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Gokaldas Exports Ltd
Earnings Call Analysis
Q2-2025 Analysis
Gokaldas Exports Ltd
Gokaldas Exports Limited reported an impressive 85% growth in consolidated revenue for the second quarter of FY '25, largely driven by contributions from acquired entities. However, if we focus on organic growth excluding acquisitions, revenue increased by a solid 28%, indicating underlying strength in the business. Notably, the company’s export revenue surged by 33%, outperforming India's overall export growth of 13.5%. This robust performance suggests a positive tailwind for the upcoming quarters, as the firm capitalizes on increased sourcing from brands seeking alternatives to traditional manufacturing hubs.
The U.S. retail market is exhibiting resilience, with retail sales up 3% year-to-date over the previous year. Brands have successfully moved to full-price selling, reducing the necessity for discounts. As brands begin to replenish their inventory to record low levels following a period of excessive supply, Gokaldas Exports stands poised to benefit from this uptrend. The expectation is that this momentum will persist into the next quarters, affirmatively impacting revenue streams.
Despite strong revenue growth, consolidated EBITDA grew by 48%, with a more modest increase of 26% when excluding acquired entities. The EBITDA margin, overall, was impacted due to several operational challenges, particularly from weaker performance in acquired entities during the seasonally slow second quarter. Specific issues included increased costs from a strengthened Kenyan Shilling and necessary air freight due to prior production losses. The management anticipates that these one-off impacts are largely behind them, and they are positioning for improvement in margins moving forward.
Looking ahead, Gokaldas Exports aims for a minimum revenue growth target of 15% on a consolidated basis, leveraging favorable market conditions as global sourcing shifts increasingly towards India. The management expresses confidence in driving the consolidated EBITDA margin above 10% in the near term, with a further target of reaching at least 12% over time. The company is also focused on improving standalone EBITDA margins, which are expected to trend towards 13% next year as pricing power begins to return.
Current capacity utilization is effectively full, particularly at the new Madhya Pradesh unit, enhancing revenue potential significantly. The company plans to continue investing in capacity expansions, with Phase 2 of the Madhya Pradesh expansion expected to commence shortly. Additionally, Gokaldas is exploring leasing opportunities to quickly increase production capabilities while ensuring efficient utilization of existing capacities.
Management highlighted the importance of monitoring macroeconomic changes, particularly concerning U.S. inflation and potential tariff increases on imports from China. While these factors could introduce some uncertainties, the broader market conditions appear favorable for the Indian manufacturing sector, positioning Gokaldas Exports to capitalize on opportunities as competitors in China, Vietnam, and Bangladesh face various challenges.
Management maintains a positive outlook for both the Indian and African markets in the medium term, firmly believing that the strategic initiatives taken now will yield fruitful results in the coming years. The integration of acquired entities is progressing favorably, and operational efficiencies are expected to enhance profitability, contributing to Gokaldas Exports’ strengthening position in the global apparel supply chain.
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Ladies and gentlemen, good day, and welcome to Gokaldas Exports Limited 2Q FY '25 Investor Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Binay Sarda from EY Investor Relations. Thank you, and over to you, sir.
Thank you, Zico. 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 results, 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 also 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 afternoon, everyone. Happy to have you at our earnings call for the second quarter of FY '25.
Retail sales has been resilient and maintained gains year-to-date. In fact, if I look at the current year-to-date, retail sales in U.S. has been plus 3% over the same period last year. Brands have been able to sell their products at full price, reducing the need for discounts, which has contributed to growth primarily in terms of price and a little bit on account of volumes.
U.S. apparel imports are now trending up over the previous year. After a major period of excess inventory, which the brands were consciously trying to liquidate, inventory holdings have reached a low level -- record low levels, and they have started purchasing again.
During this quarter, our revenue performance has been robust, thanks to a strong tailwind that we have started seeing from the brands. This will start accumulating more and more as we move in the quarters ahead.
Our consolidated revenue for the quarter grew by 85%, which is a reflection of some of the acquired entities contributing to revenue. If you look at growth without the acquired entities, our revenue growth was 28% year-on-year.
And if I look at specifically export revenue of Gokaldas Exports without the acquired entities, our growth was 33% against India's export growth of 13.5%. This is the tailwind that I was talking about. And I can see this only intensifying in the quarters ahead.
Our consolidated EBITDA grew by 48%, while EBITDA without acquired entities grew by 26%. EBITDA margin was impacted, and there were several reasons for it. The underperformance of acquired entities happened in the second quarter, primarily because these were seasonally weak quarters for -- these are seasonally weak quarters for the industry as a whole. And both Atraco & Matrix had a lower revenue than their usual quarterly run rate. So this also -- this impacted the margin.
In addition, in Atraco, we also had Kenyan Shilling which is at an all-time high. It moved from 160 to $1 to 127 to 129 to $1, moving in that range. So when Kenyan Shilling went up sharply, our cost in dollar terms went up, so that also impacted our margins there.
In India as well, we had some onetime air freighting because of spillover from Q1 when we had some production loss, so our production outage on account of heavy absenteeism in Q1 due to elections. So all of that is behind us, but these were some of the reasons why our costs trended up more than planned, and that's why our margins were slightly lower.
However, Gokaldas Exports stand-alone has performed very strongly, and we believe that all the three entities, Gokaldas Exports and the acquired entities will start performing even better in the quarters ahead.
Integration of the newly acquired entities has progressed well, and we are poised to gain from operating leverage in the future. Most of the headwinds in the acquired entities are behind us now.
Our strategic investment in BTL, the fabric processing unit that we invested in, strengthens our vertical integration into critical raw materials, and this will enable us to deliver high-quality, cost-effective solutions faster to our customers.
