Vardhman Textiles Ltd

NSE:VTL

Earnings Call Analysis

Company's Utilization, Spreads, and Strategy

The company, a player in the spinning industry, is navigating a landscape where overall industry utilization is at 85-90%, with well-managed companies at full capacity, while smaller and vulnerable players are reducing utilization. Margins, gauged by the spread between cotton and yarn, are currently lower than the healthy benchmark of $1, hovering around $0.50 to $0.70. In response to market conditions, including demand patterns and pricing, the company is focusing on modernizing and possibly expanding capacity to shift toward blended yarns, which are witnessing rising demand. They are prepared to adapt their product mix and infrastructure to remain competitive and capitalize on changing market opportunities.

Navigating the Tides: Company Outlook Amidst Global Demand Fluctuations

The company is experiencing a period marked by a reduction in global demand, a situation that is not causing significant concern for the management due to the industry-wide nature of this trend. There is an anticipation that this challenge will be overcome in time as economic factors, such as interest rates, adjust, and the market stabilizes. The management is confident that their efficiency will enable them to emerge successfully from these current adversities.

Capitalizing on Domestic Potential: India's Competitive Edge

The management identified India's potential to maintain viability, particularly in the spinning sector, despite global market volatility. The focus is on ensuring that domestic production remains competitive, considering factors like raw material costs, which are instrumental in battling international peers like Pakistan, Vietnam, and Indonesia. The company is exploring two strategic pathways: cautious capacity expansion and creating infrastructure for higher-margin opportunities, the latter being a tactical priority aimed at leveraging capabilities rather than just chasing revenue growth.

Commitment to Modernization: Upgrading for the Future

The company has pledged a considerable investment in modernization, projecting to spend INR 300 crores this year and possibly a similar amount next year. This investment strategy is designed to enhance the company's capabilities, allowing it to capitalize on future opportunities with enhanced margins. This approach underscores a preference for value over volume, positioning the company to remain adaptable and competitive as market dynamics evolve.

Measured Expansion: Strategic Capital Expenditure

Management has disclosed that ongoing project evaluations in the spinning division could result in an additional INR 100 crores to INR 200 crores in capital expenditure. However, the company has not embarked on any significantly large projects yet, with a forecast of INR 300 crores to INR 350 crores in spinning capex and around INR 100 crores for the fabric business, totaling an estimated INR 350 crores to INR 400 crores in capex for the near future.

A Turn to Renewable Energy: Reducing Dependence on Traditional Power

In a strategic move to curtail power costs and environmental impact, the company has entered into an agreement to procure solar and wind energy for its MP unit. This transition, expected to take 15 to 18 months, is a part of a broader initiative to increase the proportion of renewable energy in the company's overall consumption mix.

Calculating Risk: Awaiting Clarity in Industry Economics

The company's management has expressed a conservative stance toward large-scale expansions, preferring to wait for clarity on industry-wide economics. With regards to cotton pricing, concerns loom over the Minimum Support Price (MSP) in India that may create a price floor hampering competitiveness if global cotton prices fall significantly. This predicament underlines the need for strategic patience and the importance of governmental policy clarity on import duties and pricing, which will ultimately shape the company's future expansion plans.

Operating Underutilization: The SME Challenge

The estimated utilization rate in the spinning industry is at approximately 85% to 90%, echoing a disparity wherein well-managed and large companies operate at full capacity, whereas Small and Medium-sized Enterprises (SMEs) are potentially reducing operations due to vulnerabilities and financial constraints. This indicates a diverging performance within the industry segments and highlights an area for potential capacity optimization.

Commodity Conundrum: Cotton Price Challenges

Cotton prices, which are a key cost driver for the company, have seen a recent decrease after a prolonged period of high rates. However, the corresponding drop in yarn prices due to continuous decline over the past six months has limited the potential for improved margins, even with the reduction in raw material costs. This underscores the complexity of managing profitability in an environment with fluctuating commodity prices.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Vardhman Textile Limited Earnings Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Archit Joshi from Batlivala&Karani Securities India Private Limited. Thank you, and over to you, Mr. Joshi.

[Archit Joshi, executive]

Thank you, and good evening. Welcome to Vardhman Textile Limited 2Q FY '24 Earnings Conference Call. We thank the management for the opportunity to host this call. We have with us today Mr. Neeraj Jain, Joint Managing Director; Mr. Sushil Jhamb, Director of Raw Materials; Mr. Rajeev Thapar, Chief Financial Officer; Mr. Mukesh Bansal, Head of Fabric Marketing; and Mr. Varun Malhotra, Head of Finance. Without further ado, I'd like to hand over the call to Mr. Neeraj Jain, Joint Financing Director of the company for his opening remarks. Over to you, sir. Thank you.

[Neeraj Jain, executive]

