Himatsingka Seide Limited (HIMATSEIDE) Q2 FY23 Earnings Concall Transcript

Himatsingka Seide Limited (NSE: HIMATSEIDE) Q2 FY23 Earnings Concall dated Nov. 15, 2022

Corporate Participants:

K.P. Rangaraj — President – Finance and Group Chief Financial Officer

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Analysts:

Prerna Jhunjhunwala — Elara Securities (India) Private Limited — Analyst

Umamaheswaran B. S. — Kotak Mahindra Bank Limited — Analyst

Roshan Nair — Batlivala & Karani Securities India Pvt. Ltd. — Analyst

Vikram Suryavanshi — PhillipCapital (India) Pvt Ltd — Analyst

Srinivasan Krishna Kumar — Lion Hill Capital Private Limited — Analyst

Mithun Aswath — Kivah Advisors LLP — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Himatsingka Seide Limited Q2 FY ’23 Earnings Conference Call Hosted by Elara Securities Private Limited. [Operator Instructions]

I now hand the conference over to Ms. Prerna Jhunjhunwala from Elara Securities. Thank you, and over to you, ma’am.

Prerna Jhunjhunwala — Elara Securities (India) Private Limited — Analyst

Thank you, Inba. Good evening, everyone. On behalf of Elara Securities India Private Limited, I would like to welcome you all for Q2 FY ’23 post result conference call of Himatsingka Seide Limited. Today, we have with us the senior management of the company, including Mr. Shrikant Himatsingka, the Managing Director and CEO; Mr. K. P. Rangaraj, President, Finance and Group CFO; and Mr. Dilip Panjwani, Executive VP and CFO, Strategic Finance.

I would now like to hand over the call to the senior management of the company and post which we will take the Q&A session. Thank you, and over to you, sir.

K.P. Rangaraj — President – Finance and Group Chief Financial Officer

Thank you, Prerna. Good afternoon, ladies and gentlemen. This is Rangaraj, President, Finance and Group CFO, Himatsingka Seide Limited. Let me, first of all, welcome you all to this Q2 FY ’23 earnings call. As always, I will start this with a short business update, followed by some comments on the financials, and the floor will be opened to question-and-answers by — addressed by our Managing Director, Mr. Shrikant Himatsingka.

So first, starting with the business update. Q2 FY ’23 and the first half of the fiscal year, operating performance have been severely impacted by raw material inflation, energy inflation, and inventory correction initiatives that were undertaken by global clientele. Therefore, both operating margins and total income have been impacted during this period. As a result of the above, capacity utilization across all our plants was marginally impacted during the quarter. The capacity utilization for our manufacturing facilities during the quarter stood as follows: the Terry Towel division recorded 56% capacity utilization versus 54% in the previous quarter, Sheeting division recorded 53% against 55% in the previous quarter, and the Spinning division recorded a capacity utilization of 75% against 78% in the previous quarter of this fiscal year.

During the quarter, revenue streams from brands stood at INR402 crores versus INR575 crores during the previous year and INR439 crores in the previous quarter. Our first half financial operating performance is in line with our expectations, given the headwinds we faced on account of raw material inflation, energy inflation, supply chain challenges, and inventory correction initiatives undertaken by global clientele. As shared with stakeholders earlier, we expect progressive recovery on the operating performance front going into H2 of this fiscal year. We’ve already begun to see the easing of cotton prices with the arrival of ’22-’23 cotton crop, and in addition, we’re also witnessing the easing of supply chain congestion and disruptions over the last couple of months. We continue to be focused on rationalizing our inventory levels to drive more efficient working capital cycles.

I now move on to comments on financial performance. The consolidated total income for the quarter stood at INR639.68 crores versus INR816.21 crores in the previous year. This represents a decline of 21.6% year-on-year. Consolidated EBITDA for the quarter stood at INR52.68 crores versus INR144.55 crores in the previous year. The EBITDA margin for the quarter stood at 8.2% versus 17.7% in the previous quarter. Consolidated EBIT for the quarter stood at INR11.34 crores versus INR104.41 crores in the previous year. The consolidated PBT for the quarter stood at a loss of INR56.57 crores versus a profit of INR63.34 crores in the previous year. Finally, the consolidated PAT for the quarter stood at a loss of INR33.89 crores versus a profit of INR48.03 crores in the previous year.

