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Ladies and gentlemen, good day, and welcome to Nitin Spinners Limited Q3 FY '24 Post Results Conference Call hosted by SMIFS Limited. [Operator Instructions]
Please note that this conference has been recorded. I now hand the conference over to Mr. Awanish Chandra. Thank you, and over to you, sir.
Thank you, Manuja. Good evening, everyone. On behalf of SMIFS Limited, I welcome you all to Quarter 3 FY '24 Earnings Conference Call of Nitin Spinners Limited. We are pleased to host the top management of the company. Today, we have with us Mr. Dinesh Nolkha, Managing Director of the company; and Mr. P. Maheshwari, CFO of the company.
We will start the call with initial commentaries on results, then we will open the floor for questions and answers.
Now I will hand over the call to Mr. P. Maheshwari, CFO. Over to you, Maheshwari, sir.
Thank you, Awanish Ji. Good afternoon and welcome to all the participants to this Q3 and 9 months FY '24 earnings call of the company. I hope all of you had a chance to look at our investor presentation that is uploaded on the company's website as well as stock exchanges. Before Shri Dinesh Ji elaborates on the present industry and the business scenario, I'm giving brief financial highlights for the quarter and 9 months ended 31st December 2023.
Revenue for the current quarter was INR 750 crores against INR 737 crores during Q2 FY '24, that is an increase of 2% Q-on-Q basis. And on a year-on-year basis, revenue increased by 40% from INR 537 crores in Q3 '23 to INR 750 crores in Q3 FY '24. Cumulative revenue for 9 months of the current year is INR 2,105 crores against last year's same period revenue of INR 1,752 crores. That is an increase of 20%.
EBITDA for the quarter was INR 103 crores as compared to INR 82 crores in Q2 FY '24 and INR 60 crores in Q3 FY '23. Cumulative EBITDA for 9 months is INR 261 crores against INR 226 crores in the same period last year. EBITDA margin for the quarter is 13.7% as against last quarter's margin of 11.2% and Q3 FY '23 margins of 11.1%.
Profit after tax for the quarter is INR 31.75 crores as against INR 31.70 crores in Q2 '24 and INR 31.58 crores in Q3 FY '23. Cumulative PAT for 9 months is INR 92 crores as against last year's same period PAT of INR 126 crores. EPS and cash EPS for the quarter is INR 5.65 and INR 11.83 per share, respectively, and 9 months EPS is INR 16.43 per share, and cash EPS for 9 months is INR 31.05 per share. That is all from my side.
I now request Shri Dinesh Ji to apprise about the industry and business scenario.
Good evening, everybody. Thanks for joining in this conference call. After several challenging quarters, the textile and cotton yarn industry has seen some improvement during this quarter, especially in the export demand and the various end user segments. On the raw material front, the major positive development was on the cotton side. It has remained stable and marginally below international prices. Moreover, availability of cotton was also quite reasonable. Furthermore, the utilization in the spinning and weaving has been near normal levels. The woven apparel segment has witnessed improvement due to increased offtake by the retail clients. This has particularly led to the margin improvement and increase in cost competitiveness of the industry as a whole. Our global challenges are still prevailing due to which margins remained below the normal levels.
To summarize, while challenges persist, I must say that textile and cotton yarn industry is on the path of recovery, and the industry stands resilient and optimistic. The collective efforts of all the stakeholders, government, coupled with strategic initiatives, position our industry pretty well for the sustained growth going forward. Coming on to the company's performance, the utilization of spinning and woven fabric has been near optimal in the quarter, with all capital expenditure successfully completed in the given time frame.
Knitted fabric utilization saw an improvement, reaching approximately 60% level, with positive trend resulted in quarter-on-quarter volume growth; however, the increase in top line was only 2%, primarily due to increasing selling prices, resulting from lower raw material costs. Export growth was observed, thanks to the stable raw material prices during the last 4, 5, 6 months. As a result of increased capacity utilization and favorable cotton prices, margins have improved during the current quarter; however, still the margins are not at the normal levels due to the pricing pressures.
Looking ahead, our strategic focus for the upcoming quarter revolves around optimizing the product mix, increase -- and then optimizing our increased production capacities as well and defining the product mix to increase the value add. With Completed capital expenditure, we are quite well prepared to meet the anticipated demand which we think will come very shortly in the coming quarters.
