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Edited Transcript of WELSPUNIND.NSE earnings conference call or presentation 30-Jul-19 10:30am GMT

Q1 2020 Welspun India Ltd Earnings Call

Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Welspun India Ltd earnings conference call or presentation Tuesday, July 30, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Altaf Jiwani

Welspun India Limited - CFO

* Rajesh Ramesh Kumar Mandawewala

Welspun India Limited - MD & Executive Director

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Conference Call Participants

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* Arjun Sengar

Reliance Nippon Life Asset Management Limited - Research Associate

* Naushad Chaudhary

Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst

* Nihal Mahesh Jham

Edelweiss Securities Ltd., Research Division - Research Analyst

* Nisarg Vakharia

Lucky Investment Managers Private Limited - Analyst

* Nitin Agarwala

JM Financial Institutional Securities Limited, Research Division - Research Analyst

* Riddhesh Gandhi

* Sachin Kasera

* Saurabh Patwa

HDFC Asset Management Company Limited - Manager of Investment Process Control, Equity Analyst and Equity Dealer

* Vikas Jain

Equirus Securities Private Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Welspun India Limited Q1 FY '20 Earnings Conference Call hosted by Equirus Securities Private Limited. (Operator Instructions)

Please note that this conference is being recorded. I now hand the conference over to Mr. Vikas Jain from Equirus Securities Private Limited. Thank you, and over to you, Mr. Jain.

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Vikas Jain, Equirus Securities Private Limited, Research Division - Research Analyst [2]

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Thank you, [Nivas]. Good evening, everyone. On behalf of Equirus Securities, I would like to welcome all of you to the Q1 FY '20 Earnings Conference Call for Welspun India.

From the company, we have with us the key senior management, including Mr. Rajesh Mandawewala, Managing Director; Mr. Altaf Jiwani, Director, Finance and CFO; and Mr. Akhil Jindal, Group CFO and Head Strategy.

I would now like to hand over the call to the management for their opening comments, post which, we'll open the floor for Q&A.

Thank you, and over to you, sir.

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Altaf Jiwani, Welspun India Limited - CFO [3]

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Thank you. Good evening, ladies and gentlemen. On behalf of Welspun India, I would like to welcome all of you to our Q1 con call.

So we have had actually, Q1, a very strong profitability, coupled with the deleveraging. So we have seen a turnover of INR 1,736 crores, which is a double-digit growth compared to the same quarter last year.

The EBITDA is INR 371 crores, which is a margin of 21.4%. So again, this is 77 basis points higher than the same quarter last year, and it's substantially higher than the Q4 EBITDA, which was 15.8%.

In terms of PAT, we are at INR 150 crores, which is a 17.9% growth in EPS compared to the same quarter last year.

And the borrowing level has actually come down substantially, so we have net debt, we are at INR 2,815 crores compared to INR 3,028 crores as of 31st March, 2019. Now if you see the core business, which is the home textile business, we have actually reduced the borrowing by almost INR 412 crores in Q1. So there's a substantial cash flow generation in the core business, to which has led to this kind of reduction in (inaudible) debt level. And we also had a -- better number of days have come down with the better management. We had some government receivables, which we have received during this quarter. All these 3 factors have actually helped us reduce the borrowing level.

We have been -- as far as top line is concerned, it is the growth it has -- 3 factors which have -- it's a combination of 3 factors. One is the currency, which is about 4.8% growth impact, 3.4% is because of the renewing the RoSTCL, which happened in March last financial year. And the 3.4%, which is [above] the volume and the unit value relation resulted into growth in top line.

As far as Welspun Flooring is concerned, we have come to our almost end of our CapEx cycle in this financial year now. We have invested INR 850 crores as of 30th June for Welspun Flooring business out of INR 1,100 crores, and the core business does not require much of CapEx, so -- there's a strong ecosystem available in India, where we can source our products. So this will help us, all the cash flow, which will get generated from the core business will then actually help us reduce the debt. So we are on track for our debt reduction plan during the current financial year.

As far as OpEx is concerned, you would have read about this. There's a -- retailers are recalibrating their OpEx in the U.S. market, which happens to be the largest market for us. But this has -- actually, we have prepared our plan based on this scenario, and we have a lot of levers available with us, which will help us achieve the guidance of double-digit growth for the full year. We might see a variance from quarter-on-quarter, but the overall guidance for the full year, we are confident we'll be able to achieve the double-digit growth. Where we'll also have a situation where in the second half of the current financial year, we'll have Welspun Flooring business coming in, which is not there in the base.

We have -- some of the levers, which I'd like to highlight which are available with us is, one, is we are launching new products in our different markets, in U.S. as well as in India. For example, in India, we launched a new category pillow in Q1. In U.S., we are launching new products. We are also looking at new segments in U.S. So hospitality continues to be our focus, and we have seen a substantial traction over there. We are also looking at e-commerce segment in U.S. market. We are also looking at licensed brand for the U.S. markets. So there are -- all these levers are available for us to mitigate the impact of the calibrated OpEx from the U.S. retailers.

Yes, in terms in Indian -- U.S. domestic market, we actually launched this Bamboo Charcoal product in retail business, and that has -- that was very well received during the current quarter. Also for the advanced textile, we launched this Green Spunlace, which is like a biodegradable product, which has actually helped us create a sustainable range of products within nonwoven products.