Some comments on debt. The consolidated gross debt as of the 30 September ’22 stood at INR2,898 crores compared to INR2,977 crores at the end of the previous quarter. The total term debt stood at INR1,694 crores, and the total working capital debt stood at INR1,204 crores. The cash and cash equivalents stood at INR125 crores as of 30 September. In addition, the total amount of unsold RoSCTL scripts stood at INR150 crores as of the 30 September ’22. Consequently, the company’s net debt outstanding as of 30 September stood at INR2,773 crores compared to INR2,797 crores at the end of the previous quarter.

With this, I would like to complete my update. We’ll be happy to take on your questions now. I now hand over the call to our Managing Director, Mr. Shrikant Himatsingka.

Operator

Mr. Himatsingka, could you please unmute your audio, sir?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Yeah.

Operator

May we open the line for questions now?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Yeah. Am I audible?

Operator

Yes, sir.

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Okay.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from the line of Umamaheswaran B. S. from Kotak Bank.

Umamaheswaran B. S. — Kotak Mahindra Bank Limited — Analyst

Good afternoon, Mr. Shrikant.

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Good afternoon.

Umamaheswaran B. S. — Kotak Mahindra Bank Limited — Analyst

Yeah. Thanks for this call being arranged. Just wanted to understand how was the segmental sales Terry Towel vis-a-vis Bed Linen? How are these two segments shaping up? How has the performance of Terry Towels been in Q2 versus [Indecipherable]?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

We don’t share the revenue breakup between Bath and Bedding. As the total revenue stream comprises of pretty much entirely Home Textile. So it is some of our Bedding and Bath division. But to answer or throw more light on your question in terms of how both the divisions are doing, so as we’ve highlighted to stakeholders, the first half of this fiscal was going to be strained given the reasons that Mr. Rangaraj cited, that of extreme levels of raw material inflation and energy inflation coinciding with an overbought inventory situation across global markets. And so this combination obviously did not augur well for the operating performance of the company during this time, which is something we were transparent about with stakeholders. Our operating performance is in line with what we expected.

But other than the short-term challenges, the ramp up of the Terry Towel division has been progressing well. At the close of FY ’22, the division had notched up over 70% utilization. Do keep in mind that this is a new unit of the group, and it was commissioned as recently as Q3 FY ’20. And subsequently, it lost time during the post-COVID situation in terms of operations, but it saw one of the fastest ramp-ups in capacity utilization during the last fiscal. So I think as soon as some of these conditions improve, which I estimate will progressively improve starting the second half of this fiscal, as we have outlined, and we should head towards normalcy post that.

We are confident and optimistic about our Terry Towel division and its contribution to the Home Textile unit. And as far as Sheeting is concerned, in our business portfolio that’s part of our mix for a much longer time. And I see broad stability on that front. But I see more growth probably coming from this vast [Phonetic] division in terms of trajectory going forward. But overall, I think stability is shaping — resuming as we go along progressively. And Terry Towel has seen a good ramp-up during FY ’22. We’re seeing the short-term challenges as we have outlined, but with progressive recovery I think that should get back as well.

Operator

[Operator Instructions] The next question is from the line of Roshan from B&K Securities.

Roshan Nair — Batlivala & Karani Securities India Pvt. Ltd. — Analyst

Yeah. Thanks for the opportunity. Sir, in first half, we saw capex of around INR38 million. So what should we see for FY ’23 and FY ’24? What capex are you planning to deploy in FY ’23 and ’24?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

I’m not sure where you’re getting this number of INR38 million from. We’ll be happy to discuss this offline. But Roshan, our capex outlays and view on capex is extremely clear as far as we are concerned. At this point, we are focused only on our organic capex cycle, which is typically INR60 crores to INR80 crores a year, and nothing more than that. We are only focused in making sure that we head back to normalcy after these short-term headwinds that we have witnessed of late. And we are not capex driven [Phonetic] at all. So our capex will be light. Our major capex cycle is over. And we will — we are focused on shaving [Phonetic] our assets and making sure that they deliver as we had set out to deliver. We are indeed running behind schedule on that front for reasons that I’ve outlined. But most certainly, our capex will be broadly contained in that vicinity. There could be some minor movements here and there, but nothing of major levels.

