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Vardhman Textiles Ltd
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Ladies and gentlemen, good day, and welcome to the Vardhman Textiles Limited Q3 FY '23 Earnings Conference Call hosted by Batlivala and Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Nigam from B&K Securities. Thank you, and over to you, sir.
All right. Thank you so much, [ Jordan ]. Good evening, everyone, and thank you so much for dialing in to Vardhman Textiles 9 months FY '23 Earnings Call. Today, we are joined by Mr. Neeraj Jain, who is the joint MD; Mr. Rajeev Thapar, CFO; Mr. Mukesh Bansal, Head of Project Marketing; and Mr. Sushil Jhamb, Director of Raw Materials.
And now without any further delay, I will hand it over to the management.
Hi. Thanks, Abhishek. Good afternoon, everyone. The results were declared day before yesterday. I'm sure you had the opportunity to go through the same. In terms of business scenario, as we discussed on the numbers, as we discussed during the last call, we were expecting lots of devaluation of stocks. We are also expecting the margins to be low because the utilization was very less at that stage. The exports from India was not happening because of the global pressures of [ no ] demand and especially from Europe and USA. And the very high prices of cotton in this quarter also were the reasons where the margins are relatively much lower compared to the immediate preceding quarter.
Given at the situation today, the prices of cotton has started coming down, but it's still much higher than what it should have been in our view. But if you look at it from the perspective of New York's Future, New York Future is in about [ $0.85, $0.87 ] as of now. And historically, the Indian cotton is about[ $0.04 ] higher than the New York Future. So it should have been in the range of about [ $0.90, $0.91 ] per pound. As against that, it is close to about [ GBP 96, GBP 97 ] as of now, one.
Number two, the overall crop size seems to be quite good. The quality is reasonably okay, but it's the first time in the history of India, where the partners have quoted lots of cotton in anticipation that they are likely to get better prices as they got in the last year. So the farmers are expecting during -- since the last year the prices they got almost [ INR 9,000, INR 10,000 ] even for a smaller period higher than that prices also [indiscernible] normal. So their expectation is also that this year also they should get better. So that's why they are holding on to lots of stocks. But at the same time, I think the last year, New York Future was almost at about [ $0.120, $0.125 ] against that [ $0.35 ]. From that perspective, one is to look at and rationalize what should be the right level of prices in Indian context.
Third, in terms of the quality, as I mentioned, the quality seems to be quite good, but the overall arrival of crop is much less. Till now the crop has come only to the level of about 110 lakh bales or so out of the total expectation of close to about 330 lakh bales. And after this time last year, the crop was almost 175 lakh bales or so. So we are short by 65 lakh bales till now in terms of arrivals compared to the last year. But it's not because of the nonavailability of funding. It's more because of the pricing expectation by the suppliers where they feel the -- if they hold it, they may get a better price going forward. So let's see what happens.
The next in terms of the demand and utilization. This period has seen a little better situation in terms of demand, especially the export demand. We can -- after almost 7, 8, 9 months have come back to start buying because we -- because of the COVID, there were lots of restrictions in China, which have started opening up. And it is expected -- it's an expectation that after they have the hard immunity, so maybe they have more difficulties for next 1 or 2 months. But eventually, after that, we'll be lots of opening up and lots of pent-up demand, which could come in. So they have started buying beyond. They started buying the other material, which has given some push, some improvement to the spinning industry worldwide.
It is still expected or estimated the worldwide spending this utilization is not more than 75% as of now. And Indian cotton spinning utilization the worst time, I think it has come down to about 50%. So our estimate was -- the spinning was running close to about 60%, 65%. But the cotton spinning has come down to 50%, and meaning 10%, 15% people shifted to 100% [ polyer ] and put some [indiscernible] kind of products. We are not making money, but at least -- at least [indiscernible] was in a position to get a partial fixed cost. So that's why they had [ sticked ] to the alternate products.
But going by the today's situation, our estimate is cotton spinning is back to the level of about 85%, 90% as on today. Of course, the full quarter, it was not there, but then last [ 3, 4 weeks ], the utilization of spinning has definitely improved based upon the orders from the international markets, especially China. And I think it looks like the -- since the utilization is improving, the losses would be coming down and the pressure would come down to the extent -- to that extent. And we might look at the 100% utilization also in the times to come, though still the [indiscernible] still be confirmed in the issues.
In demand, I look at it from 3 perspectives. One, the general slowdown of demand, which was there because of the oil prices, because of the gas prices, because of the overall recession [indiscernible] or interest rates increase, [indiscernible], interest rate increasing [indiscernible] and that continues the -- that concern continues to be there. The second was most of the brands, they had lots of inventories. So they suddenly decided not to buy anything, and they wanted to reduce their stocks because the supply chain started improving. And as a result of that, whatever material they have overbooked that had started reaching them, demand was less. So as a result of that, their overall stock as much higher than what it should be. And they decided that unless the stocks [indiscernible] normal levels, they'll not be buying.
I think if you look at the last few weeks, over there, definitely, the improvement has started coming. And any plan where they are liquidating their liquid at reduced stock so they have come down to a reasonable level of stocks, they have started buying. So there's some improvement on account of there also in the overall [ value ]. The third, as I mentioned, China could be one factor where it's a big country huge population, good per capita income. And the expectation of the China [ comes ] up. So the local -- or the domestic demand can definitely be much better. So I think in that scope, there's lots of yarn they have started buying and they started converting into the fabric of the government. So that's definitely given a pickup to the spinning industry in India as well.
So this is on the end as far as Vardhman is concerned. We're running 100% capacity utilization for the last about 1.5 months or 2 months. Initially, it was a little less. But I think as the opportunity came in to start turning the full capacity. Of course, the challenges, as I mentioned, are still there. But I think in terms of utilization, it looks like the work is over. And also, we have also converted about 12%, 13% of our capacity to the alternate products, which, as of now, has come down to 2% to 4% only. So majority of the capacity is back to our convention -- started coming back to the conventional products rather than the 100% [ polyer ] 100% [indiscernible] kind of products. So this is on the selling side. Now, I'll request Mukesh to give some idea on the fabric side also, and then we can start the question and answer. So, Mukesh, to you.