Yes. Good afternoon, everyone. Thank you for joining this call. So the declared results and flows you have gone through the same. The results are almost in line with the first quarter, maybe a little lower than the first quarter, but in any case, not really much of improvement in the overall numbers are looking like. In terms of business, this has been, again, continued to be a challenging period for the spinning industry worldwide, not only for us, but for a [indiscernible] is not improving. Of course, it was much worse if you look at 2 or 3 quarters back. So from there, it has improved in terms of demand. And most of the spending today is running on a full capacity basis. But at the same time, it is still on an oversupply situation. As a result of that, the margins are not improving at all. So this has been a period where -- I mean, if you look at the 2 or 3 last calls, we always talked about lots of stocks or development with the clients that it's not ordering the other orders coming and the [indiscernible] segment of the business is not doing good. But I think if you look at the current period, move wherever or whichever brand wanted to stop, that's where and the brands have started coming back for the normal buying. Maybe they are not buying 100% of the requirement, but they are definitely buying 75%, 80%, 85% of what they think is the requirement going forward. So to that extent, there's an improvement happened. At the same time, still the overall demand is still on a not annual basis, which used to be there. The impact of higher interest rates, the impact of higher gas prices because of the Russian Ukraine, the impact of EMI because of the higher interest rates and food inflation, et cetera, et cetera, still hurting most of the Europe, most of the U.S.A. And as a result of that, again, as we have been discussing, the discretionary demand where the textile comes in is comparatively low. And as a result of that, since our segments are spinning and leading, I think there's some impact -- negative impact, especially on the spending side in this period. There are 4 major segments in the textile industry, which is home textile, knitting, denim and beading. And we look at both the -- all the 4 segments. Home Textile in terms of consumption is doing reasonably well for the last couple of months. And they are practically running the full capacity for the last 6 months or so. So which means their demand has started improving. And this is one segment. Of course, the prices of [indiscernible] are not increasing or the price of context may also be under pressure. But at the same time, at least, their utilization for the Indian wells are surely better. The second segment where we started looking at some improvement was the leading Govan fabric. Most of the companies, which were -- which started the work from home kind of a concept in the COVID period. Most of the companies started looking at partial compulsory coming to the office partially, if not fully. And as a result of that, the demand for formal fabric improved. And because when the COVID happened, govern fabric was the burst it at that stage. And now once the people have started going back to the offices, they have started looking at the formal clothing. The moment is definitely improved. And for us also, I think these are the 1 or 2 months where our utilization is definitely one of the best, and I'll explain it a little later once again. Third segment is the denim, which is one of the biggest segment, but it's not doing good. And the fourth is the knittting. So both denim and knitting, which is considered as more of an informal or casual kind of clothing. These are not doing well because as people are moving back to the offices, the demand for these products are less as of now. And as a result of that, there is a pressure on these segments. And since these are the large segments, this is putting a pressure further on the spinning side. For the spinning side, the India normally used to do close to about 110 million kg, 115 million kg of exports per month, which came down to as low as 30 million, 35 million kg from 7, 8 months back. But as of now, we are back to the normal and the overall export from India is in the range of about 110 million, 115 million per month, which means in terms of volume at least, we have started matching what we used to do early. The second part is with local consumption. I think definitely, there is a pressure because of direct and indirect, both. So the local consumption means the meter denim manufacturer or the move [indiscernible] were buying an in India, and they are exporting the products to the outside word. I think there's [indiscernible] over there. Two, the Indian reduction of -- Indian consumption also looks like a little lower -- on a lower side. As a result of that, I think in spite of of normal exports of yarn, the overall yarn is very, very depressed as of now. On the woven side, we have definitely improved, as I mentioned, and for Vardhman also, we are in a position to utilize almost full capacity for the last 1 month to 2 months. And we hope that this trend is continued as of now, going by whatever orders we have or whatever predictions we have or whatever visibility we have, the things are looking positive. And I think that's one of the advantage Vardhman number as of now, but this business is doing better, both in terms of volume as well as on the profitability as well. On cotton side, this has been, again, a very, very different period. We have seen the last year cotton behavior. So in Indian scenario, the -- from the original crop size of estimation of about 330 lakh bales. And the crop arrival was very, very less or in the initial period. It was estimated, maybe the crop will be very, very less. And at one stage, the CCI kept reducing their crop estimates, and they came back to as maybe 295 lakh bales or so 290, 295 lakh bales as a total crop size. But eventually, I think it was rather than the less quantum, I think it was more of a holding or most of the lesser -- the lesser reset, which was there in the market, which was done by the farmers. But I think by the end, we -- by the time we ended the season on 30th of September, the total crop size was almost 320 lakh bales, which was not very bad compared to the initial estimation of 330 lakh bales. And I think that gave some advantage to the -- I mean there is some reduction in the prices towards the end of the season. But otherwise, it was estimated most part of the season since the crop will be very, very less. The Indians may not have availability of cotton because import couldn't be done because of the import duties. And as a result of that, everyone in the system was going long, whether it was farmer, whether it was Giner or a trade. But eventually, as crop kept coming slowly, the prices got adjusted and the enough availability of cotton was there almost for the full year. The new season has started. Again, the industry estimate is still close to about 320 lakh bales, but I think the first official crop estimate, which has come in from CCI, they have given a crop estimation of 295 lakh bales. Once again, the field because there is an attack of [indiscernible] in some of the areas where it is felt that may be crop size could be less. So again, showing a concern. So they have shown a top size consumption of 311. So which means there is a reduction of almost 16 lakh bales. And if we look at the closing stock 30th September, it was estimated to close to about 40 lakh bales. And in case, we reduced another 16 lakhs out of that by the end of next September, the overall closing stock is estimated only 22, 23 lakh bales. In case that happened, that is going to be very, very difficult for India to manage the entire system because we have so much of spinning and they are -- there are different stakeholders who -- or anyone and everyone will have some stock of cotton. And managing the entire country with 20, 22 lakh bales is definitely going -- could be a concern. But as far as the industry estimations are concerned, they are still feeling the crop size may not be less than 316 to maybe 320 lakh bales even as of now also. So on one hand, we have an issue where if the availability becomes a question mark to the New York future in this period has been coming down. As per the latest estimation of consumption, now the consumption have been reduced from $4.9 million or 25 million tonnes to close to about one of the agencies related as 23.9 million tonnes also. So there is likely to be some increase in the overall stops. So which means the worldwide, there seems to be enough cotton available the prices are under pressure. So most of the time, New York future has been in this period in the range of about 0.87, $0.88, which is $0.85 to $0.87, which has come down to $0.80 as of now. So the Indian prices today are close to about INR 57,000, INR56,500 to INR 57,000 a candy. We converted into the U.S. sends, it is close to $0.86, $0.87. In the time we have an international cotton or a New York Future at in the range of about $0.80 to $0.83, which means our cotton will be 300 to 400 basis points over and above the year of future, which has been the normal trend if we leave the last year. But the worry could be in case New York future keeps coming down and comes down to rate $0.75, $0.76. In that scenario, we will not be in a position to -- Indian cotton will not go below this because 56,500 or 57,000 practically becomes the MS2 prices, where the CCI will start operating and they'll start buying the cotton. And in case they corner some of the cotton, the prices will not come down. So we have a situation where the New York future, if it goes -- if it remains there, I think it's not really big of a concern for the Indian spending. But in case the year future goes down further to $0.75 or so. In that scenario, our cotton at $0.86, $0.87 will be almost INR 1,000 to INR 1,200 on, which will be a little expensive because the Vietnam are in a position to get the contamination pre-con in the range of about 900 to 1,200 basis points. And in case we get the Indian bottom at 1,000 plants, I think it's definitely a disadvantage of the industry. So this is yet another challenge that how the New York feature will be placed going forward. And to that extent, how the Indian prices will behave. So both -- so third is in terms of the quality. As of now, though, there's the pink ball going from, but at the same time, there doesn't seem to be any big disadvantage in terms of quality till now. But we'll have to keep watching because it is only the starting of the season as of now, only about 100,000 bales per day has started coming in. The overall crop side, which has come into the system from 1st of October is only about 25 lakh days or so as of now. So we'll have to wait for -- a wait and watch for another 2 months so that by the time we take a call that how the overall crop quality arrivals happen. So the next 1.5, 2 months are quite challenging for the spinning industry, and we'll have to look at how the things evolve, so that we are in a position to make up our mind in terms of our sporting policy as well as how the prices will be ranging in this between. So these are a couple of issues and challenges where the industry is struggling with as of now. And I think that struggle, though, in terms of the business cycle, in terms of the China plus thought process, I think things are quite favorable for India as of now. And most of the brands whosoever was committing, I think they are looking at India as definitely 1 of their possible supplier of goods. So those are some positives also, but at the same time, because of the oversupply situation of spinning as of now, the things are under pressure for sure. And we'll have to wait for some more time till the time the normal demand happens. But in the meantime, as I mentioned since the moment for the company is doing better, so our results are better. and request Mukesh to give some more brief to the investors on the woolen marketing fabric side so that then we can start with the Q&A. Over to you, Mukesh.