Now this is all from my side. I would like now to open the floor for the question-and-answer session.
[Operator Instructions] The first question is from the line of Manish Ostwal from Nirmal Bang Securities Private Limited.
Very good set of numbers for the quarter and a strong recovery in the margins. So congratulations to the team, Nitin Spinners for that. So my first question on the demand trend, which you spoke about in your initial remarks. So in exports, we are seeing some green shoots from other players commentary. So how you see the demand sustainability in the export markets and how the domestic market is behaving after the festive season? So can you comment on these 2 points?
Regarding yarn demand overseas, as you can see, if you see our numbers as a whole for the country, the demand has increased, I mean, basically, we are exporting nearly 100 million to 110 million kgs of yarn per month at the moment in the last 4, 5 months. Before -- 1 year back, it was about 50 million kgs. So overall -- and this is -- and the normal levels for the year '21 and '22 was around 110 million to 120 million kgs only. Only in between for the year '23, later part of '22 and '23, we saw a dip in the demand.
So this has been in normalcy level, which has come in. And the demand is coming overall from all over the world. It is not only one particular reason. Of course, there is -- the demand in China, which has dropped down substantially has also picked up after the reduction in the cotton prices in India.
We saw that demand from -- and we reached a parity level with the international cotton, then the demand from China also improved substantially. So this was one area, especially in the cotton yarn where the demand was better. As far as domestic demands are concerned, I think domestic demand has been quite robust. The pipelines, I would say the channels, the inventory levels at all the different -- in the different segments of our industry are at quite low levels. And there is a robust demand, especially we are seeing in the apparel side that the demand is quite reasonable, and also in the home textile sections.
It's very heartening to see that demand is recovering. So second question on the margin side. So we have seen a very sharp recovery in margin from quarter 2 to quarter 3. So if we assume the RM cost where it is, then these margins are sustainable in your opinion, sir?
Definitely, these are below the margin levels -- these margins are below normal margin levels, I must say. Here, if you see our -- in the normal circumstances, our raw material costs are around 60%. If you see before -- 1 year before, it was like in the range of 58% to 60% for us. Now, it is -- for last 1 year, it is ranging between 66% to 68%. Now again, in this particular quarter, the raw material cost was about 64%. I feel this is quite sustainable.
And last one small data point, what is the gross debt and cash on balance sheet and capacity utilization of the new facility, what is the current utilization level of the new facility.
Capacity utilization of the new facilities, especially on the spinning side has reached 90% level. In last quarter, since part of the unit was capitalized in between, a commercial production started on the 30th of November. So the last quarter, it was slightly lesser, but now everything is running at 90% plus levels, and we expect to improve this further to another 3%, 4%, 5% to the 95% level, which is our usual level. As regarding debt, our total net long-term debt is about INR 1,000 crores and the short-term debts are about INR 375 crores. So total debts at the end of December is about INR [ 3,950 ] crores.
And any outlook for the debt reduction for FY '25, '26, sir?
Actually, for us, continues -- all these long-term debts are at a reduced interest rates, incentivized interest rates. So to reduce them much, we are normally repaying as per the repayment schedule, it is about INR 130 crores, INR 140 crores every year. We continue to repay that. So that repayment will continue, plus whatever cash accruals we are doing that actually reduces our working capital loans. So accordingly, whatever earning is there will go into the reduction of the debts only, apart from the normal CapEx, which we are doing during the year.
The next question is from the line of Subrata Sarkar from Mount Intra Finance.
Sir, just 2 questions from my side. First is like when we are planning the next capacity expansion because we are almost at 90%, number one, sir. And we whenever, we are planning like what will be our source of fund for that? Whether we will depend mainly on internal accrual or like we have some fundraising plan, any fundraising on the equity side or entirely from the debt side?
And we are -- definitely, you are very right that we are utilizing 90% of our capacities, but that is a normal feature for our company. And normally, we look at our margins and the demand side that we -- wherever we get better -- when we get better demand with higher margins, then only we look to expand our capacity. At this point of time, we have not contemplated any major expansion. We have small capacities or debottlenecking keep on happening in our company with the internal accrual. And since there are no expansion plans, there is no plan to raise funds either from debt or equity.