In the first half of the year, we generated about INR 171.5 crores in cash from operations. Our new manufacturing unit in Madhya Pradesh has fully ramped up and is working for two major international customers. And we are planning to expand in Madhya Pradesh further. So we are planning to commence work on the second unit, which will happen in this quarter. And hopefully, the work will get completed in 9 months. Monsoons are over and the physical construction work will start soon.
We are finding a strong tailwind for business in India and Africa now. And hence, we are looking at expanding capacity across our system. So we are looking at additional capacities in our existing units and looking at leasing some capacities as well in the South of India to allow for quick expansion. We are -- apart from Bhopal and South India, we may also look at incremental capacity in Ranchi in Jharkhand.
The company's order book remains strong, securing robust near-term prospects. The long-term outlook is also very favorable, supported by a continued shift in global sourcing away from China, Vietnam, even Bangladesh, where there is turmoil at the moment. And there is also a trend towards supplier consolidation among efficient, well-capitalized players and the ongoing supply side instabilities across the South Asian region is also helping us.
We are expecting the momentum to pick up in the second half of the year, particularly with Q3 production for spring 2025 as brands are showing incremental -- or brands are pushing incremental business to suppliers like us and are promising a good set of quarters ahead.
This is also a period of increased sourcing from India. So we anticipate sequential growth to trend up from now. We believe that the strategic moves that we are taking will allow us to continue to grow the business going forward.
We continue to closely monitor any potential macroeconomic situation and will take measures focusing on customer relations and service excellence. With the macroeconomic situation becoming more favorable for outsourcing from India, we only hope that the tailwinds will intensify. We are confident of medium to long -- strong medium- to long-term prospects for the company.
I'll pause here. 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 Kaustubh Pawaskar from Sharekhan by BNP Paribas.
Congrats on a good like-for-like performance. Sir, my first question is on EBITDA margin. So at consol level, the EBITDA margins, including the acquisition, is around 7%. If we look into like-for-like EBITDA margins, it is around 11%.
So as you said in your initial commentary that now things are looking good, acquisitions have been integrated. The air freight cost is also reduced. Second half will be good for the acquired entities. You are seeing good momentum in the garment exports as well. So considering that, should we expect this gap between the consolidated and the like-for-like EBITDA margins to reduce?
Also, would like to understand whether there is a further upside in the like-for-like EBITDA margins, which are currently 11%, to improve to around 12%, what was historical high for us?
So I believe that the like-for-like will definitely go up. I think your commentary on like-for-like can it go to 12%, I feel confident about it. When you say like-for-like, it's the old Gokaldas organizations without the acquired entities. So yes, that will happen because that is the trajectory in which we are trending towards.
Our production efficiencies are going up. We are seeing a robust order traction as well, not only for Q3, Q4, but also for the quarters ahead. And I believe that some of those onetime impacts and all -- are all behind us. So we should be trending towards that number definitely.
As far as the consolidated EBITDA is concerned, there also, I feel that at a consol level, we should be seeing a 1.5% improvement in EBITDA margin.
Sir, my second question is on the capacity utilization for our stand-alone entity in quarter 2. And what was the volume growth? Because the revenue growth on like-for-like basis was 28%. So what was the volume growth in this quarter?
Sathya, would you like to answer the volume growth?
The volume growth in Q2, the total volume what we have done is 14.95 million at a consolidated level. The realization is at INR 580.
So sir, consolidated level, you mean including the acquired entity, or this is only for...
Yes. Including the acquired entities, yes.
Can you help me with the stand-alone entity volume figures as well?
Stand-alone, we've done 8.1 million. And acquired entities, we have done around 6.8 million, 6.9 million.
Okay. And sir, what would be the utilization level? And what do you expect in the second half?
So if I can answer directionally, and Sathya can probably give the number of pieces, though we don't look at the business from that perspective given that we make a very wide variety of garments. If I look at the capacity utilization in the second half, we are running full capacity utilization. In fact, our Bhopal unit has reached its full utilization of 1,100 machines as we speak. And order -- I mean, it's also running at full capacity. We are actually capacity starved and we have business for another 1.5 factories actually.
So we are looking at expanding our capacities in the system. So at the moment, we are running at full capacity, which is higher than, of course, what the levels we were in, in Q2, given that the Bhopal unit fully ramped up only in Q3. So I would imagine that we would be at incrementally another 5%, 7% higher than the quarter [indiscernible].
Sir, my follow-up question would be, you mentioned about capacity expansion in your initial commentary. So what would be the CapEx? Is it going to be anything above what you have mentioned in the presentation or most of it is covered in the presentation whatever the number?
Most of it is covered in the presentation. This was -- we had planned for it. It is just that we are now -- we will just be implementing it now. I think out of INR 100 crores that we planned for this year, I think we have already incurred INR 55-odd crores. I think the rest of INR 45 crores, which will go in will help in taking our capacities up.
Most of these incremental capacities we are working on will yield fruit only in the next financial year. CapEx will be spread between this year and next financial year for them.
And one more point is, similarly, capacity utilization in Atraco and Matrix will also go up in Q3 as we have a fairly good order book for both of those entities. In fact, in Atraco, we are looking at expanding the capacity by another 500 machines. We have already gone ahead and that work is going on in full swing.
The next question is from the line of Bhavya Gandhi with Dalal & Broacha Stock Broking.
Sir, I wanted to understand, I mean, freight cost is a part of our expenditure because most of the other peers, they tell it on FOB basis. So why is this different? If you can help me understand.
