Welspun India Ltd

NSE:WELSPUNIND

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to Welspun India Q1 FY '23 Conference Call, hosted by Edelweiss Securities Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Nihal Jham from Edelweiss Securities Limited. Thank you, and over to you, sir.

[Nihal Jham]

Thank you, Michelle. On behalf of Edelweiss, I would like to welcome you all to the Q1 FY '23 Earnings Conference Call of Welspun India Limited. I would now like to hand over the call to Mr. Abhinandan Singh, Head Group Investor Relations at Welspun Group, to introduce management and take it further. Over to you, Abhinandan.

[Abhinandan Singh, executive]

Thanks, Nihal, and good afternoon, everyone. On behalf of Welspun India, I welcome all of you to the company's Q1 FY '23 earnings call. We have with us today Mr. Rajesh Mandawewala, Managing Director; Mr. Altaf Jiwani, who most of you are already familiar with; Mr. Sanjay Gupta, the company's CFO, along with by myself. Our CEO, Dipali Goenka, is traveling for customer meetings and therefore is unable to join us on this call.

As usual, we will start the forum with some opening remarks by our leadership team, and then we will open the floor for your questions. Once the call gets over, should you have any further queries that remain unanswered post the earnings call, please feel free to reach out to me.

And with that, I would like to hand over the floor to Mr. Altaf Jiwani to share his perspective. Over to you, Altaf.

[Altaf Jiwani, executive]

Thank you, Abhi. Good morning, ladies and gentlemen. Thank you for taking time to join us today. It's always a pleasure to interact with all of you. I'd like to begin with a quick snapshot of our operating performance for the quarter, and then cover the external environment followed by our strategy. Subsequently, Sanjay will take you through the financials. During this quarter, overall revenue was INR 1,979 crores, out of which INR 1,852 crores was from the core business, that is home textiles. And as you all know, the environment was extremely challenging. Overall, this has been a great start to the fiscal year for our domestic retail business, which you'll recall has 2 power brands, Welspun and Spaces. Both these brands delivered a very strong growth and reported revenue growth of 113% year-on-year. This was achieved even after we passed on higher input costs to a large extent, demonstrating the strength of brands.

The reach of brand Welspun within the country has further expanded as it's now covered almost 500 towns and over 7,800 stores. The branded portfolio recorded growth of 41% year-on-year and 31% quarter-on-quarter, which includes owned and licensed brands across businesses and geographies. During Q1 FY '23, markets have grown in low and mid-single digits, driven essentially by price growth. However, our brands have witnessed double-digit volume growth. This ahead of the market growth for the brand and the emerging businesses is a testimony of our strategy and agility of our teams. Our investments in the brands and D2C is undoubtedly giving us an edge and is steadily making us as FMCG of home textiles. The share of our branded and e-commerce revenue has steadily moved up to 24% of our total revenue as compared to 16% last quarter. It also gives us immense pleasure to inform you that Welspun India has won the Texprocil: Platinum Trophy for highest global export, 12 years in a row.

Further, Welspun's Innovative Artificial Intelligence project of travel counting and defect detection using AI/ML-based vision system, which is an industry first, has received the Nasscom AI Gamechanger award as an Innovator.

Now let me share our assessment of the excellent environment. Inflation has been a challenge for the industry over the last few quarters. Unfortunately, this bout of inflation has been worse than the past one, because prices of several key commodities have inflated to all-time high simultaneously, be it cotton, crude, caustic soda, ocean freight, the price increases are at historical highs. I do acknowledge that there has been a very recent cooling off in a few commodities. However, they still remain significantly elevated versus the long-term averages. The softening is a very recent to conclude that the correction has finally kicked in. The power rates for cotton are indicating significant reduction in prices.

In such inflationary scenario, it is but natural for consumers to withdraw their spend, at least for discretionary items. The consumers world over are prioritizing essential categories to manage their budgets, and we are seeing the same trade in the U.S. and western economies. Most large retailers in the U.S. have revised their profit guidance for the year; a, due to change in consumer spending trends, where consumers are spending more on food and less on higher-margin merchandise; and b, due to offloading high inventory buildup by offering steep markdowns.

Recent data from the U.S. that came out last month showed that U.S. inflation hit a fresh 40-year higher with the consumer price index rising 8.6% year-on-year. In the U.K. too, as per data released a few days ago, CPI was up by 9.4% in the last 12 months.

As per U.S. Department of Commerce, the U.S. Retail Trade and Food Services sector grew by 8.1% year-on-year between April to June quarter. This is, however, a deceleration from 12.9% increase year-on-year registered in the previous quarter, that is Jan to March 2022. Month-on-month, the growth during June 2022 was 1%. This clearly reflects a softening compared to preceding quarters, and this trend might sustain for a while.