[Mukesh Bansal, executive]

Thank you, Neeraj. Good afternoon, everyone. As far as the fabric business is concerned, as we mentioned during the last quarter call also, the international brands had 3 major concerns while placing the orders. One concern was the current inflation because of the inflation, there was lesser disposable income with the consumers. Number two was the fear of economy going into the recession. And third concern was the they're carried over inventory in hand with the retailers. So we are also seeing the results of some of our retailers who published their results internationally. Now the -- the first 2 concerns still remain, which is the inflation at this year of recession. But the third concern, which was the inventory in hand, that concern has more or less -- the inventories have come back to the near normal level. Barring a few brands in some brands, the inventory could be abnormally low. In some brands, it could be higher. But by and large, in the supply chain, the inventory has come back to the normal level. So which has triggered the demand to a big extent. Particularly, we are seeing the demand from the U.S. market. We are seeing it from the U.K. And from the European market also after a long time, the demand has started building up. And Japan is also 1 of the bigger markets for us. And from Japan also since the COVID happened, the market has never revived. Now we are seeing the revival in the Japanese market as well. And the next biggest market for us is the India. Indian market, the retail situation at the moment still continues to be a little subdued. But there could be the reason because this time the festive and the merger season was a little late, which is the major time when the people go for shopping the garments. Since this time, the [indiscernible], the Durga Pooja and Diwali were a little late. So now that demand has started picking up. And we, along with our customers, we expect that the next 6 to 8 weeks, we'll see a good demand in the Indian retail sector also which will enable the retailers to put the money back into the materials. So the Indian demand is also likely to pick up. .Second, another aspect that Neeraj also mentioned is the China plus 1 strategy. Many, many brands are now focusing. So day by day, the concern of sourcing from China and people fearing that Chinese cotton may find a way in the supply chain, those concerns are increasing. That is why the brands are also putting more impresses on buying from India as India doesn't buy any cotton from China. And then the sustainability and traceability practices also come under the focus. And Vardhman has that natural advantage being the 100% vertical integrated. So more than 90% of the yarn that we consume for the fabric, it comes from within the word demand. And then we have to trace back the cotton, wherein we have very good practices in place. So we are able to give full traceability to our customers. So we have that natural advantage. And as we mentioned that in second quarter, our capacity utilization was better than Q1, and Q3 is going to be better than Q2 and in any case, 2 for the fabric business because it is largely bringing some oriental for international market, we are primarily cotton-based textiles. So H2 is better than H1. So we are likely to continue sequentially better numbers as much -- as far as fabric is concerned. That is it from my side, Neeraj.

[Neeraj Jain, executive]

We can start with the QA and whatever are the queries we can resolve it or we can reply it as the questions are asked.

[Operator]

[Operator Instructions] The first question comes from the line of Rishabh Shah with [indiscernible] Securities.

[Rishabh Shah, analyst]

So my first question is, we have spoken of MMS becoming a larger portion of the overall pie. How does it alter our competitive dynamics of the country and what are your thoughts on what can help our company to grow and get bigger share of MMS in the coming future, let's say, next 5 to 7 years?

