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Vardhman Textiles Ltd
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Ladies and gentlemen, good day, and welcome to the Vardhman Textile Limited Q4 FY'24 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. Roshan Nair from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, sir.
Thank you, Petal. Good evening, everyone, and welcome to the Q4 FY '24 Earnings Conference Call of Vardhaman Textiles Limited. On behalf of B&K Securities, I welcome all participants and the management of Vardhman Textiles Limited to the call.
We have with us today Mr. Neeraj Jain, Joint Managing Director; Mr. Sushil Jhamb, Director, Raw Materials; Mr. Rajeev Thapar, CFO; Mr. Mukesh Bansal, Head of Fabric Marketing; and Mr. Varun Malotra, Head of Finance.
Without further ado, I would like to hand over the floor to Mr. Neeraj Jain for his opening remarks, post which we can have a Q&A session. Thank you, and over to you, sir.
Thank you, Roshan. Good afternoon, everyone. So the results are before all of you. There is some improvement in the results, but I think those [indiscernible] disaster is continuing. This was a period where we saw a huge variation or huge sink in the cotton prices, both in India as well as outside, so majority of the cotton count in the period October, November, December to February, March in India, and this was a period where the peak arrives [indiscernible].
So if you first look at the international prices of cotton, it was stable at about USD 0.83, USD 0.84 per pound. And in the period, it increased to almost $0.97, $0.98, then came down to $0.74, $0.75 and as of March, it was $0.77, $0.78 or so and so on. So which means there is a huge thing happening on the international cotton prices because of various factors that it's not related only to the cotton, it's related with the overall interest rate cycle, overall commodity cycle and the overall issues which are beyond cotton. But of course, since the cotton is a part of that, we have to understand and we have to look at what could be our best strategy for [ recovery at this time ].
In this period, the Indian prices started at a lower form. The effective MSP for the Indian cotton as of now has raised about INR 56,000, INR 57,000 a [indiscernible] and then the cotton started coming in because of the lower demand and because of the pressure on the overall system, the cotton prices were lower compared to even the minimum support price.
As a result of that, the CCA started operating in India. India accumulated almost 32 lakh, 33 lakh days this year in the initial period, especially in [indiscernible] and the [indiscernible]. Of course, they did some operations in Maharashtra and [indiscernible] but the majority of the operations were in. To they have accumulated almost 32 lakh, 33 lakh days of cotton. The prices was lower in the rest of the market. So I think they start recovering and trade also started recovering cotton at those [indiscernible].
Looking at the cotton prices because most part of the season, it was ranging in the range of about INR 56,000 or so, which is almost USD 0.85, USD 0.86 delivered in India compared to, at that stage, the New York Future was $0.83, $0.84. So that meant the Indian cotton was available only at about $0.01 or $0.02 on, which seems to be quite a reasonable level when it comes to the overall risk strategy to that extent. So Vardhman also started cutting the cotton and recovered most of our cotton in this period.
Last few years, we have seen very different scenarios where we did cover the cotton because of quality, because of the sizing. And this year, I think our normal events started happening. We recovered most part of the cotton as usually we do in the normal time, both because of the commercial as well as the quality customers. So that's one part that we covered it.
And immediately after that, the New York Future started going up. As a result of that, India cotton also from INR 56,000, INR 57,000 went up to almost INR 64,000, INR 65,000 also. Then coming -- once the New York Future started coming down, the Indian prices also realigned. And as of now, if you look at the New York Future at $0.77, $0.78 and the availability of cotton internationally with 1,000 or 900 on, which grows to about $0.88.
Indian cotton, also, as of now, the market is available at $0.87, $0.88 only, which means there is some disadvantage for the Indian cotton [indiscernible] without looking at a duty component on that. But if you add the duty component, then maybe the Indian cotton is cheaper by about $0.02, $0.03 only.
So that's on 1 and 2, the change of price of cotton was increasing both international and in India. There was some improvement in the yarn prices also in this period. [ Prices somehow ] normally which is usually in the range of about $2.90 to $3, went up to $3.20, $3.25 also. But of course, as the cotton started coming down, the prices also were aligned and started coming down and as of now, I think international prices would be in the range of about $3.10 or so; on a cotton basis, $0.77, $0.78 [indiscernible] $0.88.
So of course, this helped us in the -- and there's some improvement of our overall margins on the selling side.
In terms of utilization of the spinning in India, our expectation or our [ building ] estimation is that it's in the range of about 70%, 72%, and there is still about 18% to 20% capacity unutilized especially the smaller segments where I think [ maybe develop ] the margins or maybe because of lesser demand in domestic market, there seems to be some issues and challenges.
When it comes to the export of yarn, the India's is doing almost 105 million, 110 million kg per month which is the normal export, which we were doing pre-COVID also. So I think in terms of the -- of course, the prices are challenged. But in terms of exporter plant, there doesn't seem to be any question mark that is concerned. So the normal countries are going, which means still there's the pressure on the yarn prices which we -- the domestic segment, the demand is a little lower, which is not [indiscernible] to go up.