In this challenging time, as we have continued to articulate in the past few quarters, we have 2 specific imperatives. First, we need to maintain our competitive edge that comes from a highly differentiated business model. I have earlier shared updates on the branded and domestic side of the business. Flooring also followed suit with revenue at INR 169 crores, growing 40% year-on-year. Sales momentum is coming on domestic flooring business, seeing a healthy growth of 108% year-on-year. D2C business is picking up good traction in all 5 key cities where it has been launched. Flooring exports, however, continue to face challenges due to input cost pressure and high ocean freight. Further increase in mortgage rates will have its impact on housing demand in the U.S.

Second, we need to continue focus on building the organization for the future, driven by purpose. In the past quarter, we continued our efforts to demonstrate ESG leadership through our work on the sustainability front with circularity embedded in our operations and ensure that we keep strengthening our position on each of the E, S, and G parameters. We were pleased to note the recognition received once again with Welspun India's industry leading over by CRISIL in its Sustainability Yearbook 2022 that was released during May. The company has been rated strong in that report where CRISIL analyzed over 575 companies across 53 sectors on ESG.

Welspun India leads among textile companies with the highest scores in each of these 3 dimensions of environment, social and governance. Texprocil too has awarded Welspun with a Gold Trophy for Special Achievement in Madeups for Sustainability Initiatives. Through these unprecedented challenging times, the company has shown great resilience through an unmatched combination of scale, quality, innovation and deep customer relationships, which clearly sets us apart from rest of the players in the industry.

Our investment in brand and D2C initiatives globally has started giving the desired results, and we expect the momentum to propel future growth through our D2C initiatives and our emerging businesses. We would again reiterate that while the medium- to long-term fundamentals of the business remain strong, these couple of quarters are a bit challenging following the deteriorating global environment. With the downward trend of commodity prices, and as the consumer sentiments improve, we expect the operating performance would start reflecting the same.

With this, I'd like to hand over to Sanjay, who will take you through the financial highlights. Thank you.

[Sanjay Gupta, executive]

Thank you, Altaf, and greetings, everyone. I'll briefly discuss the financial highlights for the quarter, and then we will be happy to open the forum for your questions.

From the financial perspective, quarter 1 financial year '23 has been a quarter of resilient cash flows and balance sheet with sustained deleveraging. During quarter 1, we reported revenues of INR 1,979 crores, which was down 12% quarter-on-quarter and 7% year-on-year on a like-to-like basis, that is after taking out the impact of quarter 4 financial year '21 RoSCTL accounted for in quarter 1 of financial year '22. Compared to last year, volume impact has been about 16%, while price upcharge has been 5% and ForEx upcharge about 1%.

EBITDA margin for the quarter stood at INR 174 crores, and EBITDA margin was 8.8%, which is lower quarter-on-quarter by 220 basis points, reflecting the impact of highest ever input costs as well as relatively lower volumes. The major impact has been due to increase in cotton prices by about 15% from last quarter. The performance is relatively healthier due to various steps taken by the company in rationalizing costs and achieving better efficiencies across both. Year-on-year EBITDA margin on a like-to-like basis is lower by 790 basis points, down about 50%.

Profit after tax after minority interest for the quarter is INR 22 crores, vis-a-vis INR 53 crores last quarter, and the like-to-like INR 145 crores in quarter 1 of financial year '22, reflecting the earlier mentioned factors.

Our consolidated EPS for quarter 1 stood at INR 0.23 per share, vis-a-vis INR 0.53 per share last quarter, and INR 1.3 on a like-to-like basis in quarter 1 financial year '22. On the ForEx front, we have been consistently following the Board-approved policy to hedge 45% to 65% of our receivables on a rolling 12-month basis. Our average exchange realization for the U.S. dollar during quarter 1 of financial year '23 was INR 77.13 compared to INR 75.77 in the corresponding quarter last year.

Going forward, while these pressures might linger in the near term, we expect improvement as prices of cotton, coal, and freight soften. An uptick in sales volume post inventory decongestion should also help on both the top line and resultant margin front. As you are already aware, Central Banks worldwide, including in India, have acted to counter inflation by raising interest rates. With the existing geopolitical factors and the accompanying inflationary situation sustaining, or in some cases even exacerbating, the possibility of further tightening cannot be ruled out. We believe that our ability to continually deleverage and maintain debt levels at a very healthy level will stand us in good stead.

During quarter 1 of financial year '23, we saw some positive impact starting to stream in from measures undertaken to enhance efficiencies and improve cash flows even as we did not shy away from investing in innovation or brand building that are key drivers of our long-term growth. As a result, at the end of quarter 1 of financial year '23, net debt stood at INR 2,139 crores. This is INR 90 crores lower than INR 2,229 crores at the quarter ago, and INR 110 crore lower than INR 2,249 crore a year ago.