So our strategy of twisting the category on its head, that is through Spaces, where we are -- we personalize our own [custom net,] which is actually helping us create a kind of a growth rate. So both our emerging businesses have grown at 30%-plus during Q1, and we expect this kind of growth rate to continue. You might be hearing about this slowdown in the domestic market, but for us, we are seeing a kind of growth because there's a large chunk of unorganized segment in home textiles, which is actually getting converted into segments. So there is -- there's an opportunity for players like us. And fortunately, for us, there are other players also who are focusing on this business, which is helping us create more of this organized segment in the home textile business. So we don't need to do the entire heavy lifting in the domestic market.

As far as CapEx is concerned, we have actually done CapEx of about INR 200 crores during Q1, INR 166 crores has been for Welspun Flooring. And our CapEx guidance for the full year continues to be INR 600 crores, and we'll continue to calibrate our CapEx based on the cash flows available.

In terms of working capital, you would have seen our inventory and debtors, both have come down, and we have seen the number of days payable has gone [for --] cash conversion cycle has improved substantially to 83 days from 95 days as of March.

So with this, I would like to leave the floor open for question and answers. Thank you.

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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 Saurabh Patwa from HDFC Mutual Funds.

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Saurabh Patwa, HDFC Asset Management Company Limited - Manager of Investment Process Control, Equity Analyst and Equity Dealer [2]

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So just would like -- if you can throw some light on AS 116 implementation. You have mentioned in your notes that your [-- this has increased your] liability by INR 99 crores. But how much would have impacted the EBITDA and depreciation? If you can just throw some more light on that.

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Altaf Jiwani, Welspun India Limited - CFO [3]

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In terms of PBT, there is no impact actually. In terms of EBITDA, there is an impact of about 0.5%

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Saurabh Patwa, HDFC Asset Management Company Limited - Manager of Investment Process Control, Equity Analyst and Equity Dealer [4]

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0.5%?

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Altaf Jiwani, Welspun India Limited - CFO [5]

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Yes. So there's about INR 8.4 crores of rent has been classified as interest and depreciation.

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Operator [6]

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The next question is from the line of Nihal Jham from Edelweiss Securities Ltd.

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [7]

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Sir, my first question was that our volume growth (inaudible) 3.5% (inaudible). So just wanted to understand that of the 3 main segments as we have which segment has driven this growth. Because I understand, last quarter, you mentioned in rugs you're seeing quite a lot of traction because you mentioned that the U.S./China trade and this was one of the product's that has seen duty increase. So just wanted to understand that is it in rugs you're seeing a higher volume growth or has it been spread across all the 3 categories.

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Altaf Jiwani, Welspun India Limited - CFO [8]

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So we're seeing a significant growth in bedsheet, and that is substantially higher compared to the other 2 categories.

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [9]

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Sir, any reason that the bedsheet category is seeing traction? Because I would assume that even the rugs category would have seen a continuous growth considering that Q4 was also strong for them.

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Altaf Jiwani, Welspun India Limited - CFO [10]

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So rugs, we expect to pick up actually going forward, Nihal.

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [11]

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Okay. Sure, sir. And just one, so what is the average realization for this quarter, sir, (inaudible) [realization.]

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Altaf Jiwani, Welspun India Limited - CFO [12]

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The exchange rate you're asking?

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [13]

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Yes, sir.

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Altaf Jiwani, Welspun India Limited - CFO [14]

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[INR 59 rupees, 55 paise.]

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [15]

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Okay. Sure, sir. So just on working capital part, I mean it was pretty commendable that even in the current environment, we are mentioning that -- the retailers are mentioning that demand outlook is not been great, and they are looking at (inaudible) ended up reducing debtors. And so just if you could throw some more light that how we managed to do this. And is there any more possibility of reducing this?

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Altaf Jiwani, Welspun India Limited - CFO [16]

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So we are -- this is a continuous process, which is where we're trying to minimize the time required -- the turnaround time between the dispatch and the negotiation with the bank. So we have also introduced kind of (inaudible) negotiation, and we continue to focus on this activity, which is helping us improve that. But as you know, most of the retailers are also looking at how to extend the credit period. So it's a constant battle, which is there. So I won't be surprised if retailers suddenly increase their credit period from the current level.

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [17]

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So sir, is there a possibility of maybe the debtor is increasing again in the coming quarters, is what you're saying?

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Altaf Jiwani, Welspun India Limited - CFO [18]

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(inaudible) be very conclusive on this part. But yes, we should be mindful of that.

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [19]

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Sure, sir. So just one last question. I think at the end of this quarter, our net debt stood at around INR 2,800 crores. And we are looking at a guidance, INR 2,700 crores by the end of this year. Considering you've already made so much progress and considering the amount of cash flow you generate -- generate for the remaining 9 months, is there a possibility that we could see net debt being further lower than INR 2,700 crores at the end of this year?

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Altaf Jiwani, Welspun India Limited - CFO [20]

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We'll stick to our guidance of INR 2,700 crores as of March 2020. Our endeavor will be to -- because as you know, we have actually announced our vision that by March '23, (sic) [March '22,] we want to become (inaudible) net debt company. So that's...

