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Vardhman Textiles Ltd
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Hi, everyone, and thank you so much for joining Vardhman Textiles Limited First Quarter FY '24 Earnings Conference Call. Today, we are joined by Mr. Neeraj Jain, Joint Managing Director; Mr. Sushil Jhamb, Director, Raw Materials; Mr. Mukesh Bansal, Head of Fabric Marketing; and Mr. Varun Malhotra, Head of Finance.
And now without any further delay, I will hand it over to management for opening comments.
Good afternoon, everyone. Abhishek, I hope I'm audible.
Yes, sir, you're loud and clear.
Okay. Okay. So I'm sure the results are -- everyone would have seen the results. So this quarter as expected, has not been very good, and there has been a continuous pressure on the textile industry, which started about a couple of months back. And I think still -- there's some pain is still there even as of now also. So keeping the news the same, the results are declared, which is showing EBITDA of about 13%, 14% for the company. And in this period, of course, the utilization on the spinning side has been almost full. The fabric side has been a little lower, which slowly started improving now. So I think the 2 factors which I have been mentioning earlier also, that one, the demand at retail stage, which still continues to be lower. If you look at the import data of U.S.A., Europe, the government and et cetera, there's been a drop of about 20%, 25%. So that's one concern or there's been one fact that the retail demand is less starting from all these political or the issues related with inflation and high gas prices and all and all involved.
Second was the supply chain mismanagement, which happened about a year back, where most of the brands collected lots of material, and they wanted to destock their things. And by and large that situation is over now. And the day-to-day demand of these brands have started happening for most, I will say, almost 80%, 90% brands. There still -- there are a few still which want to reduce it further. So eventually, that means the 80% demand has started coming back for most of the products, which is some sign of relief for most of the industry. Of course, till the time the entire utilization is not happening fully the margins cannot improve because there's a pressure of the utilization through everyone.
The third factor, in India the demand has been relatively less in the last couple of months, and there's been again some odd improvement, which we have seen in the last couple of weeks, but we are yet to establish whether that's kind of a permanent or they still only for a small period of time that demand is coming. Though the overall industry, the pressure is there, but there are some small silver linings, which have started appearing, so the first silver lining was the better demand of home textile products.
Last year, when the things have gone bad, home textile was the first one to die down or to where the capacity utilization has come down. But fortunately, for the last 3, 4 months or 2 months, the utilizations and margins are one part, first, we are talking of the demand supply only. So apparently, the home textile has started doing good both sheeting and towel the utilizations are far better than what it used to be before.
The second segment where we have seen some improvement in the last couple of weeks is the woven fabric. So again, the woven fabric, if you look at most of the industry, the utilization has come down to about 70% or so. Now as of now, we understand or we estimate it close to be about 80%, and I hope in the next 1 month, 1.5 months, we'll be reaching almost 90% plus, which is the normal kind of utilization for the weaving also. On the knitting side also our estimate is from a worst of about 50% today, we are operating in the range of about 65%, 70%. So there is some improvement, but yes, there is still more scope.
And the fourth segment, which is still in a bigger problem as of now, looks like is the denim where the utilization is not more than 55% even today also. So again, but the -- another silver lining is India the festive season is ahead of us. Next 3 months, 4 months are dispersing. And the western word also the festive or their year-end is coming in, which is end of their festive season. So hopefully, things should be better in the next couple of months. And so this is on the -- in general, on the textile demand side.
On the raw materials side, this has been, again, the share or the struggle on the raw materials side continues. We've seen lower cotton prices in India on the New York Future basis. So it has come down to a lower side of about 300 to 500 basis points, which again has now increased to 600, 700 points as of now. So whenever there has been a lower price of about INR 55,000, INR 56,000 a candy, which is kind of almost a minimum support price going by the 10% increase that the government has done. So practically, the cotton prices, it looks difficult that it will be coming down below INR 55,000 or so. At the moment, it starts coming to that level, people start hoarding on to the bottom. So the prices start going up once again. So we're seeing this quarter, the price is moving from INR 61,000, INR 62,000 coming down to a lower of INR 56,000 and again, now back to about INR 59,000, INR 60,000 as of now.
The overall crop -- there has been a major seesaw in the overall crop numbers for India in this year. So the original estimate started coming somewhere about 330 lakh bales, in between the government agencies or the private agencies, they kept reducing that number, and it was estimated by some of the agencies that the crop may not be more than 290 lakh bales or so, which was putting kind of a huge pressure on the system because imports could not be done because of the 10% duty in the system -- 11% duty.