Roshan Nair — Batlivala & Karani Securities India Pvt. Ltd. — Analyst

Okay. That helps. And on the debt front, do you have any plans to reduce debt as in some internal targets as such?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Yeah, so gross debt corrected by about INR100 crores from last quarter. And we are — we have also made our stance on debt fairly clear, which is as soon as we are done dealing with the short-term headwind, which is making our deleveraging exercise run behind schedule, as soon as we see this progress and recovery come through, we should also continue to see the deleveraging exercise pan out because, as I said, our major capex cycle is over. We will be sticking to our organic capex only and the rest of the accruals will be channeled towards debt reduction. If there’s something that is on our plate which is over and above this, we will let stakeholders know. But at this point, we are focused only on this.

Roshan Nair — Batlivala & Karani Securities India Pvt. Ltd. — Analyst

Okay. That’s all from my side. Thank you.

Operator

Thank you. Our next question is from the line of Vikram Suryavanshi from PhillipCapital. Please go ahead.

Vikram Suryavanshi — PhillipCapital (India) Pvt Ltd — Analyst

Yeah. Good evening, sir. Basically, I just wanted to possibility or how is the situation of raw material import because we do import significant amount of raw material. So how is our mix for cotton import compared to past? And I guess there was a duty-free import allowed. How is the current situation? Is there any duty on that? I just want to get update on that.

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Yeah. So I’ll divide the raw material update in two buckets, domestic, imported. So on the domestic front, you may see cotton prices cool off with the arrival of the new crop. And of course, it’s not started on the 1st October, but on a weighted average basis, it’s coming down gradually, which is a good sign. And it’s going to help the operating performance. International raw material prices have also softened or begun to soften over the last 45 days or so. And the company continues to use imported cotton as well. So depending on the variety of cotton, the weighted average costs will be marginally different, but that has also started to cool off. So, as we go forward, we should progressively see this benefit coming. As far as the duty is concerned, yes, there is a short holiday for the duty. However, the government has not made clear its stance on what the duty structure and quantum will be going forward. So one has to wait and see what they announce.

Vikram Suryavanshi — PhillipCapital (India) Pvt Ltd — Analyst

Okay. But is our import quantities around 50% or so or higher than that?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

No, on a total portfolio, it’s probably lower than that.

Vikram Suryavanshi — PhillipCapital (India) Pvt Ltd — Analyst

Okay. And second, on your outlook on how the inventory level in USA are setting up going forward and how much time it will take to normalize, what are the industry expectations on that front? And second thing is on opening up of the opportunities with the FTA in Australia and how is the industry feedback on possibility of FTA with EU? Any development on that front?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

I think we are progressively seeing the easing out of some of the initiatives that our global clients had undertaken on the inventory correction front. So it is not as intense. And some of them have concluded whatever they were set out to achieve, and they’re slowly inching back to normal order cycle. So we should see progressive improvement on that front. As far as the inventory easing initiatives were concerned, we feel that we will see the gradual easing off of that.

As far as the impact and positives coming in through initiatives being taken by India on the FTA front. Thematically, it is most definitely going to be an opportunity not just in home [Phonetic] textile but in various sectors of textile. But at this point, the FTA with the U.K. is still pending. And what we’ve signed with certain other jurisdictions are not necessarily, at least the [Indecipherable] is concerned, then it’s thematically positive, but they are not going to be number swingers in the short term. I think the U.K. will be a larger opportunity in size, even when it comes through. So that’s how I see the FTA part play out.

But I must comment here that there are other themes in favor of, A, the industry; and B, India, as far as home textiles is concerned and at least in our view. And there’s other themes which is the China Plus One theme that continues to hang in there. And we feel that will continue to play out. And we’re also seeing relative instability in other jurisdictions for various reasons, which could present opportunities for India in the short- to medium-term or long-term going forward, including issues coming in from jurisdictions like Pakistan and opportunities coming in for India in that context.