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [21]

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Sir, you actually exceeded guidance. And unless working capital deteriorates significantly, whether CapEx plans are more or less in place that our net debt could be significantly lower. So just on that part, any reason for being conservative?

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Altaf Jiwani, Welspun India Limited - CFO [22]

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Nihal, I understand your point, but we would like to stick to our guidance of INR 2,700 crores for March.

On the flooring, I wanted to give an update that we will be commissioning the flooring business, say, by end of this quarter. So as we had guided earlier, we will be having about INR 150 to INR 200 crores of revenues from the flooring business, but we are also seeing kind of opportunity opening up in the U.S. market for the flooring business.

So all -- the entire project, the execution is on track. For -- the commissioning date, we'll be announcing very soon, we expect before end of this quarter.

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Operator [23]

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(Operator Instructions) The next question is from the line of Mr. Vikas Jain from Equirus Securities Private Limited.

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Vikas Jain, Equirus Securities Private Limited, Research Division - Research Analyst [24]

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Sir, one question, as you just mentioned about the flooring part. Can you just elaborate upon the export or the export flooring market for us? How is that? And what are markets are we targeting? Is it primarily U.S. market or the other markets also? And how big is the opportunity for the flooring in the export side, let's say?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [25]

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Yes, Vikas, this is Rajesh. So first thing is that the project is on schedule. So this, we are very happy to report that.

And to your question on (inaudible) the business, international business potential. So over a period of 3 to 5 years, we believe this -- you know it will be a 1/2 and 1/2 spread between the domestic market and exports. So all the products that we are going to produce now, (inaudible) do attract a -- this are part of the U.S./China, this trade war. So which means all imports from China on the products that we are going to manufacture will attract this additional 25% duty. So it certainly opens up, and this creates an advantageous position for us in the U.S. market.

But having said that, that's not the only market. So this, as we speak, we are trying to build a network across the globe, more importantly in Europe. So this Europe and the U.S., which are going to be 2 very important export markets for us.

Our big emphasis -- our big focus is actually on the domestic market. And very honestly, the genesis of us getting into this business was actually to develop the domestic market where we, perhaps, will have a, let's say, a first-mover advantage as a manufacturer in most of the products that we are going to make here. So our big emphasis is actually on the domestic market. So we are actually building this very elaborate dealer distribution, distributor networks. So as we speak, we have already appointed about anything between 25 and 30 distributors. Say, about 300-plus dealers have been appointed, with a sales force in excess of 150 people, is on the road trying and this -- doing business development for us and preparing ourselves for, let's say, this as the -- this as the plant will come up.

So -- and there are some imports that have happened, which is helping us, let's say, fill the pipeline and give us some experience in terms of this -- any roadblocks that we might get in the distribution system.

So we are -- it's very keen to develop India as a market. And again, let's say this, all these products that we are making attract this between 15% and 25% import duties into India. And so that gives us a substantial advantage.

And for example, the carpet tiles now will be the first plant to actually produce here. And also, just on the hard flooring as well, there are a couple of others of those manufacturers that is very, very in [front end]. There's a huge potential for that part of the business to grow as well. So this -- while we say this is going to be 50-50 between exports and India, the heart of the business, and as I said, the investment genesis thesis was actually to capture the Indian market both in B2C and B2B play. So there's a lot of work that is going on in the company to leverage that.

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Operator [26]

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(Operator Instructions) The next question is from the line of Nisarg Vakharia from Lucky Investment Managers.

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Nisarg Vakharia, Lucky Investment Managers Private Limited - Analyst [27]

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Sir, so you're one of the very few companies who has actually utilized the cash flows into a very progressive segment rather than doing overcapacity in home textiles, whether it is a bedsheet or terry towels. My question was that the domestic carpet business is a more B2C business than a traditional B2B business that you are doing in the U.S. You were saying that you'll do INR 150 crores of top line in India. Can you give us a little more confidence on what is the kind of visibility that you have that you can easily replace an existing market in India, which is being imported by your product?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [28]

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So Nisarg, so this (inaudible) this INR 150 crores guidance is for the business and not only the domestic market. So this [will be necessary for] sum total of exports as well as the domestic market.

What makes us -- let's say, so there are multiple products that we are doing. So there is wall-to-wall carpets. Now the primary, let's say, this market for the wall-to-wall carpets in India is going to be the hospitality industry, so the hotels and auditoriums and these cinemas halls and so on and so forth. So -- and we are trying to create a very specialized product there.

So this is where we are, and we are already making (inaudible) facilities also capable of partly doing that product range. So we are already making some product and business developing on that front. So -- and we are currently at a run rate of about, let's say, just INR 1 crore a month just on the wall-to-wall side.

The second product is actually carpet tiles, which is a B2B play that carpet tiles is essentially a product that goes into commercial offices. So it's all the multinational companies, the large companies, the IT companies and where carpet tiles go. And it's a tile which can be replaced, let's say. So assume now there is cable running under the ground these days, and the carpet tile, it makes it very easy for any maintenance work or repair work that needs to get carried out. So this is not a market that we need to create. We just need to take market share from all the imports that come into the country. And our estimate on imports on carpet tiles is about INR 125 million to INR 150 million on an annual basis.