On the fabric side, things continue to be better, and we are still utilizing all our 100% utilization. As we mentioned in last 2 or 3 calls, as -- once the people started going to the offices or the workplace started happening, I think that there is definitely an improvement in the overall [ business ] consumption and our basic [indiscernible] is doing well, and we are running all the 100% capacity utilization on that consume.
The third is we have announced now some CapEx. I'd like to give the details of the same. There were 2 announcements which were done before in 2021 and '22, where we have announced the increase in the spinning capacity price, but I think we have withdrawn that. And now we have looked at a fresh investment, which is both in terms of the expansion and modernization on the spinning side as well as on the fabric side as well.
On the spinning side, we intend to put up a [ opening ] project, I think that's one expansion, where, in addition to that, we are also looking at major modernization in the spinning sector. So normally, we grow almost about INR 150 crores of modernization every year in the spinning. But this year, there's a special project taken where we are looking at productivity improvement. We are also looking at tendering of our [ shop floor ] where more and more number of products could be produced at a right quality.
And also, I think it's our policy to keep investing and modernizing our machine parts so that the customer doesn't have a disadvantage at any stage. So this is we have taken a special project where we are looking at modernizing spinning in a bigger way. I think the overall CapEx on the spinning side, including the expansion, could be in the range of INR 1,000 crores or so, which is estimated. And we expect most of the spinning modernization of the project should be completed, I think, by March, April '25 -- April '25, May '25 [indiscernible].
On fabric side, there are 2 major products which are undertaken. One is the modernization as usual, which we always keep giving there. This modernization refers to debottlenecking also so that we could increase or enhance some of the capacity. And also one manmade fiber -- manmade fiber-based project has been taken for the manmade fabrics, which is India, I think we're very, very big on the manmade-based products, since most of the consumption of the world is going on the manmade now. So I think to support industry, we have decided to go for the manmade fabric. And I think this project will also be completed in the next 1.5 years or so. So I think the CapEx on this plant would be in the range of about INR 300-odd crores, the first phase. And then looking at the success or looking at the optimization of this, we would be looking at the next phase of expansion only after that.
In addition to that, this year, we are taking a special project on our green power also. So today, our green power is only about 2.5%, 3% of our consumption. And as this is both commercially viable as well as most of the world is talking now for more the sustainability, we are taking some special measures where we intend to spend our money both on the solar as well as wind parks so that our green could be increased. And it looks like maybe our first target is to complete and to reach our green power from 2%, 2.5% to about 25%, 30%. So that's the intention this year.
So there are some small steps already taken, and we are negotiating and we are discussing with the area service providers where we could enhance this, and we are hopeful that within the next 1, 1.5 years, we should be in a position to complete this as well.
So with this, our total CapEx, which has been estimated for about 1 year, I'd say practically 1 year and maybe 2, 3 or 4 months, in addition to that, we are estimating it to be in the range of about INR 2,000 crores at least, I think which will definitely give a good stimulus to the organization in terms of strengthening our shop floor in terms of our capability, in terms of debottlenecking and also in terms of improving the overall quality and reduction in the [indiscernible], et cetera.
I think this is my initial remarks. We can move on to the question/answer so that whatever are the specific queries, we can address or we can discuss it along with that.
[Operator Instructions] The first question is from the line of [ Aditi Loharo ] from [CB ig Research ].
Sir, my question to you is that our inventory is almost doubled from FY '23. So could you please tell us the reason behind this?
Yes. So as I mentioned earlier also, last 2 years, our cotton inventory has been much less. Because of the prices, we were not very confident to store it or not. But this year is our normal inventory balance. And since the season ends practically towards the end of March, we could cover most of our cotton. So that's why the inventory is on a higher side.
Okay. So you see the demand also to get back to normal?
Yes, for us. I think the [ semi side ] also, we are 100% capacity utilization. So one is the pricing pressure, which has to be aligned to the market. But in terms of demand, I don't think there's any issue for a company like Vardhman. We are doing [ business ] to that extent.
The next question is from the line of Himanshu Upadhyay from BugleRock PMS.
Am I audible?
Yes.
So my first question was see, in the last quarter, we announced a small CapEx, but even then, we've had much more skepticism, okay, on how the industry will play out and especially with the cotton prices and the narrowing gap between the Indian cotton and U.S. cotton and what will be the government policies and all those things. And hence, we wanted to be more cautious.
But what has changed so dramatically that we are taking a INR 2,000 crores CapEx within 1 year since? Can you just give your thoughts on how your change of thought has happened out of the evaluation of what has happened? And what was the reason for that?
Okay. I think [indiscernible] we have shown that sector we were also very [indiscernible]. There are lots of clients we have on the ground where we want to implement as the confidence improves. There are a couple of things where we feel the confidence is improving. One would be we've been talking last 2, 3 years, that the end of China plus 1 is there and lots of brands are coming to India, where they want to have the second source in addition to China. That trend continues for the organized sector. And I think we are also finding they tend to be very, very positive, where more and more [ banks ] want to come and they want to source from India.