So the themes — the macroeconomic regulatory/policy driven/balancing driven themes are not limited just to FTAs, but also the market players [Phonetic]. I feel that the medium- to long-term perspective and prospects for our industry undoubtedly remain strong, and we remain optimistic about the fundamentals in the medium-to-long term. These short-term headwinds have caused a little bit of a setback in terms of achieving some of the targets we have set out to achieve and so on. But that’s something that’s purely external in nature, and we will have to just wait it out. But I think the worst is behind us, and we should see progressive recovery going forward.

Vikram Suryavanshi — PhillipCapital (India) Pvt Ltd — Analyst

Okay. Got it. And last question from my side just to try to understand from your end. What we have seen is that with the ban on Xinjiang cotton, a lot of Chinese actually cotton yarn is also getting to Indian market, either directly or through Vietnam. And we have seen that impact on our domestic cotton yarn prices. So I just wanted to say, though, we are primarily in export market like USA and Europe, and particularly for USA, you might be using the Indian cotton or imported cotton. But is that actually impacting the overall pricing situation in the cotton and cotton yarn. So are the customers in export market taking it separately and ready to pay higher premium for our product or will they ask us to price products based on the overall market — commodity market situation? So that I just wanted to understand from your end, how that is impacting the overall profitability or business for the exporters.

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Our own opinion and perspective on this is our global clients will most certainly benchmark yarn and cotton prices towards reasonable and what is considered average when compared to competing jurisdictions by these people. They won’t give us a premium just because of some of our raw material inputs are not expensive than others. But I don’t think that’s ever happened in this industry. And I don’t think we, as a jurisdiction or as a company, are materially off on pricing either. There could be some minor variations in the ordinary cost. But I don’t think we are materially off in most product categories. There could be a couple of exceptions in product categories where India is less competitive, but in the areas that we operate in and compete in, I don’t think there is material differences in raw material input per se.

What could cause material differences in input prices is if we had own contracts on certain varieties of cotton and they are continuing to be used, then until such time that these old contracts last and the fact that they’re higher than current market prices, to that extent, we will be worse off. But I think that’s company-centric issue, depending on which company has that contract. So in conclusion, I don’t think that in our industry and vis-a-vis what we operate in, our raw material prices are materially or significantly off from counterparts. And the second conclusion is, to the best of our knowledge and in our opinion, our clients will not pay us a premium based on our input prices per se which are specific to us. They will be more focused on global averages and industry benchmarks. But they do pay us a premium for innovation, brands, services, which are more holistic or more integrated than others, and specialized products and so on and so forth. So those are buckets that will attract premiums, not inherent cost structures.

Vikram Suryavanshi — PhillipCapital (India) Pvt Ltd — Analyst

Understood. That was very helpful, sir. Thank you very much.

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from the line of Krishna Kumar S. from Lion Hill Capital. Please go ahead.

Srinivasan Krishna Kumar — Lion Hill Capital Private Limited — Analyst

Good evening, Mr. Shrikant. I know times have been very tough. But just to understand, sir, from a market perspective you have explained that things will get better from here. But particularly in terms of pricing, if you could give us some more color, sir. Because right now, our gross margins are down to 50% from probably a much higher level, which probably means that we haven’t been able to pass through the costs. You explained to the previous participant that being a highly more brand-oriented player, is it — should we expect in the near future that the price pass-through will happen and the margins should get restored at a gross level — gross margin level? If you could give some perspectives, sir, in terms of how do you see the pricing playing out?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Krishna, thanks for your question. So, as I said earlier, look, the Himatsingka and the industry, in general, but I’m talking about Himatsingka, we’ve had extreme headwinds for four quarters now vis-a-vis raw material prices. It started in Q3 FY ’22 in terms of really hitting our operating performance. It continued during Q4, and we had then spoken with stakeholders that we are likely to see this in the first half of FY ’23 as well, and in fact, probably with greater intensity and that’s what happened.

So now it’s eating into our gross margins, it’s therefore eating into our EBITDAs, and this recent inventory correction exercises has exacerbated the impact of these events. But we have to take this in our stride. These are rare events and challenges the industry has faced. It’s not something that the industry faces every couple of years. [Indecipherable] has been operating in this space for over 15 years. It’s the first time we’ve seen it as extreme as this. But looking forward, I feel that there is progressive recovery that’s going to happen. The raw material prices have already begun to ease. They’ve come off the peaks by approximately 30% on an absolute basis. On a weighted average basis, it will defer from company to company depending on how much they had of which variety.