We also believe that because there is nobody producing in the domestic market, that the market is actually getting [throttled.] Because from the time you rent, let's say, an office space to the time you want to occupy the 6- to 8-week window, and if the tiles are not available this off the shelf, then this could possibly delay the commissioning and the furnishing and finishing of the office space. So we believe that the market will actually grow. So as we come in and offer, let's say, with a quick delivery solution to, let's say, these all the architects and interior designer community to furnish these offices. So that's the second product.

The third one is artificial grass. Again, we are the first player. This all started getting imported, and this is a product [that improves] institutional selling. The [big size] making stadiums, these hockey stadiums and football stadiums. And so that is one. And the other thing is landscaping in the houses itself, to replace natural grass. And there is a distribution system already available. So this is both a B2B and B2C play. We will also use our distribution network as well as [make sure there's build for] contracts for making stadiums and so on and so forth, the OEMs for the artificial grass.

And then the hard flooring business is going to be all B2C. So this is by and large going to residences, some a little bit into commercial space. So this is where our channel is going to come into play and where this will -- where we'll see a lot of this brand visibility. And it's essentially this will be marketed under the Welspun brand. And so this is going to be a large B2C play.

All these 4 products have also export possibilities now and particularly to the U.S. because of the U.S./China thing going. So there'll be -- let's say there's possibilities that -- to export as well.

So we are -- our current run rate is about 5 -- let's say, it's about INR 5 crores a month through, let's say, this product that we have reported. So we are already doing about INR 5 crores a month. And as the production comes about and (inaudible) we have merchandise to offer this, we are hoping that we should be able to step up volumes in the back half of the year.

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Nisarg Vakharia, Lucky Investment Managers Private Limited - Analyst [29]

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Okay. Sir, is it safe to assume that from quarter 3, quarter 4 onwards for the next 2 years, the top line growth would actually be driven by the ramp-up in the flooring segment because you are at sufficient capacity utilization in your traditional business of terry towels and bedsheet?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [30]

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Thank you, thank you for understanding the genesis of our investments. Let's say, this today, we have a 24% market share of towels in the U.S. Yes, we have a 13%, 14% market share in sheets, and there is competitive intensity. So at some stage, see the growth is going to slow -- slow down, and particularly, the volume growth is going to slow down. And this -- in anticipation of this, all these measures have been taken. So you're right, there'll be some growth, which will come from our -- continue to come from our textile businesses through, let's say, these new product additions. I think the rug business is going to grow phenomenally. This -- we are introducing fashion bedding. And this basic beddings, we see in a modest way, the brands that we will license. There's a lot of growth that is still just waiting to happen on the e-commerce side and hospitality.

So our textile business will also continue to grow, not that it will not grow. But this whatever -- the shortfall is the rate of growth will actually get made up by the newer, let's say, this businesses. And when I say newer businesses, flooring being one of them. And then we also have, let's say, the Spaces and the Welspun brand for the home textile business itself in India. So we are seeing phenomenal results as we are aggressively marketing this -- both the brands here in the domestic market. And this -- we are in excess of 30% growth this year-on-year, and (inaudible) it's gone beyond INR 200 crores already. And the growth, which we are very confused with the response that we are getting despite, let's say, a slowing market situation here in India, our business continues to grow. And we believe that it will continue to grow at a scorching pace in the domestic market.

And then the third part is the small advanced textile business that we have. So that's also now -- it's small, but it is crossing INR 200 crores now in sales. So it's also generating decent amount of EBITDA. So that's another area, which possibly we would like to grow capacities and also leverage our existing capacity some time in the future and not very high CapEx. Right now, we could actually grow 50% without spending a penny. So this -- we are not looking at any CapEx in that area, but it's moving up from INR 200 crores to, let's say, about INR 300 crores, INR 350 crores with the current, let's say, this capacity that we have is a real possibility. So yes, so there's a fair amount of substantiation of growth that will actually come from these 3 focus areas, which is flooring, our advanced textile business and the Spaces brand and the Welspun brand for our own textile products in the domestic market.

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Nisarg Vakharia, Lucky Investment Managers Private Limited - Analyst [31]

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Okay. Sir, my last question is relating to the growth engine that you have developed for the future. Traditionally, the economics of our business has essentially been -- if you invest INR 100 crores, you do a top line of INR 100 crores and an EBITDA of about 20%. What is the blue sky scenario possible in this flooring segment? So let's say, you invested INR 1,100 crores. So over a 5-year period, what is the peak turnover potential? And what sort of margins we can do on that investment?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [32]

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So look, it's early days. But by and large, let's say, this is the way we are looking at this. This is that -- this INR 1,100 crores of CapEx is a starting point. So because, let's say this, we have created a funnel-like capacity, so there is no point in putting all the investment in all the processes upfront. So we've actually staggered some of the processes, future capacities for the future.

So but just give or take, after this INR 1,100 crores, we, let's say, we invest another couple of INR 100 crores. So if you get a (inaudible) INR 1,300 crores over a 5-year period of INR 1,300 crores to INR 1,500 crores of investment, it's capable of generating a 2x, let's say, this kind of top line.