Two, I think it's -- it was a [ proper ] -- we wanted to look at and understand what could be the timing where we should announce a bigger modernization and expansion. And we were also looking at -- so one thing which has happened in this period, the government has announced a [indiscernible] on the -- under the advanced license. So the disadvantage of cotton import with the duty is relatively much less today compared to what it is used to be. If there was a duty on India and they do not get the [indiscernible] also, it was impossible to go on with imported cotton without any [indiscernible] on that. But I think definitely, the government has responded to the industry needs where under the advanced license, they're allowed the order, which is quite frankly one of a big step because even if now the imported is where it should not be, but you want to quote, I think the relative disadvantage has come down. So that is one big step there, which has boosted industry's confidence. Two, as I mentioned, the customer requirement helps.
I think profitability is one part, margin is one part, price is one part. But having said that, the kind of orders which are coming in and every customer wants a delivery within 30 days, 45 days, we require to relook at our entire thought process as well as the organization, how do we cater to these demands.
All these customers which intend to come to India, there are 2 requirements: One, the variety of products, especially the new products, et cetera; two, the variety of fibers. Now to cater to both and both things should happen within 30 to 45 days around delivery expectation, I thinking to that or thinking about that, we took upon special efforts to look at how do we reorganize ourselves and how do we look at creating to these customers. So there was a comprehensive plan, which will not only deliver on these, but was also related with the productivity improvement in terms of the overall machine productivity as well as [ nonpar ] productivity.
So that's where I think this project has been taken. Last 2, 3 years, we didn't do much. At the same time, we have always been mentioning there are issues on the government policies, in our view, as per the cottons are imported, et cetera, but there is some relief or some thought process which have given probably that feeling is that the disadvantages which have been created may be less or eventually, it may go also. So I think to that extent, we'll be much more confident in the announcement [indiscernible].
And on the technical textile producing this 15 lakh meters, can you specify what type of products you would like to produce because [indiscernible]...
So I've asked -- incidentally asked Fabric business where Fabric has also just joined us, so I'll request her to reply you on this.
So this is regarding technical textile. So our cost phase is going to involve a capacity of about 15 lakhs meters per month and 80%, 70% to 80% of this will be polyester, and 22%, 30% would be nylon. So the applications would be ladies. There would be sportswear, activewear. But then there's also industrial applications such as tent, parachute fabric, defense application is also there. So customer base would be [ rain ]. It would be some of our existing customers, like Colombia Decathlon, but then there would also be other sports customers. And then, as I mentioned earlier, defense and industrial applications.
Just to give you a sense that he already said that there was a big opportunity that was available for Vardhman. Because as Mr. Neeraj Jain already mentioned, there was a China plus 1 [ vibe ] that we feel that a lot of brands, a lot of customers want to look at alternatives other than China.
And then in the Indian market itself, there was a vacuum in the market due to maybe not as many organized established [indiscernible]. And we also felt, as Mr. Neeraj Jain again mentioned, that if you look at world versus India. So India, we have 80% cotton and -- 70% to 80% cotton and 20% to 30% manmade. In the world, this trend is exactly opposite. So we wanted to capture all these trends.
Would you -- do you have any follow-up questions?
Yes. I suppose one follow-up. So do we stay in the existing capacities are catering to any technical fibers? And how big are those capacities? And are we -- and have you already got the customers? And how different would be the more solid, say, the challenges in this business versus the cotton-based fibers?
Right. So currently, we do not have technical textiles. So this would be our first foray into technical textiles. If we compare it to what we've previously done, so if we compare it to cotton, it would be -- I wouldn't say it would be more difficult. It would just be different. So we have to build up internal capability. And also sourcing will be different because some portion -- like it's no longer a natural raw material that we would be sourcing. It would be manmade.
So there would be certain differences, and we would be building up in [ dollar ] capabilities in order to meet the same.
The next question is from the line of Prerna Jhunjhunwala from Elara Capital.
Thank you for the detailed brief on technical textiles. I would also like to understand the level of integration that you are building in this segment, as in is this also fiber, the yarn, from what level? And are these capacities -- had to already spoken to some of the customers who would be interested in this capacity? And what are the technical technological collaboration that would be needed if at all required?
So currently, we are not looking at the manufacturing element on our own. We would see sourcing this element, and then we are planning to have leasing capacity and processing capacity in-house. And if you're asking about what the synergies would be with existing customers, so we have kept a few of our customers in the group, and they are enthusiastic about it. But like I mentioned earlier, while we would be catering to some of our existing customers, but we also want to diversify and grab new markets and new customers.
Okay. And what will be the approximate cost of setting this technical textile business?
So in the first phase, we are looking at about INR 320 crores, INR 330 crores. And once we are able to establish this, then we will think of setting up a Phase 2.
And will it be getting PLI benefit as well? Any government incentives that you are looking forward to?