But prices have come off by 30% from peak. Supply chain disruptions that existed during the last three, four quarters and as recently as a month or two ago have begun to ease. We also hope that energy inflation will soon ease off. And with this, our gross margins will start heading back to or progressively heading back to normal. So it might take a couple of quarters to get there. But I think — don’t hold me to this, it’s difficult to predict in such volatile times as to how long it will exactly take. I’m not a future teller by any means. So our best guess is this is directionally what we see because if the prices are easing of raw material and some of these other, let’s just say, areas then it will automatically lead to better gross margins we expect we’ll see.

Srinivasan Krishna Kumar — Lion Hill Capital Private Limited — Analyst

Sir, would we have to pass through any benefit of raw material going forward? Like you mentioned, we can’t pass through cost increases. So would we be able to keep the benefits of raw material cost reductions or would we have to share it with the…?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

That’s an excellent question. Look, we will get to keep some, you’ll have to give back some because clients will expect that there is no doubt in the matter. But they also understand where the supply base — suppliers stand and the inflation rate is. So I think it’s going to be a give and take. Net-net, it should have a positive impact. And then there are other tailwinds, including going forward some currency tailwinds and things like that, which will help balance some inflation. So I think, all in all, we should progressively — and I’m stressing on the word progressively — head towards gross margin expansion and reverting back to our operating performance levels as we had.

And as I said, other than the inflation piece, this is also contingent on the demand in the ecosystem coming back to normalcy, which was disrupted in the short term for the reasons that were outlined. And at least in most cases, I see that directionally happening. So this is what we see at this point. And therefore, we have to go through this short-term pain and then head back to our broader performance parameters, which we would normally have.

Srinivasan Krishna Kumar — Lion Hill Capital Private Limited — Analyst

Yeah. Sir, just on the logistics, ocean freight part. Generally, on our business, do we bear it or is it more on the client side? So would we benefit…

Shrikant Himatsingka — Managing Director and Chief Executive Officer

No, no, our business and in this industry, the ocean freight is borne by the client. But the disruptions in oceans — generally, in our case and in this industry, it’s borne by the client for the most part. There could be certain transactions and/or contracts or understandings with clients, where the supplier is required to have inventory in their international warehouses, in which case, to that extent, you would have to bear the expenditure on ocean freight. But as part of the overall portfolio, it’s largely done by the clients.

Inflation was witnessed not just in ocean freight, but even in the inland [Phonetic] freight, which has gone up significantly. And the other challenges that came through because of supply chain disruptions, Krishna, because creating a lot of stir in terms of throughput, in terms of holding up production and so on because it feels we are running behind schedule. One cannot endlessly store products on their shop floor. So these are challenges the industry faces vis-a-vis disruptions, but that’s begun to ease out. Ocean freight costs have begun to come down, corrected by about 30%. And inland freight is still high. But I guess, at some point, we will see some easing out in that area as well.

Srinivasan Krishna Kumar — Lion Hill Capital Private Limited — Analyst

Thank you, sir. Thank you very much and wish you all the best, sir.

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from Prerna Jhunjhunwala from Elara Capital. Please go ahead.

Prerna Jhunjhunwala — Elara Securities (India) Private Limited — Analyst

Sir, just wanted to understand if there are any green shoots visible in the demand recovery today so that we can understand the gradual recovery that you’re talking about. What recovery we can expect over the next six months or one year to just understand if you could give some instances or anything that you can help us to understand the gravity of the issue or improvement in the scenario.

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Well, I think, Prerna, to be honest, we have seen recovery in certain buckets stronger than in certain other buckets. I cannot say whether that’s an industry-centric phenomenon or Himatsingka-centric phenomenon. But I would choose to call it a Himatsingka-centric phenomenon for the simple reason that I don’t know/cannot comment exactly what’s going on with others. But — so the utilization levels that were called out in start of this call, so we see our utilization levels in our steel plant heading back north. So they are already, as we speak, crossed the 80% mark and heading towards 85%, 87%. Again, it may not be the weighted average for this particular quarter that we are now in, but it’s headed in that direction. And I think it will go back to being pretty much full.