Good evening. Thank you very much. Most of the points as far as the overall outlook every textile industry [indiscernible]. From fabrics stand point, I can say that last quarter, we [indiscernible] slowness in demand on 2 [ scores ]. One was the slowdown in the retail sales in the U.S., Europe and if you [indiscernible] in India and Japan. On to [indiscernible], the inflation concerns because all the commodity prices were high and the brands that are sitting on the inventory, which was [indiscernible] price carried over from the previous quarters.
So in order to generate demand, should be happy to [indiscernible] discounts which would have impacted their cash flows and the profitability. So that has been a major concern. The correction on the inventories on the retail side still continues because given the future outlook should brands are not looking at [indiscernible] demand in the immediate future. So they still are trying to manage the inventories and further be carried over inventories. So the demand [indiscernible] continues for the time being.
But the moment -- if you look at the next 3, 4 months, when the inflation concern start to ease, and U.S. may not increase interest rates further, the inflation is within the target. And then the [indiscernible] demand can start happening. So if the retail sale bounces, the inventories are relatively lower levels. And then we can see a good amount of demand coming up. And in Europe, the situation is being [indiscernible] and also the inventory prices and the energy prices. So the moment that sort of [indiscernible] see normal level of demand coming up. [indiscernible] the demand, formal demand picks up. The inventory is at the lower level. What have [indiscernible] in demand happens. The question will be [indiscernible].
Similarly, in India, unexpectedly, the last quarter has been looking [ slower ] as far as the retail demands are concerned. But this quarter, we are seeing a better demand coming up from India even the marriage season and the [indiscernible]. So we are seeing that demand getting -- started happening.
And the next [indiscernible] market [ for us ] in Japan. So in Japan, so one of the Japanese will tell us they have a big market [indiscernible] China. So now the Chinese government had a few restrictions and Chinese economy is opening up. So there is a possibility that the demand from China will also pick up. So as a whole, we can only hope for a better future regarding this [indiscernible] sluggishness continues. That's it, sir, from my side. Thank you.
Thanks, Mukesh. We can start with the Q&A, and the remaining queries, we can answer as the question comes in.
[Operator Instructions] The first question is from the line of [ Anik Mitra from Wolford ].
My first question is sir, cotton and [ yarns ] trade were quoting and quoting negative for quite some time. So what is the current situation? And sir, what percentage of yarn produced -- I'm saying from your perspective, what percent of yarn produced by you is sold outside?
So we -- whatever we produce almost 60%, 65% is sold outside. So our internal consumption is only about 35%, 37%.
Okay. Okay. And sir, what is the current scenario of cotton and yarn spread?
So the current spread is still in the range of about $0.60, $0.65 only.
Okay. Sir, I'm asking in terms of cotton and yarn spread, not the international one, Indian cotton and yarn spread, like it was quoting negative for quite some time.
No, it's not negative now. So if you look at the Indian cotton, the clean cost comes to about INR 225 a kg. [ INR 220 to INR 225 ] a kg. I'm taking the December average of INR 63,000 a candy price. And against that, the yarn price should be in the range of about INR 270 or so.
Okay. Okay. Okay. Got it, sir. Sir, next -- my next question is, what is the inventory situation in the industry now?
Our estimate, the cotton inventory with the mill sector will not be more than 1 month as of now.
Okay. Okay. Sir, from a few call with a few management of some retailers, I got to understand like around 30% of inventories carried by U.S. at this point of time. And around 50% to 60% of inventories carried by U.K. at this point of time. Sir, what is your take on this ground?
I think my call is a little different. So one is that these brands have lots of [ stores too ], I simply look at whether we have started getting the orders from the brands or not. And frankly, wherever we are working almost 70%, 80% brands, we have started getting back the orders in the small quantities, and they will be buying only if they have exhausted inventories.
So maybe the brand to brand, it would depend what kind of stocks are they having. But surely, a couple of brands, I think they have started brands. So this gives me one surely a confidence that the situation is not that bad we have 50%, 60% inventory. So definitely things have improved from that perspective.
And sir, in terms of fabric...
Sir, if you do have further questions, we request you to rejoin the queue.
Sure, thank you so much.
The next question is from the line of Abhineet Anand from Emkay Global Financial Service.
Sir, 2 questions. First is that you indicated that exports have picked up one of the things being that [indiscernible] Indian cotton has corrected compared to 2Q. So what are the key regions, Bangladesh used to be one of the large ones, and you indicated China. So for this quarter, typically, what are the key reasons of yarn exports for us?
No. The quarter 3, which we are discussing at that stage, there was no improvement. So as I said, the improvement is in the current situation where the selling utilization has improved. It started improving in the month of December and definitely, it's better as of today.
Two, I think, as I mentioned earlier also, the overall worldwide, it is expected that the utilization of spinning sector won't be more than 70% or so. And this was for the Indian situation also. Now Indian situation is a little bit better. So I think we started touching 85%, 90% -- in my view, going by [indiscernible] we do internally.
So -- and the biggest reason for improvement in this period last 1 month or so has been buying additional -- buying from the Chinese market, which earlier they were not doing because of the COVID restriction and there were lots of sentimental issues -- sentiment issues over there where people were not sure when the opening will happen. So since now they have started relaxing the [ conditions ] of COVID, I think there's much more optimism in that country as well from that perspective.
Okay. And one of the reasons, I think in 2Q, you had highlighted that because of the fact that the Indian cotton was at higher price, some of the yarn importers from [indiscernible] Bangladesh imports yarn from India. They were not buying because of the fact that our cotton was at high price so our yarn would also get a high price. So that situation has improved, Sir?