Now look, there's some work as a company that we need to do, so INR 3,000 crores is not a small business. So there's work that the company will need to do. But you ask me the potential, so the potential is the capacities that we are setting up as we invest about, let's say this, INR 1,300 crores to INR 1,500 crores could actually generate a INR 3,000 crores, this revenue [docket] across all the 4 products that we are intending to do. And the margins will be this year about, let's say, the home textile business. So this -- we are hoping that the margin should be similar to the business that we are currently looking at. So not really -- this -- in the early years, it will not be because of the obvious reasons that operating leverage will not come. But as the business matures, this 16% to 20% kind of margin on a steady-state basis should not be difficult.

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Nisarg Vakharia, Lucky Investment Managers Private Limited - Analyst [33]

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So if I go as for your guidance, sir, actually, it will be over a 5-year period your talking of creating a (inaudible) within your organization. Wish you all the best, sir.

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [34]

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(inaudible) if you allow us to run our business, and we are too small in this space to be even talking about the leaders here. And so right now, we are focused on that sort of building our category, and it's an alternate kind of flooring. So we are not into ceramics, and (inaudible) obviously, we are not targeting that as well. So we are pretty excited with what's going on and with what we are seeing. So at least, where we are going, we are seeing very favorable response, and everybody likes the products, everybody is liking the approach that we are taking both in the domestic as well as the international market.

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Operator [35]

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The next question is from the line of Riddhesh Gandhi from Discovery Capital.

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Riddhesh Gandhi, [36]

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Congratulation on your numbers. I have a quick question with regards to how much of your increase in profitability is driven by the increase in RoSL. And there is a little bit of chatter that the MEIS will go away. Is there expectation that there'll be incremental RoSL [giving off] some other subsidy or then -- or could that potentially impact our margin going ahead?

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Altaf Jiwani, Welspun India Limited - CFO [37]

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Riddhesh, if you see, our material cost has gone up by about 2.4% [starting] the current quarter compared to same quarter last year. (inaudible) INR 49,500 compared to INR 44,500 last year, same quarter.

Now you're right, MEIS actually, it can go away any time. So you never know when it will happen. So it's not a question of whether, it is only a question of when.

And all our plans, actually, which we have prepared are actually based on that scenario, where MEIS will not be there. And therefore, the guidance, which we have given 19% to 21% is after considering all the scenario. And we are confident that the kind of mitigation impact initiative, which we have taken will actually make sure that we achieve this kind of -- our annual guidance. We might see a quarterly movement. But for the annual, we are very confident we'll be able to achieve that.

Now the other side of this story is also you are seeing a kind of drop in the cotton prices, the yarn prices, the commodity prices. So that is also reflected. That will also help improve the margins going forward. So we expect that the impact of this should get mitigated through various initiatives, which we have planned during the year.

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Riddhesh Gandhi, [38]

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So if we look at the quarter, effectively speaking, it has an incremental impact of MEIS. And then in the event that it goes away, you expect that to be offset by lower RM cost is it?

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Altaf Jiwani, Welspun India Limited - CFO [39]

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Yes, that is one initiative. Other is also looking at the growth and third, is looking at new products.

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Operator [40]

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The next question is from the line of Nitin Agarwala from JM Financial Limited.

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Nitin Agarwala, JM Financial Institutional Securities Limited, Research Division - Research Analyst [41]

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Sir, just to clarify, so whenever MEIS goes, we still have a RoSTCL of 8.2% and Duty Drawback of 2.6%-plus input tax credit. Am I correct?

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Altaf Jiwani, Welspun India Limited - CFO [42]

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Yes, that's right. Yes.

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Nitin Agarwala, JM Financial Institutional Securities Limited, Research Division - Research Analyst [43]

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Okay. And there is no time line given on when MEIS will go. Because yesterday news, it was there that there is a note which is floating in the cabinet that this RoSTCL will be coming in other industries too, and MEIS will eventually fade out. So nothing impacting on home textile as of now.

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Altaf Jiwani, Welspun India Limited - CFO [44]

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So within -- definitely, it's a question of when. So we don't know. Your guess is as good as mine when it will happen. But it is definitely going to go.

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Nitin Agarwala, JM Financial Institutional Securities Limited, Research Division - Research Analyst [45]

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Okay. Sir, my second question is, in last quarter, you said that for FY '20, our hedge is at -- [final] hedge is at 73, which will start kicking in from first quarter. But when we see in other income also, there's just a $33 million of forex gain and in other expenses there's a $52 million of expense. So where is this gain of 73 hedges coming in? Is it coming in this quarter? Or will we see it in coming quarters?

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Altaf Jiwani, Welspun India Limited - CFO [46]

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So actually, see, our -- 60% of hedges were at around 71, 72 in Q1. And the remaining was actually settled at the spot level. So we -- and we expect the exchange rate for Q2 should be better than Q1. Because as you know, last year, in the Q2, (inaudible) almost 74. And so whatever hedges we have, we are carrying since then (inaudible) at a higher rate.

As far as your question about the INR 5.17 crores is concerned which is into other OpEx because that's a realignment because rupee has appreciated towards the end of the quarter. So the closing rate was 69.02. So all of our [debtors] get realigned at that level. So whatever we sell during the month, we actually value at spot and then realign at the end of the quarter. So that is an impact of the realignment of debtors .

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Nitin Agarwala, JM Financial Institutional Securities Limited, Research Division - Research Analyst [47]

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Okay. So even in next quarter hedge deals which we get at 73, 74 will be recorded in top line?

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Altaf Jiwani, Welspun India Limited - CFO [48]

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Yes.

