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Edited Transcript of VTL.NSE earnings conference call or presentation 14-Feb-20 10:00am GMT

Q3 2020 Vardhman Textiles Ltd Earnings Call

Ludhiana Feb 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Vardhman Textiles Ltd earnings conference call or presentation Friday, February 14, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mukesh Bansal

Vardhman Textiles Limited - SVP of Fabric Marketing

* Neeraj Jain

Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director

* Rajeev Thapar

Vardhman Textiles Limited - CFO

* Sushil Kumar Jhamb

Vardhman Textiles Limited - Director of Raw Materials

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Conference Call Participants

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* Abhijeet Dey

BNP Paribas Mutual Fund - BNP Paribas Focused 25 Equity Fund - Fund Manager

* Abhishek Rathi;India Ratings and Research Pvt Ltd

* Amit Doshi;Care Portfolio Managers

* Ankit Mukesh Gor

Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps

* Arjun Sengar

Nippon Life India Asset Management Limited - Research Associate

* Avi Mehta

IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary

* Chetan Thacker

ASK Investment Managers Limited - Senior Research Analyst

* Gagan Thareja

Kotak Investment Advisors Limited - VP

* Keshav Garg;Counter Cyclical Investments

* Manish Ostwal

Nirmal Bang Securities Pvt. Ltd., Research Division - Senior Research Analyst

* Prerna Jhunjhunwala

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

* Sandeep Baid;Quest Investment

* Sunil Shah;Turtle Star Portfolio Managers

* V. Srivatsa

UTI Asset Management Company Limited - Fund Manager Offshore

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Presentation

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [1]

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Thank you, Faizan. Good evening, everyone. On behalf of IIFL, I would like to welcome all of you to the 3Q FY '20 conference call for Vardhman Textiles.

From the company, we have with us the key senior management, including Mr. Neeraj Jain, Joint Managing Director; Mr. Sushil Jhamb, Director, Raw Materials; Mr. Rajeev Thapar, CFO; and Mr. Mukesh Bansal, Senior Vice President, Fabric Marketing.

I would now like to hand over the call to the management for their comments. Over to you, sir.

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Operator [2]

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Ladies and gentlemen, the line for the management is disconnected. Please hold while we reconnect them. Thank you.

Ladies and gentlemen, thank you for being on hold. The line for the management is now reconnected. Thank you, and over to you.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [3]

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From the company, we have with us the key senior management, including Mr. Neeraj Jain, Joint Managing Director; Mr. Sushil Jhamb, Director, Raw Materials; Mr. Rajeev Thapar, CFO; and Mr. Mukesh Bansal, Senior Vice President, Fabric Marketing.

I would now like to hand over the call to the management for their comments. Over to you, sir.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [4]

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Yes. Good evening to everybody. I would like to welcome all of you to Q3 conference call of Vardhman Textiles Limited. Right now, Mr. Neeraj Jain is outstation, and I think he's trying to join the call maybe in a few minutes. So in the meantime, we can just run through the results, and I will request Mr. Sushil Jhamb, who will give overview about the cotton scenario and markets, and then Mukesh Bansal can also give a view of the markets regarding fabric business.

So for Q3, you can see that turnover of the company, top line has grown by about 12% as compared to Q2 and about 6.5% as compared to Q3. And EBITDA level is slightly lower at INR 270 crores as compared to Q2, which was INR 278 crores, and Q3 versus Q3, there is a steep fall from INR 361 crores to INR 207 crores.

And at PAT level, if you see that PAT is INR 189 crores as compared to INR 120 crores of Q2, which is mainly due to the adoption of new tax rates by the company earlier because we have been providing our deferred tax liabilities at a rate of about 35%. And with the adoption of new rate, which is 25% reversal of deferred tax has taken place in this quarter. That's why reversal entry of INR 76 crores is being reflected.

And on expense front, still, we see that other expenses are shown to be increased from INR 198 crores to INR 233 crores, which is largely because of increased production and increased sale during this quarter because of the capacities which have been established as a set up in the last quarter. So of course, some CSR expenses have been -- have increased in this quarter compared to Q2 and some INR 5 crores or INR 6 crores of write-off has taken place in this quarter.

So this is a broad outline of the results. And now I will request Mr. Sushil Jhamb to give a view of the cotton markets and other yarn markets, to some extent, until the time Mr. Neeraj Jain can also join. Please.

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Sushil Kumar Jhamb, Vardhman Textiles Limited - Director of Raw Materials [5]

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Good afternoon, everyone. As informed you last time also, that this year, India is going to have bumper crop of cotton. The expected bales are around 370 lakhs as compared to 315 lakhs last year. And the prices at the moment are prevailing at around 10% less than last year. The reason that the big -- prices are at this level is most of the cotton is being purchased by Cotton Corporation of India under MSP operation. Had Cotton Corporation not been there, the prices would have fallen by another 8% to 10%. The total crop size is 370 lakhs. And till today, what we have received is around 240 lakhs. That's probably 65% out of total crop of the season. And what we are expecting is -- yes, and what we are -- what we have done is we have covered almost 75% of our cotton requirement of the year.

The prices are stable at the moment. Those prices have come down considerably after 30 January, that is primarily because of the coronavirus as export to China of cotton has been almost nil now. There are some contracts which are still pending and people are not sure when that material could move out. The export to Bangladesh and other countries continues. Probably, the situation would emerge in the month of April or May, that it will be the CCI who would be deciding the price of cotton in India. Mukesh ji? Mukesh? Can you give...

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [6]

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Good afternoon, everybody. This is Mukesh Bansal. I'm heading the Fabric marketing at Vardhman.

As far as the fabric business was concerned, the third quarter was a mixed bag of some pluses, some minuses. On the plus side, it has been one of the best quarters for us so far. The capacity utilization and the expansion of the product mix, as we have been giving the guidance in the period, that was rectified to a large extent. Though the market support was not as much, the order flow was lesser than as we would have expected. The Indian domestic market, neither the consumer sentiment nor the trade sentiment was positive during the quarter. There are challenges on the working capital front, there are challenges on the retail sales front. And there is also a challenge of the demographic being changed, wherein the value retailers, the large-format retailers, they are occupying the larger share of the market. So there is a severe price competition amongst the retailers.

And secondly, if you look at the international market scenario, whether it is American or European, in some markets, the retail sale has been relatively okay, but still, there was a lot of inventory correction happening in the pipeline for people who were reducing the inventory. And as we see that past portion is catching up, everybody wants to shorten the pipeline as much as possible. So thereby, either the amount of the orders was curtailed or the order placement was about 3 to 4 weeks delayed in order to set the correction in the supply chain, the stocks in this pipeline.

But nevertheless, as we have expanded our capacity and we have also broadened the product range, so we could sustain our operations by offering the new products to the market and also to an extent adding a new customer. So for us, the capacity utilization was as per our target, nearly as per our target size. So that's all from the fabric side.

Over to you, Thapar Saab.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [7]

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Yes. So I think now we can open the floor for questions. And still, actually, we are waiting for Mr. Neeraj Jain to join and he's still not joined the call, maybe some deficiency is there.

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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 Sunil Shah from Turtle Star Portfolio Managers.