Yes, that situation has improved. That's why China has come to buy from us. Otherwise, they were buying only some Vietnam because our cotton was much more expensive than even the imported cotton or American cotton, which was available in Vietnam. So we couldn't export it at all. So definitely, Indian cotton today is better compared to that. Of course, not at what level it should be, but it is definitely a better situation compared to when we had the second quarter call.
Sure, sir. And second, on the capacity side, the -- I mean, we were to add 65,000 [ spindles ]. What is the status? And second is that sir, you -- when you indicated that we have started reaping 100%, so we had that medium-term plan of [ putting ] another 2 lakh spindles. I mean what is the company thinking about when you have already started hitting something like 100%? So any thoughts on placing orders or any change in that thought?
So the first question on the 65,000 spindles. So we've already started the commercial production, partially. And it is likely to be completed, I think, next maybe 2, 3, 4 weeks or so. The full production should be available by end of February in my view. The partially it has already started. Two, though we have started getting the full capacity, but I think still the margins are much less. And we are waiting or we will still like to wait for some more time before the situation becomes normal, because still with the 85% utilization in the worldwide utilization is much less. We are not in a hurry to take all we have to place all the orders today.
Three, also looking at what stage -- because we are talking to the government for the import duty of cotton et cetera. And I still feel because we take a very big expansion, this issue must be solved. Otherwise, this issue will keep coming up primarily whenever the crop is short. Whereas on today, we are likely to get [ lots ] a surplus in India for the current year. But I think for the long-term of the industry it will be better that these issues get resolved and then only we should take up very big expansion we want to take this.
[Operator Instructions] The next question is from the line of Prerna Jhunjhunwala from Elara Capital.
In light of maker arrivals this year, what will be your cotton procuring strategy?
We always look at it from 2 perspectives. One is the -- we have to buy the quality cotton, two see what will be commercial. So in this scenario, because the quality cotton means earlier, whenever the prices are lower in the season, lots of cotton will get exported. And then later on, the good quality of cotton is not available. So that's one of the considerations where we normally have a stocking at a much bigger level compared to our consumption in the full season so that we don't require to buy in the off-season.
This year, because of the high cotton prices in India, that situation is not there. So the exports from India has not happened at all. I mean it's only about 2 lakh bales or 3 lakh bales till now. And I mean, since the good quality cotton is available in the country, then at least that pressure is not there the cotton will [ vanish ]. So you have to buy to run your operations or to give the right service to our customers, that pressure is over.
Second is the commercial that is what we feel is the right size. We feel these are the prices which are still higher than what it should be. And cotton is available if in case the prices do not come down to the normal level, which we feel is always near feature plus [ 4%, 5% kind ] of a pricing. I think we have not really going to have a 6-month talking at the end of March. That cotton in any date available. So we'll keep buying as we require or as and when we want to buy. So there is at these kind of levels -- this kind of spreads for the Indian cotton compared to the New York Future, I think there is no intention for us to buy very big quantities. So we'll keep [indiscernible] good quality cotton is available in the country.
And sir -- is there any hedging loss, et cetera, in this quarter? And are we doing any hedging for [indiscernible].
No, [indiscernible]. We do the hedging only whenever we had to buy big quantities at that stage to cover our [ space ] we try to hedge it one or the other way. Since this time, our cotton stocks are bare minimum so there's is hardly any [indiscernible] I don't recall. But overall, there is no hedging because there is hardly any stocks available to us.
Okay. And last question if I may ask on profitability. Now that -- our units are at around 100% utilization in spinning and we're recovering in fabric. So do we see returning back to normal profitability in towards 2 quarters?
No. Surely, no, because it's only the running of the full capacity where we are either covering up to costs or maybe sometimes covering not full cost even. So the [ decision ] has to be better. We should stop the capacity or we should keep running, where the losses are less. So since the losses by running is less or there's a small profitability. So that's why the capacities in India have started utilizing better capacity.
But in any case, the margins are not normalized at all because that won't happen until the time the entire world is running with only 70% capacity utilization. So I don't think that's a situation where we can say the normalization of profit will happen in fourth quarter. It may improve. The situation overall may improve from the earlier period. But I don't think today, as of today, there's a situation where we can say we have become normalized. No.
And sir, last question on the segment-wise, the demand scenario [ nit versus woven versus denim versus home textiles ]. Can you give some color on [indiscernible].
Because we supply to all the 4 segments. And in our view, if you look at the home textiles, I understand the lowest capacity utilization has come in the range of about 45%, 50% from where we are improved to I think, now 65%, 70%. Same way if you look at denim export situation continues to be about 50% utilization, whereas the domestic demand for the denim has improved. So the overall utilization by the denim also has improved from 50% to about 70% or so. Woven, we feel most of the mills are running into capacity utilization about 80%, 85%, and it also the -- in between has come down to about 50%, 55%. They're improved to about 60%, 70%.
So there's an improvement in every segment. But again, it is sub optimally utilized even today also. So it looks like only I can say for most of these segments, probably the worst is over, but I don't think anyone can make really good money till the time the entire value chain starts utilizing the full capacity or else optimal capacities.
We have the next question from Falguni Dutta from [ Jet Age Securities Private Limited ].
I had a question on inventory loss. Did we have any inventory loss for the quarter?
Yes. Last quarter, there was a loss because -- if you recall the -- before that, I think the cotton prices were ranging almost in the range of about INR 85,000 INR 80,000, INR 85,000 or so. So there's a partial loss which has already happened, and some loss is likely to happen even in the current quarter also.
So is it possible to quantify the amount for Q3?
No, you can look at -- I mean I can only suggest you, you can look at the market prices of cotton are available to everyone. Stocks you can make out easily what kind of stock prices are having. So we don't share that number, but I think it's possible for you to calculate that.
Okay. And sir, how much inventory of cotton would we be carrying end of December?
I think, not more than a month or 2.
Okay. And sir, one more thing. You mentioned about the price of yarn at [ INR 270 a kg ] so is this for [ 30 counts ]?
