Pearl Global Industries Limited (PGIL) Q1 FY23 Earnings Concall Transcript

Pearl Global Industries Limited (NSE: PGIL) Q1 FY23 Earnings Concall dated Aug. 16, 2022

Corporate Participants:

Pallab Banerjee — Managing Director

Sanjay Gandhi — Chief Financial Officer

Analysts:

Keshav Kumar — RakSan Investors — Analyst

Hemant Shah — EdhaWealth — Analyst

Parth Desai — HCM — Analyst

Akshay Kothari — Envision Capital — Analyst

Vignesh Iyer — Sequent Investments — Analyst

Pulkit Singhal — Dalmus Capital Management — Analyst

Mohit Khanna — Banyan Capita — Analyst

Shubham Jain — Revanta Funds Management — Analyst

Nirmal Shah — Seraphic Management — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Q1 FY ’23 Earnings Conference Call of Pearl Global Industries Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions, and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pallab Banerjee, Managing Director of Pearl Global Industries. Thank you, and over to you, sir.

Pallab Banerjee — Managing Director

Hi, good morning and I welcome everyone to our quarter one financial year ’23 earnings conference call. Along with me, we have our Group CFO, Mr. Sanjay Gandhi and SGA our Investor Relation Advisors. I hope all of you have gone through our investor presentation uploaded on the exchange and our company website. Since this is our maiden call, I would like to give a brief overview of our company and the industry, followed by a review of the financial performance of the company during the quarter.

Pearl Global Industries Limited founded in 1987, is a leading apparel manufacturer offering end-to-end sustainable solutions to the fashion industry. We have a multinational presence across eight countries India, Indonesia, Bangladesh, Vietnam for manufacturing and USA, Spain, Hong Kong, and UK for client servicing and designing. Our diversified product offering across categories includes knitted tees, polos, and dresses, woven shirts, blouses and dresses, denim jeans, outerwear jackets, active performance wear, and athleisure wear and we produce for men, women, and toddlers.

Our 75 plus designers across these eight locations lead the journey for us from concept to the finished product. Pearl Global has a well-diversified and derisked manufacturing base with 22 dedicated manufacturing units. Our total capacity to manufacture is around 82 million units per year. Some of the key clientele includes Kohl’s, Macy’s, Tommy Hilfiger, Gap, Old Navy, Next, Nordstrom, Muji amongst others. In other words, we are a one-stop solution for the needs of a retailer. Our goal is to innovate the way fashion is created across the globe and we are constantly working towards our mission to exceed customer and shareholders’ expectations.

We do this by strategically driving sustainability, technological advancement, and bringing innovative solutions. Our design and product development team analyze the fashion trends and use modern technologies of 3D rendering. We do use 3D tools like CLO, Browzwear, and Optitex to craft our products. Each of our locations are equipped with this digital technologies.

Talking about the industry, after a subdued start of financial year ’21, owing to the COVID-19 lockdown and restrictions, garment exports did witness a fast turnaround. This was despite the high cotton prices and the supply chain delays arising due to the container shortages. Especially the US market had a pent-up demand for apparel, as the economy opened up post-COVID. Whereas now for a short run, we do have a challenging macro environment globally. These are due to abnormally high rates of inflation and huge inventory backup with large US retailers.

The looming energy crisis in Europe on the backdrop of Ukraine war and at the same time, on the other hand, we are looking at a continued shift of apparel manufacturing out of China. Other Asian countries will continue to gain from this shift. Vietnam, Bangladesh, Myanmar, and India has been steadily gaining due to the shift, while Pakistan and Sri Lanka due to their own economic turmoil the exporters would get a mixed bag of benefits and concerns in the short run.

Now Indian textile and garment exporters have a significant opportunity to grow with the shift of business from China. This is both due to the Xinjiang cotton which is banned and its own recent policies. There is high likelihood of India signing an FTA agreements with Europe and UK. The other government initiatives like the PLI, MITRA, RoSCTL, the free-trade agreements, provide a huge impetus heading to the growth opportunities with favorable Indian demographics and the industry dynamics, India is capable to position itself as a global textiles hub. India textile exports are expected to grow at 11% CAGR to reach about $65 billion by 2026 from a pre-COVID level of $36 billion happened in 2019.