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Sunil Shah;Turtle Star Portfolio Managers, [2]

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Sir, my question is more from an industry perspective. Right now, we all know what is happening in the Chinese market in terms of the virus issue. Sir, how does the customer from U.S. look at this, meaning from the garment, textile garment point of view or anything that gets exported from China into the U.S., what is the situation in terms of the customers? Are they looking at India as an alternate? Or what are your thoughts? If you could give us some more insights into how this could work out over a period of time or what's the ground reality because this -- more from an industry perspective, I just wanted to get some knowledge from your side.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [3]

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Mukesh, can you answer it?

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [4]

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Yes. Yes, I can take up this question. Actually, the world is under shock with the Chinese situation. Because normally when the Chinese New Year, people go on holiday, many of the retailers would try that either their material is shipped out of China before the holiday starts or they would start getting the material after the holiday period ends. But this time, the world has been under shock because their garment deliveries are already committed, whether the garment delivery was supposed to be coming out of China or it was supposed to be coming out of Bangladesh or Vietnam, but the textile was supplied out of China. So there's a huge amount of turmoil at the moment. So people are trying to establish the new supply chain. But whether -- how long the uncertainty remains, that is the key. So if the situation starts normalizing in a period of, say, 2 to 3 weeks' time, then nothing big may happen. But if it continues beyond that, then certainly, we may see some of the businesses shifting out of China. But then for the current moment, as the order commitment has already happened, and it is not very easy to adjust the supply chain in a short period of time, so nothing concrete is happening, but then, yes, people are looking at options.

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Sunil Shah;Turtle Star Portfolio Managers, [5]

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Sir, so structurally can this happen? Meaning, right now, orders are clean, but they are not able to get the deliveries because of the issue there. So will that not seed a thought in the mind of the customers overseas to look at alternate options and even if it's small business shifts, it works out eventually to be a big opportunity for players here in India. Meaning just is it possible?

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [6]

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You see, all our memories are short-lived. So if it happens now, it happens. If it doesn't happen now, then in future it may happen, it may not happen. If once the situation starts normalizing, unless the consumer starts doubting the Made in China label, nothing big is going to happen. If the consumer starts shying away from buying a product which is made in China, then we may see some long-term structure changes happening. But as of now, we can only comment on the situation on the -- in hand rather as what we previously said.

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Sunil Shah;Turtle Star Portfolio Managers, [7]

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Right. Okay. Sir, okay. Now assuming it's a normal situation, sir, how does India stack up in terms of the suppliers? So how does India compete? Or how do we -- let me say, how do we kind of compare ourselves with Bangladesh or Vietnam in terms of our costs, et cetera? Is it in their...

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [8]

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As far as the raw material is concerned, whether it is the fiber or it is the yarn or it is the textile fabric, we feel that India is fairly positioned. But when it comes to garmenting, whenever -- garmenting, we may not be as equipped as Bangladesh or Vietnam is. But then it is not very difficult, very not long process to ramp up the capacities in the garment. It is a -- there is relatively -- investment is small and relatively you don't require big space for big plant to ramp up the garment capacity, but the only thing you need is the trained labor, of which definitely we are in some gestation period.

Up to textile, again, India is pretty strong. When it comes to the garment, then we are a bit lagged in terms of the capacities and efficiencies as compared to China and Vietnam.

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Operator [9]

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The next question is from the line of Keshav Garg from Counter Cyclical Investments.

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Keshav Garg;Counter Cyclical Investments, [10]

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Sir, wanted to understand why the merger of subsidiaries has been canceled.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [11]

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Yes. It's -- have been canceled for the time being because some of the entities like investment companies are part of that. And MAT credit was there in those companies. And one of the company was having arrears of depreciation also. So under the new tax regime, if, say, we adopted the new tax regime in Vardhman Textiles and post-merger, these carryforward benefits, maybe MAT or arrears of depreciation, we would have to forgo them to take advantage of new regime. So -- because after filing of the scheme, the change that happened in the taxation law. And we are just in the process of exploring the cost benefit of merger versus carryforward of these benefits. That's why we had withdrawn the scheme for a while, and we're just reconsidering it. And after taking -- after having the cost benefit analysis, we'll just take a fresh decision regarding a merger scheme.

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Keshav Garg;Counter Cyclical Investments, [12]

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Okay, sir. Sir, and also, sir, a few years back, company did a share buyback. And sir, now the market is also weak and our profits have also fallen. Sir, so maybe this might be a good time to reconsider a share buyback.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [13]

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So actually, it's a decision to be taken by the Board. Maybe if Board consider it appropriate, then definitely they can see. But because now taxation laws had also changed last year, now earlier -- because unlisted shares taxation are not there in the case of buyback, but now I think with the budget coming, the last year, they have imposed taxation on buyback of shares also. So I don't think whether it will make sense or not from that perspective. So anyway, it's a decision to be taken by the Board and whatever they consider appropriate, they will take the decision.

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Operator [14]

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The next question is from the line of Manish Ostwal from Nirmal Bang.

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Manish Ostwal, Nirmal Bang Securities Pvt. Ltd., Research Division - Senior Research Analyst [15]

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I have a question on the -- this coronavirus issue. So after the coronavirus, are you seeing any meaningful demand or inquiries from the ex-China countries, like Vietnam, Bangladesh, for our products? And secondly, from the domestic market, like home textile companies, are you seeing some demand, incremental demand?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [16]

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Rajeev, can I answer?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [17]

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Yes, yes. Sure.

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [18]

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My apologies, I couldn't join, I just wanted to give this. On the coronavirus, yes, there are immediate effect on sales. But it's all with the immediate shipment. So it's not that we are talking of 1 month or 1.5 months or 2 months shipments kind of thing, no. People want immediate deliveries from all these countries like Bangladesh, Vietnam or Sri Lanka. Yes, there are inquiries. And in case we (inaudible), these things will be possible. From the local market, still, I do not find much of change in the demand, except some apparel demand, which is, again, linked with the export of fabric on an immediate basis. We are finding some -- these kind of demand from our fabric, internal fabric division also where they want -- where the customer wants to have the immediate delivery maybe because of the late deliveries from China.

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Operator [19]

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The next question is from the line of Ankit Gor from Systematix.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [20]

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Sir, we have seen a sharp fall in our gross margin. Was it because of spread or some one-off issues or some high cotton prices? Since cotton prices were low during the quarter or probably inventory were higher at -- costing was higher at our end, how do we explain that, sir?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [21]

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Two factors in this. One, we were covered for our cotton till almost November end, which was at a much higher prices compared to the current prices or the later on prices. So almost 2 months in the quarter, we were consuming the cotton, which was covered last time, definitely, the prices were much higher, one. Number two, the finished goods inventory also get valued based upon the raw material costs plus the conversion costs, of course, subject to the mark-to-market of the -- compared with the market prices. So whenever the raw material prices come down, at that stage, the finished goods or the WIP, that one’s also devalued because the new cost of raw material which was less and based upon that, whatever stocks we had, that's also required to be devalued. This happens vice versa whenever there is an increase happen or reduction happen. So I think these were the 2 big factors there because of which, the margin in this quarter was a little bit low.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [22]

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Okay. And how do we see margin panning out in subsequent quarters, sir? Should it be...

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [23]

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Definitely things are far better compared to the third quarter. But I mean, as of now, I can say, only as of now because things are -- all spinning mills would be using the cotton, which is based upon the current prices or the current season, which is almost at least 10% to 12% lower than the last year's prices. The yarn demand is okay with other (inaudible) as well. So definitely, the current going quarter is better -- far better compared to the third quarter.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [24]

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Okay. And whatever the cost or carrying cost of cotton now for us and now market price should be equal since we were holding inventory till November only. So you must have refilled it at the...