As far as Terry Towels is concerned, we’re also seeing a lot of positive traction under our bath portfolio. And it should head back over a 6-month period, if not in and around that period. It should head back to the levels that we saw in FY ’22. And once we hit that level, we’ll plan to go beyond that. So utilization levels are running back to pre-drop, I would just call it pre-drop levels. Please keep in mind, last year, we had record revenues of over INR3,200 crores and utilization levels across our plants were healthy, and our Terry Towel plant was ramping up well. So Terry Towel is also headed back in that direction, and I think it’s a comfortable timeframe that you spoke about. So both these buckets are headed back.

Our Sheeting bucket is a little slower than these 2 buckets, at this point, bed linen bucket. So it’s more stable at this point with some positive bias. So we are working on that front. So I think 2 out of these 3 are headed back. This is what we’re seeing on the bedding front. We will keep stakeholders posted on how that’s panning out over the next couple months.

Prerna Jhunjhunwala — Elara Securities (India) Private Limited — Analyst

And sir, we’ve seen some challenge on the brand side also because our brand revenues were at around INR400 crores against INR570-odd run rate that we were having. And most of the known news that we read talk about that retail sales in the U.S. are not that impacted to a large extent, but there is inventory glut in the retailers. Can you just help us understand how we should look at your brand portfolio going forward and what is happening over there?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

I think with the coming — or rather the maturing of our bedding portfolio — sorry, our bath portfolio, which has added a significant number of clients to our roster, and broad-based our client and market mix, I think it’s safe to assume that maybe the percentage of revenues from brands will ease out but that won’t affect our model as such because it’s just that the private label revenue streams are also expanding and maybe they’re expanding at a faster pace than some of our branded revenue streams, simply because of the new capacities that have come onboard and so on.

So our margin structure will not be necessarily impacted because of this change or this change in complexion going forward. But I would, as an expectation, keep in mind that some of our branded revenues might ease out. And in fact, if there are some brands in Himatsingka’s portfolio which we believe are underperforming or creating a drag on our operating performance and so on, Himatsingka will not hesitate to rationalize those parts of its portfolio because we’re not in the business of collecting brands. We’re in the business of leveraging brands to enhance our operating performance. If they are not achieving that objective, then we will make sure that we balance it right.

So I think going forward, our strength and the margin strength is not necessarily positively correlated to what our branded revenues are. As long as they are integral and significant part of our portfolio, I think that in itself gives us a edge in the medium-to-long term. But I don’t think that our financial performance will be driven by the quantum of branded revenues alone.

Prerna Jhunjhunwala — Elara Securities (India) Private Limited — Analyst

Okay. Understood. Sir, just a follow-up on this question on your commentary only that is there — do you think that the branded Home Textile portfolio with U.S. consumers are not finding — they are okay with doing private labels and stuff and they’re not really brand finicky that way as consumers. Is that the change that you are seeing in the U.S. consumer psyche?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

I can’t make a generalization like that. In our experience, they are very alive to brands, and they love brands. They see value in brands and so on. But that doesn’t mean that every brand that one has in their portfolio is going to achieve that objective. Which is why I say that if we feel that there are brands that are dragging — that are creating a drag on our operating performance because of the inherent cost structure of the brand, then we will most certainly make sure that we rationalize that part of our portfolio, even if it means that there is a slight reduction in branded revenue streams in favor of private label revenue streams.

As I said, we are an integrated player that design, develop, manufacture, and distribute a suite of products — textile products. As long as we have a reasonably strong portfolio of brands, as long as Himatsingka is at the forefront of flexibility [Phonetic], as long as our innovation quotient is strong, I don’t think movements in the percentage of our brands as a percentage of our total revenues will make much of a difference to our model. And therefore — yeah, and I think it will also iron-out expectations because we’re not a collector of brands. It’s not our objective that 100% of our revenues comes from brands. That’s not our objective. Our objective is to make sure that we have a good balance between brands and private label revenue streams. And that Himatsingka is driving the right amount of integration, the right amount of services for our clients, and the right amount of solutions for our clients and making sure that our model delivers on being capital efficient, making sure that we’re focused on our themes of deleveraging.