But now slowly, we are still finding some arrivals coming in from the last season. And as of now, it is expected, 305 lakh bales have already come in. So maybe this year's crop could be in the range of about 315 to maybe 320 lakh bales, which will be coming to the market because Indian cotton year is from 1st of October to 30th of September. So we're left with about 50 days. So I expect maybe 320 lakh would be the numbers where this year, the arrival could be there.
The next year sowing seems to be good, most part of the world. And definitely, of course, there are some areas where the sowing is a little lower, but at the same time, the U.S. is likely to show better numbers because last year, there was a huge abandonment of the crop, which may not happen this year. Of course, it's too early to say as of now, but it is only going by the today's situation.
The India sowing numbers are good. So the rains have been reasonably good. Whatever excess rains have happened apparently that hasn't impacted the cotton area in a bigger big. So probably this year, crop would also be good. And we can hope maybe the crop size could be in the range of maybe about 320 to 340 lakh bales or so, again, going by the today's situation.
The only one area, the Pakistani crop seems to be good. So last year, they were -- there has been floods, so they have to import lots of cotton. As a result of that, the overall cotton prices kept rising up. The only area where there seems to be a little lower crop expected till now is the China, where sowing is less and maybe they can -- they will be lesser by about 10%, 15% from the normal crop size in this year.
If you go by the demand supply, there are various agencies which have shown including the ICAC, USDA, which have shown some improvement in the consumption numbers for the next year, which can happen also. But at the same time, even in spite of that, the overall closing stock of cotton is likely to be higher than even this year closing stock.
So which means whatever are the production numbers and whatever is the consumption numbers, the net, net there could be a possibility of a little increase in the stocks because international cotton -- international cotton season starts from 1st of August. And since as of now, situation is not very good. So maybe first 1, 2, 3 months, the consumption would be lower. As a result of that, there could be some addition on the raw cotton side in the world markets overall, whether it is in A country or in a B country. So that's the situation on the raw cotton.
In terms of the supply chain, things are quite good. I mean there is not -- nowhere if there's any issue of the supply chain or the cost increase. So most of the trades have come down to the normals. The availability of the cargo, et cetera, it's absolutely no issues.
So -- and the demand supply and the supply side in terms of reaching the goods in a particular time, whatever was the normal time, I think that's happening in a normal, normal way. So there's no issue and concern to that extent only. So that's, in general, my initial comments. I think there could be much more questions. So let's go along with the question-and-answer session.
Before that, I'll request Mukesh to give a little more idea on the fabric because that's one of our important and bigger business. So Mukesh, if you could just give a couple of your more views and general -- the market situation as of now.
Yes. Yes, Neeraj. Good, everyone. If you look at last about 1 or 2 quarters, the demand from the international markets was quite muted. There were about 3 reasons for that we can quote. One, of course, was the carried over inventory that the brand had. Second was the fear of recession and increasing cost of living because of interest rates and other commodity prices.
Third, of course, was, as demand was low, and the commodity prices were expected to fall down, so everyone is skeptical of valuation losses. So the order placement was also lower as compared to what they may have otherwise done. So as a result, the inventory in the supply chain, as we estimate, is quite near normal now.
Even if you look at the numbers declared by some of the brands in the U.S. and we compare their inventory level as compared to their last financial year, so now barring few brands, most likely, in most of the brands, the inventory numbers are near their long-term normal or in some cases, they are low also. And the brands are temporarily willing to live with the lower inventory to take care of concerns of the future recession or the prices falling on the commodity side.
So out of the 3 concerns, 1 was the inventory which seems to be settled. Second was the bottoming out of the commodity prices. So that also seems that the quality prices have bottomed out, whether it is cotton or the yarn. And from here on, the -- there is a possibility if the demand picks up, the prices may only go up. So now the -- after 2 quarters of muted demand, now the demand is coming up from the U.S., it is, I will say, near normal. Europe is still subdued. U.K. is -- the demand is good and other bigger markets for us like Japan and India, there are also we are seeing the demand level happening.
Particularly in India, the period from end of August till December, it is particularly festive season and also the marriages. So that is the peak time when India really happens. So all the brands are geared up with new inventory, new styles, to take on the consumer demand, which is -- everybody is expecting the demand is likely to be good.
And now with the prices also being near normal, there is no fear that if they place demand today, they place orders today, the prices may fall tomorrow. So it looks like that the worst is behind us. And as compared to Q1, the capacity utilization is also improving. So hopefully, the things will turn out to be better. That's from my side, Neeraj.