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [25]

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For some people. So for current year, the prices have not gone up as yet. The current prices of cotton are almost INR 39,500, ranging between INR 39,000 to INR 40,000 a candy per Shankar. So I think in this season, till now, there's not much variation happening on the current prices or the prices since the season started.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [26]

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Okay. And our carrying costs should also be in the similar range, INR 39,000 now?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [27]

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Yes. So I am saying the current prices and some variable there.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [28]

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Okay. So in that sense, we should be back to normal, probably in 2Q, whatever margin we reported in terms of 2Q, we reported gross margin of around 48%. Should it be back to 48% or it will take a couple of quarters more to -- back to those levels?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [29]

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It all depends upon 2 factors. One, how the prices of cotton moves in India or internationally; two, what happens to the yarn prices. So the international prices, the Indian cotton is still one of the cheapest when compared with any prices, so one. Number two, once the off-season happens, I think one of the biggest share, which is going to determine the fee paid would be the Cotton Corporation of India. They are the biggest holder of stock as of now. As of now, their policy, they will be announced relative -- they will not be selling their cotton lesser than their cost prices. Their cost price as per the data, given announcement, given by them is almost close to about INR 45,000 a candy. They have been sharing this till now that we will not be selling the cotton less than our cost. In that scenario, if that happens, then they are going to be the biggest holder of inventory in the entire Indian system. They already are holding close to, I understand, including the last year crop and Maharashtra Federation together, our estimate is it's not going to be less than 75, 77 lakhs bales till now, which means the moment the current arrival stops or reduces, they will start selling or the people will have to buy to them. Now depending upon what policy do they have, in case they continue to have a policy of INR 44,000, INR 45,000 a candy to be sold their cotton, I think, in that scenario, there'll be good likelihood either imports start happening, which will give an increase to the raw material prices internationally and Europe region or because India has a substantial share in the international market for the yarn, so the yarn prices may also increase further.

So I think it's very difficult for me to say what the margin will be. But yes, considering the biggest stock and division policy, they will determine how the Indian cotton spinning mills will shape up then. But surely, with this kind of cotton available to them, there's going to be less pressure on the availability for the normal mills.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [30]

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Great. And sir, what is the general spread as of now, cotton against spread, not for us, probably, but for industry, let's say, for Shankar (inaudible)?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [31]

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It's definitely more than $1 as of now, close to comparable to $1. In terms of rupees, I think, it'll be almost close to about INR 70 or so.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [32]

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And then 3Q average was how much, sir, in that sense?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [33]

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Much less, much less.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [34]

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Much lower, okay. Okay. And sir, in terms of other expenses...

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [35]

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To say precisely, the big difference, cotton Q3 was almost INR 43,500 or so. Today, it's INR 39,500.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [36]

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Okay, okay. And sir, in terms of other expenses, was there any one-off this quarter? And how should we look at this? Should we look at lower run rate...

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [37]

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Rajeev, can you explain the other expense?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [38]

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Yes, yes. So as just explained that the rise in the expenditure is basically, there are 3 components, one is manufacturing expenses, administrative expenses and selling expenses. So manufacturing expenses and selling expenses are relatable to the quantum of production and sales. So as the capacities, new capacities have come in operation in the last quarter only, so the impact of increased production and sale is there in this quarter. And of course, like the CSR expense, which is a part of administrative expenses, that is there, which is higher by about INR 6 crores, INR 7 crores and one write-off of about INR 5 crores of some debtor we have taken in this quarter. So these are the kind of items in this expenditure.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [39]

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So probably INR 5 crore and INR 6 crores...

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [40]

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Yes. One is the absolute number increase, which is linked with the quantum of production or selling. So I think in general, the yarn prices in this period was less. So if you look at as a percentage to the top line, this will also be showing a little higher because the yarn prices in this period were definitely on a lower side because everyone was under pressure. I think the good thing what has happened in the last 2, 3 months, starting November, we are back -- our exports from India is back to almost 95 million, 96 million kgs, which, in the month of July, as I said, come down to -- I mean, the first 6 months average was 72 million kgs, 73 million kgs and the last 2 months, November, December, we were almost 94 million kgs, 95 million kg as export from India. So that's the reason where, I think, slowly, the demand -- since the demand picked up, the prices were also stabilized and with the lower raw materials ensure the thing that it is compared quarter to quarter.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [41]

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Okay. Sir, lastly, from my side, if things remain where it is now, how do we see our incremental capacity ramp up in yarn as well as in fabric side to be utilized?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [42]

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On the yarn side, irrespective of the present situation, we have ramped up the entire capacity. So as -- I mean it takes generally about 1 to 2 months to start up the capacity. And as of now, we are running full capacity as far as selling is concerned. On the fabric side also, I think there are 2 factors. One is ramping up the capacity, in general; two is the seasonality. But you have to understand the volume over there has also started increasing. And maybe it may take us finally over 2 or 3 quarters to sustain those volumes. So we are already touching, I mean, definitely, upward trend as far as the capacity utilization of fabric is concerned. It may take us maybe another 2, 3, 4 quarters before we can be confident that we can run this capacity on a sustainable basis also. But definitely, there is a capacity improvement on the fabric side. So on the yarn side, we are fully operational as of now.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [43]

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Okay. Okay. And sorry, I'm squeezing one more. Lastly, on the demand side scenario on yarn as well as on the fabric side, how do we see in wake of every situation around us?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [44]

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So I mean, the impact of coronavirus has yet to know what kind of impact will it have on middle term or short-term or long term. But yes, if I leave the part that particular -- because it is still very, very difficult to understand what's happening. There is not much of clarity what is happening on the China side. What I understand, the factories have started operating. So we hope the things will be okay soon. But still, for us to comment on that may be difficult. So if I leave the part that this particular uncertainty, I think the -- otherwise, overall on the demand side, overall on the business side, things are okay.

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Operator [45]

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The next question is from the line of Arjun Sengar from Reliance Mutual Fund.

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Arjun Sengar, Nippon Life India Asset Management Limited - Research Associate [46]

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Sorry, if I missed this part, sir. What is the current demand in terms of our yarn exports, especially from China? I think our first half, obviously, has been very muted. The Chinese demand, I think, was down 20%, 30%, 40%. So has there been any improvement in that?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [47]

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Yes, there's definitely improvement. So the Chinese demand for 3, 4 months is normal. So whatever they were importing from us, from India in the last corresponding period, last 2, 3 months, we are almost comparable to that.

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Arjun Sengar, Nippon Life India Asset Management Limited - Research Associate [48]

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Okay. And besides China, is there -- things were always okay. So no change in that regard?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [49]

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Yes.

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Arjun Sengar, Nippon Life India Asset Management Limited - Research Associate [50]

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Okay. And secondly, this quarter, I think, like you said, the gross margin is impacted because of inventory losses. So next quarter, that will not be the case. So do you think we can be higher than the kind of profitability we did in the first half of this financial year? Or it will be somewhere around -- along those lines only?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [51]

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So as I mentioned, for me, I can only give what the raw material prices are, what the yarn prices are as of now.

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Arjun Sengar, Nippon Life India Asset Management Limited - Research Associate [52]

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Assuming prices stay at current levels.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [53]

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Sorry?