Now for Pearl, despite these headwinds on account of high inventory levels in USA’s retailers and the H1 being a weaker season for Indian apparel industry that is due to the seasonality of the product that we made in India. We are able to despite these headwinds, we are able to clock the highest ever revenue in quarter one since our inception. This was facilitated by increased volumes aided by the new customer acquisition, better product mix, and our existing ones with an improved efficiency of our operations.

Our multinational presence works as a strongest synergy as customers continuously aim to shift sourcing from China to other countries. We envision a high-growing order book for the year on the backdrop of these tailwinds. The new customer acquisition, continued improved performance, and H2, the second half of the year being seasonally stronger quarters thereby yielding a growth in our financial ’23 versus financial year ’22. Our multinational presence ensures we are present in two of the four major textile and apparel supply chains of the world.

We aim to act as an end-to-end supply chain provider who can do concept to the store. This helps us in increasing the wallet share from our existing customers. Our endeavor is to improve our return ratios and we are making conscious efforts to make that happen. Our partnership model, strategy is working for our planned growth initiatives. In the partnership model role of Pearl Global and the partner are clearly defined where Pearl provides the working capital, investment, the designing and product development, appoints and execution and monitoring teams at the partners factories, procures fabric, and is responsibility — responsible for optimum capacity utilization of these partner facilities.

Whereas the partner undertakes the capex and we have a contract with the partner on per piece basis. The partnership model provides the following synergies. It helps us to faster capacity planning or ramping up the capacities as required. The capacities in proximity to the supply chain areas thereby making us asset light as we improve our return ratios. Our strength lies in all these mentioned factors coupled with strong customer relationship setting us apart from the others.

For our way forward in nutshell, our next leg of growth will be driven by the following strategies, new customer acquisition, geographical expansion, more automation in our facilities, optimum utilization of the existing facilities, growth through partnership facilities, and explore PLI scheme for our growth engine in India. With this, I would like now to hand over the call to Mr. Sanjay Gandhi, our Group CFO, who will run us through the financial performance of the company for this quarter.

Sanjay Gandhi — Chief Financial Officer

Thank you. Good morning, everybody and welcome to our first ever earning conference call for quarter one FY ’23. Coming to the financial and operational performance of the company, we have reported the highest ever quarter one performance since inception. Our strong financial performance during the quarter was aided by improved product mix, increased contribution from in-house manufacturing, and partnership facilities. An improved performance in Bangladesh and Vietnam factories have been the key driver of the growth in this quarter.

On a consolidated basis, total income for quarter one FY ’23 increased by 95% year-on-year to INR851 crore, facilitated by improved volume due to better capacity utilization, and increased contribution from partnership facility. Partnership factory contribution to overall revenue increased from 2.8% in quarter one FY ’23 to 21.3% in quarter one FY ’23 translating to 1.9 million pieces on a standalone basis. EBITDA for quarter one FY ’23 increased by 370 bps year on year to 7.9%. PAT for the quarter stood at INR36.4 crores versus a loss of INR0.8 crores in quarter one FY ’22.

The increase in profitability is due to the improvement in margins, aided by operating leverage, better product mix, and improved capacity utilization. Going ahead, we are confident on the industry growth and we believe that our company is best placed to capture the larger pie of this opportunity. Thank you. We shall now open the floor for question and answers.

Questions and Answers:

Operator

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Keshav Kumar from RakSan Investors. Please go ahead.

Keshav Kumar — RakSan Investors — Analyst

Hi, good morning, sir. Congrats for a great quarter. Sir, I just wanted to ask if our partnership model is similar to what our related party PDS is doing with the sourcing business or is there a difference?

Pallab Banerjee — Managing Director

Mr. Ramzi, sorry I missed your name. Yes, thank you for the question. Our model is definitely different from PDS model. In PDS basically it’s more of a trading and sourcing model, their business in terms of trading would be, I would say close to about 80% plus, whereas we present ourselves to our customers as a manufacturer. We do have the partners who are working for us where certain capacities or certain factories we undertake for our production, which is completely dedicated to us. So that capacity is completely dedicated throughout the year for us as a manufacturer, whereas in trading it is as per the need. I hope the difference is clear to you.