Thanks, Mukesh. So can we start the question answer, please?
Sure, sir. Thank you so much for the opening commentary, Mr. Jain and Mr. Bansal. And now, we will open the floor for questions. [Operator Instructions] So maybe I can ask the first question. So there has been an FTA with Australia now. And I'm just wondering if people are now starting to import cotton from Australia, which will be without duty to sort of lower the raw material prices. So is that happening in a big way now?
There is a limitation of 50,000 tonnes duty free cotton, which can come to India, which is barely about 300,000 bales only. So since this quantity is limited, and the quota system was implemented by the government of Australia, where they had given it to their shippers to decide, they have given this quota into their shippers. .
So eventually, the shippers in Australia, they have increased the basis for India. So practically, the advantage of duty free cotton to India is not available because it's only 300,000 bales, and they have increased the prices to almost the same level there where you will not get any advantage of the duty free, but practically, the cotton remains same. What you otherwise you can import to India and by paying the duty. So practically 0 advantage to India, even if the FTA happened.
Okay. That's very interesting. So we have the first question from the line of Abhineet Anand.
On this spread, what has been our cotton spread for the quarter, sir?
Almost in the range of about $0.55, $0.60 only, and that continues even now also because -- as I mentioned, since the downstream industries are not doing very good and the spinning everyone is trying to run the capacity with the higher open prices, so the spread continued to be in the range of about $0.55, $0.60 only.
Okay. Second thing is that, I think 2 things you had highlighted in your earlier calls also. One was a differential in Indian and international cotton? And second was the import duty, which was the reasons why apart from the demand part, which is obviously there, reasons why you are not expanding beyond the current expansion that has happened, right? So with present scenario where the differential has come down to mid-single digit, any thoughts on that, sir?
It's -- whenever we are expanding, I think the call has to be taken for a longer period of time, that what is the likely scenario for the next couple of years. It can't be on a quarter-on-quarter basis because you are spending the money for the next 15, 20 years.
I still have 2 concerns in my mind. One concern is the import duty, which will always force us to have a higher basis for the Indian cotton compared to the international because there is -- you can't import. So even if a crop is not good or things are not good, you can't import because by paying 11% duty you are virtually out of the system. So that's been a one concern.
Second concern comes from the minimum support price. Minimum support price as of now has become almost INR 55,000, INR 56,000 per candy for the Indian market, which is like -- so in case the New York Future remains above $0.80, $0.82, I think it may still not hurt us. But when it starts coming down to $0.75, $0.70, then Indians will have a huge disadvantage compared to the rest of the world because then we will be caught up with the minimum support price.
Now these are the 2 challenges unless -- I mean the minimum support price announced, so nothing much could be done to that extent. But unless we have a flexibility on the import duties, I still feel the permanent solutions are not there and suppose tomorrow this duty continues for a longer period of time, then it is always be a concern for us why do you spend and how to expand on this. I think that concern is still there in our mind. We are still waiting and watching till the time the final decision is taken on this issue.
Okay. And so in the meantime, if we are largely full on the spending side, as you said, can there be small bottlenecking, et cetera, which can help us in a slightly higher?
That's being done everywhere. So wherever there is a possibility by doing some modernization or some debottlenecking that's always been done. So that's one area where in spite of whatever difficult times we had in the last one year, so rather my modernization budget for the year is one of the best.
So over there, we have no issues because whatever has -- whatever capacities we have, we want to run it as efficiently as good as the best period we can. So over there, modernization debottlenecking or augmenting it, absolutely not even thinking it even for a second.
So for '24, if one has to see '23 you added around 1 lakh bale -- 1 lakh spindles. So on an average, if one has to assume one is that addition of around 1 lakh spindles plus this modernization, how much volume can increase in '24, assuming there is demand?
So I mean, there are 2 factors. One is that we have added this capacity. And second also last year, there was some partial capacity which was stopped on the spinning side. So my belief both things taken together there could be a possibility on the spinning side 15% to 16% top line growth.
In volume -- volume terms?
Value has been coming down, so I can't predict on that, but I'm only talking on the volume side. So 10% to 15% would be possible to do in this particular year.
And on the fabric side, sir, I mean, how do we see -- I mean you obviously did highlight that you utilized and improving there. So any thoughts on there? How -- what was the utilization now and over the next 2 quarters where it can go?
Mukesh, can you answer please?
So during the Q1, our utilization was about 70%. And Q2 will be in the range of about 88% to 90%. And Q3 should be 90% plus.