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Arjun Sengar, Nippon Life India Asset Management Limited - Research Associate [54]

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Assuming the yarn and cotton prices stay at current levels, assuming that, then the profitability for the coming couple of quarters would be higher than what we saw in the first half of this year or similar to that?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [55]

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I mean, today's situation, it's a bit better, surely.

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Arjun Sengar, Nippon Life India Asset Management Limited - Research Associate [56]

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Today's situation, surely better.

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Operator [57]

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The next question is from the line of Chetan Thacker from ASK Investment Managers.

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Chetan Thacker, ASK Investment Managers Limited - Senior Research Analyst [58]

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Sir, just one question on, what is the impact of the raw material write-down that you've seen and the higher cost inventory that has gone into the COGS, if you can quantify that?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [59]

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It is hard for me to quantify because the consumption will happen, keep on happening based upon whatever raw material we had. So that difference was quite big. But at the same time, I think, depending upon whatever finished goods you have and the fabric you have, we'll have to look at the raw material cost plus the conversion cost compared with the market prices. So as such, numbers, see, generally, we don't give the number because we don't decided, it's keep on happening month-on-month basis as new materials will come in. But yes, it was a substantial number.

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Chetan Thacker, ASK Investment Managers Limited - Senior Research Analyst [60]

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So current, where the prices are? And what has gone into this quarter's number? Is the difference on cotton in the range of INR 6000, INR 7,000?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [61]

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From the last quarter, I mean, the last quarter also, I think the partially, we used the new cotton, partially we used the old cotton. But if I look at the difference from the second quarter, then the gap will be close to about INR 4,000 a candy.

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Chetan Thacker, ASK Investment Managers Limited - Senior Research Analyst [62]

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Okay. And the other expense you said, there is INR 6 crores of bad debt that is included there and INR 6 crores, INR 7 crores odd of CSR expense. And the rest is linked to higher production and sales.

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [63]

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Yes, that's true.

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Operator [64]

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

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Amit Doshi;Care Portfolio Managers, [65]

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Sir, can you give some -- initially in the opening remarks, the domestic cotton scenario and the prices were discussed. However, if you can just share thoughts on the international cotton scenario. And along with that, if more guidance can be even on the yarn, I mean, considering that Indian situations were unique in the first half where cotton prices were very high and the yarn prices were very low. So how that thing actually panned out in Q3 and how it is happening now if you can throw some light on that?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [66]

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Okay. Jhamb Saab, can you give your views on the international cotton?

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Sushil Kumar Jhamb, Vardhman Textiles Limited - Director of Raw Materials [67]

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The international cotton is -- as far as international cotton is concerned, the total supply for the 2019/'20 season was estimated to be around 245 million tonnes. And against that, now after the review in the month of February, they have increased the supply by 1 million tonnes. The difference is primarily because of the adjustment made in the opening stock. As far as the consumption is concerned, it has been reduced by 1 million tonnes again. That is on account of coronavirus in China. The price range, it starts -- in the year 2019, the price, which was around $0.70 has gone up to around $0.80. It's gone up by 10% to 12%. And for the last couple of months, it's remaining within this range only, that it's near $0.80, it will be $0.01 less, $0.01 more. But supply wise, there is no issue.

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Amit Doshi;Care Portfolio Managers, [68]

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Okay, okay. So now considering the fact that yarn prices are approximately up by 10% to 12%, hello?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [69]

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Yes.

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Amit Doshi;Care Portfolio Managers, [70]

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Yes. Considering the fact that now yarn prices are about 10% to 12% up and the cotton prices or the inventory that you mentioned -- I mean, what we get after the November season is now approximately 10% down. So -- and you mentioned that 75% of requirement has been covered by us. Is that my understanding correct?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [71]

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Yes. As far as covering of cotton is concerned, yes, your understanding is correct.

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Amit Doshi;Care Portfolio Managers, [72]

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Okay, okay, okay. And as far as this China coronavirus issue is concerned, we, of course -- I mean, it will be too early to predict anything. But any export that we do to China? And what percentage of our sales is there? And is there -- I mean, what kind of impact is likely to be in this quarter?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [73]

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As far as China is concerned, our share out of the exports that we do, I think, will be close to maybe in the range of about 30%, 35%. But at the same time, this quarter, I don't foresee any issue because all the shipments are going as usual. So our direct customers have started getting confirmation, they started operating their factories, someone is running 50%, someone is running 75%, and they are eagerly waiting for the material to come in. So as far as Vardhman is concerned, I don't see any major issue in this quarter. But if the demand comes down, this doesn't get control, so then it's not a Vardhman issue, then I'm not very sure what kind of impact we'll have in the various parts of the industries. But as far as this quarter or the current going is concerned, I don't foresee any major issue to that extent. All their health is well up and settled, so now everything is in place, so nothing really serious as on date, today.

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Amit Doshi;Care Portfolio Managers, [74]

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Hello? Sir, what is the margin guidance for the coming quarters?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [75]

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A tough question. We've been struggling last 1 year, but I think now it's a time which is coming in where we should be back to our normal range, which as we have always been guiding. So I think starting this quarter, we might talk of coming to the normal range of 18% to 22%.

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Amit Doshi;Care Portfolio Managers, [76]

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Okay, okay. Sir, this increased production and sales figure will continue to be in the coming quarters, correct?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [77]

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Yes, yes, yes.

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Amit Doshi;Care Portfolio Managers, [78]

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Sir, what kind of capacity expansion is still going to happen?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [79]

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No. As of now, we are not looking at more capacity expansion. So whatever we have done or as I mentioned on the spinning side, we are fully operational. On the fabric side, we are ramping at it month after month. So it may take us maybe next 6 months to utilize it fully. But there's nothing on the cards as of now to expand further. So we want to first utilize...

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Amit Doshi;Care Portfolio Managers, [80]

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There is some (inaudible) shown in our assets.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [81]

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As far as buildings and all where the bills are pending, but otherwise, by and large, the capacity is fully operational.

Some machinery or some part, which is yet to be capitalized because of some bill or the contractor is not given, and those are kind of things. But as far as the actual operations are concerned, I think, by and large, they are fully operational.

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Amit Doshi;Care Portfolio Managers, [82]

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So at present, are we operating at full capacity?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [83]

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Some go downs are under construction. So those kind of roads are under construction, which has nothing to do with the direct production.

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Amit Doshi;Care Portfolio Managers, [84]

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Sir, in case of fabric, are we utilizing full capacity?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [85]

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As I mentioned, we are improving it month after month. So till now capacity utilization is happening. But yes, it is improving.

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Amit Doshi;Care Portfolio Managers, [86]

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Sir, what is current capacity utilizing?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [87]

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Mukesh, can you give some idea?

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [88]

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I think Thapar, we have given numbers?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [89]

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If any capacity utilization is not there, you can explain them.

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [90]

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Yes, capacity utilization, actually, on an annual basis, if you look at this financial, we will be meeting at about 85%, 90% -- 85% or so.

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Amit Doshi;Care Portfolio Managers, [91]

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Okay, okay. Sir, what is debt on the balance sheet as on date?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [92]

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Yes. So total debt is around INR 1,800 crores as of 31 December, out of which around INR 1,500 crores is long-term debt and INR 300 crores or INR 350 crores is the short term.