No, we will not be getting that. I think the PLI scheme is no longer available.
It's not relevant as well because that's for a smaller company and this project is going to be a part of Vardhman Textiles only.
Okay. Okay. Understood. Understood. And the overall demand scenario in fabric, is it much better today as compared to in the past 6 months? How are you looking at the outlook of the fabric business -- your existing fabric business in the near to medium term? And are there any capacity expansions lined in the [indiscernible]?
Sure. So if we compare to last year, last [indiscernible], it has been a very difficult year and the team has done a fantastic job in trying to grab new customers and enter new territories in order to maintain a further volume.
If we think about demand outlook, then it seems that the worst is over. However, recovery is still going to take some time. There are some headwinds and there are some tailwinds. If we look at tailwinds, then we can see that a lot of the lead brands, their inventory levels, which were very high after COVID and even last year, that inventory level has come down. So at the retail level, they are -- at the retail level also, it is supporting, which means that now supply chain is relatively dry, and they are starting to replenish. So that will be taken.
But if we look at headwinds, the interest rate, the inflation and also the propensity of the consumer to spend on [indiscernible], that continues to be a challenge. So I think we can say that the worst is definitely over, and we are -- we can look for a better future.
Apart from that, we are also looking at new customers and new products. So we're working towards more innovative fabrics, whether it is more blend so that we can compensate the lack of demand.
You also asked about whether we are planning to enhance capacity in our conventional [ factory ]. So as of now, yes, we are looking into certain debottlenecking operations because we have been -- if we look at the financial year, we -- our utilization was about -- if we look at the full year, 88%, 90%. So -- which does mean that we are looking to debottleneck in certain areas. This debottlenecking will allow us to enhance capacity while also improve serviceability to our customer. So that's what we plan to achieve.
5% capacity enhancement, would be there on this, with debottlenecking?
It will be very small, actually. Some of it would be normal CapEx as well. I think we can let you know in the next Q call.
The next question is from the line of [ Neesh Jandra ] from Smith Limited.
Congratulations, management team on improved performance. Sir, first thing, last time we have talked about INR 200 crores small CapEx. That is separate than what we have announced today.
Yeah, that was CapEx.
So that was a very small project of 15,000 spindle. So that is still going on or that capacity is already added?
That's still going on. All that capacity will be available, I think, by December, January this year.
Okay. And out of this...
This 2,000 is over and above that 200.
Okay. Understood. So that small capacity addition will be completed by December this year?
Correct.
Okay. And new 50,000 spindles that we have talked about in new CapEx, that it will take another year from here to get commissioned?
Correct.
Okay. And sir, you talked about around INR 1,000 crore CapEx, which includes 50,000 spindle and modernization project. So this 50,000 equivalent spindle, how much that CapEx would be, separately?
So there are 2 ways. One is like a new open-end project is coming, which is equivalent to about 35,000 spindles. That project cost will be INR 300 odd crores or so. In addition to that, the remaining 17,000 spindle is a modernization of existing spindles where they will be putting up the new spindles instead of the old spindles. And as a result of that, we are adding net-net 17,000 spindles. So it's not only a cost of 17,000. So we are replacing almost 60,000 spindles and we'll be adding close to about 77,000, 78,000 spindles new. So the net addition will be 17,000.
Okay. Okay. Okay. Understood. That's why total is huge, INR 1,000 crores.
Correct. Correct.
Okay. And ma'am was talking about the INR 300 crores CapEx on this first phase. So 15 lakh meters per month is your first phase or there is a Phase 1, Phase 2 in this 15 lakh meter fabric technical textile?
So I was talking about Phase 1. You're absolutely right. Phase 1 would be 15 lakh meters per month, and that entails a CapEx of about INR 320 crores, INR 340 crores, around that.
Okay. Okay. And then one more thing, what would be the asset turnover in this business, in Technical Textile?
What would be a?
Asset turnover. How much revenue we can generate after first phase get completed? So we are putting INR 300 crores CapEx, how much revenue we are expecting when this new project of 15 lakh meter fabric could get commissioned in a year?
So we can expect a sales revenue of about INR 200 crores.
Okay. So in this business, asset turnover is less than 1?
Yes. This -- it will be less than 1 because we are adding lots of rooms where the advantage doesn't come in. But once we go for the second phase, probably the asset turnover, we might touch about [ once a month ] in total project.
Okay. And margin-wise, it will be similar to our company margin? Or this will have better margin?
Similar.
Okay. So again, the margin would be what we always guide, 16%, 18%, this kind of margin will be generated?
Yes.
Okay. And sir, 1 last question on the margin side. We are still far away from our guided or earlier years margin. So what did you expect it from there? It will take another year to reach that? What is your outlook on that?
My feeling is if we look at the U.S. and [indiscernible], almost 20% drop is there in the import. In the time the modernization happen, in the entire work, the margins won't improve. On the spinning side, still I think most part of the world, it is running about 70%, 75% spinning utilization. Of course, it has improved 8%, 10% in the last 6 months. So I can only hope the improvement in the margin in a big way once the normal utilization starts happening. It's slowly building up, slowly picking up, but it may take maybe another 6, 9 months. So I'm hopeful by the time we complete all our expansion and modernization, things should be far better than what it is today.