Some of these objectives have obviously not come through in recent times, Prerna, for factors that we’ve shared that are entirely external. It is indeed running way behind schedule in terms of us delivering some of these things. But unfortunately, some of these events are not in our control. So that’s how I see this whole equation of brands and private label going forward. The consumer will always have the affinity for brands and branded propositions. But it’s the supplier that has to be careful about which brands and how much? Because as I said, it’s not necessary that every brand will drive home results.

Prerna Jhunjhunwala — Elara Securities (India) Private Limited — Analyst

Makes sense, sir. Sir, this is quite enlightening and detailed response. Sir, the last question left from my side is on inventory. Just wanted to understand the breakup of inventory in terms of finished goods and maybe WIP are in this quarter end?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

We’ll have to take that offline, Prerna.

Prerna Jhunjhunwala — Elara Securities (India) Private Limited — Analyst

No problem, sir. And is there any write-down that we will have to take because of the price correction that has happened in cotton or input cost?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

No, I don’t think there is any write-down. The price correction in cotton will not surface in the form of a write-down. The price correction in cotton will surface in the form of lower gross margins and it’s anyway what we are facing already. That is the price of higher cotton. But if the market prices have fallen, and as I said, you have some old cotton with a higher price, it will not come in the form of a write-down. It will come in the form of you having lower gross margins than you should.

Prerna Jhunjhunwala — Elara Securities (India) Private Limited — Analyst

Okay. And anything on the finished goods side that we will have take?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

As far as finished goods write-down, nothing to report as of now. As of now it’s okay. We’ve reduced inventory by around INR100 crores from June. So that’s come down. There’s been some translation impact because of the dollar, failing which it could have been even lower, but it’s come down. So we hope to bring it down a little further. But if this cycle goes back progressively up, we’ll see how it pans out. But right now, we’re working on rationalizing the prices.

Prerna Jhunjhunwala — Elara Securities (India) Private Limited — Analyst

Sure, sir. Thank you for the detailed response. Thank you so much.

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Yeah, sure.

Operator

Thank you. Our next question is from the line of Mithun Aswath from Kivah Advisors. Please go ahead.

Mithun Aswath — Kivah Advisors LLP — Analyst

Yes, sir. Two, three questions. I just wanted to understand some of the competitors are looking at India as a growth opportunity. I just wanted to understand what are your domestic sales and any plan to ramp that up as well? That was question one. Question two was, what are your net debt levels currently, and what your cost of debt at the current juncture? And you do mention that the second half should be much better. Any target in terms of margins in the second half that you’d be targeting? And do you expect FY ’24 likely to be more like FY ’22 or is it too early to take that call? Thank you.

Shrikant Himatsingka — Managing Director and Chief Executive Officer

So there are four, five questions in your bucket list. Let me address one by one. I’ll address first question number three. I’m going to just clarify. I didn’t say that H2 will be much better. It could very well be, but what I did say is we will progressively improve operating performance as we go into H2, right, for the reasons that raw material prices are easing out, some of the supply chain congestion issues and challenges are easing out, and the inventory correction initiatives which were undertaken by our global clients and customers seem to be coming to a close in some cases; the intensity is coming down in certain other cases. So these were the factors that we felt will drive progress of the company going forward. So that’s one point.

The second point is as far as the domestic market is concerned, it is undoubtedly an important growth opportunity. But I would like to add that it’s an important growth opportunity, not in the short term necessarily, but in the medium-to-long term one cannot and should not ignore Indian jurisdiction. Himatsingka’s India plans and revenue streams are very low, which is not something that we’re necessarily happy about. But at the same time, we are trying to plan out our India strategy, which is taking time because it’s not a simple market to enter and grow. It’s fragmented. It has challenges. And the optics of the size of the market belies its underlying fragmented nature and challenges.

So while it’s an interesting opportunity and at some point it will become substantive as well, at this point, we’re trying to figure out how to make sure that we get our strategy right on India and not start another exercise, which creates a drag on operating performance. So as an opportunity, I resonate with your comments. But in terms of specific strategies as to how to seize this opportunity, there are challenges, which we’re working on and trying to see how to create strategies where we don’t create short-term drag of any consequence on our operating performance. We currently have 2 small brands operating in this jurisdiction, Atmosphere and Himeya, but they’re not of any consequence in terms of size.