[Neeraj Jain, executive]

So on the -- definitely, if you look at the word consumptions, the [indiscernible] is much higher than the cotton. So it's almost 70% in favor of and made 30% cotton, whereas the Indian situation is reverse of that, we have 30% cotton. We have 30% [indiscernible] 70% cotton. We are finding even for the Indian brands or outside also, whoever was buying 100% cotton. I think there's definitely improvement or there's definitely demand for the blended yarns, whether it is mix with the viscose-based or it is next visible based. So definitely, we have geared up ourselves in case the demand for the brand increases. The -- on the spinning side, we don't have any issues, and we have created those capacities. And depending upon how the -- because the spenders are almost same. There's only some changes in the [indiscernible] which are required to do the same. So to that extent, as Vardhman, there is no challenge to us, and we can increase whatever is the blended capacity which comes in or even 100% synthetic, or manmade fibers are concerned on the spinning side. On the fabric side also, I think we are definitely improving. We already have a good experience of blended as well as the man-made fiber consumption production. So as far as the blended yarns that tender fabric is concerned, not much of it all. But on a 100% mandate, definitely, there are some companies, some technologies which are -- which is specialized on the man-made side. So since as of now, there's not really much of demand, but at the same time, going forward, there could be a possibility. So we have started evaluating those business, where in case we have to look at 100% man-made base fabric. How do we go on that? So we are studying it, somebody valuation. And maybe all the demand growth we are all studies should be completed. Our experiment should be okay. And maybe by the time we find the actual demand starts coming in, we'll definitely [indiscernible] or add those equipments, which can help us in processing the man-made based fabrics more efficiently. We can do it today also on the cotton line. There's absolutely no concern or issue. But I think going forward, if the 100% man-made increases, we can equip parcels. It's not really a very big time required for the same. So to that extent, we have already started working and evaluating those technologies.

[Rishabh Shah, analyst]

Okay. And my second question is in the business of spinning and fabric manufacturing, besides utilization of facilities and procurement of cotton, what are the key focus areas for the senior management ?

[Neeraj Jain, executive]

Our first focus was -- I mean, of course, you mentioned that the first focus was how to utilize the full capacity. At the moment you start utilizing full capacity where all cost starts coming down. I think the focus as the more and more brands are coming to India, people are talking about China, plus one. So all these brands, which comes in, they require a very different service levels, we'll be requiring different kind of fabrics, and then we definitely requiring more mix of demand made based products also. So getting to all those change management, something they require, all the kind of social orders they require, all the sustainability information and data require because all these brands, which comes to India will definitely start looking at better managed companies because for them to go to -- or to go to the very, very small companies for every product, which won't be possible. So both on the fabric side as well as on the spinning side, we are finding whichever brand wants to come. They want to look at 1 or 2 sources only where they can depend more on that. And markets are coming in their requirement of sustainability, quality, different products, different. It is a different ballgame altogether for every brand. I think as of now, the entire energy is going in the whenever the is[indiscernible] when these customers are coming in, how do we get it to them, how do we understand them? How do we create business model with them. We have to start supplying them the products because some of these products are really imported from China. China is [indiscernible] make these products there on the implanted test products. And in terms of the challenges where the organization is looking at and once these brands here for a longer period of time. I'm sure this will give us lots of opportunities for growth as well.

[Rishabh Shah, analyst]

Okay. And sir, my last question is, we say that we are a client-centric company. What does it mean? And how are we different from other companies in the market?

[Neeraj Jain, executive]

I'm sure today, everyone has to be a client or a customer-related organization, customer-centric organization. The only point is the whatever service levels are required, whatever the customer needs, customer demand, how fast can we meet them first and right? So many times the customer requirement, I want product in these many number of days or some there are some urgency. There are some different products where there are sampling requires. So there is a cost learning from one plant to the other test products and also in terms of our own development and comping the customers' development. I think the amount of focus being given their demand on the customer-related issue was, I'll not say the others would not be giving, but definitely, we feel we definitely give lots of time and energy to that too. Second is that repeat customer requirement. So there are lots of companies where they have a policy of selling for 1 month only or maybe on a deal-to-deal basis. We are open, customer wants -- some customer wants to see on pricing. Some customers want a deal-to-deal basis. Some customers want a 3 month pricing. Some customers want, whatever model they require, they're trying to fit into to our system, whether for yarn, for fabric. So the customer -- many customers will able will not change the product sizing during the season. So you give me 6 months pricing. Now that some of my customers asked me, even for yarn, 9 months tiding. So whatever is their requirement, which is fitting into their business model, we are trying to look at that we should upgrade and we should have in a position to take that risk and get that product to the customer so that we can fit into that. Third is the customer should not suffer maybe because of quality, for example, we know the quality of cotton has been very bad 2 years back. But it was a decision that we will not let the customers suffer on account of quality. So whatever was the cost to be incurred there because we feel we find it may be a loss for a year. But if you lose customer confidence probably losing forever. So as Vardhman, we have always been looking at the customer ship might suffer, they should be in a position to get what they require. And to that extent, whatever internal systems processes or cost is required, if we are not in a position to even utilize that, we should have be in a position to bear that so that the customer continues to remain with Vardhman.

[Operator]

Next question comes from the line of Resham Jain with DSP Asset Managers.

[Resham Jain, analyst]

Thanks for giving a clear update on the sector. So I have a couple of questions. The first one is, just with respect to, let's say, upcoming quarters, first half has been single-digit margins overall. And I presume yarn would have been significantly lower, while fabric would be a double digit. But how do you see, based on your current order book and the current cotton in and margins to behave, let's say in near term?

[Neeraj Jain, executive]

So at least for the current quarter, going by today's situation, I don't think there's any likely to be any change, major change from what we have seen in the first 2 quarters. And most of the yarn orders today are not beyond 1, 1.5 months or 2 months. So I think depending upon how the prices go, how the cotton goes, we'll have to wait for the fourth quarter numbers. But going by the current situation, the third quarter is likely to be aligned or in line with the second quarter.

[Resham Jain, analyst]

Okay. And in terms of margins, how are the margins different between yarn and fabric right now?

[Neeraj Jain, executive]

So what you mentioned that the yard will be significantly lower in the single digit and fabric will be mid double digits. That's where we are.

[Resham Jain, analyst]

Okay. And in terms of the situation, you mentioned about the inventory situation at the retailer level. But generally, yarn also mills used to keep 2 to 3 months of inventory earlier break over and all, are you seeing that situation coming back? Or because most of the mills are now keeping yarn for a very less period. So is this the new normal?