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Amit Doshi;Care Portfolio Managers, [93]

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Yes, yes. So these are -- our cash generation will be around INR 1,000 crores. And is there any capacity expansion plan?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [94]

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As of now, we don't have any capacity expansion plan. We have just completed our -- the expansion program, which we have taken 2 or 3 years back. So as of now, there's no more major capacity expansion program.

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Amit Doshi;Care Portfolio Managers, [95]

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So whether we'll be utilizing this cash generation to repayment, repay the debt?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [96]

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The repayment will happen on the due time only because that loans which we have raised, some are TUF, central TUF loans, some are having the state subsidy. So we'd like to retain them and repayment will happen only on the due date only.

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Operator [97]

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The next question is from the line of Abhijeet Dey from BNP Paribas Mutual Fund.

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Abhijeet Dey, BNP Paribas Mutual Fund - BNP Paribas Focused 25 Equity Fund - Fund Manager [98]

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Sorry, if I missed this earlier, but what has been the trend in domestic yarn prices in January and February this month?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [99]

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The January was almost comparable to the international prices, February starting also. Generally in line with international prices only. So plus/minus yarn prices international or domestic, the gap will not be -- anytime will not be more than INR 2 or INR 3 plus or minus. So I think still it is comparable only.

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Abhijeet Dey, BNP Paribas Mutual Fund - BNP Paribas Focused 25 Equity Fund - Fund Manager [100]

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Okay. Right. And given the fact that domestic cotton prices have corrected, which were going up in the month of January, now they have started to correct, perhaps because of the concerns surrounding the coronavirus in China, do you think till the season ends at least the cotton prices may remain stable at current levels? Or there are chances that it can come down further?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [101]

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It's very difficult. No. Come down may not be possible because CCI is very active. They are -- out of the total arrival as of now, it's close to about 200,000 bills -- a little less than 200,000. Almost 40% to 50% is being taken by CCIs. So as such time when the new consumption starts basically almost 85,000, 90,000 bills a day. So practically, we are not in a position to add much of a stock, except barring some, which can do that. So since the demand-supply gets adjusted because of this drop looks very, very less possibility that prices may come down from these levels.

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Operator [102]

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The next question is from the line of Avi Mehta from IIFL Securities Limited.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [103]

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Sir, I just wanted to clarify, was the yarn spread in 2Q also close to about $1, if I'm correct? Or was it slightly?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [104]

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Sorry?

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [105]

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Yarn spread in second quarter was also around first?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [106]

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No, it was a little lower.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [107]

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It was what, around INR 60 or INR 50?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [108]

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Yes. I think it's close to about INR 50 or so.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [109]

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So it has gone up from INR 60 to almost about INR 70 now, is what is the case, right, sir?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [110]

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Yes. Yes.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [111]

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And so that is closed. Okay. So that -- this is what should flow through. So almost 15%, 16% increase in yarn spread from first half levels?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [112]

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Yes.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [113]

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And sir, you highlighted that demand for yarn has kind of continued to remain healthy with exports back. Does that imply that from a demand front, even if prices were to move up, the environment, at least right now looks favorable to see yarn price increases because of domestic cotton increase?

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [114]

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No. The increase may also not happen because the international prices, the domestic prices of yarn will always get adjusted to the international prices of cotton, international prices of cotton -- yarn. International price of yarn will be determined by the international price of cotton.

So if you look at the near future and base this around that yarn price, I think it's -- whatever it is based, so based upon that, the prices of yarn is okay in India.

Second question will be whether because of the demand, the price will increase. If in the near future, the raw cotton increases, I think then there could be a case. But simply, Indian cotton prices start increasing, then yarn price may or may not.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [115]

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Okay, sir. And second last part…

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [116]

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The Indian yarn price generally is an offshoot of what is happening internationally.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [117]

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Okay, okay, sir. That is very clear. The last part, sir, is that on the fabric side, I mean, I remember that second half is typically an export heavy quarter. Are you seeing any concerns over there? And if you're not, would it be fair to see fabric spreads also expanding further from...

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Rajeev Thapar, Vardhman Textiles Limited - CFO [118]

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No. Not really. It's a rather -- sometimes it's a reverse. Because when the yarn prices are lower, the fabric gets an advantage because margins will expand. And vice versa may happen also because whenever the yarn prices will go up, fabric may not be in a position to perform the same fully to the customers. So I mean any time we look at yarn movement plus or minus, it has a reverse impact on the fabric part.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [119]

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Okay, okay. So in terms of the FY '20 margin, you said that 18%-plus is what you can see possible in fourth quarter? And that is how we should look at least for this year. Is that understanding correct, sir?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [120]

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Yes.

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Operator [121]

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The next question is from the line of Sandeep Baid from Quest Investment.

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Sandeep Baid;Quest Investment, [122]

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Just a few clarifications. One, on your capacity, so the spindle capacity is now, you have 11 lakh spindles, is that correct?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [123]

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Yes.

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Sandeep Baid;Quest Investment, [124]

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Okay. And in terms of processing capacity, you will have 180 million meters plus the 3 printing lines?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [125]

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Correct. Correct.

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Sandeep Baid;Quest Investment, [126]

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Okay. And are you looking at a fourth printing line as well?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [127]

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Mukesh?

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [128]

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Yes, the printing, we have already -- the fourth line is already commissioned.

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Sandeep Baid;Quest Investment, [129]

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Okay. The fourth line is commissioned, okay. So how much would be the capacity on the printing side now?

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [130]

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Printing, total monthly capacity is about 2 million meters.

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Sandeep Baid;Quest Investment, [131]

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With a fourth line? So that is only 20 -- because I thought each line is about 9 million meters, right?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [132]

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No, no. The total printing capacity. He is asking total printing capacity as of now per annum.

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [133]

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Yes, total pending capacity is 24 million meters a month ---annum -- 24 million.

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Sandeep Baid;Quest Investment, [134]

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Okay. So that would make it 6 million per printing line, right, per year?

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [135]

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Yes. Yes, yes, you can say that. Because on the same lines, there would be some difference because of the product mix, and there could be some difference because of the sampling also being done on the same machine. So total rated capacity you can take as 24 million.

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Sandeep Baid;Quest Investment, [136]

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Okay. All right. Secondly, did you say that 30% to 35% of your exports is to China?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [137]

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For yarn?

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Sandeep Baid;Quest Investment, [138]

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For yarn, yes.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [139]

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Yes.

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Sandeep Baid;Quest Investment, [140]

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Okay. Third, you mentioned about debt INR 1,800 crores in all. This is stand-alone or this is consol?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [141]

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It's a stand-alone, Deep.

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Sandeep Baid;Quest Investment, [142]

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And what are the consol debt and consol cash?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [143]

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Leather will be -- leather company, we are not having any (inaudible)

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Sandeep Baid;Quest Investment, [144]

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So this is consol. And how much would be consolidated cash levels in the company right now as of December 31?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [145]

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Cash investments, you're talking?

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Sandeep Baid;Quest Investment, [146]

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Yes.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [147]

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It's around INR 1,000 crores.

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Sandeep Baid;Quest Investment, [148]

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At the consol level?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [149]

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On stand-alone basis.

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Sandeep Baid;Quest Investment, [150]

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No, at consol basis?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [151]

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On consolidated basis it could be INR 1,300 crores.

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Sandeep Baid;Quest Investment, [152]

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So net debt would be about INR 500 crores, right? INR 1,800 crores minus INR 1,300 crores?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [153]

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Yes, sure.