We have the next question from the line of Awanish Chandra. Okay. I'll move to the next participant. We have the next question from the line of Falguni Dutta.
See the spreads compared to Q1 and Q2 and Q3. I mean, directionally, how much higher do you see them to be?
So from actually the spreads, Q2 would be if I talk of the spinning could be even a little lower than Q1 because in this period, if you look at the yarn prices that continues to get kept on coming down. So we started last year from a price of about $4.5 per 30-spun and slowly as of now, the price is $3.10. So the price has been coming down only.
And whenever the prices are coming down, you have the advantage or disadvantage there, you booked something at a little better prices, which will keep coming down on a month-on-month basis. So we talk of the spreads for the Q1, that may be almost comparable to the fourth quarter of last year. And Q2 would either be comparable or a little lower because the prices of yarn has been continuously coming down.
There is no instance of any increment in the yarn prices till now. So it's only one way direction because the downstream industries were not doing well. It's only the last couple of days where we are starting -- finding some small demand improvement in the domestic market. The prices have not improved.
But once -- I'm sure once everyone is booked on the yarn side, probably it's only way that the prices could improve. So if you look at the quarter 1 or we are looking at even quarter 2, as of now, I'm saying, the spreads are not likely to improve. It is only coming down and down.
Sir, this is just for my understanding, assuming the cotton prices remain where they are, if we see an improvement in the overall garment -- overall improvement in garment demand, then can we assume that the yarn prices could go up and slow the spreads?
Of course, yes, of course, yes, because it's only as of now, spinning is trying to run the full utilization in India. They are exporting reasonably well. They are still trying to sell it in India. So their margins are under pressure because downstream is not working on a 100% capacity utilization. The moment we start finding the downstream industry also in a normal utilization, spread is surely likely to improve. But at the same time, it is not -- as of now, that's not the situation.
Great. So the next question is from the line of Awanish Chandra.
I will just build on the same question. Sir, you mentioned that spread remains the same what we had in quarter 4. And then yarn prices is also coming down. So mathematically, our margins should improve rather than going down. And so that mathematics, if you can just detail that for us?
How will the margins improve if the yarn prices are coming down?
Spread is same, right, more or less quarter 4 and quarter 1. So -- and my realization is going down. So spread by realization mathematically, some upticks will be there.
No, no, sorry. So when we talk of spreads, we talk of the spreads means the difference between the cotton prices and the yarn prices. That's the spread, it is generally talked on the textile one or on the spinning side. I'm not saying in terms of spread means the margins on the sales. I was not saying that. So the spread is the difference between cotton and the yarn prices. So it is coming down only because the yarn prices are coming down. So I suppose earlier I had sold yarn at $3.30, then I've sold at $3.20, then $3.10, my cotton remains almost similar cost. Then practically, my spread is coming down only on an every month basis, and till the time the prices of yarn are going down. So now the yarn prices are stable. So once it starts going up, then only the spread would improve. So in this period, whenever the prices are going down, the spread every month will keep coming down only assuming same raw material prices.
Okay. So -- and the situation is continuing the same thing what we have seen in first quarter?
As of now, yes.
Okay. So practically, though no chance of margin improvement until half of the quarter, quarter 2.
I can't say that, I'm saying it's -- so today's situation, as Mukesh mentioned, last 2, 3, 4 weeks, we are finding good demand on fabric side. So if things start improving, it can improve. But yes, today's situation, not really any substantial improvement in the system.
Okay. And sir, you have already explained everything related to your thought process on CapEx, and you highlighted your 2 concerns. But if these 2 concern on MSP side and import duty side remains additive, then we will decide not to grow from here?
No, no, no. That's not the answer. But yes, it may take some time because there are 2 factors looking at it. One the overall things look good. I mean, I forgot to mention, which I mentioned earlier also. The thought process of most of the Western world on a China plus 1 continues. I have listed USA last week, a couple of weeks, 3 weeks, 4 weeks back, the big brands. And that thought process seems to be quite good and quite consistent.
They are looking at China plus 1. So they want to come to India. The only concern will be your question will be whether the country will be in a position to give them what they want or not, one. Number two, they continue to come to India. There could be a situation for maybe a year or 2 where the things are continuously bad for Indian market. Maybe some of the capacity will go up, unfortunately, right or wrong if the things are not improving. And if 7%, 8%, 10% capacity is under question mark or goes down, probably there will be again -- this is a situation where our concerns are legitimate as of now, in our view.