So for us, we also sell it on FOB basis. What -- our CIF revenue is very, very small. It's almost negligible, under 1%. So it's all FOB. However, freight cost comes into play when we look at inbound logistics. Since we do a lot of synthetic outerwear, et cetera, in India, and we are one of the market leaders in that, especially in Q1 and Q2 when we do a lot of fall/winter programs, we do have a significant component of our raw materials coming from the Far East. So we do have freight component loaded in inbound logistics, raw materials coming in.
Secondly, for Atraco also, there is a big component of freight because all the raw materials for Africa comes from Asia, so either India or China or Vietnam and some of these countries.
Okay. So let me just ask it in another way. What is the total raw material which we import across the mall?
So if I look at the stand-alone entity, 25% of the raw material on an annual basis gets imported. For Atraco, 100% gets imported. So Atraco's revenue will say, between INR 200 crores to INR 250 crores. Raw material cost will be about 60% there. Almost 100% of that gets imported. For GE's INR 650 crore revenue, the raw material component will be about INR 350 crores, of which 25% gets imported if I take on a quarterly basis. But in second and first quarter, we usually have a higher proportion of imported. And in the third and fourth quarter, a much lower proportion of imported components in its raw material.
Right. Another question is respect to the steady state. What would be the ROCE and ROE? Because there are a couple of acquisitions, there are a few other cost elements, and also it's very difficult to find out the implied steady-state ROCE and ROE. So what would be the number that we are targeting?
Sathya, you want to answer this?
Yes. The current level is -- we are trending around 15% to 16%. In a steady state, our endeavor is to reach towards -- to reach over 20%. That's our endeavor over a period of time over the next 2 to 3 years. But because the investments, whatever we made, all this investments, it will take time. Once it comes in a steady state, all these results, our CapEx approval is always with the assumption of average ROCE at the rate of 20%.
So I wouldn't like to work at below 20% at any cost. So at this moment, if you look at the stand-alone entity, its ROCE is high. It's almost approaching 25%. However, on a consol basis, the ROCE is operating at around 15% because the acquired entities are yet to reach the level of performance that we want. And that will happen by end of this year.
So we are working towards them and working towards improving the performance of these entities, and we will start seeing some of those benefits. Keep in mind that these acquired entities have come into fold only at the start of this financial year. So there is a lot of work that is going on in integrating -- in also changing the customer profile there and all of that. And that will be a work in progress for a year. We are also dealing with a fairly large volume and business growth, but we are very confident that the performance of those entities will also come up very strongly by the end of the year.
So we are expecting by end of the year, we will be touching on a consol level 20% ROCE. That is what you're trying to say?
No, no, no. No, no, no. So that means all the inputs to correct that will happen. So we will start seeing an improvement from the next financial year onwards. I will defer to Sathya to say what will be the ROCE hopefully next year. But if you ask me the year after, we should be hitting closer to 20% or even exceeding 20% rather.
'27 by then all the investments once you start yielding the results only, we will see that.
Got it. And just one more question, if I can squeeze in. Any progress on the U.K.-India FTA agreement? And do we see any significant benefit out there?
So there has not been much progress. There is an intent on both sides, but there has not been much progress on the U.K.-India FTA. So we don't know what will happen or what will be the eventual outcome.
Having said that, if it happens, the outcome is going to be very positive. And if is positive, definitely more positive for GE because we already are working with some U.K.-based clients in anticipation and they will only increase their sourcing.
But regardless of that, I'm seeing that with problems in Bangladesh, I'm finding even U.K.-based customers who currently enjoy a 12% delta in import duty between India and Bangladesh because Bangladesh goes duty-free, are looking at outsourcing more from India. So we are seeing traction coming from there, which will only accelerate if the FTA happens.
Okay. And is it possible to give us the share between the brands versus retailers? What would be the contribution on a full year basis?
I think we only directly work with brands. I don't know what you mean by retailers. Retailers are retail brands we work with. We don't work with intermediaries or importers at all. We only work with direct brands.
I meant do we work with any large sized retailers?
All the brands are retailers. So when we work with Gap, we work with Carhartt, all these customers are retailers. JCPenney, all these are retailers for us. So I don't know -- these are retail brands. So when I say brands or when I say retailers, we are using them interchangeably for our customers.
The next question is from the line of Sundar from Avendus Spark.
First, I just want to have a clarity in terms of what you have mentioned in terms of capacity and utilization. So not going through the volume numbers given the price/mix impact. If I were to just look at it in terms of the potential that we've got today, that is we did broadly about INR 650 crores this particular quarter, and you said there's about 6%, 7% upside to that particular number. One, have I got this number right? And two, is that, does this include the entire Bhopal expansion? Or does it include only phase 1?
No, no. There is only phase 1 of Bhopal expansion as of now. Phase 2 of Bhopal expansion, the work will commence from Q3 and hopefully, will get done by Q1 of next year. So effectively, it will come into play only in the second half of next year, then we should start training people, et cetera.
So at the moment, Bhopal expansion will come -- will start contributing from -- the expansion will start contributing in Q3. And likewise, whatever incremental expansion that we have done in the South, in our debottlenecking of existing factory, that will also start contributing to our revenue growth in Q3. So this is one part.
Secondly, Matrix and Atraco, which were -- which have a seasonally low quarters in Q2 will also start showing some incremental growth in Q3. So that is how we are seeing growth in the third quarter.
Now pure if I to just talk in terms of numbers, we believe we can do INR 700 crores per quarter on the stand-alone numbers as per the current capacity that we have?
Say that again?
The current capacity that we have, stand-alone?
Stand-alone, currently, we are at -- I think this quarter, we were at INR 650 crores or thereabouts. And I think in the quarter ahead, we should be closer to about INR 675 crores, INR 680 crores, in that region. And at a consol basis, we should probably cross 1K.