In addition, we have enhanced e-scripts of RoSCTL and RoDTEP amounting to INR 400 crores. Over the past 3 years, our net debt has consistently been coming down from INR 3,028 crores at the end of financial year '29 to INR 2,139 crore at the end of quarter 1 of financial year '23, a reduction of 30%. The expansion projects of flooring, advanced textile, and home textile businesses, which were in different stages of progress, had some balance CapEx of about INR 200 crores remaining, which we plan to complete during financial year '23. In quarter 1 of financial year '23, we spent INR 85 crores towards these, and the balance would be spent in the course of future quarters.

Coming to segmental results. Quarter 1 of financial year '23 core business, home textile revenue stood at INR 1,852 crores versus INR 2,073 crores in quarter 4, and like-to-like INR 2,023 crores during the same period last year. Quarter 1 EBITDA of home textile stood at INR 172 crores at 9.3% as compared to 11.6% quarter-on-quarter. During the quarter, revenue from flooring business was INR 169 crores, up 40% year-on-year. EBITDA was at near breakeven at INR 2 crore as compared to a loss of INR 26 crores year-on-year. We are deeply encouraged to see the growth impetus in all of our emerging businesses, and it continues to endorse the confidence we have in our strategy. Emerging growth businesses, which include branded business, e-commerce business, flooring, and advanced textile cumulatively grew by 40% year-on-year and contributed 37% to the top line during quarter 1 versus 21% in quarter 1 of financial year '22 and 26% in the previous quarter.

With this, I leave the floor open for questions and answers. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Aman from Augmenta Research Private Limited.

[Aman Madrecha, analyst]

I just wanted to ask about how has been the order inquiries or we can say order book from the U.S. retailers in this quarter or we can say for the upcoming quarters given the fears of recession pending and huge inventory on the books of the retailers, can you throw some light on this thing?

[Altaf Jiwani, executive]

So good question, Aman, and it's a million dollar question. It's clear that in the developed markets that the spending is wearing towards services and experiences, which is travel, restaurants, it is having a good time. So it is moving away from products and particularly discretionary products, and that includes our home textile products as well. So we have been witnessing a slowdown in demand, and this has been going on for the last couple of quarters. And there has been a very aggressive promotion strategy by our customers to push this excess inventory out of their doors. But there's still a lot of inventory that they are carrying, not only this in home products, but also in electronics and so on and so forth.

So there is a drive to get rid of this. And there's been some guidance revisions from some of our large customers. So I'm afraid it doesn't look good for the next quarter at least. And our hope is that as we get into the holiday season, our Christmas season shipping, which is sometime in September, October, that there should be some revival that we should see. But as of now, it's not looking good and the mood and the confidence with our customer buying teams is circumspect. So we have at least another quarter of pain on the demand side ahead of us.

[Aman Madrecha, analyst]

And sir, second question regarding, let's say, like if I'm not wrong, we are integrated to the tune of 25% to 30% in the yarn side. And if I want to ask regarding how has been the yarn prices? Or how has been our procurement on the yarn side, because we have heard from the spinners that they have halted the production, like around 30% to 35% of the spinning mills in India are shut down currently. So how has been the -- like prices on the yarn side, how are they behaving, like the procurement we do from outside?

[Altaf Jiwani, executive]

So with the reduced order flow and reduced volumes, so we are not honestly procuring much. And there is procurement, but we are not procuring as much as we used to and making most of the yarn that we need within our spinning facilities. And see, generally, on our -- you take a 1 or 2 quarter forward view. So December futures today are trading at about $0.94, $0.95. And even cotton in India is being offered at between, let's say, the INR 65,000 and INR 70,000 over the last 10, 15 days, or a little more than that. Futures cotton in India is also trading between INR 65,000 and INR 70,000.

And it's an open world. So everybody knows about that. The spot prices of cotton are in the INR 80,000, INR 85,000, INR 84,000 range. So the customers are waiting and everybody is in that circumspect mode. So the yarn prices are already adjusting to the future cotton prices. So they are somewhere at the INR 70,000, INR 75,000 range. So yarn prices have significantly come down. I think the deltas have also significantly come down, because irrespective of whatever cost that spinning mills have bought their cotton at, but they have to adjust their prices to the current reality. And the suggested prices for December are about INR 65,000, INR 70,000 today. So the yarn prices have definitely adjusted downwards.

[Aman Madrecha, analyst]

Okay. Sir, one more question about, we are reading that currently during this cotton season in India, like India would have a deficit and we might have to rely on imports because the crop is -- crop is good, but it is a bit low because of the weather and the pest thing. So like how is the cotton scenario building in India? Because if you think of the scenario whether like in the case we have to import on the cotton and there will be a good demand for cotton in India. So are we expecting the prices to remain at the same level? Like you have mentioned that it would be around INR 65,000 to INR 70,000 -- it is quoting at INR 65,000 to INR 70,000 for the November future. So like how is the cotton scenario, because like the crop is low as compared to the last year, right?

