So my question is, you were saying that order book is full, but you are very categorical in guiding in second half things will improve. So is it that in 2 quarters, second quarter also, there are some issues which will persist.
No. So in the second half, I don't see from a capacity standpoint. Usually, it's a weak quarter for the industry per se in the second half because we usually ramp down on fall winter and ramp-up on spring so that this shift in seasons happen in second half. So usually second half -- in the second -- sorry, second quarter, so usually, there is a bit of a gap.
And while Gokaldas itself doesn't have an issue, this second quarter gap is a little more pronounced in Atraco and Matrix. But I don't see that as much of a problem because the transition is we have kind of worked a lot to offset that, the way we did it in Gokaldas a few years ago. And I don't see this as a problem for next year onwards. But that's why I think I'm saying from Q3 onwards, we will be powering away with full capacity utilization. In Q2, for a very brief short period, there may be that seasonal change.
The other part is, from a margin perspective, also as we enter spring, summer, we should be able to pick up some stream because a lot of these businesses that we have, even in Q2, which is for fall winter because of exceptionally warm winters over the last several years, we've had an excess inventory. We've had a situation where we had to go and get this business at somewhat more sharper prices than otherwise. So all of that will also wear off in the second quarter.
But by and large, revenue trajectory will be maintained. Capacity utilization are near full in Gokaldas and near full in others as we speak, but all of them are ramping up to full utilization in the month ahead.
Ladies and gentlemen, that was the last question for today's conference call. I would now like to hand the conference over to the management for their closing comments.
Thank you. So, we are very conscious from a financial standpoint about running the business. We are also conscious that the growth imperative is very important, and we need to handle both growth as well as margins. And sometimes, one leads to compromising the other. But we have now, in the last 1, 1.5 years, despite extreme headwind from business challenges, global volatility and all of that, we have focused on growth.
We also took the opportunity to acquire some entities which we are in the process of stabilizing. We are confident that some of those strategic decisions will pay off in the quarters and the year ahead. We feel confident that all the decisions that we took are decisions in the right direction. And a lot of work is going on to make sure that the company's strength will fully come out in the years ahead. We are very well poised in that sense.
We are also having a strong relationship with most of the customers and that's evident in the way we are seeing our order and evident in the way we are working with customers whether it is on co-creation, whether it is in fabric development, in garment development, et cetera. So I feel that directionally we are on the right track.
I'm hoping that the demand supply at an industry level will become more or less even as we go forward. But there are enough volatilities, particularly in the Western world is still not completely out of their economic situation.
And if there are some soft economic challenges or softness in demand, there could be some volatility. But we have worked hard to make sure that we are reasonably insulated from it. We are also very well safeguarded against any of those challenges, which is why some of this vertical integration moves as well, which strengthens our offering considerably.
So strategic calls, I believe, are all in the right direction. Execution are falling in place and that will help us improve our margins, sharpen our margins as we go forward. hopefully, demand supplies at an industry level will also help us in that. Thank you. We remain quite confident about our future, and we are working hard to make sure that we will deliver stronger results going forward.
On behalf of Gokaldas Exports Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.