Okay. But all these projects, in this year, we won't get anything from this new CapEx, right?
No, no.
As far as capacity is concerned, everything will come into the picture in FY '26, yes?
Correct. Correct.
The next question is from the line of Pritesh Chheda from Lucky Investments.
Just your audio was weak so capacity utilization in spinning gain for us, Vardhman, in FY '24 and quarter 4 FY '24 was what, sir?
Almost 100%.
The next question is from the line of Rahul Jain from Credence Wealth.
Am I audible?
Yes, yes.
Sir, pardon me in case if you have covered this in your initial 2, 3 minutes of commentary. So typically, sir, given the current situation on demand and spreads of yarn, cotton yarn and the exports and the domestic, how are this behaving? Two, three questions aligned. One is the demand on the cotton yarn side, both export and domestic, and also the spreads on cotton yarn, how are they behaving? And what is your expectation going ahead?
Yes. So the demand, both domestic and exported for Vardhman is normal. And in terms of prices also are comparable to [indiscernible] markets. There is -- I mean, generally, the gap of INR 2, INR 3, here and there. But by and large, the prices and the margins are aligned both in exports and domestic and the demand is reasonably cooking both the segments.
The gross margin as of now is in the range of about USD 0.70, USD 0.75, which normally the benchmark is always in the range of about $0.90 to $1.
Sure. So given the scenario today and also there are currency issues in some of the countries in the globe, so has the situation eased now? And are you seeing some better inquiries or demand from the export side?
Definitely, there is an improvement. And I mentioned in my initial comments also that from India, the export is almost in the range of about 105 million kg, 110 million kg per month, which has been a normal export for -- even with pre-COVID levels also. So that means the overall demand from the export market is okay.
Of course, since the overall utilization in the entire world is still less, but that is where the margins are not improving, but as far as the exports from India is concerned, we are starting to see our normal volumes.
Sure. For my last bit, you mentioned in your commentary about China plus 1. You mentioned that we have been talking about China plus 1 for last 3 years and some of the [indiscernible] are surely looking for reliable [indiscernible] source. Sir, given your understanding and the experience in this industry, you being a leader in the industry, in your assessment in last 2, 3 years, what is that structural change which the industry and Vardhman both are going through? Because in general, the cotton yarn has been a very cyclical business. We have 1 or 2 good years followed by 2, 3 years of issues on the demand or cotton prices going up, the margin is going down. So typically, the changes which has happened in the last 2, 3 years, how do we perceive the change in the industry today and going ahead?
So there are very clear [indiscernible] changes which have happened in the last couple of years. To start with one, most of the order demand is today for 30 days delivery, 45 days delivery. Earlier, someone will book me down for 60 days, 90 days. That time is over. So every one wants a delivery in 30 to 45 days because everyone wants to reduce their inventories and they are looking at a better turnround of their products. So their first need is that the product has to be delivered in the number of days.
Two, the number of orders that started increasing, both manmade and different cottons, whether it's organic, for example, the organic cotton, there needs to be one kind of organic. Today, there are 8 kinds of organics. Similarly, if you look at polyester. There are 20 types of polyester today available. You talk of [indiscernible]. There are 20 kind of [indiscernible] available at this [ whole time ]. So every customer, and then they want a mixture of the particular [indiscernible], particular cotton. So this will be overall directly and improve or increase in a big, big, big way. So that's another thing which has happened where we are posed to, one, deliver it well in time; two, at the same time, have to have the differentiated products.
Third, as the banks are coming to India, their capital [ play ], the requirement of the new product is also very high. So which means they will get some ideas, we will have to generate some ideas. So both customer and when they're together, you have to keep generating new ideas so that [indiscernible] for the customer could be provided. So that's yet another change which has happened, which generally was not there in the normal daily products, but we are finding also mixture of A2B, B2C, C2D. So that's something new and something different could be created. These are the 3 changes or fundamentals from the customer side.
In addition to that, maybe I said this, one is on [ capability ], [indiscernible], sustainability. Now there's lots of passion on the recycling products. There's lots of requirement of customer on reduction of carbon footprint. There is lots of requirements for them to stop using the [indiscernible], et cetera, et cetera. So that's on one hand.
On second hand, there is not a total capability up to -- given expense up to farmers, if not farmers, at least up to [indiscernible]. So the entire chain has to work on the logistics actual [ workout ] so that you are in a position to give them visibility on the capability or on the entire supply chain. And these are very, very big changes.
And the last, not the least, the total compliances. As these brands are moving more and more to India, the requirement of social audit, social requirement is huge. And their expectation is also that all the organization, wherever they're working, they should be compliant to that extent. So I think that's, in a way, a natural advantage, which will go to the larger organization who can organize all these things.