[Altaf Jiwani, executive]

Well, the past crop was lower as we started the previous season, '21, '22. So the estimates started at 340 lakh bales. And then through the course of the year now, let's say this, it looks like the crop is not going to be more than 295 lakh bales. So India is almost run out of the last crop cotton, which is '21, '22. But the good news here is that the new crop, which will start arriving in September, is progressing well. I think the plantings are going to be in the 5%, 7% higher range. And year-to-date, right at the current situation, it's about 5% higher than where it was last year. And so far, while whatever we have heard on the weather side in India, but overall, the crop situation is looking good. Trade is estimating the next '22, '23 crop, which starts arriving in September, to be around the 340 lakh, 350 lakh bales level. So as of now, the crop situation in India is looking quite decent with, say, 5% to 7% higher planting and hopefully better yields as compared to last year, because last year the yields were horrible, the quality was horrible. So hopefully, that should get better.

Coming to your question on imports, I doubt, because see, the spot prices even now are significantly higher. And when you know that the futures are trading at 25% discount. So it will be hara-kiri to actually contract new imports now. So not much in new imports will happen. Yes, imports did happen, I think until June, and those arrivals will keep coming up to September, October. But I don't see more import contracts getting transacted at this moment, and people will wait it out for the new crop to arrive. And it's not too distant, it's not too far away. So end of September, the arrivals will start. So just a couple of months. And the industry is operating on a best-guess basis at about 65%. So the spinning industry is at about 65%. So consuming a significantly lesser amount of cotton. So I think people will wait it out. And at these higher levels, spot purchases of cotton, whether in the domestic or international markets, are likely to be meager.

[Aman Madrecha, analyst]

Okay. Okay, sir. And sir, like to summarize the whole scenario that is going on across the whole value chain. Can you just say that everyone is just on a wait and watch mode because the prices are decreasing and like there's a fall in demand? So everyone is on a wait-and-watch mode on procuring the raw materials, or the major retailers on giving the orders, like to summarize the whole issue?

[Altaf Jiwani, executive]

Yes, yes, yes. You could say that. So that is the situation. So nobody wants to take a position right now at higher prices. And it's across the board, across the value chain. So having said that, demand in India is holding up well, Aman. And here, let's say this, we don't see -- while there's a huge rhetoric about recession and inflation, but I think the demand in India is holding up well. And so to that extent, the productions and the consumptions will continue to happen. But I don't think many positions would get taken on the basis of the international markets, at least not until the new crop arrives.

[Operator]

The next question is from the line of Abhineet Anand from Emkay Global. [Operator Instructions]

[Abhineet Anand, analyst]

Okay, sir, just on the present gross margin numbers, is it fair to assume that buying at the spot currently and selling at the current spot of your products is giving these low gross margins? Or because you had some higher cost inventory is the reason for these margins?

[Altaf Jiwani, executive]

So good question, Abhineet. So what you see in this quarter is, the highest cost inventory is still not consumed. So this is from cotton that was bought before this quarter. So I'm afraid the margins will continue to remain under pressure. In fact, they'll worsen because from July to September, the highest cost inventory is likely to get consumed. But the good news is that it will get consumed in this quarter, which is the ensuing quarter, July to September. And thereafter, let's say this, from the October quarter onwards, the average cotton consumption rates should significantly improve.

So the margins will continue to remain under pressure. The next quarter is likely to be, in fact, this even more severe pressure on the margin. But ensuing the back half of the year, I think we should hit the bottom in the second quarter, slight improvement in the third one, and hopefully, significant improvement coming from the fourth quarter of the current financial year.

[Operator]

[Operator Instructions] The next question is from the line of Tarang Agrawal from Old Bridge Capital.

[Tarang Agrawal, analyst]

Three questions from my side. One, if I look at your branded e-commerce business, international, that seems to be doing reasonably well despite all the commentary around inflation. So if you could just comment in terms of what's really happening there? And are there efforts or is it because of the segment that you're playing in? That's number one.

Number two, do we -- I mean, there is a certain bit of seasonality with your textiles business with September being the heaviest month. I mean, is there a seasonality associated to your flooring business as well? That's number two.

And number three, in your opening comments, you spoke about, about INR 400 crores of script. What is the realizable value of this INR 400 crores? I mean, historically, how much do you realize out of those script values. Yes, those are the 3 questions from me.