So as far as your India question is concerned, work in progress, taking its time. Honestly, we’ve been more preoccupied with fighting battles in the inflation front and other macroeconomic challenges that we recently discussed. So once we settle those challenges, we will come back to addressing this opportunity of India. So that’s as far as India is concerned. Sorry, what was your third point? So there was India, there was the second half, then you had one more question.

Mithun Aswath — Kivah Advisors LLP — Analyst

On the net debt level currently? And what’s your cost of debt?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

The cost of debt is probably under 10%, probably in the 8% to 9% region, which we’ll take offline, and we’ll be happy to share with you. And the second point is net debt is INR2,773 crores as we outlined, but it’s excluding any unliquidated scripts. If you particularly liquidate the scripts, which is not technically sitting in cash and cash equivalents, but which is more or less debt [Phonetic]. It should be probably coming down to INR2,640 crores, INR2,630 crores range. But technically, per the conventional definition they’re just outlined under net debt level which is INR2,773 crores.

And as far FY ’24 is concerned, I think, yeah, it’s a good timeframe to be headed back to where we should be. The benchmark of where we should be in terms of margins is definitely not FY ’22 because FY ’22 saw us be hit by inflation in the second half. Himatsingka led the industry and industry space in operating margins up until FY ’19. When we were hit in ’20 with COVID, so the second half has created a wash on our margin profile for that fiscal. And then thereafter, there were some interruptions [Indecipherable] post-COVID. So I think ’24 should be good for us in terms of timeframes, heading back to more solid operating performance. FY ’22 H1, we were positioning ourselves to achieve EBITDAs over INR600 crores with Terry still having to ramp up and with some inflation pressure. But I think our assets are well put together, they’re world-class. Our capacity is at a global scale, our brands are strong.

I think if the macroeconomic environment supports us, as it normally does, but has been not. It’s not been the case over the last year or so. Our assets are poised to deliver EBITDA. I would say, new EBITDA margins should be [Indecipherable] as we’ve always shared with stakeholders. Earlier we used to say 20%, 22%, but on a more cautious note given the global volatility, I would place [Phonetic] it more in the region of 19%, 20% somewhere there. And there is more revenues to the clocked than what we did in FY ’22. So we remarked, I think, that there is more revenue potential, and then with this margin profile, I would say that’s what our assets should deliver in a normal macroeconomic environment.

Mithun Aswath — Kivah Advisors LLP — Analyst

Sir, thank you so much. And just one last question. in FY ’22, despite a reasonably good performance, we were not able to bring down our debt. I just wanted to understand, are there some vagaries in the industry that prevent us from bringing down…?

Shrikant Himatsingka — Managing Director and Chief Executive Officer

We had two, three issues in FY ’22. There was over INR200 crores of unsold scripts. I don’t know, over INR200 crores of unsold scripts, which normally wouldn’t have piled up to that extent. But it piled up because the government of India were sorting out some procedural/regulatory issues with regard to the sale of scripts. So that caused some working capital expansion. That is one issue. The second issue was inflation in working capital, which we witnessed during that time. The third issue was some of our other subsidiary/incentives due from other stakeholders, including the state, were behind schedule, which normally isn’t the case. So all this put together created a situation where we couldn’t bring down debt as much as we should have. We also had some additional working capital, which was because of buildup in inventories. So these were specifically the reason why we couldn’t bring it down. We should have but we couldn’t. And so that’s the answer to your question vis-a-vis FY ’22.

Mithun Aswath — Kivah Advisors LLP — Analyst

Got it, sir. Thank you, sir.

Shrikant Himatsingka — Managing Director and Chief Executive Officer

Yeah.

Operator

Thank you. I would now like to hand over the conference to the management for closing comments.

Shrikant Himatsingka — Managing Director and Chief Executive Officer

So ladies and gentlemen, thank you so much for taking your time this evening and joining us for this call. I do hope we’ve thrown light and given you satisfactory answers and responses to your queries. If you still have anything you’d like to clarify and/or know more about, get in touch, and we’ll be more than happy to assist you with anything you need. Thank you, again, and look forward to our next session. Thank you very much.

Operator

[Operator Closing Remarks]