[ 30 counts ] So all our discussions are always the common count at 30 counts.
Okay. And sir, exports, what would be the exports of yarn, let's say, last month from India? And in that, what percentage would be China?
So in December, the improvement has not come in. So -- and then from India, the overall export was about [ 53, 54 million kg ] in the month of December also. The Chinese most of the orders have come in the second, third week of December, where I think January, my expectation is the improvement will happen. In December, there was no change in what the Chinese are buying. So there was hardly any buying price with China.
But all these improvements, so the factory started [ using ] material from the [ second, third week ] of December. And I hope the January overall progress from India. Can be higher surely -- it should we have from 53, 54 million kg, which was constant for 2, 3 months. And in fact, to the lowest figure, I think in the month of September or October, we got only about [ 35 million kg ]. So from [ 35 million, lowest of 35 million, we price 54 million a kg ] in December and January figures, definitely, it can be -- in my personal view, it can be [ 10 million to 15 million a kg ] at least [ 15 million a kg ] higher than the December figure as well.
Sir, in normal times, what percentage of our exports would go to China from India?
So from India, the export to China would be in the range of about 25%.
25% of yarn by exports.
20%, yes. 20%, 25%.
And sir, my last question, directionally, would you think that Q4 should be better than this quarter?
So one is the number. Second is the business. I think numbers -- you guys have to work out how the number goes out. I can only say in terms of utilization, it's better. I can only say in terms of cotton prices, it is better. Can only say the [ lots of ] losses have already been provided in the system on account of the inventory [indiscernible] affected though it is yet to come.
So the overall business sentiment perspective seems to be better, whether they get converted into the numbers in the fourth quarter or maybe a quarter after this, that's something you guys have to work on. I don't want to give any indication or any suggestion on the profitability numbers at this stage because the kind of volatility we have seen in the last 6 months, it's anyway guess how the tomorrow will be.
And sir, if we talk of yarn spreads, the one you mentioned that they are -- this is the last question.
If you have any further questions, we request you to please...
Fine, no problem. Thank you.
The next question is from the line of [ Amruta Deherkar Sane from Wealth Managers India Private Limited ]. Please go ahead, ma'am.
I have 2 questions. First is regarding the capacity. So from [ 11.26 lakhs ] the new capacity that we have -- so after the commercialize now [ 65,000 ]. So now the company capacity at the end of March will be [ 11.91 lakh per bale ]. Am I right?
Yes.
Okay. And the second question was regarding the sustainable EBITDA margins for the yarn and fabric segment. So what kind of margin do you expect after all these [indiscernible].
The margins of fabric are surely better because the spinning is passing through the stress time as of now. And whenever the yarn price come down, normally, we have always seen, whenever the price of yarn goes up, the fabric price increase doesn't happen the same proportion. And the same is true for the reversal also. So whenever the yarn prices are coming down because we have booked the fabric is always [ with some ] orders and run, which are at a high price. Also the prices doesn't come down in the same proportion. So surely, the margins as on today on the fabric division is better than spinning.
So what could be the [indiscernible ] on a sustainable basis, the fabric division to run?
Sorry?
On a sustainable basis, what kind of margins from the fabric division [indiscernible].
Sorry, normally, we don't share the numbers of the division-wise margins [indiscernible].
Then just one last question. So for our fabric business, the entire yarn that we used in -- from our yarn division, right? Or do we acquire any yarn from outside also?
No. So 97%, 98% is in-house, maybe sometimes 1% or 2% some specific yarn or some which we don't produce, [indiscernible], they buy. But 99%, they buy from us [indiscernible].
The next question is from the line of [ Rushabh from RBS Investment Managers ].
From the industry perspective, we have been talking about increased sourcing of big retailers from India. So in that perspective, is it that asking that the India has to scale up the MMF capacity as we currently have a strong quarter ecosystem, but MMF is not so good. Simply, if can you please share some insights, sir, on the sourcing let's say, cotton versus MMF?
I'm sorry, can you repeat the question, please?
I'm just asking in the current scenario, we are seeing a lot of industry players they're saying that the bigger retailers from European and U.S. countries. They are saying that we will only increase the sourcing from India only if you increase the MMF capacity, Man-made fiber capacity as opposed to the current cotton-based capacity that we have.
It's not like this. I think there is a product basket every brand has. So wherever they get the better pricing or the better product for any segment, they'll keep buying. So it's not that they want to -- in this condition that if you increase then only will buy from you. But yes, as a matter of fact, it's known fact that the cotton consumption out of all fiber consumption is only about 30% worldwide, 70% is man-made.
So it's not that brand is putting pressure. But of course, slowly, I think as the share of man-made is increasing, India also is looking at, and we are also increasing our man-made or blended capacities to that extent.
First if I have to look at in the business dynamics and I suppose a person who is into 100% retail versus blended, how do the -- say margin profile or doing the business sense makes sense which is better opportunity for a person who was doing both?
Historically, cotton [ spinners ] are made [ polyer ] has made more money in India. But where this has been a period where either you are making cotton, you are making polyester, you are making this [indiscernible] you are making any brands everyone was losing equally.
But historically, since the cotton is a place at the right prices. Historically, the Indian spinner makes more money on the basis of 100% cotton products.
The next question is from the line of [ Surya Narayan from Sunidhi Securities. ]
Just to understand, from the current revenue stream, how much has come from the regular customers and how much is out-of-term customer, new customers?
There's is hardly any new customer in this kind of period. So most of the business was would be existing customers only.
Okay. Secondly, sir, you have said that for the denim capacity industry-wise have risen to [ 70%, 20% ] and woven to around nearly close to [ 100% or 80% to 85% to 90% ] and nit by around [ 10% ]. So what is [indiscernible] also saying that the demand has not seen poking of in the U.S. market and because of the -- the retailers there destock [indiscernible]. What has led to kind of [indiscernible] in the capacity utilization?