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Operator [49]

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The next question is from the line of Naushad Chaudhary from Systematix Group.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [50]

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Two questions on our flooring business, in terms of the pricing strategy. What are our strategies for all these 4 segments in terms of our pricing versus import prices?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [51]

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So we are going to benchmark, let's say, this on a -- landed cost basis. And so it's early days, we have this formulated for each of the product categories a pricing strategy. But by and large, this -- you know, (inaudible) on a equivalent of landed cost basis, and that is how we are going to price product.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [52]

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Okay. And when you talk about that around 15% to 17% ROI you will get from this investment, what price base would have taken to get that number, sir?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [53]

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So the product existing prices in the market and -- so this -- all these numbers that I'm speaking to you about are based on -- and as I told you, this year, already had a INR 5 crores kind of a run rate. So there is some, let's say there's evidence now in terms of what product is selling where and at what price. So this -- this our assumptions are actually based on that.

I think the volume and the trajectory of growth in top line is -- are the questions that I think that we need a little more time to answer. And as we penetrate the network a little deeper, we will have better clarity. But by and large, from a pricing perspective, we are fairly even (inaudible) now.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [54]

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I'm just trying to understand whether the demand has (inaudible)

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Operator [55]

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Sorry to interrupt, Mr. Chaudhary, you are sounding low. Can you please speak louder?

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [56]

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Is it better now?

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Operator [57]

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Yes.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [58]

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I was just trying to understand whether the demand of these products would be driven by the better price compared to imported products or the lesser, lead time. And what would be the key drivers for these products versus imported product?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [59]

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(inaudible) the B2B side, as I said, is we believe that this shortening the lead times will be a critical success factor for us and it'll actually this generate more demand. And this will shift more, let's say, this commercial premises into our product categories.

And look, we don't want to be margin spoilers and destroy pricing in the marketplace. Which we'll be the last people to do that. But if we want to play, let's say, fairly and squarely, we don't want to destroy this pricing, and we don't want to destroy margins. So we'll take it -- this very cautiously. So that the business in the future remains profitable, and we don't become so aggressive in our greed to grab [purses,] a quick market share that we actually end up destroying future profitability.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [60]

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Okay. Any specific geography you'll be focusing first? Or you'll be...

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [61]

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(inaudible) on India, 50 cities (inaudible) penetration. So by the end of this financial -- by March start 2020, which we will be available in at least 50 cities. This is through, let's say, the shopping shops or dealers and exclusive showrooms by our distributors. So we will be there. As I said, at least 50 cities, if not more.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [62]

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Okay. Any initial teething issues you see in the plan, sir.

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [63]

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It's early. Right now, the machines are getting erected and commissioned. So this -- so we are hoping that -- and these are all world-class equipment. So there shouldn't be -- this all things -- just being fair -- there shouldn't be this hiccup that we should not able to work out before the end of this quarter. So as of now, we believe that we are good to go (inaudible) towards the end of September.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [64]

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Last question. At what level of utilization we should get our desired margin from this, sir?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [65]

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About INR 750 crores [-- let's say,] this revenue of about INR 750 crores to INR 1,000 crores should start delivering, let's say, this -- the margin, the numbers that we discussed.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [66]

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Okay. And overall, expected revenue from this investment is around how much?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [67]

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As I said, we -- let's say, that right now, that we have built the capacity like in a funnel shape. So over a period of 4 or 5 years, this INR 1,500 crores kind of an investment is capable of generating INR 3,000 crores in revenue.

Now I'm not saying we are going to generate that INR 3,000 crores, but need to get [started] more penetration, with more experience to actually determine at what trajectory we are going to grow and what kind of market share we are going to get. But over a 5-year period, it will be definitely in 4 digits, and there's -- and much more than that from, let's say, just the earlier signals that we are getting.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Research Analyst [68]

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Sir, about this initial INR 1,100 crores of investment would start giving us?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [69]

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Good for INR 1,000 crores of revenue.

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Operator [70]

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The next question is from the line of Sachin Kasera from Lucky Investment Managers.

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Sachin Kasera, [71]

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Congrats for a good set of numbers. Can you give some sense? You mentioned that the realization of 69.5% for the first quarter based on the current hedges, what are the type of realization we can expect, say, for Q2 and for the full year?

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Altaf Jiwani, Welspun India Limited - CFO [72]

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So Sachin, (inaudible) put the number because 40% at what level the spot will remain...

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Sachin Kasera, [73]

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Assuming the current spot rates, sir?

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Altaf Jiwani, Welspun India Limited - CFO [74]

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Yes. In terms about -- between 71.5 and 72.

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Sachin Kasera, [75]

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Okay. So essentially, does it mean that then there could be some offset to the margins? Or because we are going to start the flooring project, part of this incremental margin, the base business will be [complementary as] lower margin in the flooring business.

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Altaf Jiwani, Welspun India Limited - CFO [76]

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So Sachin, we don't give actually quarterly guidance for margin, it is the annual guidance...

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Sachin Kasera, [77]

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(inaudible) for the full year. Because -- it is 21 in this quarter, and we are assuming the current spot rate, then the realization should be have at least 2.5% and 3%.

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Altaf Jiwani, Welspun India Limited - CFO [78]

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Yes.