Now INR 680 crores here presumes a full utilization?
Say that again, please?
The INR 680 crores presumes full utilization. So at full utilization, we can do INR 680 crores per quarter. Is my understanding right?
No, I think it could be more because I'll tell you why I'm saying that because what happens is revenue is based on -- not on production, but revenue is based on dispatches. And in December, especially during the last week, dispatches slowed down. That is because of Christmas and all those holiday season and all of that. So it may not be fully characteristics of the revenue may not be fully reflecting the production capacity increase. So this is factoring in all of this.
I'm just trying to come in from the views that on one side, we see U.S. inventory levels going down. U.S. imports from India has also increased. There is a possibility with the new government coming in place in the U.S. that the tariff rates on China could go up. I think what is the production capability that we would have? Because on one side, demand seems to be a lot more of tailwinds are coming through from that front. So I just want to see what's the maximum revenue that we can do with the current capacity and with the extended capacity that comes in terms of Madhya Pradesh Unit 2, that is from 2H of even FY '26. So what is the maximum run rate that we can get to in terms of revenue? So discounting for volumes and price mix effects?
If you ask me, if you talk about max revenue, right, our current footprint, our current footprint should yield approximately INR 700 crores. And if you look at Unit 2 of Madhya Pradesh, that will, on an annual basis, yield another INR 175 crores of revenue.
And then we are looking at more capacities going forward. Those are all work in progress. If we're able to lease some factories, we will do that as well. And incrementally, in Atraco and Matrix, also we are looking. For example, we are looking at another 500 workstations increase in Atraco. So that should hopefully bring in an incremental 10% capacity increase. So that's about INR 70 crores, INR 80 crores -- INR 80 crores, INR 85 crores. Plus we are looking at an incremental capacity in Matrix also, which should yield INR 100 crores. But some of those capacities will -- Matrix capacity and Bhopal Unit 2 capacity all will start playing up somewhere in the second half of next year.
So should I presume that Matrix, the current capacity allows us to do about INR 600 crores per year?
About INR 500 crores, INR 550 crores per year.
Right. And Atraco?
Atraco will be about INR 900 crores.
INR 900 crores. And no, with the increased capacity, can it increase by about another INR 100 crores, sir, can that be?
You said current capacity, right? So that's why I said increased capacity will bring in another 10% or thereabouts.
Perfect. So now just the other angle in terms of just the margins out here is that this quarter has been weak for various other reasons. But what should we look at it on a sustainable basis on the stand-alone numbers?
The stand-alone GE, right?
Yes, sir.
Stand-alone GE, I'll tell you what has happened is we have not seen the pricing power come back yet. If you recall, last year, all the customers dropped their purchasing by a very significant amount, 20%, 25%. Even if you look at YTD, you will find that the imports for this year, CYTD compared to previous year, is actually lower, U.S. imports and European imports.
But it has started picking up from July onwards. So the quarter from July, we have seen that imports for July, August, September, this period has trended above the same period last year. So we have started seeing the curve turn from Q2 onwards the import increase, right?
So I am seeing that when that starts picking up pretty significantly, that is when some pricing power will return and which will really happen in the next financial year. So at the moment, when we are trying to ask for increased pricing for increased costs, that's not on the cards, especially for this financial because there is enough capacity going up again and competing with us.
But I'm presuming and I am reasonably confident that we will be able to price in better going forward in the year ahead. So that will also improve margins. I'm presuming that, that will help us in the stand-alone next year to close to 13%.
Right. And in terms of the other acquired entities sort of margins, I believe Atraco has been the big pull-down this quarter?
Yes.
Was there any one-off there, sir, any work strike or anything of that nature? Or this is all the onetime effect which in 2Q?
So Atraco, you remember there was a strike early on when we had acquired, and there were some continued air freights, which happened until August of this year. So from September onwards, that one-off has got. The other one-off is the Kenyan Shilling going up against U.S. dollar, which was not anticipated by us. We were -- that was the last currency we thought would go so strong vis-a-vis U.S. dollars, appreciating from 160 to 128 or 129. So it's almost a 20%, 25% appreciation of the currency, which had happened.
The effect of that should also, in my opinion, wear off. I'm not saying the currency will weaken again. If that happens, that's good. But we have started pricing it into our contracts going forward. So that effect will start happening from -- partly in Q4 and from Q1 onwards. So we are mitigating it by pricing and factoring in a stronger currency, but the impact will come in later.
So when would be the target quarter when we say we go back to that 10% margins on the acquired entities, sir?
Target quarter, I am very confident that, that target quarter will be Q1 of next year. We will make every attempt to see if we can do that in Q4.
Right. And then just a continuation to that is that I presume you've started booking orders on you -- the orders have been booked by Gokaldas from third quarter, on the acquired entities also?
Yes. Gokaldas has been booking orders now for all these entities from third quarter onwards. Of course, the existing customers of theirs are contributing, but we are playing a role in pricing and all of that. So all that will start from third quarter onwards. All the orders that we booked in Q2, which will be executed in Q3 were all under our ages.
Right. That should also be a margin driver?
Partially, as I said, the impact -- the ability to raise prices in an environment where there is still a supply exceeding demand is not very high, right? So now we will start seeing the situation because there is an incremental demand coming in from the U.S. as they have completely worked out their inventory and everybody is coming in and buying more. As I said, the trend reversed from Q2 onwards, if you look at the import stats, and that is what will help drive the pricing up. Until then, the demand-supply mismatch won't help in pricing.
However, India sourcing is growing. So even if they are not buying so much more, they're buying much more from India, relatively speaking, right? So they are reallocating from other regions to India. So that is helping us. Even that will help us negotiate better. But all of that will happen, in my opinion, from the next year onwards. So we are seeing a volume tailwind in H2, and I hope that it will be augmented by some bit of pricing power also from H1 next year.