Keshav Kumar — RakSan Investors — Analyst

Yes, sir. And sir, when we on-board a partner, do we have any return metrics in mind or are we trying to build our business for now and what like scale and not focus that much on the returns? I mean I’m sure that our geography of where we get the partner would be essential. So just trying to understand like how do we like if there is an internal model that we follow.

Pallab Banerjee — Managing Director

So let me add to the last question that you had. See this kind of model do exist in countries like Bangladesh and Vietnam where we have partners who have been working for us with a dedicated capacity for us for some time for more than a couple of years I would say. And in India, like this concept is still quite new. So we have started with at least one arrangement or two arrangement at this point of time, where we take that capacity and feed continuously throughout the year and we develop it at our own factory. That’s the way that we work with our partners. In terms of return, definitely as we have mentioned that we do have a contract on per piece basis, where it is beyond a simple Subcon, it a little bit of profit sharing is included into it, but we do our arrangement on basis of a number of pieces that we do. Sanjay, you want to add something?

Sanjay Gandhi — Chief Financial Officer

Yeah, just to add, we do like you said there is we do have an internal benchmarking standard where we are looking at overall return on capital employed for any incremental partnership arrangement to be close to 20% that’s the target we really work towards it. So this is normally the threshold hurdle which we try to say at least a 15% plus. It should start and then we reach to that level.

Keshav Kumar — RakSan Investors — Analyst

Helpful. Sir, secondly, the bulk of our manufacturing as per our presentation comes via Bangladesh. So, I mean just trying to understand if the EU FPA we signed would it be detrimental to the production via Bangladesh versus India. Would it not affect us?

Sanjay Gandhi — Chief Financial Officer

So you see right now in terms of our turnovers from the respective countries if I look at it close to about 70% comes from India and Bangladesh both in between I would say between 30% and 40%. It should vary. So sometimes like this particular quarter if you see that India is slightly more almost close to 38% of the turnover. So we will continue to maintain that of course Bangladesh we did recently one acquisition. So the percentage will grow up by a couple of points, but more or less, it would still remain similar. India and Bangladesh doing about almost anywhere between 70% to 75% close to 80% and Vietnam and Indonesia will do the balance.

Keshav Kumar — RakSan Investors — Analyst

So thanks for asking the question — for answering the questions, I’ll come back in the queue.

Pallab Banerjee — Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Hemant Shah from EdhaWealth. Please go ahead.

Hemant Shah — EdhaWealth — Analyst

Thank you for this opportunity and congratulations for a great set of numbers. And as you explained the efficiency is visible in the return ratios as well as EBITDA. So great, congratulations to the team actually.

Sanjay Gandhi — Chief Financial Officer

Thank you.

Pallab Banerjee — Managing Director

Thank you.

Hemant Shah — EdhaWealth — Analyst

I just have two questions. Now, since we have done great sales in Q1. And one of the highest sales actually in the history of the company in Q1, and it’s a dull quarter, first half is usually the lean quarter. Is it fair to assume that we can comfortably do a top-line of around INR3100 crores or so for FY ’23.

Pallab Banerjee — Managing Director

So I think this is where we are really looking at it. I think in terms of the number definitely, this is in our target line of achieving crossing INR3,000 crores in this financial year. The quarter one has been really very encouraging and it’s moving in this direction with all other facilities really coming into place and utilization improving. We are quite hopeful of going in that direction.

Hemant Shah — EdhaWealth — Analyst

Okay, great. Because usually even if we now do not grow for the next three quarters. I mean, we can comfortably achieve INR3,000 crores since the Q1 was extraordinarily strong. So what was the reason for this traction in Q1. I mean if you can just elaborate?

Pallab Banerjee — Managing Director

So as I mentioned, like we had all the three strategy working for us. Like we were acquiring new customers and we were going for better efficiency, that means utilizing more of our capacities and we also had the better mix, so where the per piece value or the per unit value goes up for the customers.

Hemant Shah — EdhaWealth — Analyst

That is going to continue the per mix revenue, I mean, the value-added products will contribute more going forward do you think so sir?

Pallab Banerjee — Managing Director

That’s our endeavor, definitely. It definitely help that US market had a very high demand for that particular period. So, it’s how the market changes like everything is not in control — in our control. But then, this is the strategy and this is the endeavor and this is the way that we are progressing.