[Neeraj Jain, executive]

No. The yarn stock with the mills even pre COVID, the yarn has always been less than 1 month. So in between these yarn stocks increased because this [indiscernible] was not in a position itself. But otherwise, the norm has always been less than 1 month and even that continues. So if mills are not in a position to sell, they may increase it temporarily. But effectively, at the end of the day, we are always looking at inventory to be managed within 1-month maximum.

[Resham Jain, analyst]

Okay. And sir, generally, you have been quite confident about scenario improving over medium to long term. And obviously, some of our investments we have deferred, given the uncertainty in the situation right now. But -- and obviously, companies which are strong in terms of balance sheet, would typically take advantage of these low cycles to either put up capacity or to maybe acquire some companies. How are you thinking about it given that your medium to long-term kind of expectation is there in terms of improvement.

[Neeraj Jain, executive]

The way 2 situation looks to us One, the -- whatever is the demand happening in the worldwide it is less. So this is not really giving us a big concern because everyone is in the same boat. It's a matter of time, interest rates will come down. Things will be all right. And whoever is the efficient player, they will survive this period. The -- some of the weaker players may go out of the business and all good companies will start making good money once the situation is normalized. It may take 3 months more, it may take 6 months, 9 months, 12 months, so that's really not a big concern to us as of now, and we are very confident as the things will start improving, we will also start working well. So there's no issue to that actually. The only concern we as an organization or as the industry has as of now, we have an import duty on raw materials in India. And in case, the Indian raw material continues to be on a higher side. And because of that duty component, then whether the India will be in a position to really be viable on the spending side. So that's nothing to do with the world markets or the demand that's something to do with the India because we are not the only supplier. India is not the only supplier. So suppose our cotton is expensive, will be Pakistanis, Vietnamis or Indonesians, will they not get the chance to create capacities and sell in the export market if our raw material is expensive. And that's one larger concern there, we have to look at as a country, how are we competitive which should be in comparison to the world markets. So that's the second point we have. But having said that, I still find there will be a lot of opportunities for the Indian suppliers also. So to that extent, there are 2 choices available. One, that we keep expanding the capacities but suppose tomorrow, whatever is I've mentioned, if that doesn't get resolved. So to that extent, I think the spinning margins will always be concerned or a question mark. So the second part is that why not to create some infrastructure or some capabilities, some debottlenecking where once this kind of a brand business comes in, you are in a position to cater to that and maybe you reduce your -- the basic productsI think Vardhman strategy more is on the modernization or a demodelacking side as of now. And we are trying to look at in case we can do -- we can create those capabilities going forward. Obviously, whenever the opportunity comes, we take advantage of that rather than only expanding the capacity. And all our thought processes, as of now are going into that. Just to give you an idea, normally, we have a capacity. We have a normal monetization in the spending business, about INR 100 crores and INR 140 crores a year. But I'm sure this year going by the situation or the opportunities we are looking at, we're creating capabilities where we are -- we have increased or announced our monetization plan, and we might look at we might spend another -- I mean we might spend INR 300 crores on the modernization for this year, maybe a similar amount in the next year so that we create those capabilities that if those opportunities come in, we encash with a better margin rather than just creating a top line numbers only.

[Resham Jain, analyst]

Okay. Understood. And sir, last one is on CapEx this year. What are the plans? You mentioned INR 300 crores from modernization. But is there any other CapEx other than that?

[Neeraj Jain, executive]

So there is -- there are some small projects within spinning, which is being considered under evaluation. And I hope once -- if we are in a position to start implementing that, it could be maybe another INR 100 crores, INR 150 crores or INR 200 crores but not really any very, very, very big project as of now. So I feel the physical CapEx for the spending may be about INR 300 crores, INR 350 crores critical because even if we start taking some projects this year, the expenditure won't be there, and maybe another about INR 100-odd crores for the fabric business. So the totality could be INR 350 crores, INR 400 crores.

[Resham Jain, analyst]

Okay. And nothing on renewable power in terms of CapEx.

[Neeraj Jain, executive]

So Rajeev, can you give some idea on the renewable side?

[Rajeev Thapar, executive]

Actually, in case of Vardhman Textile, we already entered into an agreement with the new power company for supply of solar and wind power to our MP unit, which is another month spinning mills. So partial power will be supplied through this project and implementation of the same is expected in the next 15 to 18 months. So that is already tied up project and there is also -- we are flooring the opportunities to strengthen the solar and in power waste where we can see that our renewal power composition may be improved within the overall energy consumption in the company.

[Neeraj Jain, executive]

The first part, which Rajeev mentioned, it is through the SPB where our contribution will be very less. So in terms of our CapEx, it may not be directly into our company. But it will be via STB, so it may not be a paring directly into our books because we will be holding only 26% equity in that company. The other, we are considering some other projects. We are yet to take a final view whether that happens by STB or it is a direct investment in the company. So all those options are there. But definitely, we are evaluating it seriously to create a bigger capacity, which I'm sure next maybe 2, 3 months, we should be in a position to take a final view on that.

[Operator]

Next question comes from the line of Awanish Chandra with SMIFS.

[Awanish Chandra, analyst]

Sir, in the remark, you have touched upon points very briefly, but is still continuing the discussion on the margin. Sir, if I look at your 10 years performance or even 5-year performance and even I exclude 24% [indiscernible] margin and few 20% margin, still even bad, ugly, whatever maybe the situation we use to it 13%, 14% all the time. So last fourth quarter performance was very low. So is there any strange you are seeing, and that is the reason we are not even able to make 12%, 13% because that was a norm even in the bad years of 10 years. So looking at such a long data and hitting below margin still doesn't add. So any structural change you are really seeing in the market for the margin perspective?