And any update on BRFL, where are we currently?
So that -- whatever support that needs to be made, we are doing. And in fact, GE has started placing orders on BRFL for fabric sourcing as well. And we are trading -- we are pushing a significant amount of our purchasing to that unit. Simultaneously, that unit is also conducting a -- with the money that we have invested, they are also incurring CapEx to improve its machinery and improve its productivity and all of that.
We are also seeing BRFL's product quality improved. Rejections come down and all. So those are all positive signs, which gives us the confidence that they will be able to service our requirements well. So it's going in the right direction. It's been only a quarter since our investment, but all the operational metrics are trending up.
And infusement into that entity until now has been just INR 50 crores?
Until the end of Q2, it's been INR 60 crores. And I think in October, we have infused another INR 20 crores. So it's INR 80 crores.
Right, sir. And one more question, just the last one on the balance sheet itself. Why specifically you said the debts have not been repaid and we continue to hold cash?
The debt is in Atraco in Dubai. It was done from a tax efficiency point of view. So about 30 million debt is we are carrying more in Dubai. Otherwise, in Indian entities, that is less, zero.
Right, sir. So any part to repatriate this back and have it paid out given that cash is also there on books?
We are exploring, but the only challenge is that repatriation at a later point of time, that would be a challenge. We are working on. Our intention is to reduce at least about 10 million to really bring down at least by 10 million in Atraco. We'll see that how it works.
The next question is from the line of Bhavya Gandhi from Dalal & Broacha Stock Broking.
Sir, can you just help me understand what would be our top 5 customer revenue contribution? And is it possible to name them? After the merger of acquired entities. I believe that one new acquired entity does not have overlap our customers.
Yes. I think with Matrix, we don't have an overlap of customers. With Atraco, we have an overlap of customer, which is JCPenney. Our top 5 customers are Gap, Carhartt, Columbia and JCPenney, which will be the fifth one. I think it's Puma. So these are some of the -- okay, Abercrobindustrial & Fitch that likely more. So these are some of the customers.
The combined contribution of the top 5 customers to our total revenue will be approximately 65% to 70%. It will vary from quarter-to-quarter, but that is the range it oscillates.
And our top customer, how much revenue contribution would it be somewhere in the range of?
The top customer is close to 27%.
27%. And what would be as a percentage of their total procurement? Because I believe Gap doesn't allow more than single-digit procuring -- procurement from one customer, right? From one vendor.
Peanuts. We will be peanuts. The Gap itself will be buying close to 4 billion. Our revenue will be single-digit percentage -- very low single-digit percentage.
Okay. So without -- so basically, I'm trying to look for without adding new customer also, there is significant runway, right, to penetrate deeper in the existing customers?
100% Yes. But what happens is we will have to decide whether we -- which kind of programs we want to go to. So we tend to remain in highly profitable women's business, fashion business, et cetera. We tend to stay away from men's, kids that we use because those -- there the pricing will be sharper.
Secondly, we also stay away from core businesses, except in places like Africa or in Madhya Pradesh or some of these low-cost regions. That is because, again, the margins will be sharper in some of those programs. So if we start opening up our opportunity landscape, opportunity space in those programs, it's very, very large. Core programs will be large. If I look at just the bottoms, right, pants or shots or shirts, there's a huge opportunity there. We really don't do that, not because we can't do it. In fact, we can do it very well, very efficiently, et cetera, but it's just lower margin, and we have to effectively use the capacities that we have for the best of the products.
So between knit and woven, which would be a better margin provider to us?
So it depends. So the knits that we do in India are high-value knits, [indiscernible]. So -- and out of the erstwhile GE, we do sportswear knit. Both of them are very high-margin programs, relatively speaking, but also complex. Whereas in general, if you look at knits, which are the regular T-shirts and jerseys and the leggings, et cetera, the woven margins will always be higher. For us, we are in high-margin knits and high-margin wovens.
So possible to share roughly what would be the margin differential between the 2?
Again, depends on which knits. If you look at ours, we don't see much of a delta between knits and woven for the business that we are in. Again, if you look at the commodity knits, if you're vertically -- vertical player, you will have good margin because you will enjoy the benefit of verticality. But if you are a pure garment player in commodity knits, you will have to offset it with high productivity. So there are lots of variability there.
I think the net margin delta will be between knits and wovens, commodity knits and wovens will be about 1% or so, 1%, 1.5%. If you look at the business that we have, we are more or less at par.
Okay. And would you like to give any guidance for next 3, 4 years on the revenue and EBITDA front because all these acquired entities and everything is there. So if you can just give a broad guidance on consol level.
So you know our current quarterly run rate, and there is bound to be -- on a consol basis, our endeavor will be to grow at a minimum of 15%. And if we are able to grow even faster, there is nothing stopping us, because there is a lot of business tailwind. And I'm seeing this business tailwind, at least for India, right? It all depends on how -- what policies the new government in U.S. comes up with. But I feel that whatever they come up with is only going to be helpful, incrementally helpful.
If they go more against China, that's going to add to our business prospects. Things in Bangladesh will take time to settle. Anyway Bangladesh capacity is at the moment, fully being utilized, but incremental capacity could come to India. Most of the brands are looking at more India sourcing, and they are all capacity stock. So there is a good amount of tailwind. So our endeavor will be to add capacity at an even faster rate in country so that we can capitalize on it. So 15% is a mean growth rate, I believe.
15% revenue growth, not volume growth you are saying, right? Around 2%, 3% realization growth would be there?