Hemant Shah — EdhaWealth — Analyst

Sure sir. I can understand. Sure. My second question would be can this margins of 7.8% or around 8% level be maintained because the — I mean, if we try to pursue this INR3,000 crore of turnover, the efficiency and the utilization will be definitely good. So is it fair to assume that margins should be in this range for the whole year. I’m not talking of any quarter?

Pallab Banerjee — Managing Director

Yeah. Whole plan and strategy is made for that. As I said like there could be certain risks in the market or in the macro factors that we see. Otherwise, if it doesn’t go overboard, like this risk doesn’t become too much, or it doesn’t go too much out of control. We are on that journey and that’s our endeavor.

Hemant Shah — EdhaWealth — Analyst

Great. Alright. And if you can just give some more elaboration on this China Plus one strategy since we are located in India, Vietnam, Indonesia, Bangladesh, and I’m sure we are witnessing some positive traction with respect to China plus one strategy. I mean if you can just elaborate something what kind of traction we can see or what kind of new customers or volumes added volumes we can see going forward?

Pallab Banerjee — Managing Director

See, due to the geopolitical situations like US definitely brought out policies in which they were discouraging sourcing from country-of-origin China, major being the Xinjiang cotton which got banned in US. So the cotton products started moving fast — fastest I would say. That it’s still continuing. Most of the US customers have moved their garment or apparels of cotton, in maximum out of China. The one who have got a strong supply chain or a strong sourcing base, so they are able to move faster. The companies which did not have or do not have a very strong sourcing base, so they are following. So that trend will continue.

See China used to be for US market almost like I think about $35 plus million. So it’s a huge market. So it will continue to move for some time. Apart from that, there are certain ones, the big ones who have very established sourcing arms. So they are trying to now work on the non-cotton product as well. Now the countries who are immediately benefited out of this is definitely Vietnam and Bangladesh which numbers can tell you like you can see that they have grown at a very higher percentage compared to other countries like Myanmar, India, Sri Lanka, Pakistan, so far. So this trend will continue. And as Indian policies are becoming better and FTA discussions are on. So, and with the Indian demographics that we have, we do expect some more investment coming into India and India should benefit as well.

Hemant Shah — EdhaWealth — Analyst

Okay, great. Thank you for this elaborate answer. I’ll come back in the queue and all the best sir. Thank you.

Pallab Banerjee — Managing Director

Thank you so much, Mr. Hemant.

Operator

Thank you. Our next question is from the line of Rishi Gupta from Goldstone Capital. Please go ahead. Mr. Rishi Gupta, please go ahead and ask your question sir. It looks like your line is in mute mode. We are unable to hear you. In the meanwhile, we’ll move to our next question. [Operator Remarks] Our next question is from the line of Parth Desai from HCM. Please go ahead.

Parth Desai — HCM — Analyst

Hi, thanks. Thanks for the opportunity. So, I had a quick question on the capacity utilization. So what’s the current capacity utilization let’s say for F ’22 and the first quarter if you could share?

Pallab Banerjee — Managing Director

For FY ’22. You are asking for FY ’22. That means 2022-2023 this — what kind of capacity utilization that we will be able to get?

Parth Desai — HCM — Analyst

No. What is the capacity utilization was for, let’s say, the last year and this quarter?

Pallab Banerjee — Managing Director

So if you see the way that we have established factories and the partner factories, we do have a capacity of almost about 80 million plus. So out of that we are at this point of time in the range of 65% utilization I would say. So, definitely we are growing towards from 65 to 75. That’s the kind of growth plan that we had for this year and we’re continuing on that journey. So by capacity, I mean, the infrastructure that we have created. But we are not utilizing all the machines or all the workforce like we have not put in as of yet. So we can without any major capex investment we can go towards this number. So that’s what I mean by capacity.

Parth Desai — HCM — Analyst

Okay. So essentially without any significant capex, you can get to 80 million type. Okay. That is helpful. And then in terms of, let’s say, geographic revenue you shared I think manufacturing revenues, but from a, let’s say, a client perspective is the majority of your client base in the US and is there scope called geographic expansion as well.