Okay. So a follow-up question like, what kind of margin -- generally at what kind of margin, generally we plan for new capacity expansion? Because last time when we planned, our margin was around 23%, 24%, EBITDA margin, I'm talking about. So I'm just -- what is your thought process like at what kind of margin and like we think of new or fresh expansion?
While taking expansions, we need to take 2 things in consideration. One is the return on capital employed, whatever we are deploying the capital, what is the payback of that? And along with the sustainability of the products which we are going to manufacture and sell -- it is the margin of those products. Normally, with the kind of structure we have in our company, we think whenever the EBITDA levels are in the range of 16% to 20%, that is quite a reasonable level where we can think about adding the capacities, especially in the yarn side.
Whereas on the fabric side, it is on the higher side. So we need to balance both of them accordingly and then plan for the capacity expansion.
Okay. And sir, what kind of time periods look for, for payback period, like what is the payback period we generally target for any expansion.
Normally, we target for 5 years.
The next question is from the line of Marshall, an Individual Investor.
While going through this financials, there was a note that, okay, that the company is eligible for certain incentives from the Rajasthan government and it's not been accounted for yet. So can you please spell out that what is the accrued incentive for the Q3, Q2 and Q1, which has not been accounted for yet.
There is all the accrued incentives up to now has been accounted for only for the new expansion period. We are yet to receive the approval from the state government, which is going to be accrued to us once they give us the permission for that. We feel that once we have a firm figure in hand and the dates in hand, of course, we have announced our expansions, commercial production from 1st of October and also part of it from 30th November. We are yet to get the final date of -- letter from them, which date the incentives will be accrued. So then only -- so as of now, I can -- I'll not be able to comment on the amount for the quarter, particular quarter.
The question is that, that there is like prescribed policy. And we have -- and we know that how much we have incurred on the CapEx? And like what is the visibility criteria for each kind of CapEx? And how much of all worked out. We are told you for that...
Okay. Okay. So basically, you want to know what is the total amount of incentives that we are going to get. So, basically, we will be eligible for 2 kinds of incentives. One is the interest incentives, which should be -- once it is operational, should be in the tune of about INR 20 crores every year which has not been considered here in these numbers. So whenever that is getting sanctioned, then we will accordingly account for the same. That is one part. And second is, we will also be eligible for capital subsidies, which will also be in about the next 7 and 8 years, we'll be getting about INR 200 crores plus of capital subsidies.
All these numbers, I'm giving on the basis of the policy, which is in prevalent and we have applied for that. So accordingly, once we get the sanction, then the amounts will change here and there.
Yes. No, problem. Understand that. So basically, roughly like I come to, you can say, about approximately INR 10 crore to INR 11 quarter we must get -- per quarter.
I think, yes, it should be -- that should be there. We should be getting around INR 40 crores every year.
Let me just reexplain you. So as you mentioned, there is about INR 5 crore s for the interest of -- INR 20 crores, which was quarterly INR 5 crores. And then you said about INR 800 crores -- sorry, sorry INR 200 crores you will be getting for the capital subsidy over 7, 8 years. So 8 years, if I take, so it is 25 crores per year. So like for quarter, INR 6.25 crores. Total about INR 11.25 crores. Am I right?
Yes, sir, I told INR 40 crores every year.
INR 40 crores per year? So you are right, you are right. Okay. Okay. And secondly, when you said, okay, there are some things, some part was commissioned in September also. So does that mean that since it was capitalized on 30th September. So will we get one full quarter capital subsidy for September quarter also?
That is what is not clear to us. That's what we've not accounted for. So that is what the government permission has to come in.
My second question regarding this volume, just like I just made a thumb rule, you can see back off the office -- like back of the envelope calculation, yarn sales growth has increased by 15% over Q2 to Q3, but it's revenue realized only like increased by 1% and fabric volume growth has been 43% over Q2 to Q3, but the revenue is only 4% decrease. So we can see that like there's huge, for example, you can say that like a price deterioration vis-a-vis Q2, and Q2 was a sluggish period. I'm not comparing 2 years back when there was a boom in the textile. But like Q2, like Q2 of FY '24 versus Q3 FY '24. So there is a huge gap, can you, please, explain this one?