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Sandeep Baid;Quest Investment, [154]

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Okay. And lastly, can you give the breakup of your INR 70 crores of other income in Q3 into other operating income and interest income or dividend income?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [155]

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Yes. We are having investment income of about INR 26 crores.

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Sandeep Baid;Quest Investment, [156]

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Sorry, how much?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [157]

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INR 26 crores. Remaining is other income, but it includes the income tax interest rebate of about INR 18 crores.

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Sandeep Baid;Quest Investment, [158]

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INR 18 crores, and the balance is other operating income?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [159]

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Yes, yes.

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Sandeep Baid;Quest Investment, [160]

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Okay. Okay. And lastly, Neeraj, this is for you. So let's assume this coronavirus issue continues for the next few months, how will that impact your exports of yarn to China? And would it be possible for you to then maybe export it to other markets like Bangladesh, Vietnam, and...

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [161]

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I mean, that's possible because ultimately, the garment requirement would be there. So if they do not import, some other countries will import. So ultimately, the (inaudible) China before that is happening from China will continue to be the same. So if China is not taking then some other country is bound to take, whether it's Vietnam, Sri Lanka, India, Bangladesh and so on and so on. So I don't think really that's a big issue over there.

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Operator [162]

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The next question is from the line of V. Srivatsa from UTI Mutual Fund.

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V. Srivatsa, UTI Asset Management Company Limited - Fund Manager Offshore [163]

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Yes. I mean, sir, in the last call, you had mentioned that the number of idle capacity is around 21%. So is there any kind of change you are seeing? And also sir, mostly from an addition perspective on spindle for the industry, given the fact that today, probably it was not viable to set up any spinning capacity without the incentives, which used to be there earlier. So do you see a situation where in the next medium term, say, 3 to 5 years, the capacity addition would be far, far less and at some point, we will read some kind of equilibrium over the medium term, sir?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [164]

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Yes. So first, the capacity which we've partially closed temporarily at that stage is between the range of about 20%, 22%. I understand I think, out of that, about 7%, 8% still remains unutilized. That's a kind of almost -- it looks like almost permanent closure kind of a capacity, one. Number two, you're right. The -- in our view, the expansion on the selling side will be lower for 2, 3 reasons as the margins are low; two, incentives may not be there. Third, the funding may also not be available as the banks have also become very choosy to get funding to the -- especially to the textile sector also. I'm sure if this continues within next 1 or 2 or 3 years, there will be lots of consolidation which may happen. And whatever is the excess capacity ability, that may get adjusted with the increase in demand.

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V. Srivatsa, UTI Asset Management Company Limited - Fund Manager Offshore [165]

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Okay. But sir, in your view, what would be the excess capacity?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [166]

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If you talk to the machinery manufacturers as of now, so they're almost running 35%, 40% of capacity what they used to run a year back. There's one signal there in their capacity utilization, which means demand to that extent is much less.

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V. Srivatsa, UTI Asset Management Company Limited - Fund Manager Offshore [167]

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Okay. And sir, I think for the last many years, you've clearly articulated that you would not put up any kind of stand-alone merchant spinning capacity and whatever we put up would be only for our backward integration. So given the fact that you are not seeing industry putting up capacities now, is there any change in the thought process to say, acquire a capacity or putting up a fresh greenfield capacity because at some point it will be viable, I mean, over the medium term?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [168]

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Yes. So I've always maintained this, if we get a right project for a consolidation for a (inaudible) location, we are willing to look at that. So spinning capacity in standalone for the market that is low cost may not be viable. But if you get a right project, then probably it can make sense, so we will be open to this, yes.

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V. Srivatsa, UTI Asset Management Company Limited - Fund Manager Offshore [169]

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Okay. And sir, coming to your next phase of capacity expansion, now we are finished with this current phase and probably any new capacity even if we decide today, will at least take 2 to 3 years to come. So any time frame you have by which you will decide on the next phase? Because the risk is that after next year, we will run the risk of no growth because we may not have capacities for growth at all. So any kind of internal time limit you have where you can come back to us and say that this is the next phase of capacity, either on the fabric side or on the yarn side?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [170]

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I mean, I appreciate the concern from the growth perspective, but internally the issue challenges are a little different, one. We always say whatever capacity has been built up, that must be utilized fully, which we have done. Two, we want to create a right culture in the organization because to have a long-term vision and viability, it's always good to have the right culture, which takes time. So we are not in hurry that we have to expand every year only for the top line, but rather if we have to sustain and maintain the bottom line, I think we have to invest a lot of time and on to that, which we are doing it as of now, three. There is a tremendous -- always, there's always tremendous pressure on the quality of products. So I think the amount of modernization that we have started investing is far more than what we used to do because the customer prices are increasing, the lead times have come down. So I think to sustain the business, which has been created, it's important to invest into those kind of things rather than looking at only the capacity expansion, fourth.

I think there's always room in case demand is better, in case the profitability is better. So maybe whatever products you are producing, whatever customer you are serving, in case the lowest one can be knocked off in any case, if the overall business growth is there. So those permutation combinations, I think the companies will keep on making. And fifth was that our financials should be strong enough so that anything happening, any good or bad thing happening in any part of the world, we should be in a position to sustain at that time. Sixth, I think internally the organization building is very, very important. And I can give you one example.

During this period of last 6 months, there was such a tremendous pressure because the export was not happening. As Vardhman, we continue to run 100% capacity utilization. All our customers, products supported us. Our team really created wonders in this period. That gives me a lot of confidence, but I have to keep on investing my time and energy to ensure that the same spirits are there. So if you are only looking at the expansion, maybe sometimes you are more busy on to other things, which is, I think our view is that once we have capacity of INR 1,500 crores from our perspective, it's not a small capacity expansion. Once we have done, we'd like to wait for at least the next 1 or 2 years to consolidate ourselves, rebuild on what I've mentioned. And in between, if I get an opportunity to acquire something which is cheaper or which is good, then I'm willing to go the extra mile for that. Other than that, on a greenfield project as of now, we haven't decided anything.

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V. Srivatsa, UTI Asset Management Company Limited - Fund Manager Offshore [171]

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Okay. And sir, finally, if I see the trends in the domestic apparel companies, such as, say, Madura or even Trent, I mean -- or even Arvind, a lot of them are showing very interesting good growth. So I want to ask 2 questions. What is our total fabric, I mean, are we servicing the big, say, top 5, top 10 apparel companies in India? And do you also share the view that I mean, these companies are quite bullish on the growth in the medium term? So do you also feel that over the next 5 years on Indian, whatever we service, India can become a big part of our fabric portfolio?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [172]

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Mukesh?

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [173]

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Yes. Actually, if you look at out of our total fabric base, almost like 37%, 38% goes into Indian domestic consumption. So India is a very important market for us, and very close to our heart. We are operating into the Indian market through different channels. And currently, the Indian retail demography is getting changed. With the new large retailers coming up, as you mentioned (inaudible) Trent or Westside or Big Bazaar or Reliance Trends and a couple of others. So Indian retail is definitely undergoing a major change, wherein the organized retail is coming into -- in a big way, and they will require more and more mill- made fabric, I mean to say, the fabric from the organized base like us. So yes, India has always been in the range of about 37%, 38% to 45% of our conversion and with the annual capacity also, we target to maintain the same here for the internal.