Could be there. That is the endeavor. I mean that is one crystal ball I refuse to get down to going forward because there's a lot of factors which come into play there. If U.S. tariffs go up, then would there be a pressure on pricing? I don't know. There's a lot of ifs and buts going on there. So we don't know because any such moves will be inflationary. And I don't know if the customer will have the ability to bear all those costs, but that's going to be a universal impact. So that's something which I don't have a sense on -- but our endeavor will be to see definitely realization go up by 1% or 2%, definitely. Our endeavor will be that, and we'll push towards that. Volume growth will definitely happen.
Right. And on the EBITDA margin, if you would like to guide anything, a steady-state EBITDA margin considering the consolidation and all that.
As I said, the steady state, our immediate endeavor is to take the consol EBITDA to over 10% pretty quickly, very, very quickly. And that should happen this year itself, very soon, hopefully, in the quarter ahead itself. And after that, we are looking at a steady-state EBITDA of at least 12% for the consolidated entity.
Right. And beyond 12%, I believe we'll have to change the product mix only, right? Because even with operating leverage and because we'll be adding capacities also. So there won't be significant operating leverage, right? Or is the understanding wrong?
Whenever new capacities comes, there will be a deleterious impact on the EBITDA margin for the component of new capacity, correct? It takes 2 years before that starts kicking in incremental.
Having said that, some of our newer capacities are in regions which are low cost and which will contribute positively going forward, like our Bhopal Unit, et cetera. So there are going to be some positives as well. And depending on the product mix, depending on the automation, because we are also sitting in a lot of automation, et cetera, in our production unit, which will also yield incremental productivity. Our aim will be to take the EBITDA margin up through those means.
Right. And just one last thing on the -- we have India has an FTA with Japan. I mean, I don't see a lot of Indian companies capitalizing on this. What's your take on this? And are we looking any opportunities in that front?
So we are and we are not in the sense that we do have an opportunity in Japan, but we have capacity at the moment. So we're not actively pursuing to add a new customer from that perspective. And it also takes a couple of years before we can orient our production to the Japanese market requirements because that market and its standards are very different from rest of the world.
So we have enough business opportunities in other regions that we have to take a strategic call. But having said that, Japan today imports a lot from the Far East. They are also looking at incremental sourcing from India. That opportunity does exist, we will have to take a call going forward.
Our next question is from the line of Varun Gajaria from Omkara Capital.
So just wanted a little bit of clarity. How is Bangladesh shaping? So -- and has there been any capacity closures in Bangladesh, the existing capacity closure in India as such?
So the reality is that Bangladesh needs garment industry badly. So no matter who is in power, the garment industry in Bangladesh will function, and it is vital for the economic survival. So this industry is protected. So there is no capacity outage in Bangladesh.
Having said that, there is a lot of investor lack of -- I mean, customer lack of confidence in Bangladesh. So most of the customers think that there is going to be incremental volatility. The relationship of Bangladesh with India is not great. And Bangladesh depends on India for a lot of things, including day-to-day consumption items. So food, cooking oil, everything goes from India, so cement and all of that.
So this will -- any friction in our relationship increases their cost and increases their inflation, which adds to instability in that region.
Secondly, the -- an election is due in Bangladesh because currently, you have an interim government. And when that election happens, there is going to be another round of instability during that process. So there is a lot of these uncertainties which people are looking at and saying that, look, we don't want to do incremental growth in Bangladesh anymore. We want to, in fact, look at diversification out of Bangladesh to India.
So much so that even European players are talking about it. So that's the fascinating part where they're willing to forgo the duty arbitrage that they get from Bangladesh and look at alternate locations. So I feel that there will come a time -- it has -- the time has come where people are really looking at alternatives to Bangladesh, but Bangladesh's existing volumes will not come down. I don't believe that. The country as well as the world will need Bangladesh.
Right. And are we witnessing any other countries or companies from any other countries probably taking up tie-ups with vendors in Bangladesh? Has that been the trend so far, let's say, Chinese players or Taiwanese players or even Indonesian?
No, no. You are saying that brand -- retailers in China, Taiwan, et cetera are sourcing from Bangladesh. Is that what you're asking?
No, no, manufacturers, probably Indonesia also for that.
So at the end of the day, all this is driven by the customers, correct? Where do they want to source from? So customers incrementally are looking at other regions. Incrementally, they will not look at additional sourcing from Bangladesh. Customers are looking -- if they look at China, many of the customers are seriously considering a more rapid descaling from China. Customers are looking at Vietnam and seeing that the costs have risen up so high in Vietnam and Indonesia that they have alternate options.
So all of them are pointing towards India, pointing towards other regions in South Asia. some people are even looking at Pakistan again because their currency is cheaper. There is a fabric ecosystem there and all of that. Some people are looking at Africa again, and we have seen some renewed traction for that region also. So the world is exploring other options. I think India stands a good chance to profit from it.
Right. But Pakistan will be more in the home textile space, right? I don't think it has much skin in the game in the garment space.
It is increasing.
Okay. It is increasing.
Our next question is from the line of Bijal Shah from RTL Investments.
My question is with regard to your stand-alone margins. So now if I look at your stand-alone margins, it is around 9.5% for the last 2 quarters. And I'm looking at margin without including other income. So can you give us some idea that where this margin -- what kind of margin we should build in for FY '26 and '27? And I'm specifically asking question for the margin without other income because your other income because of your treasury and investment in BRFL will actually push your other income significantly higher. So can you tell us that operating level, what kind of margin you are expecting?
Operating level for stand-alone entity, I'm expecting 1 percentage up in the next financial year, that is FY '26, and 1 more percentage up in FY '27.
Around 10% kind of margin we should expect next year at operating level.