No, I think there is some -- there is not 42% difference in the -- this year in the quantitative production as far as -- no, no, no. volume-wise, I think in Q2 to Q3...
No, no, I remember. Knitted Fabric, I mean to say, knitted fabric is a...
Knitted fabric numbers -- but knitted fabric numbers have not been given what is the sale price, particularly. Individual sale price has been given there.
No, no, no, It is actually given only fabric.
Yes, it is -- so You are looking only at...
No, no. So like next time, just like when in the volume side, when you are giving a yarn separate, knitted fabric separate and then gray and wovens fabric should be separate. Then correspondingly in the next slide, we should have the same thing. Otherwise, it misrepresents like, like it's happening just now.
Okay. No problem. Anyway we'll look into that. Basically -- so just for your information, knitted fabric price has remained flat. It has not decreased at all during this particular quarter. It has remained at the same level.
Sorry, I missed you. Kindly repeat, sir.
So knitted fabric price has not reduced. It has remained at the same level as it was in the last quarter. Flat -- it has been flat. In the woven fabric business, the prices have gone down by 2% in comparison to the last quarter, 2.5% to be precise from the last quarter. And for the yarn side, I think the yarn prices have gone down by nearly, just a minute, it is about 7%, 6.5% to 7%, I think.
So any reason for the reduction of prices? Or like do we see any like silver lining in the next quarter? Currently, how the prices are hovering?
Because cotton prices have also fallen by more than 10%. So that's why the yarn prices have also fallen by 6%. It is linked with the raw material prices. So cotton prices was -- has fallen by about 7% in absolute terms. So that has resulted in this particular reduction as well.
let me put it differently, for example, what was the margin in yarn or the fabric in Q3? And how we -- currently, we are standing, for example, like almost -- how is margin, same or better or lower? You don't have to precise, just an idea.
We do not give the numbers for the margins for the separate -- for -- because it's an integrated mill and, we are not able to...
So in terms of prices -- in terms of prices, how the prices are currently faring vis-à-vis average price of the Q3.
As of now, more or less at the same levels as of Q3.
Okay. So any silver -- sorry, like, what is the growth trajectory for the...
The next question is from the line of Chirag Shah from White Pine.
Sir, first question is, if you look at the industry, there seems to be a tailwind where generally utilization is going up. I'm talking about across the chain, we are seeing somebody seeing a better -- faster improvement and slower improvement. What is driving this improvement, sir? Is it restocking that is driving the improvement? Or is it genuine demand which is driving the improvement? And if you can give some color, both for domestic as well as export it would be helpful.
First of all, this demand -- this downturn which we saw in last one year was because of the destocking. So inventory had gone down to -- if you see the numbers of various retailers as well as -- internationally as well as in India, you will see the stock levels have been substantially reduced in last one year. And that is -- so they have reached a nonsustainable level, means basically, normally, the industry has to keep certain inventories to maintain their operations even in the retail as well as in the manufacturing lines. So because of this reduction, now no more reduction is possible. So there is no demand contraction on that side.
Demand per se, on the retail side, as volumes, if you see, more or less have remained stable in the last 5, 6 months. And accordingly, the same is reflected in the utilization of the textile manufacturers. This is happening globally. This is happening in India, particularly in better terms, not globally because of the various challenges people are facing in their own countries.
Why I was asking this question was, sir, and if you can help me to understand. When we look at some of the retailers' commentary, in general, the demand or the final sales has not been that great versus the kind of utilization jump that we have seen. So the question is, is it a onetime event that you may reach 95%, 100% utilization level because once the restocking happens, again, we can see some downward pressure in demand. Is this the way we should think unless demand really revives in a very strong manner.
I will explain it to you in a different manner. Last year, when we were not utilizing our capacities and the capacities were down, you did not saw any reduction in the sales of the retailers. Rather retailer sales were continuously growing. So it was x, then it is x plus 10%, 15%, 20% in last 3, 4 quarters. By now, they have reached a level where they are not able to increase the demand, increase, basically, the sales because of 2 reasons.