Pallab Banerjee — Managing Director

So from the customer point of view, our major business is US at this point of time. We would like to have a better percentage mix across the globe. But what we experienced during the pandemic period and just after the pandemic period, there was a huge demand which US came in first, Europe still was slow and then the war happened, which slowed down a little bit more and also we saw that Japan and Australia has been really slow in terms of the demand for the last almost, if I look at, one to two years period. So that definitely would change. So to give you numbers like at this point of time I think in this last four or five quarters if I look at our presence in India — in US would be maximum, would be more than 80% more towards 90% I think it is 80% to 85% plus. So that should change a little bit as we go forward.

Parth Desai — HCM — Analyst

Okay. Then a follow-up question on that would be your most of your clients are mighty global clients like let us say Tommy Hilfiger or Calvin Klein or even Ralph Lauren. So, let’s say, give you orders only for the US and not, is it something to do with some trade agreements or?

Pallab Banerjee — Managing Director

No the clients that you mentioned, like for example, Tommy Hilfiger have got a big presence in Europe as well. So, we are of course like we started with them with the US manufacturing and now they’re starting to source for the Europe as well from us. So the brands which are global, definitely, we would like to serve them across the globe and then apart from that, there are other customers like Primark in UK or the Inditex Group, which is the Zara and Bershka and all. So we are quite big with them as well. And in Japan, there is Muji, in Australia there are Target, Kmart, and Big W. So those are also in our portfolio. So these are also — we are seeing substantial growth as well as now those markets the economies are opening up in terms of the retailers are opening up more number of stores. They were quite shut for a long period of time due to COVID.

Parth Desai — HCM — Analyst

Okay, that’s helpful. Thank you. Thanks for the opportunity and congrats on a great performance and best of luck.

Pallab Banerjee — Managing Director

Thank you so much Mr. Desai.

Operator

Thank you. We’ll take our next question from the line of Akshay Kothari from Envision Capital. Please go ahead.

Akshay Kothari — Envision Capital — Analyst

Thanks for the opportunity. So as you mentioned our majority of business comes from US so any discussions with the customers, because there is ongoing recession, any slump in demand, which we are expecting any guidance on that?

Pallab Banerjee — Managing Director

Recession or not recession I think April is normally like after once your food and petroleum is taken care of, I think April is the next need, which will continue to happen. That is point number one. Point number two is that at this point of time US is undergoing a high inflation and fear of recession. So let’s see how that evolves. We are impacted more in the short run due to the inventory levels our high inventory level with some of our customers, which definitely is the result of the inflation and to certain extent, maybe the fear of recession. So because of which, what we’re seeing is some of our clients like from US which are the large format retailers. They have cut down their buys by anywhere between 10% to 30%. We do not have a big exposure with very large format retailers like Target or Walmart, in a big way, Walmart USA, I mean, where this cut or the inventory situation is even more steep. So that is why some of the large exporters of the world like the Taiwanese or Koreans are majorly affected at this point of time.

We are seeing lack of demand from the kind of customers that we work with that is Gap Inc or the Kohl’s or the Macy’s where anywhere the reduction is between 10% to 30% on a seasonal basis that we see in terms of net booking. As I said like you know part of it is getting compensated because the Japan market, the Australian market is opening up more. The demand is going up in those market in terms of — in comparison if I would say like what I have seen in the last couple of years and simultaneously as I said like we continue to add new customer in our profile. So that we can continue to utilize our capacities. I hope that answer your question Ms. Kothari.

Akshay Kothari — Envision Capital — Analyst

Yeah, yeah. Also I wanted to know, sir, what would be our current revenue from the partnership facility.

Pallab Banerjee — Managing Director

So like Mr. Sanjay mentioned a number like the percentage in this year what we saw grew up from almost about 2% level to high 20%.

Sanjay Gandhi — Chief Financial Officer

It’s on a stand-alone basis, the portfolio from 2% to 20% in India. The standalone revenue is INR320 crore plus. So that’s the region INR50 to INR60 crores we have now in India, that is the contribution. If you take overall INR851[Phonetic] I think it will come around 7% is coming from the partnership factories of India.