Yes. So plus 1% from whatever. So whichever way you calculate. I'm talking only from an operating perspective.
Okay. So that is one. Second...
Let say, per assumption would be take 1% and 0.75% in the year after because costs will also go up, right?
Got it. That's very helpful. Second question is on -- the tax rate has been pretty low for domestic business. So is there anything which we should extrapolate into future? Or this is something which will trade away and you will go back to 25% kind of tax rate?
I think there is some -- as we grow and as we add more people, there is some APV benefit or something, right, Sathya, which is also...
That's why the blended rate, you see almost around 22% for both Gokaldas as well as Matrix. But the new entities, once both the fabric processing and the Bhopal units, all the new units are at 17%, 18% -- 15% tax rate. So that will be coming at a lower interest rate -- a lower tax rate, sorry.
So overall, the tax rate will be lower than 25%.
Yes. Atraco is tax free, whatever Atraco profits. And at a blended level, without Atraco, you can take it around 22%.
That is very helpful. Now, secondly, I mean, see, I understand that market is in turmoil right now. And I'm not questioning that there will be an improvement. But I'm just trying to understand that -- what -- I mean, how the pricing power -- when we will get pricing power?
Because on one side, what we hear and what you are also mentioning is that there is -- customers do not want to procure from the existing location, be it Vietnam, be it China or Bangladesh. And I would assume that a good part of that, I mean, there are hardly any other large country which can replace other than India. And they are coming to India, you are seeing 26% kind of growth in your revenue this quarter. And so despite that, Indian -- I mean I would logically think that Indian should have a lot of pricing power in this context and which is -- which you are saying not there. So what is the reason for that?
The only reason is this is a global business. So if, let us say, we extract -- or we demand a higher price, immediately, the business can go to Indonesia, business can go to wherever location because commercial considerations will trump everything else. So today, our aim is if there is a business coming our way, let us take it rather than just go for a skill on pricing because there are certain things which you can't obtain.
So today, incrementally, if you look at globally, if you -- till June, July, the buying was only falling Y-o-Y. After that, slowly the curve has turned, they've started increasing. So at this point, the demand-supply mismatch still exists at a global level. For India, it may not. For India, it is still favorable. Demand is slightly exceeding supply. And for people like us, we are seeing a much better traction.
So we're not in a state where we can suddenly demand pricing, in which case, the option or opportunity to diversify away from us continues to exist with the brands. So our aim at the moment is to take the orders and keep it here and then wait for an opportune moment.
Got it, very clear. Last question, See, I mean, this first year of consolidation, and we are also getting to know what is Atraco and Matrix. So on a Q-o-Q basis, I mean, we have seen around 20% drop in revenues of subsidiaries put together. Now is this seasonal trend normal or there was something which is due to transition and going forward, this kind of drop on -- from Q1 to Q2 will not happen?
No, no, no. So usually, Q2 is a weak quarter for the industry. For Gokaldas, we also used to have this about 5 years back. We have worked to remove the Q-on-Q impact on us because we work with the right product mix, et cetera. So we have a strong fall/winter program, which helps us in Q1 and Q2. So we have a more balanced capacity utilization in Gokaldas.
This is not the case for the acquired entities, which will be a work in progress going forward for us, which -- so historically, Q2 has been weak quarter for both the entities. Q3, they will both come back up in revenue terms. And we are -- we will have to work on fixing their Q2 for the year ahead, that is next financial year.
Okay. So just if I understood correctly, what has happened this year is not something abnormal. But in the future, you will fix the Q2s of acquired entity the way you fixed it for Gokaldas in probably a couple of years?
Correct. That is correct.
The next question is from the line of Bhavya Gandhi from Dalal & Broacha Stock Broking.
Sir, on the data front, I just wanted to understand that do we have any data financing ECGC cover or any sort of guarantee in terms of payment from them or export guarantees or any sort of guarantee?
So for Indian operations, we do have an ECGC cover for -- as a guarantee, which guarantees the receivables from our customers. I think ECGC covers to the extent of 90% of the receivables.
And for the other operations?
For the international operations, for the specific customers, we have to a limited extent, the back-to-back cover with the early payment programs, what we could really ride on with supply chain finance program, whatever has been offered. I would say at least about 50% of the receivables are covered.
Got it. So on a consol basis, roughly 60% to 70% is covered, right?
Much more than that.
Much more than that.
We can take it around 50%.
Okay. And do we refer to data...
Atraco revenue is 25% of the total revenue and half of it is covered. So that is 12.5% not covered. And for the balance 75%, 10% is not covered, 90% is covered, right? So 10% of 75% is 7.5%. So 7.5% plus 12.5%, that is 20% not covered.
80% covered, yes. And do we resort to data financing or we do not take any early payment?
In India, we take early payment. We rather prefer that because we get early payment at better rates than Indian rate because typically, early payment program that we enter into with our customers, we get the customers' financial -- customers' rates. So we only enter into early program -- early payment when we get better rates than what we can get from banks.
Do you see the number of total customers added in last 3, 4 years, new customers?
I think 4 or 5.
4 or 5. And What would be their penetration in overall numbers right now?
Anywhere between about 17%, 18%, maybe.
Correct 17%, 18%.
And this -- where do we intend to take it going forward?
This will keep growing, right? So we keep acquiring customers, and we look at the right kind of customers so that we can also have the right amount of product diversification, customer diversification and all of that. So this will keep growing as we take the business forward. What we are seeing is that our existing customers also want to grow with us because we have hardly scratched the surface with them. So there is a tremendous opportunity there.