And all these customers which come from outside, another requirement is they want to consolidate their vendor practice so they are not interested to go to 20 vendors for every different product. They want one product, one factory where most of their products should be available. And they also want their [ peaking ] to be managed by the factory. So someone is buying 5 tonnes of, let's say, [indiscernible] they want 7 tonnes, 8 tonnes, 10 tonnes, so I have to deliver them well in time.
So [ Vardhman ] has the largest capacity and the capability to [ sift ] through the product. I think that's an advantage, which is naturally going from the customer to the [indiscernible].
These are all things where all these customers or all these brands, which are looking in detail, looking at India as a serious destination, this is the basic requirement, and this is the reason we are rethinking of the entire model. And this is the reason we are -- we are taking on this kind of modernization. So that we already have got the flexibility and capacity available to us, but I think we are relooking at it entirely from a different angle and preparing ourselves for next couple of years.
The next question is from the line of Akshay Kotari from JHP.
Sir, how do you foresee the demand from China?
It's relatively less as of now.
Okay. And will we expect it to -- your views on the same?
They keep coming to us. So whenever the prices goes down, they buy from us. But I think one big change which has happened, if you look at an article, there was an article 3, 4 days back only. In U.S., they had got samples from various brands or the various retail shops, and they're [indiscernible] for the band cotton of China. And they bank almost 90% cotton samples getting paid. I was given the name of the brand as well as the shop, but it looks like as the stringency of U.S. book is increasing of these ideas, the demand for Indian yarn will definitely keep increasing even from China also.
So I think depending [indiscernible] is at their facility. I look forward because as of now, though there is all these requirements, legal requirements are there, but still, it looks like the people from China are managing it, but I think as the stringency increases, there could be or would be a larger demand of yarn from India which is made out of the Indian or any other cotton other than China.
Okay. And what would be the debt taken for this CapEx, which you have announced?
I think we are likely to take -- to be in debt in the case of about 50% to 60% overall long-term debt projects. In addition to that quarter with the working capital, that generally will take about 50%, 60% of that as well.
Okay. And sir, I missed the levels of disturbance. This is a brownfield CapEx, right?
This is not a brownfield.
Okay. Okay. And sir, lastly, what is the application of this technical textile fabric? I understand 80% is polyester and 20% would be nylon. But where would it go?
So there are different applications. So one would be sportswear or activewear. So if we look at the imports that we wear, the down jacket, so the fabric that goes on the outer side of it, that will be one functionality. Then there are 2 industrial applications like belting luggage and then there are also defense applications.
So they are the same segments. And this is an area that we are going to enter into. So some would be existing customers, but a lot would be new segments and new customers.
The next question is from the line of Riddhesh Gandhi from Discovery Capital.
Just to get an understanding, how are spreads actually -- like currently in the cotton spinning compared to the Q4 and Q3 of last year? And if you could give us a view going ahead, if you see further normalizations happening in the spread?
Sorry, I'm still not clear on your entire question.
So I was asking about how the spreads are currently.
Spreads. So spread in the third quarter have been a little less, both quarter spreads were better. But again, I will not say it happens because of the yarn prices improved. It happened only because the cotton prices came down. So spread was a little better in the fourth quarter compared to third quarter.
And any outlook going ahead as to -- what can you expect a normalization to actually happen in the spreads and what's going to [indiscernible] that?
As I mentioned, they still depends the utilization of spinning doesn't grow to about 85%, 90%, the improvement will not happen. So we have seen last 1 year, the slowly improvement has started happening as the consumptions are improving, increasing. One thing is very clear, and I mentioned in the last call also, the -- all the brands, there is no brand now who is talking about still the destocking. So this I think is over, brands are buying their day-to-day purchases on a regular basis. So this means this much of demand, which is there today should continue, and it is to improve only. It may take maybe next 2, 3, 4 quarters -- 2 or 3 quarters in my view personally for the normalization of demand, but definitely, things are improving quarter-by-quarter.
Got it. And the current levels of utilization across the industry would be how much?
72% -- 75%.
The next question is from the line of [ Askha ] from [ Navaysure ].
Okay. I want to just ask you at what capacity can technical textile can be run in future when it is ready?
It all depends upon how our product goes, what kind of demand, what kind of margins are we looking at. We feel, for the domestic market, since the [indiscernible] has to increase only, so there is a vacuum available as of now. So we are putting ourself and project and hope that it should be commercially viable, and we should be in a position to make money also with the right product. And once we are in a position to establish the product and the margins are normal, then I don't think we have any limitation or any thought process that we will not be expanding. So we'll keep evaluating and looking at it in the future.
And is it that it can produce extraordinary margins in comparison to cotton yarns?
It can, depending upon what products because slowly a part of this will be going in towards more and more technical [indiscernible], maybe the [indiscernible] and those kind of sport products. In case we are in a position to establish that and make that, maybe not in 100% capacity, but a part of that capacity going in force is very, very specialized application can definitely or will definitely give us much better margins.
The next question is from the line of [indiscernible] from One Up Finance.