I've never said my dear -- I've never said things have not improved. I have said, whichever brand they [ are exhausting, the stocks they started buying. ] Two, the improvement has happened because of the China as they're expecting a big opening up after the COVID issue is over. So they have started buying. So these are the 2 reasons where the capacity utilization started improving.
Okay. And have you -- what is your sense that of whether the U.S., Europe or the retailers they have [indiscernible] business is working progress.
So there are both kind of brands. There are some of them where we can decide or which are not buying at all. Has lots of them, which have started buying in. So for example, [ H&M, C&A. ]. So the business has started happening, which was not happening earlier at all. [indiscernible] or the [ Gildan ], which are not buying until now. But I'm sure as the thing starts because everyone is exhausting the stock, and it's a matter of time when they start buying.
And regarding the arrival of the crop, you're saying [ 65 plus ] we are falling short, I know year-on-year. So I mean, I understand that the cotton holding is being taken place by the farmers. So do you -- in dialogue -- do you have any dialogue with the government of India to work out a mechanism to reduce the import duty so that for the Indian cotton [indiscernible].
The industry has been talking to the government to remove this, but we are not very clear whether the government will be willing to take any decision or not. So they don't commit, they don't deny. So I'm not very sure how the things will happen. We are waiting for the government of India that [indiscernible]. Continuously is [indiscernible] government to move this anomaly because without this, I think unless we resolve this issue, there will be a long-term [indiscernible].
One of the industry, a lot more players have said that will not be competitive to international cotton then India could be losing heavily to -- in the [ denim ] market in particular. So is your presentation to the industry, the government -- sorry, to the government is not being heard properly or our government has already the farmer in mind and not the industry?
We can only give our viewpoint, which we have given them for the [ equation ]. Government has been their own judgment will take a view what is right for the country they feel. And accordingly, we'll do that. So we can't argue with them we can give our part of the story, which we have given to them. Just is up to them to take a view in their judgment, whatever they think is correct for the industry.
The next question is from the line of Awanish Chandra from SMIFS.
First thing, you have talked about we have one month of cotton inventory. What would be the average price of that inventory?
One ruling prices only. So I think we look at -- we've been consuming cotton almost [ 80,000, 85,000, 90,000 ] also every month. We buy one month based upon the market prices and every month that average will keep happening. So our prices will still be higher than the current prices. But it's a simple calculation starting from the monthly prices. We have one month of stock every month and we keep adding and reducing it from the consumptions. Surely, it will be having the current market price.
Okay. And sir, second question, you have talked about many times in several calls why you are not deciding on the CapEx part. But purely from the long-term perspective, if you want to participate in growth history, don't you think it is time to take that decision because it still takes 12, 15 months for Implementation from the decision making?
Yes. From a business perspective, I think it's -- what you are saying is right that once the capacity utilization, whether we are making money or not, but until the time the utilization is started improving, it's a matter of time when the business will also improve. So there's no issue and concern on that.
And you are also right. It may take 12, 15 months for implementation of the projects from that perspective also. It will make sense to add the capacity. But the larger or the bigger question is that in case the India always has a custom duty on import of cotton and any other cotton [indiscernible] So what kind of situation will be contributing. So I think we -- I mean, we still want to take a little pause for a while and want to look at how the situation goes, how the government views of the same.
And I think the -- recent only last couple of weeks, the utilization is improving and coming from a big cutback, we want to wait or pause for some more time before we take a view on a very large expansion base.
Okay. And sir, last small question. Not putting any number, but do you really think that we will come back to double-digit margin because this single-digit margin was very surprising, and we all understand that it is a very difficult situation to be in. But still next, in fourth quarter, we will come back to double-digit number?
No. So as I mentioned earlier also, I don't want to put in any guidance on the numbers. So I've given you the business scenario. And again, today, all customers buy only for next 4 weeks. So you do not know the situation every day, whether the price goes up or down. So it's very, very difficult for us to predict as of now. Two, also very difficult for us to predict what kind of cotton prices are going to be there as no mill has inventory more than 3 weeks or 4 weeks. So any judgment call on -- or any number suggestion, I think it'll be too risky and not be desirable at this as from our perspective.
The next question is from the line of Nikhil Agarwal from VT Capital.
Sir, I wanted to know like regarding these Chinese exports, what has been the trend historically? Like have there been importing cotton and fabric from India previously around 3, 4 years ago as well? Or has it increased because of the U.S. ban on Chinese cotton?
There are a couple of reasons. One, our prices of yarn is competitive. That's why they are buying from us. Two, of course, there is a big pressure of Indian cotton from USA or Western world because of it, it is easy for them to get the yarn from India and so the exports made -- export of the garment made out of this yarn. Third, one of the other reason is Pakistan is a very big exporter to China. And Pakistan situation in spinning is in a very, very bad condition is, I think, one of the worst in the world today. Their cotton crop got failed. They are getting the imported cotton, which is at a very, very high cost.
And as a result of that, their exports to China has come down in a big way. So Chinese have to buy. So I think India is replacing that because we are still reasonably placed compared to Pakistan. So that advantage has come to India. Last year, our prices of cotton were the highest. The advantage was taken by the Vietnamese where they could -- they kept exporting -- they kept importing the cotton and they kept exporting the yarn.
This year, this situation, if I look at the entire world, the worst situation would be there for Pakistan. And since their cotton cost is very high, they'll be losing high money, so their capacity utilization will be lesser. Someone else will take advantage of that. So to that extent, I think the other countries, including India will be more competitive and we started exporting the yarn to China.
Okay. Got it sir. So the 25% of yarn exports to China, this is currently that India is basically of the total export from India 25% is going to China currently, you said.
No. whatever is the export we do, out of that 20%. So our, let's say, whatever yarn we produce, about 30% gets exported. And out of that 20% would be the Chinese.
Okay. This -- you are speaking on the company level or the industry level?
Industry level, I'm talking about...