Akshay Kothari — Envision Capital — Analyst

Okay. And in the opening comments you mentioned that improvement in margins was due to product mix, operating leverage and better capacity utilization. So wanted to know how are we trying to increase. So first of all, what is our current average selling price, how are we trying to improve it. And can you please elaborate, regarding the product mix change which we are trying to achieve?

Pallab Banerjee — Managing Director

So I won’t go into the detail of numbers in this but I can give you the concept conceptually like what is happening. We have a presence as I told you like almost 20% of our total revenue is coming from Indonesia and Vietnam, where we do a lot of high-end products, lot of value-added products like outerwear, jackets, high end athletic wear. So those are of high values and those are also supplied to the customers like who are looking for high value product, high input in the garments. Similarly like in India, Bangladesh it is generally like we are trying to upgrade our facilities to serve better and go for better price points compared to what we have done in past but that also depends, like you know, one is our intent and the second would be how the macro factors are playing out like how much of those customers are buying and what kind of volumes they are driving.

So, yes. So this is how it plays. The outerwear, the high-end athletic wear, the high end technical garments that we make out of Indonesia and Vietnam definitely those have increased quite a lot. And that is shown in some of the reserves and also in Bangladesh or in India, like the products which get via higher FOB like more of the knits to denim, or certain outerwear jackets and all so that continues. I would say that will happen seasonally and in some seasons like we will see a mix which would be better, although like as a Company, we are focused to increase our revenue and the product mix to get better margins.

Akshay Kothari — Envision Capital — Analyst

Okay. That’s great. In India which branch do we sell, can you just name them or?

Pallab Banerjee — Managing Director

The names that I mentioned most of these are in India that means for US market we do Kohl’s, we do Gap, Tommy Hilfiger. We do markets of Australia. We do Target, Kmart, Big W. For UK, we do Next, Primark, and other brands, same for Japan we do Muji. So it’s a mix of brands like we try to service these brands or these companies from multi-location and for multi-product. So that’s the strategy that we work on, it’s not a particular set of brand, only for a particular set of country, that’s not our strategy.

Akshay Kothari — Envision Capital — Analyst

Okay. Currently our 55% comes from woven and 45% from knit. So what was this share five years back, if you can give a sense of that?

Pallab Banerjee — Managing Director

So, traditionally wovens was more. During the pandemic period, we saw that the knit demand was more and we enhanced our capacity for knit products as well. But I think this 55:45 is a ratio that is the capacity that we have the readiness for now, depending on what is in demand. So you see like for Pearl, we go to the customer as a multiproduct vendor or supplier. So depending on the need, we can flex us. A certain percentage of our factories can do both the product and can switch the lines. So that’s the kind of technological advancements that we spoke about in our first speech is that. So these are all the strategies and I would say innovation that we are working towards.

Akshay Kothari — Envision Capital — Analyst

And knit is of course higher margin business right?

Pallab Banerjee — Managing Director

No, not necessarily.

Akshay Kothari — Envision Capital — Analyst

Okay. And sir, you mentioned that around 70% of the revenues comes from India and Bangladesh. Whereas our capacity in India is around 28% and Bangladesh 45%. So our capacity utilization in India is significantly higher in Bangladesh or our product mix is better in India manufacturing.

Pallab Banerjee — Managing Director

So, one is as the capacity the number of factories that we have and where we can ramp up to that 80 to 82 million without very significant capex. So that is the capacity that when we speak about capacity. And depending on the product and depending on the need of the customers we do products. So India basically like we are very strong in women’s products, in the lighter-weight fabrics. That means the shirting fabrics, both for women’s and men’s and kids, and we do a lot of knit Jersey products also in India.

In Bangladesh, the trend has been more towards heavier weight of fabrics that means denim, the pant weights, the heavy drills and twrills, those kind of fabrics capacity is more in Bangladesh. Now from customer point of view these are the bulk of the buys. So that is why India and Bangladesh we do have about 70% of our capacity and 70% of our turnover is coming from. Now if I go for a particular product mix like during the pandemic period, we saw a decline in the bottoms — in bottom wear, that means the pants and denims were selling less.