And having said that it is not that we are not expanding, and we being a very conservative company, we have been a little more extra conscious, and we want to wait for a couple of quarters before we start expanding in a big way. So that we are very sure of what we are doing. That's all. So it's no way we are saying we'll not be expanding at all.
Okay, sir. Understood. And sir, last bit, you talked about Australia FTA thing, and there is no advantage as far as RM is concerned. But when we export there we have advantage, right?
So eventually, Australia is not a country which will be buying yarn or which will be buying fabric. They will be buying garments only. So our advantage will come indirectly to us whenever the government starts exporting, so the garmenter will require good fabric or good yarn, so which we will be in a position to supply to them in India. So that's the advantage which should come in. But I think slowly as those businesses start coming in, will take some time and that advantage will come slowly. But on the raw material side, unfortunately, because of very small quantity and the quota is being given to their shippers, that advantage couldn't be passed on to India.
The next question is from the line of Yash Tana.
So my first question is related to the spreads. So if we see downstream, so our garment players are indicating towards H2 recovery in demand. And I think, even you mentioned some bit of it. So my question is what are the spreads that is required for us to go back to the historical range? And let's say, if demand revives in H2. Do we expect even our margins to improve with revival?
Generally, the spread for the cotton spinning are always in the range of about $1, so $0.90 to $1. And definitely, if the demand improves, not only in India, worldwide, there could be a possibility because this has been a long-term kind of a spread. So $0.90 to $1 is -- can be done easily if the things become normalized.
And sir, at those spreads, what will our margins be?
So historically our guidance has always been about 18% to 20% EBITDA margin. If we start achieving $1 probably we will be reaching close to that.
Right. And my second question is relating -- so you mentioned in the opening comments about home textile, I missed that part. Can you please give an overview of how home textiles has been improving and their capacity utilization? And what is the reason why home textile is improving versus the other subsegments?
Yes. So if you look at -- there are 2 ways of looking at the improvement. One is the margin improvement, second is the capacity utilization. And my belief, in any commodity business, if the utilizations are improving, eventually margins will also improve because your costs come down. And as we are full, your capacity to get better prices also improves. .
So there is definitely an improvement in the overall utilization of home textile in last 2 months or so. If you look at the results, also most of the companies which have declared, they have shown decent results, and there's definitely an improvement from their corresponding periods for the companies. There are 2 reasons, I think, in my view, one, as I mentioned earlier also, as we look at the traveling data, if you look at the overall flight data, there is definitely improvement.
So which means home textile is directly related with the tourism as well, so if things are better, so it's better too. Most of the brands which would exhausted the stocks, they started giving the orders again. So that could be one area where the improvement is happening.
Third, specifically in my view, if you look at the China is -- the Pakistan is also one of a big player in the home textile. And last year, last couple of months, Pakistan, both politically and the textile industry is not very, very, good, so eventually, that advantage also coming to India and to the rest of the world where people want to have more safe supply chain management.
So probably that could be also one of the possible reasons where these orders have started coming to India. Fourth, if you look at the last year trend home textile was the first one where their capacity utilization has started dropping last year. And the remaining downstream industry, whether that's knitting, fabric, which was almost 2 months, 3 months later, we started finding the same pressure.
So eventually, I think the cycle is almost kind of a 8 months, 9 months, where they have -- their utilizations were bad and they have started improving. And if I look at the -- our woven fabric, almost similar time, so we were good till about 2 months after the home textile was down, probably now we have started improving.
So I don't know whether it's a correlation or it's a coincidence, whatever it is. But practically, I think as the brands are -- the destocking process is over, they started getting more goods for the vendors.
Right. And one last question, if I may. So in your experience, do you think that these spreads that we are operating on $0.55, $0.60 below these -- below this spread, it will be unviable for a lot of players to play and we might be near the bottom, and I mean, the raw material prices have stabilized. So what are your views going ahead on the spinning side?
So your idea is absolutely right below $0.50, $0.55 -- I mean it may start making sense for the spinner to reduce the capacity rather than keep producing. So because the reason is only that spread, including the spread, including your fixed cost, whether you are in a position to cover part of the fixed cost or full fixed cost or not.
So eventually, if the prices of raw material increases or the yarn prices go below this, the spinner -- it will be difficult for the spinner to continue the operation. And then once there is a cut in production side, probably, again, there's some respite would come in, one. Number two, it is also to be related with international market.
Today, New York Future is at about $0.84, $0.85 and the cheapest cotton will be available to Vietnam, and I'm talking of the big spinning countries. So they'll be getting cotton at close to about USD 0.98, USD 0.99 or so. There spinning cost will be in the range of about $2.70, $2.75 and today, they are selling the yarn at about $3.30, which is made out of the American cotton, so practically getting a spread of about $0.65 only, which is also very, very less. The movement prices goes up or the yarn prices come down. So it's not only India, which will be unviable, the other parts of the world also will stop dropping the productions.
So practically, this is kind of one of the lowest margins. And if let's say, the price of cotton goes up by another INR 3,000, INR 4,000 a candy or the yarn prices come down by another $0.20, $0.25, probably people will start looking at stopping part of the capacity to reduce the losses.
The next question is from the line of Roshan.
Am I audible now?
Yes, you're audible, yes.
Yes. So I just wanted to understand, the volumes that shifted to India from Pakistan, are they sustaining right now?
As of now, yes. So Pakistan had 2 problems last year. One was there were floods, so their cotton crop were damaged. As a result of that, they hit -- they were hit very badly, they have to import cotton, which was at very, very expensive prices. Two is a political turmoil. So the first problem is relatively over where the new crop has started coming in and their prices are aligned to the world markets as of now. But the second part continues to be a concern, where -- I mean, it's not my view, I'm saying when we talk to our customers, probably lots of them or many of them feel that they want more of a stability in terms of the political environment also because these are all brands which takes a longer period of time to adjust or to decide on their supply chain management. So I think that part still continues to be in favor of India.
Okay. And other question was, has there been any spindle capacity addition domestically or globally? If yes, is that a cause of concern for us?
The spindle capacity increase every year happens in the range of about 4% to 5%. And that has happened last year also. Rather last year, the expansion because of the good margins was relatively higher. So both spinning short spindles as well as open and converted on the ring spinning, the overall expansion as per the ITMF data is in the range of maybe about 6.5%, 7% of the installed capacity, which normally happens in the range of about 4%, 4.5%.
So practically, we have added about 2% to 2.5% additional capacity, which has definitely given one concern. On the top of that, the demand was less. So I think whatever excess capacity which got credited has definitely given some issue at least for the next 1 year, at least the year gone.
So till the time the demand normalizes this is a concern too. And this year also because most of these projects were announced 2 years back where the advances were given, construction was started, so if I -- if I have my own experience talking to or working with most of the machinery manufacturers, they are likely to give reasonably good quantities of machinery even this year also.
So these guys most -- if you look at Lakshmi, Rieter, Christer all these vendors. During '21, '22, they sold whatever their production manufacturing capacity, so they booked the advanced orders for about 2.5 years at that stage, which they have been supplying. So they had a very healthy order book at that stage for about 2.5 or 3 years which has slowly been coming down.
So if we look at this particular year, my belief the 4%, 4.5% expansion will happen even this year also. But yes, if this situation continues, the next year, there's no new orders are coming to them as per the verbal discussion we had with them from time to time. So practically, the next year, the drop will start happening.
But whatever projects were conceived 2 years back, I think, by and large, an example, we also added about 100,000 spindles in the March or April this year. This was all conceived 2 years back when the work was going on. So this year also, our belief maybe the normal expansion will happen even this year also.
Okay. That was helpful. One final question from my end. So any color on the U.K. FTA time line.
No idea.
[Operator Instructions] Meanwhile, sir, if I can just slip in 1 or 2 questions. So starting off with the quality control order, which has been in the news for a while. And what I'm seeing now is about what the government has done is they're probably postponed it by 3 months or so. But overall, what are your thoughts in terms of how will it be implemented? And is this practical at all or not?
Sushil, can I request you to answer this, please? .
The Government of India has deferred this for another 3 months, the way the objections are coming out, probably it will be further extended by next 3 months. Then after that, the government would take a decision.
Fair enough. But how practical is it given how unorganized we are, how do we really implement this on the ground?
No. As far as the ginning mill is concerned, they can definitely do it. But we, at the moment, we do not have the requisite number of laboratories which would test that material. That's why the government has deferred it. Probably it will take more than a year or so to get those labs and then maybe it gets implemented.
Fair enough, sir. Very useful. And just in terms of what I wanted to ask was in terms of the import duty, we really don't have any visibility that the import duty could go on cotton before elections. So I'm just trying to understand what will really help you take that capacity expansion. Is it lower machinery prices? Is it a much higher level of demand, say, 15%, 20% higher? Or is it something else?
Sorry, can you repeat the question?
Yes. So my question is that the import duty decision, it's a very valid concern because you will really make a CapEx for the next 20, 30 years. Now the thing is we have elections in India next year. And it is a possible scenario that the import duty on cotton may not go away, at least till elections, which means another almost 10 months or so. So I'm just trying to understand, is there something which can happen, which can help you take that decision in terms of expanding capacity. So for example, 20% lower machinery prices or, say, 15% higher, 15% higher demand from hereon. Is there anything -- any factor like that, which would help you make that capacity expansion?
Hello.
Hello. Yes, Mr. Jain. Am I audible?
I'm audible. Can you repeat the question, please? There were some disturbances on my iPad.
Okay. Okay. Sure. So my question is that it's a very valid concern that the import duty on cotton has to go away before you are able to sort of take that decision of expanding capacity. Now the problem is we have elections in India next year, which is another 10 months or so to go. And the import duty may not go away for another 8 to 10 months or so. Yes. So is there something that could change and that sort of help you go towards that space where you can make that decision in terms of a higher level of demand or lower machinery.
Of course, yes, these all are dynamic words. So I mean, in this kind of scenario where the overall pessimism is there, that's one part, so which is not really a big concern for me because eventually, whatever is happening with everyone in the entire world, things will get sorted out. It's a matter of 3 months, 6 months, 9 months. So I'm really, really not worried on the same. Our concern is if things are better, still India is not doing good because of the challenges we are creating for ourselves than what happens. So in spite of that, I think wherever the demand is good, there are -- the commitment from the customer or the customer wants to come in, there is a possibility for us to do a better margin business. We're still open to that idea.
Okay. Okay. Fair enough. That's very helpful. We have the next question from the line of Abhineet Anand.
Can you hear me now?
Yes.
Yes.
So just a small clarification, sir, cotton must be at an average of INR 57,000, INR 58,000 last quarter, which implies around INR 160 per kg, right? And you are saying that your spread was around $0.55, which is INR 50. So just trying to understand the math. I mean, the yarn must be more than -- must be in 250, 245 range, right?
Yes.
So that spread would have been higher. So just a small -- I mean, correct me if I'm wrong, INR 160, INR 165 at cotton and yarn must be INR 250. So that number should be on a gross number, should be INR 90, INR 95, right?
Yes, yes. But again, whenever we are talking of the spreads in the cotton spinning, one has to look at the cotton costs net of all the wastages because to make 1 kg of yarn, you require about 1.38 kg of cotton.
Yes. So you are saying adjusted to that?
Yes, yes, it was always adjusted to that and reducing the cost of sale of whatever wastages could be sold. So there's always net of that.
Okay. And second is that when you are giving example of Vietnam, you said around $0.84 in U.S. becomes $0.98, $0.99, which is basically the shipping costs, et cetera, you are trying to bake in. And lastly, sir, we had an other income of INR 92 crores this quarter, can we have a breakup of that?
Other income of INR 92 crores?
Sorry, or something, just a second.
So let Varun explain this. Varun?
Varun this side. So out of INR 93 crores, so INR 47 crores is basically the other operating income, which includes the FX gain. And other than that, the remaining part is basically the investment income.
Okay. So there's a ForEx gain of INR 47 crores, but that is...
Not entirely INR 47 crores, almost INR 20 crores of FX gain, but there are other elements like government grants and subsidies.
So that is in line with what we sell in all right, the benefit that we get.
Yes.
So the only incremental or one-off thing is the ForEx gain of INR 20 crores, and what is this related to directly?
No. So whenever -- every quarter, there has to be a mark-to-market or whatever forward contract we have done because we keep selling at that time based upon our selling of yarn when forward position is taken. But every month, we are supposed to do a mark-to-market of that. So depending upon at what price, the U.S. dollar or the rupee is closing on a particular quarter, there could be some gain or loss to that.
Okay. And for '24, '25 , what could be the average maintenance CapEx, sir?
In my view, '23, '24.
Yes. I'm saying for the 2 years, '24 and then '25.
So I mean, our earlier thought was that it should be in the range of about INR 250 crores per year. But now looking at the possibilities of a debottlenecking or the obsolescence or the improvements happening in the system, I feel personally it could go in the range about INR 350 crores to INR 400 crores for both the businesses together on a yearly basis.
Next question is from the line of Anil. Okay. I'll move to the next participant. We have a question from the line of Shivaji. Okay. I'll have to go to the next participant. We have a question from the line of Falguni Dutta.
We have mentioned about hedges in the notes to accounts. So these are what? Do we sell yarns -- is this selling of yarn, the hedges?
No. This is the forward contract. Hedges means whenever we sell yarn simultaneously or I mean depending upon our view, we try to cover the foreign exchange also. So these are those hedges.
Okay. So these are just ForEx hedges?
Yes.
We don't do any hedging. I mean there is no possibility of like, let's say, selling yarn, like suppose we are in a situation where we are seeing yarn prices falling. There's no possibility of selling the yarn in futures against.
No, no. There is no yarn future, so we can hedge either foreign exchange or cotton. So in this period, the cotton was not there. Of course, we keep taking those positions from time to time, but there's no way you can hedge the yarn.
Okay. So I missed you on the cotton. So what can you do in cotton? I mean ForEx you hedged, but...
So the cotton you can sell New York Future or buy on the New York Future. So you can do, ,I mean, the MCX is also there, but unfortunately, the volumes are not there, so we can hedge actually practically on the MCX, but you can do that on New York Future.
And do we generally do that?
We have -- sometimes if we are -- we have a very strong view or we take a larger position, sometimes we do that.
Okay. So sir, just if you can pardon my not understanding, if you can just explain how does this become a hedge in that case? Because we, as it is have cotton stocks, so what do we do against that.
Suppose I want to buy cotton today because the cotton is seasonal and most of the cotton has to be bought in the next 3 to 4 months' time.
Okay.
If I'm bullish on the cotton prices, then probably, I may not do the hedge. But at the same time, if I'm buying cotton and I feel the prices can go down, but at the same time, I still have to buy because the season is available only this, then the only choice is either I buy a put or I sell a New York Future there. It may not be 100% correlated, but directionally, it will be same.
Understood. And sir...
So which means if the cotton prices goes up, I have an advantage on my physical inventory, and I have a disadvantage on the future which are sold or vice versa.
Anil, I have unmuted your line, can you go ahead please.
Sir, I want to know -- ask what is the present capacity generation of spinning and fabric. And what do you -- in this what do you understand, any color on the future second half, what do you think about the capacity generation in the coming quarters?
So our capacity utilization on the spinning side is almost full. On the fabric side, used to be 70%. We are hoping by the end of this quarter, it will be 90% plus.
Right. And what do you think about this second half?
I hope this should continue on a better utilization basis.
Sir, my second question has already been answered.
Next question is from the line of Shivaji.
So I'll just slip in one last question before we close this call. So just wondering, 6 months back there was a lot of noise around what all the government is doing in terms of MITRA parks, there was a PLI scheme for garmenting and the U.S. -- the U.K. FTA and all those things. Now what we are hearing is that the progress on most of these has been fairly slow. So for example, even where MITRA parks have been announced, there has not really been land allocation and the process is not really underway in a big way. So overall, is that impression correct? And what are you hearing in terms of these developments? Whatever you can share with us?
I think -- I mean since -- in my view whatever decision central government has to take probably that happens on a faster basis compared to whenever you have to involve the state comments because they have their own processes. So it's not that they are not doing or they are going slow. But I think it's only procedural issue where you have to involve the state governments and they have their own issues formalities, land acquisition is not very easy today. And that's the kind of thought or delays which are happening. But in terms of thought process, it looks difficult for me to say, no, the thought process has undergone a change or it's slow from the government side. I don't think so. But yes, whatever is the formality of the states we have to do, probably that's in India, the land acquisition, those things are always been a concern, so which is a time consuming kind of a thing, so which the various state governments are working.
Fair enough. So overall, very informative discussion today. Any closing comments you want to leave us with in terms of how things look over the next 2 to 3 quarters?
Yes. So I think this quarter seems to be or continues to be under pressure. But as we are looking at some improvement on the downstream industries, I can only hope things will start becoming better from third quarter onwards, but that's only my hope as of now. .
So we have to keep watching the situation very carefully. And whatever is happening, we have to really accept that, but it's a hard part of life, but at the same time, it's factually true. But only I can say that whatever internally could be done, we are really, really working hard to look at that this difficult time should be passed through in a better way so that whenever the good times comes in, the organization is ready to take advantage of that as well.
So I'm thankful to all our investors, all our friends who have faith in the company, and I'm sure it's a matter of time as the thing starts improving, the overall situation of the business would also improve.
Great, brilliant. So that brings us to the end of this call. Thank you so much to the management for this insightful discussion. And thank you so much, everyone else for joining us today for Vardhman Textiles Limited's First Quarter FY '24 Earnings Conference Call.
Thanks, guys. Thanks, B&K, to organize this.
Thank you. Thank you. Bye-bye.