[Altaf Jiwani, executive]

Good, Tarang. So to address your first one first, which is about our branded international business. So all of you have heard Dipali constantly talking about our focus on the brands for the last couple of years. And the international brand business is -- so it's just maturing. It's all the effort that we have taken over the last 2, 3 years, which now is bearing the fruits and showing a better top line. So the effort has been going on for the last 2, 3 years, and what you see is the culmination of that effort.

And the effort will continue. In fact, we are looking at more opportunities and more licenses. And we have licensed decent brands like Martha Stewart, so they are continuing to show good traction and hopefully will continue to show good traction as we go forward as well.

On your second question on seasonality in the flooring business. So it is not as stuck as you would see with the other textile businesses. Having said that, the demand scenario is almost similar, and with falling commodity prices, customers even on that side, particularly the international customers want to wait, and they want to see the bottom of the commodities before transacting new businesses. And all this noise around recession in the developed markets is making customers very circumspect. So it's not so much seasonality, but the demand situation in the international markets, even for the flooring business, is a little circumspect right now. So that was your second one.

And the third one is about the script. So the current premiums are in the 90%, 92% range. So the realizable value would be 90%, 92% of the INR 400 crores, which Sanjay mentioned.

[Operator]

The next question is from the line of Biplab Debbarma from Antique Stockbroking Limited.

[Biplab Debbarma, analyst]

Sir, I have 3 questions. First question is, so basically, my understanding is that both the demand and the input costs, especially cotton prices, are the key pain factors for home textiles. And definitely, we want to see situation improving in both. But just trying to understand which is more severe. I mean, if you are given an option, I mean, we want both to improve, but which one would be you desire to see first, improving demand or cotton cost going down significantly? Just trying to understand the pain factor, which is more serious?

[Altaf Jiwani, executive]

Yes. So, Biplab, I think the correction on the input cost side is the more desirable in the near future from our perspective. And there's a reason to it. See when commodity prices are correcting, it's a natural tendency for everyone to hold procurement and the consequence of that is then the demand as well. So clearly, input costs. And while there is input costs, I want to highlight that it is not only cotton. So there's also energy, which is a significant cost in the textile supply chain, whether it is with spinning of cotton or weaving of cotton, or the downstream processes. So energy costs are also an important input.

And the third very important element of cost is also ocean freights. So ocean freights, as you all know, went through the roof and the U.S. freight rates, one saw freights rising up to $14,000, $15,000 for a 40-foot container. Now thankfully, there is some correction that is happening, a, on cotton, which was at about INR 100,000, INR 105,000 at peak. Now December is already getting quoted at INR 65,000, INR 70,000. Freights which were touching $14,000, $15,000, currently are in the $9,000, $10,000 range.

And we also understand that there's not enough loading of the vessels and there are a lot of cancellations of sailings that are happening out of India. So logically speaking, it should put pressure on freights. And while our friends in the shipping industry won't agree with this, but end of the day, you can't fight a demand situation. So we see cotton and freights correcting. I'm not so sure about coal and oil with the geopolitical factors playing out there. So out of these 3 key elements of input costs, I think 2 will look like correcting, and the energy might actually just take a little longer, or the jury is out on that.

Coming to the demand. So we have gone through these cycles before. So this is not the first time you see a breakdown in demand. So I'm assuming that people will continue to sleep. And I'm also assuming that people will continue to have a bath. So as long as that happens, demand will return. It will return when, let's say, the prices are good enough for a discretionary spend and with correcting input cost situations. Now one could argue how much time is it going to take? Is it 1 quarter or 2 quarters or more? So the argument could be on how much time it will take, but that the demand will resurrect I think one should not have a doubt on that.

And we also saw unprecedented demand in the whole of 2021. So it was unthinkable, unprecedented, 20%, 30%, this extra, let's say, sales out of our customers' doors. Some leveling out possibly is happening. And so it will return. So it's only a matter of time whether, as I said, one could argue it is 1, 2 or 3 quarters, but demand will definitely return.

[Biplab Debbarma, analyst]

Good to know that there are some respects in some input costs, and we are also optimistic about the demand maybe in 2, 3 quarters. My second question is on this -- please correct me if I'm wrong, if my understanding is correct. Cotton prices in the quarter or in the last few months, although has gone up initially, but later has gone down. So if this cotton price reduces further, we are hearing some good news from our agriculture analysts also. So if cotton price reduces further or hovers around the current level, should we expect better margins going forward into second half of FY '23? Just assume that everything is remaining the same, the cotton prices is gone down or at the current level, and if that is the case, what level of margins should we expect, sir?

[Altaf Jiwani, executive]

See, even the current spot prices are high, Biplab, in India. So they are still hovering around INR 82,000, INR 83,000, INR 84,000 range. So the business is not viable at the current prices. So the cotton prices need to be in the 60s and INR 60,000, INR 65,000 for respectable margins in the industry to return. Symptoms are there. So as I said, the futures December, it has actually seen INR 63,000, INR 64,000 a couple of weeks back, moved up to about INR 68,000, INR 69,000, and it's actually ranging between that level.