One, the overall prices of the products have come down. Volume would have not come down, but the prices of the finished product has come down because the raw material has come down substantially in the last 1.5 years from -- to nearly half. one year back, maybe about 15 months back, the cotton prices were like INR 110,000 a candy, which is INR 55,000 or $1.50 to $0.80, $0.85 now. So that is also one of the reasons why you're not seeing in the numbers, the increase in the sales.
But if you see on a year-to-year basis, you will find that overall volume of most of the retailers have also increased. So that is a -- and accordingly, this is not anything -- still, I think no restocking is started. I do not see anywhere in our industry, any restocking happening or some people are increasing their -- are sitting on too much of stock. So we are not at all concerned about that the restocking will happen. As far as utilization is concerned, if you see our history of our company for 10 years, I think barring nearly 2, 3 months in last year from August to December, November, December, we have always utilized our production capacity to the optimum level of 90% to 95%.
So you need not worry on that particular front because...
Okay, sir. I was asking from industry perspective. Nitin -- I understand very well about your approach. Because it also helps you as a tailwind if the industry is improving, your profitability really shoots up...
Definitely, it is improving. You can see the utilization levels across the industry has improved. There's some of the inefficient units because of their own legacy issues are going down. And that is the only reason. Otherwise, you can check this by seeing the consumption -- raw material consumption side also.
There are raw materials like polyester, there are raw materials like viscose and as well as cotton. Their consumption figures, it is only used in textile. So you can see the numbers from there you can also get that overall, the utilization level has gone up only.
Okay. And sir, one last question, if I can ask, is that so when this -- assuming the restocking to normalized level of stocking. When I say restocking, I'm using the word to normalized level and not getting exuberant and overstocking kind of scenario. So if the restocking is starting today, it generally takes 2 quarters for them to go to normalized level of stock. Would that be the right way to look at it?
Actually, why this stocking -- or slightly improved levels of normalized level of stocking is happening because most of the value chain stakeholders are considering that we have reached the bottom of the cycle. There we have seen already the lowest level of the raw material prices, and there is no room from here to go down. So at that point of time, normally people start increasing their stocks or increasing -- bringing to the normal level.
In last one year, everybody lost on the inventories, whatever they have bought when they go in the market to sell, they have lost the money on that side, whether on the margins or whether basically on the cost side as well. So this is something which has -- overall, the value chain partners are thinking that we have now reached a level where we can increase our inventory to normal levels, which could in turn increase our sales also going forward.
But this could be a 3-quarter phenomena because generally it plays out in the quarter...
Generally it is not -- this is one of the longest period of this kind of slowness in our industry. Normally, this cycle does not last for this long. We have seen this due to multiple reasons for 15, 20 -- 15, 18 months. We have seen this kind of cycle. I think we should have a normal period of -- I think from FY '25 onwards, my feeling is that we should have a normalized year as we used to have pre-COVID.
The next question is from the line of Vikram Suryavanshi from PhillipCapital.
Sir, what was our captive yarn share now with this post expansion?
I think we are consuming captively about 24%, 25%, both in knitting and weaving, like in weaving 25% of our volumes.
And would it be possible to give what was the knitted fabric sales in this quarter or 9 months or whatever is possible?
I think it was 20% on the woven side and 5% on the knitted side.
5% on knitted Side?
Yes.
Okay. And just to your comment now, cotton prices have come to close to MSP, probably that could be the bottom. So how we are looking at the buying strategy? Are we buying aggressively and holding the stock or buying as a required basis or what is thought process of cotton prices, if you can give some views on that?
Normally, whenever if you feel that the inventory levels are down normally in the industry, we have a tendency to increase our inventory levels, especially on the raw cotton side because it is a seasonal product. So similarly, we'll have to increase our inventory levels so that we are at -- we do not have any issues in the later part of the year for the raw materials. However, we have to also look at the global pricing as well. So it is very important to look at what is the global pricing and what is the global outlook overall.
So that is not very encouraging. We are not seeing any great signs of price increases in the raw material going forward at this point of time, at least. So we do not foresee any -- too much increase in the raw materials in the coming 4, 5, 6 months. Maybe this should remain at this level. And so people will accordingly basically going for their inventory levels as per the financials available with them and what is the financial cost involved accordingly.