Just one clarification. Earlier in the call, you mentioned that the spread yarn cotton price is $0.70 to $0.75 per kg. Did I hear it right?
Correct.
And this is mainly because of increase in cotton prices, which has led to increase in yarn price and which has reversed to some extent in the current quarter, right?
Yes. So the margins were lower, but as the cotton prices came down, the yarn prices were stable, the margin, to some extent, improved.
The next question is from the line of Nirav Savai from Abakkus.
My question is regarding this power capacity, which we are putting. And am I right in understanding that you're increasing your power, green power share from 2% to 25%?
Correct.
So what is the incremental capacity which you are putting? And what will be the CapEx behind that?
So the CapEx -- I think there are -- we haven't figured out the total CapEx because it's a different change we are evaluating, maybe in solar, maybe the wind, or maybe the hybrid or a mixture of both. So we tentatively look at the provision of about INR 300 crores, INR 400 crores -- INR 350 crores to INR 400 crores would be for this power for this particular year.
Okay. And what would be the cost savings [indiscernible]?
Sorry?
And would this be done in the 18 months, right?
18 months.
And what would be the cost saving on the power side, which we'll have?
Upon what -- whether is the -- [indiscernible] me to comment what would be the advantage? But I think in most cases, we are looking at whatever we are investing, a payback of about a maximum 4 years or so.
Sorry, sir, yes, I didn't get you right. Can you just repeat it again?
Whatever is the investment, our idea is to get a maximum payback of 4 years on solar power -- on green power.
Okay. And on this new spinning capacity, you were adding, what, about 50,000 spindles? Or you were adding 70,000 and some part of the existing spinning capacity will be scrapped? I didn't get it right. Can you please repeat it again?
Yes. So there are 2 projects. One is the open-end project, which is that you collect about 35,000 spindles. It's a new project. And second, we are putting up about 70-odd thousand spindles and from 16,000 spindles will be scrapped. So the net-net, there would be an addition of 17,000 spindles, making it a total of --
And technical textile is another INR 300 crores?
So I'm just asking the technical textile part is INR 300 crores. New spindling is about INR 1,000 crores. And about INR 300 crores to INR 400 crores will be in power, right?
Correct and plus some debottlenecking as well as the modernization in our fabric region close to about INR 150 crores, INR 200 crores.
The next question is from the line of Abhineet Anand from 3 P Investment Managers.
Yes. So just on the CapEx, good to hear a new round of CapEx coming for the company. Just trying to understand because it's not totally greenfield, some of them is modernization. In terms of asset turns, obviously, wheel spinning is less than 1 and the [indiscernible] travel back was talked about is also less than 1. So I mean this INR 2,000 crores in terms of financial numbers, let's assume, over the next 2 years and the ROC on that, any color on that, if you can highlight?
I think on the top line, as you mentioned, because lot of modernization, which is happening, which may not increase the overall top line. And if you look at the expansion of 50,000 [ equal ] at spindles and the fabric, the overall top line may increase by about INR 1,000 or INR 700 crores only, which means on a CapEx of INR 2,000 crores, we are talking of maybe 0.3 or 0.4 at best capital turnover ratio.
But it will be more in terms of bottom line. For example, the solar power, we are not going to increase any top line. But I think it's an out improvement in the -- or deduction in our cost of electricity. So the margins may grow, but the top line numbers may not increase.
Sure. Sure. I mean the reason I said modernization will probably end up green power will reduce that.
Secondly sir, if you can provide the broader breakup in terms of yarn and fabric, which typically we get from the annual report, but if it is 4Q, probably if you can give those numbers?
As a matter of policy, [indiscernible] the balance sheet [indiscernible].
Okay. Or else, if [indiscernible] can provide the average fabric and average yarn realization for the year, that would help.
We are not doing it separately. So the data cannot be provided as of now. So EBITDA, we are just monitoring at company level only textile as a whole.
Okay. Last bit, sir, this debt that we'll be taking. Will it be normal debt or some lower-cost of debt will be there?
Part of that could be the lower cost as well, but some of the products will be coming in in market [indiscernible] the open-end project. So there could be a possibility a part of the debt could be some subsidized also, but that's a very, very small part. Most part of the debt will be the normal rate.
[Operator Instructions] The next question is from the line of Rahul Soni from ICICI Bank Limited.
Just one question. What kind of freight increase we have witnessed due to this Red Sea crisis?
Definitely, the freight increase has happened especially to the Europe and Latin America. But fortunately, our overall shipment in that region is much less as a company, but most of the shipment of yarn as well as fabric that goes within the Asia only, whether that's China, Sri Lanka, Bangladesh, et cetera, et cetera, Vietnam, Thailand, those countries. So I think though there is an absolute increase in those place, but our overall [indiscernible] product went through Red Sea is relatively very less. So it's not really had a big impact on us.
Okay. So what percentage goes to the Europe as a direct export?
10%.