[Operator Instructions] The next question is from the line of Nirav Savai from Abakkus Asset Management Company.
So my question is the extent to which, as you said, in Pakistan, the situation is very bad. Its primarily started with floods then, now geopolitical problems. So what would be the extent of loss if we see the cotton crop damage in this cotton season where India would have an advantage with better production?
So it looks like their crop has come down to about 50% of their consumption. And to that extent, partially there'll be losing capacity, partially they'll be importing from America or the other parts of the world. And their next crop will start coming in only in the month of August or so, July end or August. So the next couple of months, I think they are likely to be more and more in difficult situations.
Right. Right. So this would not only benefit spinning, but also woven wear and [indiscernible] where Pakistan competes India's?
It should.
And next crop, you are saying will come July, August onwards. So maybe for next 2 quarters or so, India would have edge over competition from that?
Correct.
Right, right. And sir, another thing was on the import duty of cotton, as you said, that it has been a long-standing issue with the industry. So to what extent it has impacted the cotton imports? May be if we can say prior to the import duty and post the duty was [indiscernible] to the industry.
No, no, no. I think import duty should not be looked at from the perspective of hampering the imports only. We import only about 10 lakh to 15 lakh bales of cotton in India, and that is not a big issue. The bigger issue is once we know that the cotton which has to come from outside will be expensive by 10%, where local prices have gone up. It's not a question of we have 33 million bales total gross size. It's not a question of 1 million bale import expensive. The question is all 33 million, the prices have gone up because everyone knows you can't import. And this is the only supply available to the Indian spinners today. So more concern is on the domestic prices and the prices have increased because you can't import. That's all.
We have the next question from Monish Ghodke from HDFC Asset Management Company.
Sir, just one bookkeeping question. You said that average cotton price was INR 63,000 per candy in December . And currently, also, they are hovering at INR 62,000 to INR 63,000 per candy. And you said that even in this quarter, there will be an inventory loss. So how is it happening? Like could you explain?
INR 62,000, INR 63,000 have given you the market price. I'm not saying this is the Vardhman cost.
But sir, our cost will be mark-to-market as on 31st December, right?
No, no, no. The mark-to-market of cotton never happens.
Okay. So closing inventory will be valued at cost only, you are saying?
Yes.
The next question is from the line of Keshav Garg from Counter Cyclical PMS.
Sir, I wanted to understand that you are saying that cotton industry cannot import cotton, but I understand that government had made cotton import duty free and certain when it is duty-free.
It was only till 31st of October last year duty-free.
Sir, so basically, sir, to the extent that we are exporting cotton yarn and cotton yarn fabric -- to that extent, we can still import duty-free quarter under the advanced authorization scheme?...
We can do that, but in that scenario, we will lose the RoDTEP and we also lose the duty drawback. So that disadvantage is huge compared to -- because we got the cotton, but whatever is the conversion cost where the duty refunds are happening because in form of RoDTEP, those are not available to us today. So we have gone back to the government with this suggestion also that even if you don't want to reduce the duty, why don't you give a RoDTEP on the advanced authorization also in any case, has been a committed thing by the government. So government is working on that. But when do they take decision, I can't comment on that.
Sir, and also, in last quarter, you mentioned that some Chinese yarn imports were coming into India from China. And now you are saying that China has started importing yarn from India. [indiscernible] that, that trend has reversed and now no more Chinese imports are coming to India. Instead India is exporting to China. Sir, so is my understanding correct?
Sorry?
Sir last quarter, you mentioned that some Chinese cotton yarn is coming to India since...
No. That's not happening now.
We have the next question from Resham Jain from DSP Investment Managers.
Sir, on the fabric business , would it be possible to share the kind of mix you have between bottom rate, yarn dyed, the mix of business. And within that, what do you classify internally as, let's say, a value-added mix within the fabric business?
They were...
Excuse me. This is the operator. The line for Mr. Mukesh Bansal has disconnected. Please stay on the line. We will reconnect with Mr. Mukesh Bansal.
Sir, in the meantime, I'll ask the next one, which is more of a bookkeeping with respect to the gross debt at the consolidated level and the cash at the consolidated level, if you can help with these 2 numbers as on December end.
Can you repeat the question, please?
For the gross consolidated debt and the gross cash?
That is around INR 1,500 crores including long term and short term and cash investment is close to INR 2,400 crores.
This is both consolidated, right, sir?
Consolidation, is the entity is being consolidated at Vardhman Acrylics and retail investment only. So it's consolidated [indiscernible]
Okay. Right. So sir, the related question on this, is that if I look at the cash balance over the last few years, it has been consistently going up. And on the other side, obviously, the CapEx also is linked to how the industry situation is. So -- and I did ask this question a few quarters back also, but I do understand that during COVID, there were uncertainties and all. But what is -- because this cash is not earning a meaningful returns, so how are you thinking about the cash allocation going forward?
The cash, INR 2,400 crores, which we are talking as of now because the cotton season like Mr. Neeraj explained that cotton purchase is not being taken place at the pace at which we used to have in early years. So the relevant figure could be as of the end of the year when the cotton season is completed and cotton buying is completed. So at that point of time, the balance does not remain at that level. So it [indiscernible] and borrowings also take place. So that is the matter I just want to bring to the notice .
Okay. Understood -- if Mr. Mukesh is there, should I ask the question again?
Yes. We have the line for Mr. Mukesh Bansal reconnected. So you can go ahead.
Yes. Shall I repeat my question?
Yes. Yes. Please repeat your question.
Okay. Okay. So sir, my question was on the fabric business. If you can explain the mix within the fabric business, how much is coming from bottom rate, how much is coming from yarn dyed, from the other woven businesses? And how much of the overall fabric business in a way you classify as value-added kind of products?