So closer to INR 60,000, the industry should start seeing comfortable margins. And when I say industry, it is across the value chain. North of INR 70,000, margins will definitely improve. So INR 70,000 is definitely better than INR 1 lakh. But for old kind of margins to return, you need to see prices closer to INR 60,000 than INR 70,000. But as I said, INR 70,000 is definitely better than INR 90,000 and INR 1 lakh.

So the abysmal margins that one has seen in this quarter and possibly will see in the ensuing quarter, which I believe will be the worst one for the industry. So it will definitely get better from there. But for old reasonable levels of margins to return, we'll need to see cotton at about INR 60,000 levels. And also there's some correction on the freight as well as the other input costs as well.

But one good thing is the currency is working in favor. So once our old hedges run out, so in our future, when you talk about the next financial year. So already the exchange rate realization will be higher. So there's some positive that will come out of that as well, and it's been a significant movement on the Indian rupee to the dollar. So those will possibly help margin resurrection. But end of the day, the costs need to get rationalized, because as you rightly said, it's really linked to demand. And margin is a function of input cost and also, let's say, there's good demand, so both need to resurrect. And I suspect complete resurrection will happen around the INR 60,000 cotton mark, and possibly some respite on the energy cost, maybe about $70, $75, $80 to the oil price, and freight further correcting to about $6,000-or-odd or around those levels. So you see those levels, you'll see industry returning back to the average historic margins that the industry saw.

[Operator]

The next question is from the line of Monish Ghodke from HDFC Mutual Fund.

[Monish Ghodke, analyst]

Sir, for 1 kg of towel, how much cotton would be required? And what is the backward integration which we have for that? And likewise, for 1 meter of bedsheet, how much cotton is required and what is the backward integration?

[Altaf Jiwani, executive]

So no, there's no straight answer to this, Monish. It depends on the kind of yarn you make. But on an average, you would recover from virgin cotton on a combed cotton yarn. So you would recover about 87% on carded yarns and north of 90%. But with the sustainability drive that we as a company have taken, so we reprocess and recycle several times and try to extract as much of lint cotton out of whatever that we buy. So on an average, what we sell or lose would be in single digits. So we try and recover as much as we can. So that would so much be.

And at peak capacity, we have about 60%, 65% of yarn production to our needs. But now that the demand is lower, so obviously, the in-house capacity to make yarns is, as a percentage, a little higher than where we would operate on our comfortable utilization of capacity.

[Monish Ghodke, analyst]

So, sir, 1 meter of bed sheet, how much cotton will be needed?

[Altaf Jiwani, executive]

So about 2 kilos. Again, our thumb rule numbers say about 2.5 kilos. And for a towel, you would need 1 kilo and maybe 250, 300 grams.

[Monish Ghodke, analyst]

Okay. And sir, towel versus bed sheet, which is more profitable on EBITDA margin front on an average?

[Altaf Jiwani, executive]

It keeps changing. Historically, towel has been the more profitable business for us. Right now, it is the most painful, to be honest with you. And when things return, we believe that the margins on the towel will be definitely better than on sheets.

[Operator]

The next question is from the line of Abhishek Nigam from B&K Securities.

[Abhishek Nigam, analyst]

Two questions from me. So one, on the flooring side, is there any kind of medium-term guidance which you are able to provide, either with respect to revenue or EBITDA margin? So that is one. And second, if you could share your CapEx guidance for FY '23 and '24?

[Altaf Jiwani, executive]

So right now, let's say, to make a guidance would be just misguiding you people. So I would refrain from that. You would have seen over the last 3, 4 months that our key customers are constantly revising guidance and I want to refrain from doing that, and in a volatile commodity pricing situation. So right now, it will be important for me to tell you that what we are seeing on the home side, we are seeing it in the flooring business as well. So with reduction in commodity prices, raw material prices, there is a wait and watch thing that is going on.

And my answer will have to be round about on the margin side. One thing is certain, the second quarter is going to be -- this margin pressure -- the third -- I believe that we'll hit the bottom in the second one, and third onwards, we should start seeing improvement. And as I said, for it to resurrect, those three input costs that I mentioned, we would need those for our margins to resurrect themselves to our historic levels. And it looks possible to me, to be honest with you, it's not hoping. The costs are moving in the right direction. So it's not unlikely that those costs will get achieved. But the jury is out whether they'll get achieved in the December quarter or the March quarter or it will take longer. So I just do not want to misguide all you people by providing a guidance which tomorrow this will need to go out and change.

[Abhishek Nigam, analyst]

And on the CapEx side, are you able to sort of give an estimate?