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V. Srivatsa, UTI Asset Management Company Limited - Fund Manager Offshore [174]

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Okay. And sir, will it be right to assume that the names that you mentioned...

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Operator [175]

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May we request that you return to the question queue?

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V. Srivatsa, UTI Asset Management Company Limited - Fund Manager Offshore [176]

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Okay, sure.

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Operator [177]

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The next question is from the line of Gagan Thareja from Kotak Investment Advisors.

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Gagan Thareja, Kotak Investment Advisors Limited - VP [178]

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First question pertains to the working capital scenario for the company. What would the working capital have been in days for you closing this quarter? And compared to that, what would that have been in the third quarter of last year? If you could give inventory and receivables separately.

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [179]

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Rajeev?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [180]

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You require the figures -- financial figures for working capital as of end of this quarter and corresponding quarter last year?

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Gagan Thareja, Kotak Investment Advisors Limited - VP [181]

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Yes, yes. In days terms, if it's readily available or whatever is currently available.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [182]

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For you -- I think, we can discuss it offline or we can -- because right now, because these figures are not disclosed as a part of result. So we can just have a separate talk on that.

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Gagan Thareja, Kotak Investment Advisors Limited - VP [183]

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Okay. Or could you maybe just give a qualitative idea of whether the working capital is sort of stable year-on-year? Or you found that receivables have gone up?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [184]

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It is stable. Just in view of the increased sale, that threat will be there. Otherwise, the figures are almost stable, not much variance.

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Gagan Thareja, Kotak Investment Advisors Limited - VP [185]

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Okay. The second question, you indicated that Zero CCI doesn't want to or is reluctant to release its cotton inventory in the market at the prevailing prices and they have substantial inventory. Would it make sense then for Vardhman to actually procure a higher amount of inventory than it normally would have given the current prices of cotton that's available in the market?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [186]

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That can be done but -- when did we -- we never look at this as a trading business. We always look at if I have to cover myself, then only I'll buy it. But for the purpose of trading, we've never done that. So I'm still not -- we're still in the process of completing (inaudible). If the opportunity is there and we find an opportunity, we might take a view. But as of now, our thought is only to cover the -- our requirement.

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Gagan Thareja, Kotak Investment Advisors Limited - VP [187]

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Okay. And finally, I mean, there's already trade-related pressures on Chinese exports into U.S., including probably the textile exports. And we now have this further volatility being induced because of the coronavirus. If this were to become a sort of elongated train that procurement of textile -- finished textiles from China materially falls in U.S. and the resulting slack is picked up by other countries, would you be able to sort of cover up for your sales loss -- in potential sales loss in China to the other countries, one for one? Or would it not be possible to do that?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [188]

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No, it is definitely possible because in any case, China exports lots of yarn, (inaudible) yarn to Bangladesh, here and there. Lots of demand is here (inaudible). In terms of the export lots of (inaudible) to these countries. So I don't see any issue or any concern in terms of covering the same as far the yarn is concerned. (inaudible) I'm sure we will get an opportunity also, extra.

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Gagan Thareja, Kotak Investment Advisors Limited - VP [189]

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Okay. And you certainly indicated in the past that gradually, the sales mix might move in favor of fabric and that itself might have some beneficial impact on the margins. So presuming that the spreads have normalized now and probably gone a little above normal, maybe, plus the fact that you're ramping up your fabric...

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [190]

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Normal. It is normal.

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Gagan Thareja, Kotak Investment Advisors Limited - VP [191]

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Plus your sales mix, as indicated, might gradually push towards the fabric. The margin improvement should it not be more than the order of normal 18%, 19% odd with these 2 factors in?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [192]

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But things will keep on changing. There will be good or bad times. So as we have always been talking about -- always talking between 18% to 20%. In bad years 18% and good year 20%. So this 4% band is actually taking care of all good and bad times.

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Gagan Thareja, Kotak Investment Advisors Limited - VP [193]

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Okay, okay, understood. And since the coming 2 years, your free cash flows will improve given that you've indicated in the past that CapEx will be of a lower order. Is there any thoughts around the dividend policy? Do you feel that it would be -- you would be in a comfortable position to increase the payouts?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [194]

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As far as cash flow is concerned, yes, but ultimately (inaudible) I can't comment on that. Cash flow will be comfortable with both given an idea that the things which are done with the cash flows or whatever has (inaudible) looking at the company.

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Operator [195]

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(Operator Instructions) The next 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 [196]

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Sir, wanted to know the international cotton prices today and the prevailing price in 2Q of this quarter, of this year. So sequential improvement in -- sequential cotton prices.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [197]

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Our international cotton prices in Indian rupees, if we import from U.S. or Brazil, works out to around INR 45,000 per candy. And Indian prices, as of today, INR 39,500.

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Prerna Jhunjhunwala, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [198]

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Okay. And yarn prices?

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [199]

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Has he given the yarn prices?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [200]

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Yarn prices?

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Prerna Jhunjhunwala, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [201]

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Yes, sir, I asked about yarn prices.

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Neeraj Jain, Vardhman Textiles Limited - Joint MD, CEO of Yarn Business Operations & Executive Non-Independent Director [202]

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She wants what are the yarn prices as of today.

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [203]

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As of now, the international prices are close to about $3 for 30-count.

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Prerna Jhunjhunwala, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [204]

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Okay. And what was it in Q2?

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [205]

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Q2, I think the prices came down to a lowest level of 290. But at the same time, our raw material prices are much higher.

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Prerna Jhunjhunwala, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [206]

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Okay. And sir, just one question -- that came in through the conference call that we had. CCI is not looking as per your opinion. CCI would -- current policy of CCI is that they will not reduce the cotton price below their cost. And if cotton prices internationally come down, do you think that Indian cotton and yarn exports will again face some pressure that we saw in Q1 and Q2 because our pricing will then be higher than international cotton prices?

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Mukesh Bansal, Vardhman Textiles Limited - SVP of Fabric Marketing [207]

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Yarn may not -- the demand of yarn will not come down, yes. The margins of the Indian spinners may come under pressure.

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Operator [208]

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The next question is from the line of Chetan Thacker from ASK Investment Managers.

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Chetan Thacker, ASK Investment Managers Limited - Senior Research Analyst [209]

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Sir, just one follow-up. Is there any one-off start-up costs in the other expense line item in this quarter?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [210]

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Like we explained that the capacities which have been set up in the last quarter, they have become partially operational, and they are fully operational in this quarter, the impact of those operations is definitely there in other expenses as well as the other head of expenses.

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Chetan Thacker, ASK Investment Managers Limited - Senior Research Analyst [211]

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And benefit of that will accrue going forward. So I just want to get a sense whether there will be operating leverage that will come through as those get fully ramped up.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [212]

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Yes.

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Operator [213]

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The next question is from the line of Ankit Gor from Systematix.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [214]

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Just to clarify, is it 75% cotton procure -- we already procured, which is the yearly requirement, right? 75%? Or how it is?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [215]

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Yes, it's of our yearly requirement.

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Ankit Mukesh Gor, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Midcaps [216]

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Okay. So in that case, whatever be the CCI prices, probably 2, 3 months down the line, we should not get impacted since we must have procured this at INR 40,000 -- INR 39,000, INR 40,000 per candy, right?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [217]

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Yes, that's true. But we have yet to cover a lot of cotton, so let’s look at how it goes. And 25%, 30% from our volume perspective is still a large amount.