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Sachin Kasera, [79]

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And you also mentioned that RM prices are supposed to come down.

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Altaf Jiwani, Welspun India Limited - CFO [80]

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Yes. Sachin, you have to look at the full year average also because you'll not be able to extrapolate based on Q2 average. So it is -- 19% to 21% guidance includes the impact of the flooring also for the second half of the coming financial year.

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Sachin Kasera, [81]

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Okay. Second thing was on the CapEx. There is a mention of INR 600 crores for the full year. So how much of that will be towards the flooring? And how much will be the traditional home textile business, sir?

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Altaf Jiwani, Welspun India Limited - CFO [82]

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Flooring will be about -- so we have done only INR 160 crores. We'll do another INR 250 crores to INR 300 crores in the remaining part of the year. And remaining will be our home textile.

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Sachin Kasera, [83]

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So essentially, INR 400 crores to INR 450 crores will be flooring and INR 150 crores, INR 200 crores will be the traditional home textiles. And since this was one of the large CapEx that we were doing in last couple of years and you also mentioned that in the next 2 to 3 years, we target to become debt-free company, so is it debt from FY '20 onwards, the CapEx intensity is going to come down from the INR 600 crores?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [84]

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Yes, yes. There's no big bag CapEx that we are looking at right now. So I think that the chunky CapEx is behind us now. So with this INR 1,100 crores of investments in the flooring business. I think all chunky CapEx is behind us. And from here on, it will be just maintenance CapEx, balancing CapEx and so on and so forth. So you should see substantial reduction in borrowings from the next year, including this year also. So this -- even this year, we have started (inaudible) borrowings are going to reduce in this year itself.

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Sachin Kasera, [85]

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Sure. Sir, you mentioned that approximately 3.5% to 4% of the growth was from the base business. This was contributed by benefits and higher exchange rate. So -- but you mentioned that Q2 onwards, you expect some pickup in some of the segments. So for the full year, what are the types of growth we can see in the base business [including] the volumes or realization (inaudible)

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Altaf Jiwani, Welspun India Limited - CFO [86]

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Sachin, we don't give a breakup for the full year, actually. Because 10%, this double-digit growth guidance includes all the 3 impacts actually, so volume, exchange as well as the new businesses. So while the new businesses will continue to grow at 30% plus emerging businesses, advanced textile and retail. And the flooring business will add that INR 150 crores to INR 200 crores of revenue, which is not there in the base.

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Sachin Kasera, [87]

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Sure, sure. There was a mention that around INR 750 crores of run rate when we achieve, we will get to the desired margins. So based on the current visibility, you think it will take 3, 4, 5 quarters before we achieve that? Or we think the type of position we are...

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [88]

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I don't want to [stick my leg out] -- as I said this, we need some more experience, let's say, to determine the trajectory of growth. And as we have better handle on [service there, as] the plan starts, within a couple of quarters, we will know. So it's better that as we wait for that time. So right now, we are in a -- what we have learned is that there's -- where are the prices hitting. So because we have generated some revenue, that as we know where prices are hitting. But the trajectory at which the business will grow [the service,] I think this will need some more -- spend a few more quarters to really get a handle on that.

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Sachin Kasera, [89]

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Sure. And just lastly, sir, will you be able to help with the utilization levels across the various product segments currently?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [90]

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(inaudible) so we need some more experience, as I told you...

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Sachin Kasera, [91]

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I'm talking of the traditional businesses, what was the utilization for the quarter?

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Altaf Jiwani, Welspun India Limited - CFO [92]

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Traditional, we give utilization figures annually, Sachin. So last year, we had 82% for towel. 85% -- 88% for bedsheet. And I think about 70% for rugs. So we give this figure on annual basis.

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Operator [93]

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

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Arjun Sengar, Reliance Nippon Life Asset Management Limited - Research Associate [94]

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Congrats on a good result. I missed the opening remarks. Can you please give me the split of your revenue growth which is 10%? How is that between the volume, currency gain, et cetera? Sorry I missed that part.

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Altaf Jiwani, Welspun India Limited - CFO [95]

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Yes. So it was -- 4.8% is the currency impact, 3.4% is the RoSTCL impact, and 3.4% is the volume impact.

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Arjun Sengar, Reliance Nippon Life Asset Management Limited - Research Associate [96]

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3.4% is the volume growth?

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Altaf Jiwani, Welspun India Limited - CFO [97]

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Yes.

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Arjun Sengar, Reliance Nippon Life Asset Management Limited - Research Associate [98]

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Sure. Also, can you just give us some commentary on the retail market in U.S.? You mentioned that scenario there is -- retailers are calibrating -- recalibrating the offtake. Can you just elaborate a little bit more on that in terms of what that means for demand going forward?

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Altaf Jiwani, Welspun India Limited - CFO [99]

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So as far as -- see the growth, the pie size continues to grow. The expectation is that the growth rate will slow down. And in anticipation of that slowdown, the retailers are probably looking at recalibrating their offtake. So that -- nobody wants to sit on a very large, a heavy pipeline. That is the impact which we will see going forward. But as we head towards the holiday season, we might see that this situation possibly could be recalibrated. But as of now, we are seeing a kind of a, muted, a lukewarm offtake which is there.

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Arjun Sengar, Reliance Nippon Life Asset Management Limited - Research Associate [100]

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Sure. And lastly, what is the current status of this class action suit?