So on the fabric side, our top to bottom ratio is almost like 50% to 55% is bottoms and about 45% is [indiscernible] so other than that, if you look at the solid dyed is almost like about 70% and 30% to 55% [indiscernible] So another [indiscernible] Would be [indiscernible] quality value or value added or like that. So about [indiscernible] % will be value added. And the rest of the items are going to categories of [indiscernible] basic, basic will be 55% and 65% will be value-added, which will be further divided and 40% will be low value added and 25% will be high value added.
Okay. And has this ratio changed over the last 4, 5 years?
Yes, yes. There is a lot of change because in '18, '19 and '19, '20, when we expanded our capacity, we expanded more on the [indiscernible] topline side and on the yarn dyed and [indiscernible] there on the solid side. So 4, 5 years ago, our ratio was most due towards solids and toward [indiscernible] Which is now quite balanced. So when we grow our business -- so we didn't grow in the same category, we expanded to [indiscernible] also.
Okay. And the last question, sir, related to this change, which you explained. 4, 5 years back when you did analyst meet, you mentioned that the margin of fabric business was around 20%, 22%. So with this change in value-added mix and all, has this structurally changed? Obviously, quarter-to-quarter, it might differ depending on demand. But structurally, are you seeing your margin profile changing?
Well, it depends whether we are able to maintain the same EBITDA margin or not. But structurally, we have not seen any change happening as far as our EBITDA margin is concerned, but depending on the market situation that [indiscernible] commodity space is changing or more repetitive coming over the next couple of years. So otherwise, you continue being the same[indiscernible] by the overall competitive situation or the market situation there.
We have the next question from Bharat Chhoda from ICICI Securities Limited.
Sir, I just require the CapEX number for FY '23 and FY '24 and the breakup for the same, like how we'll be spending that?
For FY '23, the total CapEx could be in the range of INR 600 crores to INR 650 crores. And next year, of course, there will a normal CapEx of maybe in the range of INR 200 crores or so.
Okay. So this INR 200 crores will be majorly maintenance CapEx?
Normal CapEx, we call it. So, yes.
Okay. And this INR 600 crores, INR 650 crores will be spent on the FY '23 number, sir?
Sorry?
The FY '23 CapEx has been spent on what?
Some loan had been raised, which was eligible for some state subsidy. So remaining amount is being met through own accruals.
No, no, sir, I was saying the breakup for this like INR 600 crores to INR 650 crores that you are talking about.
Majorly in the spinning side only because that expansion has taken place 1 lakh spindles, and apart there from some normal CapEx would be there, which could be in the range of INR 100 crores or INR 125 crores for next financial year also.
We have the next question from Nikhil Agarwal from VT Capital.
Sir, this is regarding the Chinese demand. So again, so they are importing yarn from India mostly for the export markets or for their local consumption?
I think they are doing it for both domestic as well as both but primarily, they try for the export business only.
Okay. Okay. Got it. And sir, the yarn prices, I mean if you look at quarter-on-quarter numbers, your volumes have increased, improved quarter-on-quarter, but your topline, it has [indiscernible] -- it is because of the drop in yarn prices and all and cotton prices. So could you quantify? I mean, could you like quantify how much drop was seen in quarter 3 versus quarter 2 prices?
Yarn prices?
Yes, yarn and fabric as well both.
So the yarn prices on the higher side had gone to almost [ $4.60, $4.70 ] kind of a pricing, which now is close to about [ $3.30 ].
Okay. Okay. And fabric?
Mukesh, can you share with your parameter. What is the kind of as a benchmark of products, what is the price earlier versus now, the highest versus now?
That is difficult to share, however.
Any one of the products you can give them today.
So if you look at [indiscernible] indiscernible]. Polypropylene is the largest [indiscernible] item, that says. So last quarter, the average price on the range of about 95% to 97% this quarter, the previous quarter was -- or currently, I would say, currently I would say [indiscernible] of what [ 77,79, ] so [indiscernible] quarter 3.
Okay. Got it, sir. And sir, just a last question. Like how benefit is the Australian FDA that has been signed with the government, how beneficial is it?
Australian FDA. Sorry, sir, you will answer that?
No, no. Carry on.
Yes. So Australian FDA, if you look at our neighboring competitors in Bangladesh or the other areas. So they already had that [indiscernible] advantage. India had that was import duty disadvantage between 5% to 8% on the cotton garment. So which [indiscernible] but we -- by the way, it's not a very huge market wherein we will get a [indiscernible] green channel advantage. But yes, we are at [indiscernible] some exports will start happening from [indiscernible].
[Operator Instructions] The next question is from the line of Sandeep[ Ved ] from -- I'm sorry -- he's an individual investor. Please go ahead, sir.
I didn't understand the inventory loss for the Jan to March quarter because you said that December average prices were [ INR 63,000 ]. Current prices are also around [ INR 62,000, INR 63,000 ]. And you said that you are carrying only one month inventory. So the one month inventory that you would be carrying would have been purchased, say, towards in November end or in December. So how would be your inventory loss in the current quarter as well.
INR 63,000 or INR 62,000 is the market price. My cost of inventory is certainly higher because we were using a cotton worth INR 85,000, INR 90,000 in the month of September, October. Every month, we are buying one month at according current prices. So our average price is higher than the market price.
Yes. But you're carrying only as of December 31, you're carrying one month inventory and that's what one month inventory...
No, no, no, my dear, the loss or the written down value doesn't happen on cotton. It happens on whatever inventory you have finished goods, [indiscernible] it happens on that. The cotton or the raw material doesn't get devalued to that extent. So have one month of stock available to me, which could be the yarn or my work in process, that gets revalued based upon my average consumption rate for that month.
No, no. I'm sorry. I still didn't understand. So as of December 31, you're saying that you don't really value or devalue cotton. You would devalue yarn or the working process. Is that what you're saying?
Yes.
Okay. So cotton, you don't devalue, but cotton, you are carrying only for a month and cotton was [indiscernible]in the month of December only, when the prices were [ INR 63,000 ]. So there won't be any..