[Sanjay Gupta, executive]

As you mentioned, so during the financial year '23, all the projects that were under completion will get completed, and there is a plan to spend INR 200 crores during the year. Out of this INR 85 crores is already spent and the balance would be spent during the remaining year.

[Altaf Jiwani, executive]

And also, there are no new projects we are undertaking. So anything new is on hold. So we'll wait for things to get a little better from here. And there's still a lot of unutilized capacity right now. So there's no need for us to rush into anything. So everything new is put on hold. So Sanjay put a number to it, about INR 115 crores or INR 125 crores is the balance CapEx that remains. And once we get past that, there's nothing new that at this moment we wish to undertake.

[Operator]

The next question is from the line of Naysar Parikh from Native Capital.

[Unknown Analyst]

So my question is that besides hoping that the costs obviously will come down, which hopefully will, but if they remain at this level for some time, what is our sort of backup plan of strategy? Many companies are obviously looking at either some sort of cost rationalization at the OpEx level and premiumization if possible and things like that. So what are the other initiatives that we are doing to ensure that we get some bump up in margins?

[Altaf Jiwani, executive]

So again, a very good question. And on that, look, I'm very proud of the work that the company is doing. And there's just not one line item of cost on which work is not happening in the company and which is starting from the yields to the variable costs and the specific consumptions on utilities to every line item on the fixed cost. And the significant part of that is already done. A lot of new initiatives are underway. So as I said, I'm very proud of the work that is getting done in the company.

And look, these are unusual times. And there's nothing that shakes our belief in the business or that which is warranting us to change our strategy. And we are happy, we are seeing all our key initiatives are yielding good results, are making progress. So as I said, as the branded business is doing exceedingly well for us. And also the distribution, the way it is coming up between Spaces and Welspun, almost 7,500 doors. So all that good work is happening, Naysar, and there's nothing that we are seeing here which shakes our faith in the business or in our strategy.

So these are unusual times, you have to ride through them, take as much cost out of your business, continue to innovate, which has been a hallmark of the company. And clearly, you are seeing symptoms. So cotton is, from a peak of INR 105,000, I could buy cotton today at INR 68,000 for December. These ocean freights are coming down. The only area where one can't be certain is possibly this energy prices. But then exchange rate will give a lot of coverage as we get into the next financial year.

The domestic business, our domestic brands are growing in the 25% to 35% range. The flooring business has EBITDA breakeven. So every strategic initiative of the company is headed in the right direction. And give or take a couple of years, these will all become meaningful parts of the business. And there's nothing that is happening out there which makes us less confident about our business. We believe our margins will return. We believe our top line will return, and we believe all our key strategic initiatives are in the right place.

And we are doing what we can, in the meanwhile, ride this difficult period, take as much cost out of the business, innovate as much as we can, create new products, and get as close to the customers. So the fact that Dipali is not on this call is a testimony of that. She chose to be in front of the customers. And you guys will like us more if the customers like us. So we are doing all that we can take to ride over these times. But give or take a couple of quarters, I think, as I said that things are hitting the trough and you can now start seeing the light at the end of the tunnel and demand will also certainly return. So we stay confident with our business, Naysar.

[Unknown Analyst]

Got it. And just a second follow-up on the demand side. What percentage of your business would be core, which is like just the annual replenishment that you do to your regular customers? And what is the impact on that particular side of the business?

[Altaf Jiwani, executive]

So look, almost 85%, 90% of our business is replenishment. And normally, it is predictable. So in unusual times, you can't -- it will go here and there by 5%, 7%, but these are unusual times as we discussed. So that way, the home business is quite predictable. And as I said, 85%, 90% is the repeat kind of business.

[Unknown Analyst]

And on that, we are seeing the order backlog reduced by how much?

[Altaf Jiwani, executive]

Significantly. So it will be unfair for me to put a number to it. I think this quarter results are giving you an indication. So it's not likely to improve significantly at least in the second one. But we do hope that the third quarter onwards that we will see better demand.

[Operator]

The next question is from the line of Prerna Jhunjhunwala from Elara Capital.

[Prerna Jhunjhunwala, analyst]

Sir, I had 1 question on flooring and 1 of home textiles. So in home textiles, you have been operating since decades actually. But volatility in the demand in the last few years has been much higher because of idle inventory write downs by retailers or recession. So in last one decade, there is a lot of volatility. So in your experience, how much time generally takes for retailers to come back? I mean, some of the resurrection has already happened. Just trying to understand, is it fair to assume that it takes around 9 to 12 months for retailers to come back in full-fledged demand after clearing up their inventories or consumer purchases starts coming back to the industry? Because as you rightly said, demand will come back, that's for sure. But just trying to understand the general period of coming back.