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Altaf Jiwani, Welspun India Limited - CFO [101]

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So we have received the preliminary approval from the court. For the settlement agreement, which we have signed, which we can get to resolve all the issues which were there. We expect the -- difficult to put a time line on the exact time, the process -- because it's a court process. But we expect to finalize everything during current financial year. So the final hearing is scheduled somewhere in the...

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Arjun Sengar, Reliance Nippon Life Asset Management Limited - Research Associate [102]

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Hello? Hello? Yes, I think there are some (inaudible)

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Altaf Jiwani, Welspun India Limited - CFO [103]

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Yes, so I said for this settlement, we have received the preliminary settle -- approval from the court, and we expect that during the current financial year, we should be able to [close the full] settlement. The final hearing is scheduled somewhere end of October.

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Arjun Sengar, Reliance Nippon Life Asset Management Limited - Research Associate [104]

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And one more question, sir, on the margin. We have seen a 560-basis-point improvement in our EBITDA margin on a Q-o-Q basis versus for the (inaudible) FY '19. So how do we explain that?

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Altaf Jiwani, Welspun India Limited - CFO [105]

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If you recollect, this RoSTCL was introduced (inaudible) 7th March. So this quarter, we have seen a full year -- a full quarter impact.

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Arjun Sengar, Reliance Nippon Life Asset Management Limited - Research Associate [106]

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So that would have been somewhere between 200 to 300 bps, right, that positive impact.

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Altaf Jiwani, Welspun India Limited - CFO [107]

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Yes.

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Arjun Sengar, Reliance Nippon Life Asset Management Limited - Research Associate [108]

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Or was it that the Q4 margin was abnormally low?

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Altaf Jiwani, Welspun India Limited - CFO [109]

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So it had both impacts, one is the exchange as well as the RoSTCL in (inaudible)

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Operator [110]

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The next question is from the line of [Neeraj Kumansingkang] from Goldman Sachs Asset Management.

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Unidentified Analyst, [111]

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Congrats on the numbers. Sir, few questions. One was, what was the revenue growth in the domestic sales of towels and bedsheets?

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Altaf Jiwani, Welspun India Limited - CFO [112]

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[Neeraj], we are seeing 30%-plus growth in Q1, so in the domestic market.

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Unidentified Analyst, [113]

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Okay. And what is the proportion of revenues right now?

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Altaf Jiwani, Welspun India Limited - CFO [114]

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Domestic market, actually, as we mentioned, we had actually crossed the INR 200 crores of milestone on an annual basis for domestic retail business, and we are continuing to grow at 30%. So both our emerging businesses, advanced textile as well as retail crossed INR 200 crores of threshold last year in top line. And both these continue to grow at 30% in the current quarter.

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Unidentified Analyst, [115]

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Okay. Can you give some more color on the technical textiles? And you had also said that -- you said that you can easily grow revenue by 50% without doing CapEx. Can you also give some color on how much margins can you make on the gross margin side and where are the market sizes and how much investment you can need to be done to scale up further from here?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [116]

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So [Neeraj], Rajesh here. Yes, so right now, see this -- so there are 2 or 3 -- the areas that we are currently operating in. One is, of course, hygiene. The other one is filtration. And so these are the 2 areas that we are currently operating in. And this both are -- so one thing is that both are decently profitable area. The growth -- the global growth rates in these products is in the range of 9%, 10%. And these are the fastest growing, let's say, categories in all of textiles, including this nonwoven and woven when all put together. So this is the fastest part of growing (inaudible) in textiles.

The market is $60 billion, $70 billion, if you take it in aggregate, the product, let's say, we are operating in a narrower part. So right now, this is what investments that we have committed, the business is capable of going to, let's say, with INR 350 crores from the current level of about INR 200 crores. We see from there just in terms of what further specialization that we need to go and this all -- what is it that we need to specialize in. So right now, we are currently focused on what we have. And (inaudible) further operating leverage used for the full capacities within -- in both parts of our business.

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Unidentified Analyst, [117]

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And so most of the revenue would be the export or the domestic side?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [118]

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It is a mix of both. So the filtration is more domestic, also we are looking to develop international markets in that. And the hygiene businesses is a mix of both domestic as well as export, more exports than domestic.

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Unidentified Analyst, [119]

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Okay. And sir, last question. On the -- the carpet -- the tile side, what was the average realization of the tiles [median size?]

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [120]

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So this -- let's say this, so the tiles will be in the INR 175 to INR 200, let's say, the cost of ownership range. And so the cost of owning, installing a tile to a final consumer will be in that range.

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Unidentified Analyst, [121]

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INR 175 to INR 200 per square feet?

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Rajesh Ramesh Kumar Mandawewala, Welspun India Limited - MD & Executive Director [122]

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Yes, yes, yes.

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Operator [123]

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Ladies and gentlemen, due to time constraint, that was the last question for today. I will now hand the conference over to the management for closing comments.

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Altaf Jiwani, Welspun India Limited - CFO [124]

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Thank you, ladies and gentlemen, for joining this con call. And we'll be happy -- if you have more questions, you can please reach out to Harish, and we'll be happy to answer those. Thank you.

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Operator [125]

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Thank you very much. On behalf of Equirus Securities Private Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.