The next question is from the line of Naitik Mohata from Sequent Investments.
Congratulations on good set of numbers. Most of my questions have been answered. Just a couple of questions. With respect to the incentives that we might be getting regarding the interest as well as capital, so what would be our interest cost guidance for FY '25 and onwards?
Maheshwari Ji, can you highlight on this part? What will be our interest cost for the next financial year?
Yes. For next financial year, net of subsidies will be about INR 90 crores.
INR 90 crores. Okay. That's helpful. Also, sir, if you could throw some light on exports? So basically, which countries do we export to? And from the commentary, a couple of our peers, I've been listening that there is a kind of a demand pull for the upcoming quarters because the transit time towards Western countries has increased. So are we seeing that as well?
We export to nearly more than 50 countries all around the world, and we have wide exposure even in Europe as well as in America, plus in Latin America, China and to some extent, very small extent in Australia as well. So we are present practically in all the 6 continents. Now coming to your second part of the question the traction, it is just one month, and we have seen that a lot of goods, which have been shipped out is already reaching the shores of our customers.
For the next bookings, they are discussing with us that maybe the transit times will increase. So accordingly, they will start preponing their requirements, let's say, if somebody wanted to have shipments by the end of February, he would now request that he know that the transit time is going to increase by 15 days. So that will be preponed. So definitely, whatever increase in transit time is there due to this Red Sea crisis. It will definitely help us in preponing the requirements. So even in this kind of industry, where if the -- but this is not all across the world.
It is only on the western side. It is only this increase in transit time is happening only for Europe, for America or for Latin America. But on the other side, on the Eastern side, for China as well as for Bangladesh or for Vietnam or for Korea, all these countries will have normal transit times. So It will -- we'd like to see how this pans out. Even some of our customers are seeing that the transit times are increasing. So they will accordingly plan their schedules for the production as well. So overall, we feel that maybe 10 to 15 days extra products should go in coming 5 to 6 months. That is a general feeling in the industry as such.
[Operator Instructions] our next question is from the line of Kaushal Kedia, an Individual Investor.
Sir, do we see any challenge in getting the subsidy? Is it like dependent on something, some condition that is conditional on something that is not being fulfilled? Or is it just a matter of formality?
Basically, in Rajasthan where we are based, we have conditions of investments that we need to fulfill the investment criteria and secondly, on the employment, the number of people we are going to employ for this investment. So both have been already fulfilled. So already we've spent the money and already the people -- already we have started the operations. So I think I do not see any challenge in there.
The next question is from the line of [ Aditi Ambani from AK Capital. ]
Congratulations for the management team on a good margin performance, so better than many other listed peers. Sir, few bookkeeping questions from my side. Sir, now we have changed this -- so this depreciation, so we have charged almost so INR 35 crores of depreciation. So it is a full depreciation we are charging now. And what will be the quarterly run rate now going ahead?
I think for the quarterly run rate should be in the range of about INR 36 crores to INR 37 crores. Maheshwari Ji, am I right?
Hello, Maheshwari Ji.
Yes, sir. You're right. It will be about INR 36 crores per quarter going forward.
Okay. Got it. And sir, what would be the maintenance CapEx for the existing gross book.
Basically, most of our plants are pretty well maintained, and we do not -- whatever normal maintenance expenditures are booked in our -- as a part of our revenue. We only -- whenever we do some value addition or we do debottlenecking, so only those kind of CapEx are being capitalized. So there, definitely, we have plans to spend about INR 40 crores, INR 50 crores next year going forward for upgrading our facilities for new value-added products, maybe efficiencies -- improved efficiencies or maybe also to improve the production capacity also.
Okay. So sir, annually, so around INR 40 crores to INR 50 crores, we should like build in.
Yes, not more than this. Even less -- the past history does not suggest even INR 40 crores to INR 50 crores. That's been below this only.
Got it. Sir, my third question is interest cost was high, sir, and you did explain in note also, sir, please, if you can highlight like how much RIP's benefit we could not book and when that approval comes, how much interest cost will go down.