My intention is not to add a whole lot of customers. We have enough and more good customers that we work with. All the customers that we work with are top tier, almost like the top 20 customers of the retailers of the world. Our aim is to grow more with them. Also what happens is if you start growing more with them, we become more strategic with them, and that helps in pricing. If you have a customer who is only, say, INR 50 crores to INR 100 crores in revenue, frankly, we are -- our penetration in them is so low that we are only -- we will only be used to reduce somebody else's prices. So we don't want to be in that situation. We would rather be more strategic and have a meaningful engagement with the customer.
Right. Got it. And largely, I mean, the industry is very cyclical. It goes through 2, 3 years of demand-supply mismatch, then suddenly, the demand drops and all those things happen, right? Either one loses customer or something of that sort. So I mean, what is the risk element in our business? And how do we try to mitigate it? I mean what is your biggest fear when it comes to growth -- right now, you're growing, but in challenging times, what is the biggest fear that you would like to address?
Good question. We have to understand why is the cyclicality, right? So the cyclicality happens for many reasons. One is, of course, the retail industry itself can be cyclical because of economic changes, et cetera, et cetera. We will also find that certain retailers, especially in the fashion business, certain retailers have a season, right? They will tend to do very well. For example, Abercrombie & Fitch is flying high. They are doing exceedingly well. And certain retailers may be losing market share because their collections are not being appreciated by customers, et cetera. So that also drives volatility into the supplier base. So this is the root cause.
And the others is, of course, a huge amount of volatility induced by post-COVID changes. So during COVID, it fell, then post-COVID there was a stimulus money, which was -- which pumped up the demand, then immediately excess inventory brought down the demand from the retailers. So there are a lot of pipeline-related issues also, which brings in cyclicality.
The good part is to avoid the cyclicality or to mitigate the cyclicality as a supplier, what we do is we work with good quality customers. We work with customers where we believe that their financials for the next few years are not going to be weak. So we track them very closely, and we only work with good customers. And if we do have a customer whose financials are not very strong, we then tend to slow down their business or pivot away from them. And we've done that in many, many cases. Then in fact, even last quarter, we pivoted away from one customer because their financials were not good, and we actually exited the business.
So we are very clear on some of these areas. Like again, the other thing that we look at from -- to reduce the cyclicality is being in the right location. So our increased footprint in low-cost regions, et cetera, helps us make sure that we will get business regardless of what happens to the rest of the world.
And lastly, our ability to handle product diversity. So if you are in one product, then you are completely dependent on how that product does. If you're in knits, for example, and if you're doing commodity knits or something like that or if you're just in commodity bottom, then all the inventory-related ups and downs come and impact you. But if you have versatility in products, then one product type underperforming can be offset by going after some other product type.
So we have also built an enormous versatility in our business that we have insulated ourselves from some of these cyclicalities -- possible cyclicalities in the business. I hope I've answered your question.
That was quite elaborative and very helpful. One more thing, if I can squeeze in, is do we intend to be vertically integrated? I mean we've already reached to the fabric level. But do we intend to go further back because does that aid margins? And does it help in the longer run?
So this is my view currently and these views can change over a longer period of time, but won't change in the shorter period of time. I believe that we have to be in those parts of the value chain where there is a lot of value addition. So fabric processing, again, is made to order, and there is a tremendous amount of value addition there, and we have to be in that space.
But when it comes to, say, going to weaving, weaving is highly fragmented. And unless we have a very, very specific kind of weaving capacity that we want, we are not that keen weaving or knitting. But if it goes to spinning, which is again a high CapEx area and further backward integration, I believe it's commodity. And there are enough players who can put in that capacity to provide commodity yarn, but we are not that keen to go in those areas. So we will stay for now in -- up to fabric processing. For now, there is no interest in going further backward.
Got it. Just last one thing. Because before also, you had mentioned, what will be the pecking order in the entire value chain in terms of EBITDA and ROCE?
So ROCE will be highest in the garment manufacturing, and it will start going lower and lower as we go backwards.
Because the capital employed in garment manufacturing is released. So it's the highest ROCE business in garment manufacturing. If I look at EBITDA margin, however, may find that it may be higher in fabric processing or it may be higher in upstream. But that is only misleading because we are not -- we don't only look at EBITDA margin. We look at ROCE as well.
Right, right. ROCE, I think, is the right metric to look for.
As there are no further questions, I would now like to hand the conference over to the management for closing comments.
Thank you so much. I think as I continue to maintain that the business traction for India and even in the medium term for Africa looks very strong. So we are working to capitalize on it. We are working on capacity enhancements. We are also working at improving our productivity, which means increasing our operational efficiency so that we can offset some of the cost increases.
We are also working with customers to increase the share of business that we do with them. And we have seen good amount of progress that we have made from H2, which we have been maintaining since long now that H2 has been -- is looking promising. And we are seeing that the business prospects turn from Q3 onwards.
I feel that next year will be very strong given that how things are unfolding and business prospects ought to be good. I don't see too many macroeconomic challenges, which will further worsen, except for one, which is the U.S. market. We don't know how the new regime will impact U.S. from an inflation perspective, et cetera. But at the surface, it looks very positive given that the Trump administration or the President elect is more indicating that he will go -- increase tariffs on China and all those regions. So all the guidance coming from there is positive, but we still have to look at how that economy will fare over a longer period of time.
But in the short to medium term, it's going to be very, very strong and helpful for growth of sourcing from India. And regardless of any macroeconomics, at the end of the day, it impacts all regions simultaneously. But in India's position will always be much better going forward as we seem to be doing much better than all the other stronger garment manufacturing countries. We also have a fairly good vertical ecosystem in our country, which we can leverage.
So all said, it's going to be a good set of years ahead for Gokaldas and the Indian industry.
Thank you, sir. On behalf of Gokaldas Exports Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.