[Altaf Jiwani, executive]

Okay. Good question, Prerna. So historically, see in a normal cyclical recession, we have seen demand getting restored over a 2-, 3-quarter period. And it's always happened that way. And in some recessions, we have also seen that demand actually doesn't reduce. So when people tend to stay more at home, demand for home products actually doesn't reduce. So in 2008, we saw a negative growth on the top line. But other than that, to the best of my memory, that every single year we have grown our top line and we've gone through 3 recessions in the life of this business. But as this time, it has been a little unusual.

So here there was a COVID disruption that came, and then there was this resurgence of demand because people stayed at home and they had money in their banks to splurge on. And so there was an unusual demand. So I suspect this time the cycle is going to be about more 12 to 15 months. And out of that, so look, the demand going down is already -- this is the third quarter where we are actually seeing a reduced demand. So I suspect it's another couple of quarters away where the resurrection of demand should start happening. So this time, to put numbers, in the past 9 months, 3 quarters, this time it could be 5. And we have passed 3 already. So hopefully, another 2 quarters, and we should start seeing the demand resurge.

[Prerna Jhunjhunwala, analyst]

That was helpful. Sir, second question was on flooring business. Do we see any challenges in the flooring business demand in case U.S. reduces tariffs on China in certain categories, because where we are at cost structure against China in this business is something which we are not yet very clear?

[Altaf Jiwani, executive]

Yes. So again, good question. There will be no demand destruction, Prerna. So on that we are very clear. The China plus one thing is playing out. And if at all, this time, it is actually -- it has never been more pronounced than it is than we are seeing it right now. And I see that as a medium- to long-term positive for our business as well as, let's say, for India in general. And this time, it appears to me as sticking and it will stay very strong. So our customers are very, very forcefully looking to reorient their supply chain.

Now coming to the tariffs. So when the tariffs came, the world readjusted. So the margins in the industry, give or take 2 or 3 points or 4 points here and there, but the industry adjusts. And I suspect the same will happen I think as and when the tariffs go away. Some day they will go away. So as and when they go away, the margins adjust. So when a country gets slapped with an antidumping duty or a tariff, the margins in that country disappear. So the suppliers absorb most of the hit. And when the tariff gets eliminated, they would want their margins back.

So no company, no business can survive forever making no margin. So I have seen this happen with antidumping duty, antisubsidy duty. So give or take 2, 3 quarters, the margins adjust. So I wouldn't be too concerned with that. Yes, it will, as and when it happens, 1 or 2 quarters here and there. But otherwise, inevitably, I think the margins return. And the demand, as I said, the China plus one is for real. There will be no dearth of demand. And let me tell you, there'll be no dearth of demand, not only for the flooring products, but for the home products as well as we come out of this difficult geopolitical situation.

[Operator]

The next question is from the line of Umesh Matkar from Sushil Financial Services.

[Umesh Matkar, analyst]

Sir, just one question I had. With the increase in the commodity prices in India, do you see a market share shift to other global players? Or even the other global players are also facing same pressure as we are facing?

[Altaf Jiwani, executive]

So look, I can talk about the home business. So I think everybody is in the same boat, whether it is India, a Chinese player, or it is from Pakistan. So these I would think are the key 3 players as far as the home textile business is concerned. So I think the cost impact has hit everyone. And the consequence of that has been this reduction in demand, which is linked to, a, input cost; and b, let's say, rebalancing with the services consumption. [Foreign Language]. Yes because of a very high estimate on crop last year of 340 lakh bales, which actually turned out to be 290 lakh, 295 lakh bales. So I think the industry got caught on the wrong foot in terms of procuring their cotton, timing their cotton well. And the consequence of that is for this whole year, the Indian cotton prices were 15%, 20% higher than the global cotton prices.

But I think the next crop, with the higher acreage and hopefully some respectable yield, is likely to be much higher than last year. Last year was abysmal. So once that happens, I think the cotton price parity will also return. And this should be within 5% plus or minus. So overall, structurally, I think when things rebalance, I think we should be where we are. And one could argue again as this will take how many quarters for us to get there? But it looks like with the new crop and, let's say, the global markets adjusting for commodities and the recessionary trends and the rebalancing of the services, I think things will get back to normal, if not 2, maybe 3 quarters, but it will get there.

[Operator]

Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Abhinandan Singh, Group Head, Investor Relations, for closing comments.

[Abhinandan Singh, executive]

Thanks. And let me, on behalf of the entire team, once again, thank all of you for taking the time, interest, and for insightful questions. As I said earlier, please feel free to reach out to me for any unanswered questions or any clarifications that you might have. Look forward to seeing you again next quarter. Thank you.

[Sanjay Gupta, executive]

Thank you, everyone. Thank you.

[Operator]

Thank you. On behalf of Edelweiss Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.