I have explained in my earlier question also that our interest subsidy per annum will be in the range of INR 20 crores. So it should be INR 5 crores every quarter. Additional subsidy which we are going to receive. Already, we are receiving some interest subsidy on our old loans. Additional interest subsidies should be around INR 20 crores. So that will be about INR 5 crores per quarter.
Okay. Any reason, sir, for the -- so for delay in this RIP's approval or process when it starts after commissioning and if so how much time it will take? And will there be any loss -- so due to these delays?
I think only that we should lose interest -- if this gets delayed, we'll lose interest on that money which we should be seeing immediately. Major reason for the delay was that fortunately or unfortunately, when we started the production, the elections were there in Rajasthan in early November. So all the government machinery was not working. They have started reworking only by the end of December. So the process has already started. I think within this financial year, this issue should get cleared and then you will start receiving the money.
Got it. Sir, my next question was on the Red Sea crisis. As you highlighted to an earlier participant that there is an increase into the transit time. So most of the customers are preponing their -- their purchases. So sir, are you also like also getting a pinch on to the freight cost and also, sir, if you can explain like into our total exports, how much of the contracts are booked in like FOB and in CIF?
First of all, for whatever new businesses, which we are doing, that is plus -- that is with the increased freight cost. So that is one part that is very clear that increased. In our existing businesses, we have FOB as well as CIF contracts. And with our -- the contracts which we have, this is affecting only the contracts which we have for Europe as well as for Latin American side. So there -- in the Europe side, the cost has become 4x, 3.5x to 4x. And normally, our costs used to be about 1% of our sales value, the freight cost used to be about 1% -- 1%, sometimes even below for Europe.
So overall, if you see, in this particular quarter, we could see total -- if you see the total sale level, we could have an impact of about 50 basis points overall, if you consider already the contracts which have been booked, and we have to pay higher freights. In some of the cases, our -- we have FOB contracts also. So there, there is no impact and also any contracts which are there on the eastern side, there is no issues with that.
Got it. Sir, on to the Europe side, as you mentioned, so there is almost a 3 to 4x jump. So is there a possibility like this can be offsetted by passing on or you still see that demand is not that good in Europe, so that could still remain an issue?
Well, that is getting passed on. That is getting passed on. Even the customers understand it very well. And the new -- whatever new business is happening, is happening at increased prices. And even we are also ready to take -- take a part of whatever additional cost has been incurred. It is an extraordinary costs. And accordingly, we are also sharing the additional cost also in some cases.
Got it. Sir, just one last question. Sir, whenever we set up a new plant or a new business into this. So what is the threshold internal IRR we work it? Like suppose like if we want to set up a business, so what is the like minimum level of IRR at the company level, which you are like look at, 15%, 20%, any such figures, sir?
It keeps on changing. It takes on changing with time, maybe 10 years back, we used to think that we should have any business with less than 20% IRR is not as good. Today, we would be happy with the 15%. So it depends on the circumstances, the opportunities available.
But as a cost of -- total cash cost of capital employed, we would be happy if we get around 15% to 18% of returns. And because our -- basically, our cost of debt is lesser, much lesser. So on the equity side, we get a good return of about 30% plus on them, we are quite okay with that.
Okay. 16% to 18%. Okay.
Yes.
The next question is from the line of Vikas Rajpal from SMIFS PMS.
Congratulations on a good set of numbers. So my -- I have a few bookkeeping questions. So first of all, if we consider your total top line, with respect to what your capacity utilization is right now, I mean you should -- in the next year, you should clock around INR 3,000 crores in terms of revenues. And even if you assume 15% margin and 90% -- INR 90 crores in terms of interest cost, I mean, we could safely assume that the bottom line should be around INR 150 crores, INR 170 crores of bottom line, which should be similar to the levels that we've had seen in FY '23.
And with the spreads remaining largely stable, I think if you have to drastically show improvement in terms of profitability, we'll have to probably expect those spreads to increase also drastically. So what is basically your view on that? I mean what is different compared to when we were doing 20% kind of margins and what is different right now, which stops you from basically achieving those kind of margin levels? That's my first question. So, if you could just answer that first and then I'll take it ahead.