Okay. So if -- just want one more thing. So you're saying that you have witnessed in terms of absolute numbers. So for that particular shipments compared to previous charges earlier than this issue escalated, so what was the percentage change there?
For the freight?
Yes.
Double.
The next question is from the line of Monish Ghodke from HDFC AMC.
So this INR 2,000 crores CapEx, which we are doing, if I consider cost savings as my earnings, margin expansion as well as electricity cost saves, then what kind of ROC we have in our mind over a long-term period?
Primarily, as I mentioned earlier also -- so primarily, the idea was not only the cost savings. The idea was to create the capability to produce the differentiated products or to improve the overall delivery. That was the idea that we started looking at this. But having said that, all these modernization should definitely bring in the improvement in the overall system. So it's very, very -- I mean, if I look at only the cost savings potential and look at all these modernization, none of this will make sense. But if I include that with this, I should in a position to get a much better business from a much better customer. Probably it's very difficult for me to put it in as a number that this is a return I'm going to expect from this modernization. But definitely, as we have seen last 1 year has been very tough. In spite of that, at any stage, if I look at my 30 to 40 days delivery, there's always a challenge because huge pressure from every customer to deliver the products, which means the trend is changing or it's increasing where there are lots of opportunities where they're missing the business because we are not in a position to deliver. So I think that was the idea where all these modernization targets are happening. But if you ask me that what is the payback of this or what is the improvement in the numbers only with our debt, probably it will not make any sense to us.
Okay. Okay. And sir, since our fabric capacity is also operating at almost full utilization. So will we be planning CapEx in that also going forward once demand improves?
Yes, we are. As mentioned earlier, there are some debottlenecking activities that we are planning to do. So we would be -- we also understand that we're at a good capacity utilization. And we are -- this year itself, we would be looking at purchase investment.
The next question is from the line of Apurva Sharma from BugleRock.
My questions are on the technical, the manmade of the business. So you have announced the CapEx. Just wanted to understand in terms of -- I know it's a bit early, but in terms of customers where we plan to sell, is there any initial sort of set of orders or inquiries that we have been working on and what part of it? Or is it we are building -- there's a vacuum and then we'll just set up and then we'll see? I mean what part of it can be -- if there might be some traction initially? And I have a follow-up on the [indiscernible].
Right. So as mentioned earlier, there are some synergies with existing customers. We have been in touch with those customers in order to get some insight, product specifications, what products we are also looking for. So that would be some portion. It would be difficult to give you a black or white at what percentage would be existing and what percentage would be new. But rest assured, we also feel that there would -- because the existing customers are present and are enthusiastic about this product, that we would be able to gain traction maybe sooner than what would have been if we didn't have any customers.
Okay. And so just to what sort of time frame are we looking at to stabilize? Again, it's too early, but just wanted your sense on the same based on the conversations that you are seeing.
So 1 year from -- it will take us 1, 1.5 years to commission and then let's assume 1 year from that. So I think we take a guidance of 2.5 years for us to fully establish the product.
The next question is from the line of Prerna Jhunjhunwala from Elara Capital.
On this fabric technical extend [indiscernible], I understand that you were looking at expanding the target audience for the business and the customers. Just wanted to understand why the asset turnover will be lower in this business? And why the margins will be lower because especially for the -- not many people make it so why the margins and...
Well, so we didn't say any margins will be lower. We only said the asset turnover ratio will be lower because most of -- lots of these products will be polyester based or be filament based. So the guidance of that will be determined by the list of the garment prices only. So asset turnover could be less, but we are not saying the margins could be less.
Okay. So margins could be a part of our company average. You're saying average margins can be eventually when you establish?
Of course, here, from the overall company margin, it will be better because in any case, the fabric margins are better than the overall company's margin. So it will also be better.
Thank you. Ladies and gentlemen, we will take that as the last question. I now hand the conference over to the management for closing remarks.
So thank you very much on behalf of the company. I think we have seen a very, very difficult time, and we have made all the earnest efforts to come through or to pass through this time successfully. And I'm happy to share a good margin [indiscernible]. We have issues and challenges in terms of overall profitability. But definitely, in terms of customer satisfaction, in terms of developing new products and in terms of soft load manufacture, in terms of the cost-saving potential for the idea, we've been working continuously in this difficult time so that because all these difficult times, there was lots of energy or lots of ideas to sell these -- lots of conviction to sell these ideas to our people. And the entire management is working day in day out to look at what more improvements we could bring in in our overall system.
I'm sure the overall demand started improving last 2, 3 quarters and that trend should continue. And hopefully, maybe next 2, 3 quarters, I think once the business becomes normalized, we are geared up and we prepare ourselves for the next phase of improvement.
And so at the moment things start improving, we will definitely look at a much better margin from today's level. So I thank all the investment community who has always been with us and have the faith on us. And I'm sure as management, I assure you that whatever is possible in our hands, we're working day in day out and we're always looking at improvements internally, whichever area it is.
So thank you very much once again, and look forward, maybe the next call after quarter also.
On behalf of Batlivala & Karani Securities India Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.