Let me give you -- suppose in the month of September, my cotton is INR 90,000 and I am holding one month of stock. In the month of October, the price is INR 80,000. So this means my average becomes INR 90, 000 plus INR 80,000 divided by 2, INR 85,000. So my opening becomes INR 85,000 next month. My opening one month is INR 85,000. I again buy one month of stock, let's say at INR 75,000. So the average of that. So my inventory cost will always be higher. Till the time...
But the accounting wise you're not [indiscernible], you're calling weighted average?
Correct.
But you're not following [indiscernible]
No, no, no, no. It's always [indiscernible]
We have the next question from Abhineet Anand from Emkay Global Financial Services.
So I think you indicated on the spread in currently for 3Q Rajeev, sir, can you provide us the spread or maybe cotton and yarn separately average for 3Q?
Average for?
Average cotton and yarn prices for 3Q spread, whichever is available.
So it will be close to about $0.60.
Okay. And lastly, one, I just want to have a slightly more not a numerical number, but something like I just want to understand Indian spinners typically, I understand a lot of players who manufacture spindle and provide has been stating that India has been one of the countries where the spindle capacity has been increasing versus China it used to do earlier is not doing much. So as a Indian spinner just few years back and today, are we in a better situation worldwide? Or how -- if you can give some qualitative stuff on that.
No. I said we are always competitive till the time our material prices, New York Future's are [ $0.04, $0.04 ]. So in this period, it was almost [ $0.15 to $0.20 ] higher than that. And a couple of months, it was as higher [ $0.35, $0.40 ] also over New York Future. So we were not competitive. So against that, as on today, we have come down to New York Future [ plus $0.10] so we're better off. But our normal margin starts happening, whenever it is in the range of 3 to 4 years since.
The next question is from the line of Deepak Varma, an individual investor.
So my question is a bit hypothetical. And this is a cotton price is assumed, government does not take any action. How long do you think it will take for -- in your experience so far, I'm sure this is not the first time, although no situation potentially sell twice. But in your assessment, what would happen? How long would it take for the prices to actually come down because there's next crop as well and so on.
So in our review, it should have come by this time. It's the first time in the history of India, where the farmer is holding in expectation of a better price. It has never happened in the history of India till now. I mean 3 days, 4 days, 5 days stalking holding here and there in [indiscernible] always happens. But a large scale holding by the farmer where they want the prices to match to the last year prices where the international prices have come down from [ $1.40 to $0.85 ] is unthinkable for anyone.
But I think we're still holding on to that. So this situation has come for the first time, and we required to look at how the things goes in the next one month or so. So in my view, the correction has happened in last 1 to 1.5 months to quite an extent. And it may take another couple of weeks before this becomes normalized.
Couple of weeks, you said?
Sorry, a couple of weeks.
We have the next question from the line of [ Abhishek Jhunjhunwala from KAM Capital Services. ]
Good evening, sir. I hope you are able to hear me.
Yes, yes.
Sir, I mean, I have been observing the trend that I have been following the quarterly call. So I have an observation. Your cotton hedging policy, I see or maybe the Board needs to look into it. It may require a reflection, as I have observed that as your -- you end up with lower number of hedging contracts, cotton hedging contracts as prices of cotton keeps rising and your cotton inventory volume goes down.
So in your profits, inventory of cotton, or the inventory process is not [indiscernible] protected once you have exhausted or exhausting your hedging contract. So you are left in a scenario with a high price of cotton or the inventory in process but you have exhausted your hedging contract. So ultimately you are left with a high price inventory and no hedging contracts to look after the fall in the inventory cost.
There are 2 ways of hedging the indiscernible] cotton. One is that you -- I mean it's a natural way where you can sell the yarn. So that's one way, but that can happen only for a month or two because the yarn, you can sell only for a month or two, whereas the cotton you have to buy much larger quantities. Two, the only -- India, there is no hedging tool available. So the only tool available in India is the MCX where the volume is miniscule, so you can't hedge it over here.
The third way is to go and hedge at New York Future either by -- when you are physical buying, you can sell it on New York Future, so that if the prices goes up, you have the advantage of physical cotton and as we are losing on the New York Future. Or vice versa, the prices goes down, at least we'll start building on a physical, but at the same time, you start gaining on whatever you have sold as the future over there.
Our thought process is only then whenever we are buying and we feel the prices are too high. At that stage, we try to hedge it by [indiscernible] New York Future, so that whatever situation happens, you take advantage of that. But at the same time, whenever the cotton is exhausting, we have to liquidate the stock at those levels because in the month of September, October, you come to a bare minimum level where the new season will start happening soon. And you can't have the hedging position. RBI doesn't allow you to have the hedging position unless you have the physical stocks available to you.
Ladies and gentlemen, that was our last question for today. I would now like to hand the conference over to the Managing Director, Mr. Neeraj Jain, for the closing comments. Over to you, sir.
Thank you very much. And as we have been sharing our thought processes , the market has been very, very volatile. The changes are happening very fast. So we've always tried that whatever in our view, is the situation today, we have tried to explain to our investors.
So there are two factors. One, the market is changing, both cotton, yarn, the demand, supply, the Ukraine war, gas prices, which is the beyond our control.
The second factor, and we have to work and operate within that. So whatever you have [indiscernible] best segment call, we are trying to do the same. Second is internal operations where you have to look at whatever in terms of selling, buying, producing whatever you can do. And I can assure to that extent, I think the management is really, really working hard and trying to look at that whatever is controllable or is within our hands, at least we try to do best over there.
So I'm sure the things will start improving. It's already started improving. We will continue to improve, and we might look at the better times maybe the next 1 or 2 quarters. But let's wait and watch for the same.
So thank you very much for your confidence into our management, and we'll try, we'll keep trying our best. And I'm sure we'll look at a better future soon. So thank you very much for being with us, for attending this call. And anyone has any questions separately, they can talk to our investors and to that extent, we can reply if there is anything there. Thank you, guys. Thank you.
On behalf of Batlivala & Karani Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines.