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Edited Transcript of ARVIND.NSE earnings conference call or presentation 29-Jun-20 10:30am GMT

Q4 2020 Arvind Ltd Earnings Call

Ahmedabad, Gujarat Jun 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Arvind Ltd earnings conference call or presentation Monday, June 29, 2020 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ashish Kumar

* Jayesh Kantilal Shah

Arvind Limited - CFO & Whole Time Director

* Samir Agrawal

Arvind Limited - Chief Strategy Officer

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Conference Call Participants

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* Amit Doshi

Care Portfolio Managers Pvt Ltd. - Director

* Maulik Patel

Equirus Securities Private Limited, Research Division - Research Analyst

* Prerna Jhunjhunwala

Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst

* Resham Jain

DSP Investment Managers Pvt. Ltd. - Assistant VP

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the conference call for analysts and investors for post-result discussion of quarter -- Q4 financial year 2019/'20 Arvind Limited. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Samir Agrawal. Thank you, and over to you, sir.

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Samir Agrawal, Arvind Limited - Chief Strategy Officer [2]

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Thank you very much. Good afternoon, and thank you all for participating in this quarter 4 and FY 2020 earnings call of Arvind Limited. Joining me today is Mr. Jayesh Shah, our group CFO and Executive Director; as well as Mr. Ashish Kumar, who is the CEO of our garmenting, Advanced Materials as well as water businesses.

During this call and through my opening remarks, we will cover results of Q4 and FY 2020 and also share the impact of COVID-19. In terms of results, until February 2020, all our businesses were tracking as per the plan and the guidance that we have shared with you in the past. The Textile business grew by 10% and Advanced Materials business grew by 20%. COVID impact during the second half of March resulted in 42% drop in revenues for the month as dispatches and invoicing completely stopped post 22nd March.

To share specific financial results, our full year revenue was higher by 3% compared to the previous year and stood at INR 7,369 crore. This was primarily driven by growth in garmenting and AMD businesses. EBITDA for the year stood at INR 692 crores, and profit after tax was at INR 146 crores. The lower-than-expected profit was a result of revenue loss in March, while cost did not reduce during the period.

In terms of segment-specific commentary, Textile revenues were up 5% and stood at INR 6,205 crores. This was driven by increase in garment volumes to 42 million pieces as compared with 34 million pieces in the previous year. Fabric volumes saw a very small decline from 188 million meters in the previous year to 181 million meters. EBITDA margin in Textiles saw a minor decline from 11.3% to 10.7%. Advanced Materials business grew by 13% despite moving out on the last 2 weeks of March shipments and closed the year at INR 713 crores top line. EBITDA margin for this business also improved quite well from 10.4% last year to 12.9% this year.

On the whole, we, as Arvind management, estimate a loss of around INR 250 crores on the top line and about INR 75 crores on the EBITDA as a result of this COVID-19 reduction for the previous year. In addition, there are exceptional losses on account of foreign exchange, bad debts, impairments, et cetera, to the tune of INR 36 crores, which has impacted our results during the year, which otherwise, before these disruptions and onetime impact, was very well on track to deliver as planned.

On the good side, our working capital turns has really improved very well. We grew from 3.9 turns in the last year of FY '19 to 5.1 turns this year, mostly coming out of a fairly tight operating discipline, which we have enforced top-down in all divisions in form of much sharper collections and inventory management.

Also, despite the setback in March, our net debt reduced by INR 248 crores in the year. So what was INR 2,619 cores at the end of March 2019, now we closed March 2020 at INR 2,371 crores. So that was a reduction of INR 248 crores, which was quite good and [in fact that's] in line as to what we have said.

Now talking about corona. As you all are aware, the world continues to grapple with the impact of COVID-19. For -- from where we stand at Arvind, most of our global brand customers did report almost 50% plus drop in sales during April, which, as we've been monitoring quite closely, are now recovering quite well. In fact, many of the stronger brands, which are doing well globally in the marketplace are reporting a recovery to the tune of 60% to 80% in the recent weeks consumed. Our big-box retailers like Walmart and Costco, who also are our important customers, have also reported good revival thus far, right?

Domestic market, of course, continue to suffer from two issues: one is softer demand from the customers as they avoid discretionary shopping. But there's also another problem here, which is the disruption of supply and distribution networks, which are crippled by lack of liquidity. On the positive side, we are seeing a fairly good demand for our industrial products and essentials. In fact, the one more thing that is happening is that many of the brands, which we are very strongly China-centric in terms of the sourcing, has started very active engagement with us in terms of specific orders and ideas.

Last but not the least, the demand for our Advanced Materials products, our AMD division, continues to be quite robust through the entire (inaudible) environment. While the evolution of COVID-19 and its future impact on the world is still evolving, we have taken several prudent measures that position us quite well. We have made fundamental changes to our cost structure, which we believe will stay with us and give us advantage when the capacity utilization improves. Given the current demand trends, we expect to be generating positive cash approval as early as Q2, and our liquidity position is quite comfortable.

So that's all in terms of opening remarks from myself. Now I would like you to ask any questions, which you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Prerna Jhunjhunwala from B&K Securities.

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Prerna Jhunjhunwala, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [2]

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Sir, just wanted to understand the impact of lower cotton prices on your performance going forward? How much of inventory do you have? And how will it impact your...

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [3]

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So as far as inventory is concerned, so as far as raw materials are concerned, we did not have much raw material inventory as of March end. In fact, in denim, our inventory was only 15 days.

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Prerna Jhunjhunwala, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [4]

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Okay. So the whole benefit of new cotton prices would be available to the company in the event of...

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [5]

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Yes. So all -- in fact, all factors of production, be it cotton price, be it other dyes or chemicals, which are currently soft on pricing as well as currency, which is reasonably weak compared to what it was last year, are all factors which would help us in the quarter 2. Quarter 1, of course, we had excess -- we couldn't (technical difficulty) we have accounted for that loss in Q4.

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Prerna Jhunjhunwala, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [6]

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Okay. Sir, second question would be on your operations. Largely, you said that many of the customers are recovering to a very large extent. Could you please help us in understanding how were your 3 months, April, May and June? And how you have worked on reducing your cost structure and any material number that you could share that your cost would have come down to on a sustainable basis or on a temporary basis?

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [7]

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Yes. Sure. So you asked me 2 questions. One is about customers and how is April, May, June. So as you know, April was a complete lockdown. So was most part of May, it was restarted. We couldn't really work because of the availability of several things, including transportation, et cetera. It's really in the month of June that we have been able to kind of start production across all our verticals. We are currently at -- in the month of June, we will be at about close to 50 -- 45% to 50% of utilization in different plants. And basis that, we should be close to INR 300 crores of sales in June. At that level, we have been able to achieve, we should be above the breakeven at EBITDA level. So we should be making some contribution towards beyond EBITDA at operating levels.

When you talk about costs, we have been able to, as my colleague just mentioned, there are fundamental changes that we have made. Used dips as also a kind of opportunity to look at in the aspect of cost and really tackle them. I think we believe that on a sustainable basis, we should be able to reduce our fixed cost by at least 15% from where it was last year, and that should stay with us even after the, in a way, come out of this and get closer to the full utilization of our capacity.

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Prerna Jhunjhunwala, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [8]

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Okay. Sir, last question on other category. There has been a sharp decline in our -- in numbers this quarter. Could you please help us in understanding what is going around there?

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [9]

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Prerna, it has a base effect. Last year, in the other category where the water business, which is still relatively a small business for us, had very large implementations done in quarter 4. And as a result, in any case, the whole of the year, that business had very lumpy large orders that we were executing. This year, all of those are not there. So in terms of -- and of course, the last month also was a washout (inaudible). It is a bit of a project-based business that's booked in a quarter or in a period where they get implemented. What (inaudible) reasonable amount of visibility for coming year or current year for orders as well. Of course, it is a small business. We would like to keep it that way and not really dwell on it till it attains proper size for us to talk about it.

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Operator [10]

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The next question is from the line of Maulik Patel from Equirus Securities.

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Maulik Patel, Equirus Securities Private Limited, Research Division - Research Analyst [11]

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Just a couple of questions. Within the Textile, why are you seeing excellent traction right now? And whether -- I think you mentioned that export is picking up faster than the domestic. In case of domestic, there's a pickup particularly in woven segment. Will we ship more of our volume to the export?

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [12]

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In a way, yes, we would be doing it. As of today though, for -- I mean, we can only talk very short term because this is a very unusual situation. So predicting the year is a complicated thing. But in the short term, all the categories that we are in, be it denim data, wovens data, we get fabrics. Again, garments out of all of those are at around the 50% mark in terms of utilization, and we are expecting them to become more like closer to 60% in July, where in which period -- in which quarter we should be, as my colleague said, we should be making, I mean, we should be more making full cash approval. So covering interest as well as contributing more towards even the depreciation -- I mean cover most part of depreciation, if not full. So it is across the board that we are able to operate in all categories.

As far as domestic market is concerned, obviously, we are still under the impact of the lockdown. I think even now as you know, though markets are open, it's really the consumption or spending or the malls the shops are not really operational in many parts of the world, including big cities like Delhi, Bombay. So here, I think we are delayed by a few months in terms of restarting the consumption. So we have to wait for one -- our estimate is that it may take one more quarter before India opens up for consumption and the demand starts. Now obviously, because, a, currency is currently favorable, b, though there is a contraction globally and my colleague can elaborate on that. Ashish Kumar is handling some of our businesses can elaborate. But there is -- though there is a contraction in demand across the board with our partners who are our strategic customers that we are dealing with actually are consolidating their buys. And as a result, we tend to -- we are currently having reasonable amount of orders from export market, though I don't think they are buying as much as they were buying last year. Ashish, maybe you want to add?

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Ashish Kumar, [13]

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Yes. Thank you, Jayesh Bhai. So I think just to add to what Jayesh Bhai was saying, I mean, our customers, who are strategic to us in nature, have also been rethinking on their strategies. So while there is a possible demand contraction at their side because we worked with them and we are kind of reorienting ourselves to their requirements, aligning as thought partner to them and working with them on possibly how we align ourselves with the digital supply chain, which they are looking at, we have seen quite a steady demand from these customers. And now that the future -- in the garment side, the future projections have come, and they are in line with the expectations of what we had initially planned. So the strategic customers remain healthy in their market space, and we think we will have our desired share with these customers.

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Maulik Patel, Equirus Securities Private Limited, Research Division - Research Analyst [14]

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And, is it not sure whether you're gaining market share in terms of China?

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Ashish Kumar, [15]

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So I think there are a couple of reasons. It's too early to kind of define. While customers have definitely started looking at what they can move out of China, it is initial days. But a lot of discussions have already been in place, as Samir told in the opening comments, where we are having. But they will -- I mean, finally, moving the supply chain is at least a 6 to 9 months' time frame. So we need to convince. The discussions are already [underway].

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Operator [16]

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The next question is from the line of Amit Doshi from Care PMS.

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Amit Doshi, Care Portfolio Managers Pvt Ltd. - Director [17]

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Sir, your opening remarks as well as the press release contains the comment that due to the COVID, revenue is approximately INR 250 crores of loss and the corresponding EBITDA is INR 75 crore. So with our annual margins of -- EBITDA margins of around 10%, can you just clarify this? I could not get that comment.

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [18]

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Yes. So in the month of March, we actually had full overheads that we incurred. The EBIT -- so the impact of sales will have to be seen on the contribution and not necessarily at the EBITDA margin level. Our contribution is generally about 30%. After that, we'll deduct the fixed overheads to come down to around 10% EBITDA margin. So 20% is our fixed overhead on the total. But when you lose sales, you lose amount on sales minus the variable cost in the contribution is that entire contribution we lose.

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Amit Doshi, Care Portfolio Managers Pvt Ltd. - Director [19]

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Okay. Okay. Okay.

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [20]

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So for example -- yes. Sorry. So once you bring down the cost further -- fixed cost, your impact would have been much lower, had we've been able to cut the cost down in March, which we couldn't. Because what happened in March was two things: one, a, our production was only for 20 out of 31 days, number one. Number two, all the dispatches, which we did from beginning of the month around second week of the month, all were either at the Bangladesh borders or at airports, and none of those got dispatched. So even for 10 days, we ended up moving INR 250 crores of revenue.

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Amit Doshi, Care Portfolio Managers Pvt Ltd. - Director [21]

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Okay. Okay. Okay. And my second question is related to the -- originally, when the demerger of the restructuring process was done, promoter, the original plan was to improve significantly the return ratios, the ROCE, to be precise, and a lot of work to be outsourced and looms to be outsourced, et cetera. So what is the status of that? And what -- I mean, at what stage we are? And what further more needs to be done on that, if you can?

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [22]

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Yes. Sure. So one of the things that we have -- as we spoke earlier also, that one of the things which we did during this period of last 3 months was to further rationalize what we make inside versus what we can outsource. And a lot of it, what has already done has further been increased significantly last 3 months. The return ratio will improve and we go back to utilization levels that we were originally doing for last -- in the last 11 months of the last year, plus the overhead reduction that we have seen or which we hope will continue. It will then improve profitability and, as a result, the return on capital employed. It is a clear plan that we are working on. It's just got a little bit -- I think we had 1 year now plus the setback because of COVID. But we are on course.

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Amit Doshi, Care Portfolio Managers Pvt Ltd. - Director [23]

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So we would be around, say, 50% or 60% stage of whatever is the targeted outsource that we do?

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [24]

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No, no, no. We will be at 75% already. However, what I'm saying is that it will not come out or you will not see it because our overall revenue will not be at the full level.

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Amit Doshi, Care Portfolio Managers Pvt Ltd. - Director [25]

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Okay. Okay. And sir, with reference to this discussion -- a lot of discussion about the PPE production and I think this new fabric that you have launched for that COVID thing. Can you give some guidance as to what is the scalability? What are the sustainable margins or whatever the realization? What is the sustainable demand in this segment?

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [26]

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Sure. I mean, to put -- I mean, markets are large. How it will pan out, it's yet to be seen. But my colleague can explain to you what all we are doing. Ashish, will you, please, take the question?

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Ashish Kumar, [27]

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Yes. I'll take it. I think what we have done is that we -- I mean, in the time when everything got into a lockdown, there was a requirement from the government of India. And we came forward to repurpose a couple of our lines into making PPE. And now this seems to be or this will be a steady state of business also. We have also kind of put in facilities for doing mask. And in this whole period of lockdown, we worked around on options, which could be very relevant in coming times, and that is where this tie up with HeiQ, where it can -- where we can produce fabrics and then garments, which are going to be virus-resistant.

So it's a steady stream of business. Only thing is that as of now, there are a lot of restrictions which the government has put. And if you would be reading in the newspaper, a lot of companies started working on the PPE. So we think that in about 2 to 3 months, we will have a steady line of sight when the exports open because our quality systems and product integrity will differentiate from the rest of us, and we could build a regular practice in the coming times on the health care side.

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Amit Doshi, Care Portfolio Managers Pvt Ltd. - Director [28]

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Okay. Anything on what portion it could be of our company's contribution? And whether this realization would be sufficient enough considering our AMD division, the kind of margin that it generates? Would it be in the similar lines? Or...

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Ashish Kumar, [29]

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So these are early times. Initially, just to give you -- this is definitely a product where we have slightly better margins than what the textile products -- the convention or the legacy textile products, which we offer. Same is the case with the HeiQ. The whole thing will depend upon how much we are able to sell into the market. As of now, the margins are definitely looking better than our conventional legacy textile products.

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Operator [30]

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We'll move on to the next question, that is from the line of Resham Jain from DSP Investment Managers.

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Resham Jain, DSP Investment Managers Pvt. Ltd. - Assistant VP [31]

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Sir, just on the garment business, you mentioned 40%, 50% utilization as a company. But garment, because it's predominantly an export business, is the utilization much better in the month of June in the garment business?

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [32]

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So the garment utilization for June, it's a function of, a, the orders and, b, also the supply chain management because a lot of things that you need for garment, including getting various things from various parts of the world, so all of those things are getting organized. And I think -- so that is why we were at about 50%, 55% of utilization in the month of June. I think it will go up in the coming months, as my colleague just mentioned that we've got some orders already for quarter 2 and representing growth.

So we think that it will steadily go up. It is a function of various supply side constraints also that including availability of in certain pockets, manpower, everything has to be kind of walked around to make sure that we can deliver things on time because once you take an order, the customer will want material to be delivered on time. And those are all constraints that we got (inaudible).

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Resham Jain, DSP Investment Managers Pvt. Ltd. - Assistant VP [33]

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Okay. But the visibility for at least 1 or 2 months of order book is there, (inaudible) you feel that it will be closer to 65%, 70%.

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [34]

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Ashish?

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Ashish Kumar, [35]

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Yes. Can I respond to that question?

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [36]

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Yes, you can.

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Ashish Kumar, [37]

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So I think what is happening is that while on an aggregate, we are at, let's say, 55%, there are certain product categories, which we are seeing that they have a larger traction where we have, I mean, reasonable demand coming our way. This whole trend of work from home, where people are obviously -- so what we see is the categories of essentials, which is basically the underwear segment. The denims somehow because that's also looked at as a core category. And the -- so to say, the PPE and the other health care, that's something which is going very good. The shirts, we see a little bit of softening. And that's why we have in these last 3 months also recalibrated our capacities.

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Resham Jain, DSP Investment Managers Pvt. Ltd. - Assistant VP [38]

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Okay. You mean to say that in the shirt factory, alternatively, you can make something else.

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Ashish Kumar, [39]

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So we have -- so that's what we have done. So when we said that we -- see, for making PPE, we did not go out and set up new facilities. We basically repurposed a couple of our lines in some of our factories to put in time. So the entire capacity of PPE was from the garmenting capacity, which was existing.

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Resham Jain, DSP Investment Managers Pvt. Ltd. - Assistant VP [40]

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Okay. Understood. Sir, my second question is, you mentioned that there are good amount of inquiries from the customers who are looking India from a diversification perspective. Is there any specific details on the customers or at what stage we are in? Any more thoughts around that, if you can give?

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Ashish Kumar, [41]

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Resham, I think the way we work, I mean, we have, let's say, on the -- if you look at, like most of the company, we are at 80-20 principle, where 80% of our volume is coming with just 20% of our customers. And without naming them, I think almost all of them are in discussions on different aspects. So somebody is wanting to have understanding on the garmenting, which in terms means the fabric side. Some brands are looking at moving their fabric supply chain out of China and moving that into India, especially the cotton side because that's where we see that that's the first movement and then possibly they can look at verticals. So our top 6 customers, all of them have had some very meaningful discussions. And I mean, you will see in the coming time as to what numbers we clock with them.

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Resham Jain, DSP Investment Managers Pvt. Ltd. - Assistant VP [42]

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Okay. And sir, my last question is again on garmenting. If we just look at last 6 months, on the currency side specifically, the Bangladesh currency versus India, India has appreciated more than Bangladeshi currency, taka. And we have just cotton and other things also as an advantage. So is there specific product ranges where our pricing is becoming slightly better? And because of that, we may have more traction at least in the short term because of this?

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Ashish Kumar, [43]

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So yes, I think -- so I'll give you a customer lens on this. Customers have different vendor rating and country ratings. So on certain product categories where we are into a vertical, we are at an index of roughly about 96%, 96%, whereas Bangladesh is 98%. So we already are at an advantage, let's say, what we can offer to our customers, so just to give things in perspective. There are certain product categories where we are already competitive.

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Resham Jain, DSP Investment Managers Pvt. Ltd. - Assistant VP [44]

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But no incremental order wins are happening because of pricing advantage...

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [45]

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So I don't think it is like a -- trading like a thing. I think garmenting is a very, very involved activity. As my colleague said, it takes 6 months to develop a customer and a product on a range, it will not change by a daily fluctuation of currency.

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Resham Jain, DSP Investment Managers Pvt. Ltd. - Assistant VP [46]

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Okay. Okay. Understood. And sir, last question on Advanced Materials, we have seen very good growth this year and a significant improvement in margins as well. And I think we mentioned that Advanced Materials has not seen material impact because of the current situation. So any guidance on that going ahead for FY '21 on the Advanced Materials?

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [47]

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We are not giving guidance for '21 for simple that there of supply side challenges that we have mitigate, including in quarter 1. Though there was no impact on the orders, there has been an impact on the supply because the factories were shut down, even supply of material from overseas, the raw materials, everything was under all kinds of challenges. So currently, we are not guiding anyone. But what our -- what my colleague was trying to mention that we have not seen any kind of challenge on getting oldies. We have to see how it pans out.

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Operator [48]

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Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Samir Agrawal for his closing comments.

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Samir Agrawal, Arvind Limited - Chief Strategy Officer [49]

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Yes. Thank you very much. We will meet here in 1 quarter. Bye now.

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Jayesh Kantilal Shah, Arvind Limited - CFO & Whole Time Director [50]

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Bye now. Thank you.

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Samir Agrawal, Arvind Limited - Chief Strategy Officer [51]

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Thank you.

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Operator [52]

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Ladies and gentlemen, on behalf of Arvind Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.

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Samir Agrawal, Arvind Limited - Chief Strategy Officer [53]

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Thank you. Bye.