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Operator [218]

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

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Amit Doshi;Care Portfolio Managers, [219]

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Yes, sir, as a follow-up, you mentioned that CCI is currently acquiring cotton at around INR 45,000 and the current market price is around INR 39,000, INR 40,000. So the differential is there. And you mentioned that as per their policy, they might likely not sell below the cost. So -- and the international -- the yarn prices are governed by the international yarn prices. So in that situation, how the domestic yarn scenario -- price scenario arises because of the I mean, CCI, which is I mean, considered to be a significant 50% plus buyer? So how the other domestic spinners would kind of have or maintain their spread considering that? So can you just slightly clarify? I mean, how does it really...

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Rajeev Thapar, Vardhman Textiles Limited - CFO [220]

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This is going to be a challenge. This is surely going to be a challenge. So I think since India is a big part of the overall world market, the Indians will also try to increase its prices once the raw material increases. But at the same time, really, they can do it or not, I think it's a question mark. So in case the yarn prices doesn't improve, to that extent, the margins of the spinning mills will come down.

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Amit Doshi;Care Portfolio Managers, [221]

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Okay. So in any case, we will remain the decent beneficiaries of the situation in either situation.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [222]

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I don't know beneficiary or loser, the time will tell. Last year also when we were covering it out, we were good to the beneficiary, but it turned against us.

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Amit Doshi;Care Portfolio Managers, [223]

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Okay, okay, okay. And sir, in the second -- I mean, you mentioned that we'll come back to our originally guided margin range, which is 18% to 22%. Now considering that 18% to 22% was always there, now with the fabric, you are moving up the value chain and fabric increasing and ramping up the capacity on that side. So would that 18% to 22% become -- I mean, would be more because of the contribution by more fabric or I mean, yarn reducing, how would that pan out in terms of the rise from current levels of the margin?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [224]

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I think it's both ways, both ways. The yarn margins are improving and the fabric, the capacity utilizations are improving. I think both factors are going to help us.

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Amit Doshi;Care Portfolio Managers, [225]

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Okay, okay, okay. And sir, last question. On the -- anything on the textile policy, that is -- I mean, we expect anything -- benefit as far as any -- this new textile policy is concerned?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [226]

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No the government -- the industry is only talking to the government for a refund of ROSL on the spinning and on the fabric also. So if something comes down because in the budget announcement also, the Finance Minister has mentioned, they are looking at it in the current year for the labor intensive industry. So if they consider that, I think that's going to be -- that's the only pending, major pending demand from the industry.

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Amit Doshi;Care Portfolio Managers, [227]

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So what's the demand? I mean what kind of rebate as a percentage of…?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [228]

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Yes. Whatever are the levies and duties which are not getting to be repaid back to the exporters on the export of yarn and fabric, that should be allowed.

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Amit Doshi;Care Portfolio Managers, [229]

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And what could be that…?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [230]

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They have already given it in case of made up and garments. So the demand is, it should be given to the spinning as well as the fabric.

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Amit Doshi;Care Portfolio Managers, [231]

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Okay. So that roughly that 2%, which was there in the garment, I mean, 4% was done, 2%. I mean, it was expected to be done 2%.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [232]

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No, no, that's MEIS. So ROSL is in the range of, I think, they have given 5% or 6%.

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Amit Doshi;Care Portfolio Managers, [233]

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Okay, okay, okay. So if that comes up, that would be...

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Rajeev Thapar, Vardhman Textiles Limited - CFO [234]

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So only for our industry, they'll have to work out what is the actual amount. And we are paying any duty, which is paid, which is not getting adjusted in the GST, that must be refunded.

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Amit Doshi;Care Portfolio Managers, [235]

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Okay, okay, okay. And that was not there till last year, this either rebate or this GST, both are not there?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [236]

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No, this part was not there.

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Amit Doshi;Care Portfolio Managers, [237]

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Okay, okay, okay. And any -- there is no announcement as yet? I mean any likelihood when that's likely to be...

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Rajeev Thapar, Vardhman Textiles Limited - CFO [238]

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Don't know whether they do it or not. But yes in the budget statement, they mentioned that they are looking at this, and then they will look at it in this year. That's what they only announced.

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Operator [239]

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The next question is from the line of Nitin Jindal. He's an individual investor.

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Unidentified Participant, [240]

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I have a question on taxation. Why current tax is more than double as against previous quarter even after adopting more tax regime?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [241]

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You're talking about current tax only?

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Unidentified Participant, [242]

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Yes, current tax.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [243]

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So you see that under the old regime, some sort of benefits are available to the company like additional depreciation was there and reduction under section 80 IA, 80 IC were available. So now with the adoption of this new taxation rate those benefits are not available for the time being.

So in the first 2 quarters, the effect was taken for those benefits also while calculating the current tax liability. So in the third quarter, we have now recalculated the whole liability and the benefits which are presumed earlier now have been foregone for the time being. That's why the current effect is being reflected higher as compared to earlier quarters.

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Operator [244]

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(Operator Instructions) The next question is from the line of Abhishek Rathi from India Ratings.

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Abhishek Rathi;India Ratings and Research Pvt Ltd, [245]

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Just one question on the industry. So where we have seen this in this budget, the import restrictions on PT have been removed. So the industry is talking about some benefit flowing in the form of cost to the downstream external industry. So are we envisaging any benefit which in quantum, let's say in terms of (inaudible) which is being slowed for the blended yarns, which we buy?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [246]

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With the duty coming down, I think the overall impact on the melt cost can in the range about INR 3 to INR 5 per kg. Depending upon the competition, depending upon the demand and supply, this could be the maximum gap. So based upon that, whether -- how much the producer will be in a position to pass on or not. But yes, in terms of the reduction of anti-dumping duty, the melt cost of the special fibers may come down anything between INR 3 to INR 5 a kg.

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Abhishek Rathi;India Ratings and Research Pvt Ltd, [247]

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But sir, just in this -- addition to this, whether this coronavirus would have an impact because China has a substantial amount of capacities? So would this have a major impact or, let's say, in this time of an uncertainty, producers like from South Korea or Taiwan would fill the gap?

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Rajeev Thapar, Vardhman Textiles Limited - CFO [248]

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No. China still has the largest capacity. So if they are not operating fully, I think in that scenario, the others may not be in a position to fill up this gap.

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Operator [249]

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As there are no further questions, I would now like to hand the conference over to the management for closing comments.

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Rajeev Thapar, Vardhman Textiles Limited - CFO [250]

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Thank you very much to all the investors, all our associates who have been supporting us with that -- and been with us in all the good and bad times. I can only say the last year was very, very different, both in terms of the trade war between the U.S. and China, of course, the uncertainties are still there. But at the same time, it looks like, as on today, the worst is over, and also because the lots of new capacity was created in this period because of the various subsidies being given by the state governments, I think that era is also over. So I hope in next 2 to 3 years, things will get adjusted, and the margins should restore to be better.

In any case, as management, we are always looking at the various initiatives, the various controls, through various initiatives in terms of the ideas or the new products or the customer service, and we are fully agile to the situation and looking at what best possible could be done in the circumstances, which has been given to us. From that perspective, I can assure all of you that we are doing our level best, and we continue to look at more and more ideas how we can continue to be progressive company.

So once again, I thank you very much to all of you to be a part of our portfolio, and thanks for your support.