[Neeraj Jain, executive]

No, no, no, no. There is no structural change at all. It is only since the demand is not there because of very high inflation in U.S. and Europe where the priorities have changed as of now gas prices are very, very high. Those are the issues and concerns interest rates, who have seen the interest rates of 5.5% in U.S. in last 20 years. Nobody has seen that. So I think those are the issues and concerns where these concerns have started coming in. And once I think now most of the time -- I mean we are hearing or we feel there could be maybe a state the interest rate increase may not happen in U.S.A. or maybe there could be 1 or 2 tranches which can happen. And after that, once the inflation is not in control that interest rates start coming down, gas prices should normalize. So by that time, I think the things will change. But as of now, since the problems are much bigger over there or are very different over there, which is the biggest consumption centers in the world. So that is where these issues are coming in, the overall demand of textile products is less. And if the demand is less, to that extent, I don't think anyone will be in a position to make money because it's not only Vardhman or India, most part of the textile industry and the entire world is passing through the same time.

[Awanish Chandra, analyst]

Okay. Understood. So there is no issue in the structure. It just a current situation.

[Neeraj Jain, executive]

No. No. No.

[Awanish Chandra, analyst]

And sir, 1 bookkeeping thing, how much cotton inventory currently we are having.

[Neeraj Jain, executive]

So the India cotton season ends on 30th of September, where anyone or everyone in the system will have their minimum quantity. So maybe because the season ends and the new season starts in. So we also are in a similar situation where it is the change of the season. And I think typical inventory may not be more than 30, 40 days in the factory as of now. Of course, we started buying at the new arrivals have started coming in. And maybe next 2, 3 months, we should have in a position to build it up.

[Awanish Chandra, analyst]

Okay. sir, one last thing, continuing the discussion of modernization you have talked about. So we are not going to focus on higher tonnage rather than your focus will be on product mix. Because when you say modernization, it is not increasing the output, but change the product profile. Is that correct?

[Neeraj Jain, executive]

No. So there are a couple of things in the modernization, which we look at. One is the product profile change. Two sometimes because of the higher speeds, some of the machinery will be in a position to give you a better output of. Three, many times, there is 1 bottleneck machine because of which you can't increase the overall production. So if you are in a position to improve upon that, the overall production can improve. And maybe there are a couple of modernizations which are directly linked with the payback in terms of the improvement or a consumption improvement on the [indiscernible] or air, et cetera. [indiscernible] there, et cetera. So there are maybe some of the monetization happens because you require to be in terms of better in terms of safety, et cetera. So there are different parameters to look at that. And when I say the total monetization, all these are part of that. And depending upon the opportunity, we will keep taking those.

[Awanish Chandra, analyst]

Okay. But as such, there is yet no plan to increase the capacity or whatever to a on capacity.

[Neeraj Jain, executive]

No, not in a bigger way in any case as of now.

[Operator]

Next question comes from the line of Prerna Junjunwala with Elara Capital.

[Prerna Jhunjhunwala, analyst]

I just wanted to understand you were holding lesser quantity of cotton at the end of last year. And there was a lot of volatility of cotton prices in the last 3 to 4 months. Given your balance sheet, you would have procured price cotton at lower prices. Then what restricts a little better margin than last quarter? I just wanted to understand from that perspective.

[Neeraj Jain, executive]

No, the cotton prices have started coming down only in the last 2 to 3 weeks only because before that, the cotton prices were in the range of INR 62,000, INR 63,000, INR 64,000 a candy only. It's only last 2, 3 weeks where the prices have come down to INR 57,000, INR 58,000, a candy.. So I think -- and again, we have just started buying because we are -- still the arrival is only 100,000 bales a day. The overall consumption in India is also about 80,000, 85,000 bales. So the best possibility for the mills to add is only about 15,000 to 18,000 bales if everyone is buying on a one-day basis. Maybe some of the spinners may not be buying. So some other mills can actually build up some more inventory. So it's only the starting of the season, the prices have come down only now. And also, whatever the prices drop happened in India, I think the yarn prices for the last 6 months are continuously going down only. So even if the cotton prices comes down in India because the New York future has come down, so the overall yarn prices are also reducing. So the possibility of margin improvement, even with the lower cotton prices is not looking like it as of now.

[Prerna Jhunjhunwala, analyst]

Okay. Okay. So with increase in fabric capacity utilization, we should see some better margins.

[Neeraj Jain, executive]

For fabric yes, but the overall -- since the spinning is still a significant part of the company. So unless the spending improves, the overall margins may not improve significantly.

[Prerna Jhunjhunwala, analyst]

So sir, what should be the sustainable margins in the spinning industry given that import duty does not go away on cotton for a longer time? And do we continue to report such weak margins because that is 1 of the main hindrances for a better operational performance.

[Neeraj Jain, executive]

No, there are 3 factors to this. One is the import duty that is only 1 of the factors. So if you look at today's cotton prices international and today, Indian prices, there's no disadvantage to the Indian spinner as of now, even if there is an import duty. So that's not the impacting it as of now. The impact today is more coming from the lesser demand unless the demand improves. And that demand will definitely improve in future also. And in case of near future is at $0.85, $0.90 and the Indian concerns would not be there of our MSP. So I think all 3 things are related. Purely, the import duty on cotton today is not hurting us. It is demand which is hurting us the most as on. And when that improves I'm sure the demand improves, the cotton prices internationally will also improve. And once that happens, the Indian prices are also aligned to that. So to that extent, I think there's no disadvantage. So it's very difficult to say it's only because of the import duty, the prices of India or cotton is higher and the numbers are not sustainable. Now today, the biggest concern is coming from the demand side.

[Prerna Jhunjhunwala, analyst]

Okay. And if I want to understand longer-term picture for word demand from 3 years' perspective? How should we look at this company from growth or margin perspective from a 3- to 5-year perspective, I'm trying to understand.

[Neeraj Jain, executive]

We have lots of plans which we are prepared, but at the same time, we are a very, very conservative industry company, and we are always looking at that whatever we have, we should have been a position to sustain it as through all kind of difficult times successfully. Going by this kind of situation. Now let's look at another situation, the MSP in India is INR 7,020 as of now, which is equivalent to INR 57,000 a candy, which is equivalent to $0.86, $0.87 of cotton. Tomorrow or near future goes down to $0.70. Our cotton will not come down below that. We'll not be a position report because of import duty. So which means we'll be very, very on a higher side. So our concerns and questions are only that unless there is a clarity because if their import duty is not there, then there's no issue will also import at lower prices. But we can't import because there's a duty. We can't buy in India at a lower prices because there is IMS. So whether in these conditions, 1 should expand in a big way. So better to wait for a year or till the time we get a clarity on the thought process, what the thought process in terms of the economics of this industry. And once we are clear, there whatever plans we are and implementing that will not take us much of a time. It's more of a clarity required on as a country, our competitiveness. That's the debate we are having to that extent, we have not really -- we don't intend to really spend a huge amount and creating a trouble for the company at a later stage.

[Prerna Jhunjhunwala, analyst]

Understood, sir. So what will be the plan for expansion [indiscernible]...

[Neeraj Jain, executive]

Or else we get greatly a very nice part at a dirty price, so where you are in a position to take this. So there's nothing as of noncore, but if something like that comes in, we'll take a call on that.

[Prerna Jhunjhunwala, analyst]

Understood. So what is -- what are the plans in fabric business, given that we have crossed 80% utilization and the demand in woven fabric is improving now.

[Neeraj Jain, executive]

So fabric is the first time where we have started utilizing at least not even 80% or we are crossing 90%, 95% also, I'll say, the first time since this line was implemented just before COVID. We are in a position to utilize our 100% or most of the capacity, want to sustain it for a couple of months. And once we are in a position to see the sustainability definitely, we look at expanding that business or maybe adding something over there, whether on a man-made side or something like this. So I'm sure rather than the spinning, I think it may look at an opportunity where something could be coming in where maybe we'll wait for the next couple of months, so whether this demand is sustainable or not. And we'll take to [indiscernible] after that.

[Operator]

Next question comes from the line of Rahul Son with ICICI Bank Limited.

[Rahul Soni, analyst]

Sir, I would request you to throw some light on the overall utilization level for the spinning industry. And also if you can provide some insight on the utilization level at the SME level.

[Neeraj Jain, executive]

So our estimate -- and there is no industry-related data, which is available, but we keep in surveys talking to our vendors. We keep talking to the various customers of the different stakeholders in the industry. Our feeling is on the spinning side, it is almost 90% spinning utilization is as of now there. But having said that, whose server is a vulnerable player, especially the SME, the utilizations have started coming down. And lots of companies which have started stopping on a Sunday or maybe the partial capacity 10%, 15%, 20% has been reduced. So most of the good managed companies, large ones, they are running 100% utilization. And the SMEs or the more vulnerable or financially weak players, the utilization will be surely much lower. So we estimate as of now, the spending utilization could be in the range of maybe about 85% to 90% in India.

[Rahul Soni, analyst]

On an overall basis?

[Neeraj Jain, executive]

Yes, yes, yes.

[Rahul Soni, analyst]

Okay. Sir, third question on this, your modernization -- so will there be any impact on the margin, sir, both the modernization of the plant?

[Neeraj Jain, executive]

Immediately no, it is only you are creating the capabilities. So if the differentiated or [indiscernible] something. So as I mentioned, again, there are some normalization, which is happening only because of the quality front. So the new machines are coming with a better technology. And if you want to continue your preference from the customer side, you might have to change those things even if the profitability is not there. So our modernization includes the debottling -- the modernization includes where you have a direct payer pay that. The monetization includes where you have a city to modernization also includes where we have a preference from the customer. So all these 4, 5 factors are considered where we are spending money so that even after 56, 57 years old company, customers should not have a disadvantage of working with someone whose technologies not to the [indiscernible].

[Rahul Soni, analyst]

Sir, one last question. Sir, what are the factors, which affect the spread between the cotton yarn cotton and cotenancies apart from this up down in the cotton prices.

[Neeraj Jain, executive]

No, no, only demand and supply. The yarn demand is good, the margin -- the spread will improve or a vice versa, only and only demand supply, nothing more than that.

[Rahul Soni, analyst]

Is there any range which is considered healthy for the spinning industry?

[Neeraj Jain, executive]

So the industry has always been talking of healthy margins at $1 spread because of most of the industry is working with $0.50 to $0.70 spread.

[Operator]

[Operator Instructions] Next question comes from the line of Amit Khetan with Labonum Capital.

[Amit Khetan, analyst]

Sir, if you could just share what was the realized cotton yarn spread for us for the last quarter? And where is it currently?

[Neeraj Jain, executive]

So I can give you the market numbers, there will be partly 1 won't be more than $0.50 to $0,60. And the current spread is also like the same.

[Amit Khetan, analyst]

Got it. And you mentioned -- is my understanding correct that just getting back to the path of normalized spreads of $0.90 to $1, that's just a matter of demand and nothing else.

[Neeraj Jain, executive]

Correct.

[Amit Khetan, analyst]

Okay, okay. And you've talked about industry utilization in India at 85% to 90%. Would that be a similar utilization for global yarn industry.

[Neeraj Jain, executive]

Almost same.

[Amit Khetan, analyst]

Okay. Okay. All right. And lastly, is my understanding correct that the import duty is an issue for the industry only when the global cotton prices are below the MSP.

[Neeraj Jain, executive]

Not really. Not really. That is surely an issue when it happens. But let's look at the last year. The last year cotton prices, international was not lower than the India. But the entire chain came to know the import cannot be done. And the overall crop was brought in such a way -- the -- I mean, generally, if you look at the Indian cotton season, the crop will start somewhere in October. And by March, the 90% crop will be over. But since the entire chain understood that the import cannot happen, so the calibrated the entire arrival of cotton. And they gotten the old cotton kept coming until September against the February or March as the farmer was bringing in only what is required on a daily basis. So they never allowed the invest to increase the stock because enterprises have kept remaining very, very high. So it's not only when the New York future comes down, but in a normal circumstances, once the crop is less or that we can calibrate the cotton arrival so that mills couldn't make the stock, so that issue is also there. Tomorrow, if the situation comes in, where our top crops down to, let's say, INR 295 lakhs bales, and our consumption is 310. So irrespective of where the New York future is will not be in a position to run the mills. So how will we work on this.

[Operator]

[Operator Instructions] Next question comes from the line of Sanath Kumar with Value Research.

[Sanath Kumar, analyst]

Most of my questions have already been answered, but I have a question more related on the strategical level. So if you're looking at the cotton prices and the demand-supply scenarios and the impact on -- impact on the margins, what strategically the company is trying to do so that we can either safeguard itself on this volatile situation. Overall that's coming up with new product mix or more marketable let's say growth.

[Neeraj Jain, executive]

So it's not only that what we are thinking that what should we do in terms of product mix is basically on demand and supply. And I feel as the cotton prices keep going up in the market, the more and more brands I have mentioned earlier also will keep moving to the blended yarns, and we are also looking at very carefully wherever we are finding that this is a segment where the demand is increasing or improving. We are creating those infrastructure, those capabilities, and we are just moving our product mix to match so that we are not lagging behind anywhere. So all these modernization debottlenecking I'm sharing is also part of that where we have to keep investing so that whatever opportunity looks like in the product mix changes, we are in a position to get about so.

[Operator]

[Operator Instructions] Next question comes from the line of Anik Mitra with [indiscernible].

[Anik Mitra, analyst]

My question is, as you mentioned, that CCI has given a guideline regarding lower cotton yield. So in case cotton yield remains on the lower side and considering import restrictions, cotton prices may go up. And in case, Indian cotton prices further goes up and international cotton prices remained at the same level. So again, the trade between Indian cotton and international cotton may further expand. So what is your outlook on this figures?

[Neeraj Jain, executive]

As I mentioned, we still feel because the different industries have done the different surveys. And we feel -- we still feel the crop is not less than 320 lakh bales as of now, which should be sufficient to take care of us. I do not know the basis how they have come to this figure of 295 lakh bales. So the government of India also does the Ministry of Agriculture does their own survey and their report is likely to come maybe in the next 2 weeks or so. So I think that's a much more authentic figures, where they take the ground realities and what's happening on the crop side. Let's wait for that and look at it what happens. But in any case, if the crop is less and the import restrictions are not reduced. I mean, the similar situation had happened 2 years also back And at that stage, our core was less and let say, the government of India allowed the import duty-free import also for a period of 3 months or so. So maybe the government has to take a view once they know that the crop size is less consumption is higher, imports can't happen. They will have to take a view and they may allow the import, they may allow which they did 2 years back. So we'll have to only request the government that if the crop is less, consumptions are higher. So this is a situation where they'll have to decide what they want to do with the industry.

[Operator]

[Operator Instructions] Next question comes from the line of Amit Kumar from Datamine Investment.

[Amit Kumar, analyst]

Just 1 question. You talked quite a bit in terms of weak demand. So 1 of the opportunity set is opened up for us is the UAE and Australia FDAs essentially. So any thoughts on that? I mean is the possibility of these markets becoming a bigger sort of consumer for Indian yarn and fabric and specifically with respect to the company as the -- any sort of agreements that you're sort of seeing on this side -- on the back of these [indiscernible] really.

[Neeraj Jain, executive]

So all these FDAs which are being done, definitely, it's a big support to the country. But having said that, most of these agreements, whether let's say Australia, they'll be buying only the government. So to that extent, the India has to gear up for the government team, for the home textile and those products because these guys are not going to be garmenting in Australia. So for all these spinners in India, it will be an indirect demand where the increase happens on the governmenting side on home textile, we are in a position to supply yarn to. The Indian counterparts who will be in turn exporting to these countries. But all these things, advantages will come only in the medium term. Because once these FDA has happened, all these companies have to work with their own supply chain arrangement with India, they have to look at the quality products, they'll have to look at the entire trust system, which they want to create or the ecosystem they want to create. So medium term, definitely lethal these FDAs are a big advantage. But I think if you're talking of immediate something will happen, no. Because these guys will keep buying from where they are buying. They start looking at 1 by 1 product where they'll come to India, they look at the quality. They look at the logistics. They look at the supply chain arrangement. And slowly, if things goes well, they'll keep building those capacities in India. Suddenly, something will happen in 6 months to 1 year time. No, I don't think that's likely to happen. Because even if there's an opportunity, the customer won't change immediately unless he has a comfort of buying from India.

[Operator]

Due to time constraints, we have reached the end of question-and-answer session. I would now like to hand the conference over to Neeraj Jain for closing comments.

[Neeraj Jain, executive]

So I think, as I mentioned, of course, there are issues, challenges, which we have explained and the entire industry is passing through the same. Having said that, whatever internally are the opportunities in terms of improving efficiencies, reducing cost, finding opportunities, finding new customers. I think the organization is really, really working hard. And for us, the definite 1 advantage is that our wind has started doing well, which will give us some support in this kind of a time to pass through this difficult time. Of course, spinning will be largest business. We have to look at how it improves and maybe it's a matter of time once things start improving. In the meantime, as I mentioned earlier also that whatever the opportunities are possible opportunities in terms of debottlenecking or product mix changes or the machinery improvements for the customer delight, we are working on that also so that even by the time we could period comes in, we should be in a position to take advantage of that rather than at that stage also we are not in a position to supply to them. So thank you very much for -- to all of you for showing patience to us in this kind of a difficult time. But in terms of our financials, management thought process strategy and are working on the different strategies, the entire management is working really, really dent to see how we pass through this difficult time. And I'm sure the good time will also be available very soon. So thanks for being a part of the company for part of our calls. And anyone has got anything which is left because of the time cutting today. Our investor deck could be conducted where we can fix a specific call or we can reply through [indiscernible]. So thank you very much to all of you.

[Operator]

On behalf of Batlivala and Karani Securities India Private Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.