I don't want to want to give -- if you are putting the numbers in my mouth, I do not want to get into that number crunching game. So let's not be there. Yes, your second part of the question is, I would like to first reply on that, that what is different. That is -- the difference is the push and pull in the demand. Basically, when the margin -- when we -- today, in last 1 year, we are pushing -- we are utilizing our capacities. But we are just pushing the sales. We are after our customers, and we are trying to poach the customers, I would rather say that way, to our side by giving them a traction in terms of prices, which reduces our margins.
So we are able to utilize the capacity. And on the other side, when you see that there is a demand pull happening and the customers themselves want more and more, that is the difference when you see that the margins automatically improve. So this is -- so this -- basically this kind of environment we have seen in past in particular, and we haven't seen this kind of low cycle of 15, 18 months on a continuous basis for a long time. So I think it's high time that we should be in the better margin scenario going forward. Unless something drastic happens internationally with regard to geopolitical situations.
Then again, I mean, it gets back to my first part only, I mean, because in that case, we'll have to assume the spreads to improve drastically because we are already...
Yes. It's a combination, like if your prices increase, then your top line also increases. So there are -- so that is also a kicker for that. Without our -- you can see our numbers of year 2022, then without the expansion capacity, our top line was about INR 2,700 crores. So with those kind of prices -- if those kind of prices come back, maybe today, our top line could reach instead of INR 3,000, what you are contemplating, would be -- could reach even INR 4,000 crores. So that is -- when the prices increases and along with that margin increases, you see much higher bottom line coming out.
And sir, could you just again provide me with the breakup between long-term borrowings and the short-term borrowings of the total INR 1,350 crores.
I think long-term borrowings are about INR 970 crores as on December '23, and short-term borrowing are about INR 375 crores.
INR 375 crores. And sir, you said that you will do a yearly repayment of around INR 120 crores, right?
INR 135 crores, INR 140 crores...
And sir, if suppose in the next couple of years, when you feel that there's a need to increase the -- I mean, there's, again, need to increase capacity, then again, we'll probably have to go back to raising debt then I think -- I mean, what is the ceiling for you in terms of debt to equity, which you wouldn't want to breach?
We would be -- we are okay with 1:1 debt equity. To have reasonable returns on our equity, we would prefer to have 1:1 debt equity. We are at the moment at about 1 point -- long term is, of course, less than this, but we are at about 1.20, which would correct automatically within 1 year's time to 1:1.
[Operator Instructions] The next question is from the line of Kaushal Kedia from Wallfort PMS.
Sure. Just -- so you mentioned that the cost of debt will be about INR 90 crores net of subsidies. So this is long term and short term, right?
Yes, both altogether.
So that works out to be about 6.7%, right?
Yes, right.
So this has gone up slightly because of the interest rate scenario, obviously?
Yes, exactly. Our average cost of borrowing is about 6.5%.
The next question is from the line of Jatinder Goel, an Individual Investor.
I wanted to ask like the production for yarn for this quarter was 25,158 million tonnes with like additional 4% to 5% more utilization going to 95%. What do you expect the quarterly run rate for production of yarn?
Production of yarn, our gated capacity is about 110,000 metric tonnes. So traditionally, we should be able to do about 105,000 to 106,000 tonnes every year, and that should turn out to be about 26,500 metric tonnes every quarter.
The next question is from the line of Arjun Agal, an individual investor.
I just want to know what products contribute to margin expansion majorly? And reason for EBITDA margin expanding so significantly basically.
And I'm not able to -- can you repeat the question? Because I was not able to...
I just want to know what product contributes to margin expansion majorly? And reason for EBITDA margin expanding so significantly, that 2.5% increase.
Sorry, in this particular quarter?
Yes, Q3 '23.
Actually, the major increase in the margin expansion has been because of the reduction in the raw material prices. You can just see that there is a -- during the last quarter, the raw material to sales ratio was about 66%, and now it is about 64%. So major improvement has happened there.
Thank you, ladies and gentlemen, that will be the last question as the time limits. I would now like to hand the conference over to the management for closing comments.
Yes, I hope we've been able to address all your queries. If some information or for any further information, you can get in touch with our finance team, with our investor relationship advisers. We will be able to help you out on that. And I would again like to thank SMIFS and Awanish Ji for hosting this call. And thank you all for sparing out the time and joining us for this conference call. Thank you very much.
On behalf of SMIFS Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.