Now as the pandemic has like coming to get — opening up that demand for pants and people are going out to the offices or outside, so pants and denims are going up. So that kind of variation season to season will continue. But in majority, in a big picture like if you talk of Pearl, we are poised to deliver multiple product to the customers and we come to the strategy so that our capacity utilization is optimum for both the countries. So we won’t say that on one season India would be slow or Bangladesh will be more and Bangladesh will slow down and India will go up. It is not like that. So we know what is the capacity, how to go to the customers, what kind of design they need, but yes, general trend, the macro trend as I spoke about the denim and pants were low during the pandemic, now that is coming back. So those kind of changes you will see.

Akshay Kothari — Envision Capital — Analyst

Okay.

Operator

Mr. Kothari may we request you to return to the queue please, There are several participants waiting.

Akshay Kothari — Envision Capital — Analyst

Sure.

Operator

Thank you. We’ll take our next question from the line of Vignesh Iyer from Sequent Investments. Please go ahead.

Vignesh Iyer — Sequent Investments — Analyst

Hello sir. Thank you for the opportunity. I just wanted to know considering we are at 65% capacity utilization. So we can fairly say that FY ’23 would be taken care of without any need for capex, as such. So I just wanted to know are we planning to utilize the cash flow to pay off some of our debt, because we have got around like INR500 crore plus debt, and what is the level that the management is looking into which they feel comfortable in having any balance sheet.

Pallab Banerjee — Managing Director

So hello. Yeah. Thank you. So just to answer your question on the debt and the cash part, I think the first thing you talk about the capacity, right. So I think the FY ’23 capacity existing one is sufficient to take care of the revenue growth what we are looking at it. So there is no need for any capex to build that — many major capex. You see that we will always be there would be maintenance or some additional expansion will keep on happening some laundry machine to be added, some kind of specialized machine, technology has to be added. So those things will keep on continuing, but not the major one like any greenfield or brownfield acquisitions really to add on the capacity that’s the first part.

The second part you mentioned about the debt component. So if you really look at our debt composition of our debt in terms of the long-term and the short-term, the long-term debt is, as we speak is INR115 crore only. And the rest is all about the short-term capital which is self-liquidating by itself because it’s largely represented by the current assets of the company. So that is in line with the growth of the company, if you see the 95% growth in this quarter and overall if you see FY ’21 to FY ’22 also we saw a significant growth, and that’s where the short-term debt has gone high.

Now having the cash and bank balance is only helps the company, which is a growing like ours, it always provides an optionality of really looking at various opportunity which can come across, whether it’s value buying or it is the need for working capital for any good opportunity in terms of the business expansion in terms of the volume growth in the current set of schemes. So we do not have any plan of retiring any debt from the cash and bank balances what we have as of now in our balance sheet, it is to bring more optionality and also it gives us financial resilience to really meet our customer requirement well on time in any situation.

So, given the context of long-term and short-term competition where the long-term is only INR115 crores at a Group level. We don’t feel any need of retiring those debt as of now.

Vignesh Iyer — Sequent Investments — Analyst

Okay. Have we frontloaded any inventory asset, because the working capital looks quite large, as such as in the working capital debt when it comes to?

Pallab Banerjee — Managing Director

No, the working capital is always as a percentage of, if you really look at it, number of days if you see that working capital days compared to FY ’21 to FY ’22 it has actually come down, it has not increased, though the reduction is only by three to five days. But still, it is a reduction. So, as said there is no inventory pile up, which has happened in anticipation of the order, because in our case we procure the fabric only when there is backed with a firm order from the customers. So that’s the, whatever the inventory is there, it is likely to be shipped in the coming 90 to 120 days time period, so there is no — hedging is very clearly monitored in that sense. So, all the inventory as a percentage wise has actually improved only compared to last financial years. So that’s where we are.

Operator

Mr. Iyer, thank you. [Operator Instructions] We’ll take our next question from the line of Pulkit Singhal from Dalmus Capital Management. Please go ahead.

Pulkit Singhal — Dalmus Capital Management — Analyst

Thank you for the opportunity. And congrats on a great set of numbers. If you could just help explain the last two quarters, Q1 of this year and 4Q. I mean you had higher revenues in both the quarters, so capacity utilization will be similar in fact higher previously, but the margin difference is quite huge. I mean the previous quarter was 4.4 this time it is 7.9. So what could be the reason for such volatility between two labouring quarters?

Sanjay Gandhi — Chief Financial Officer

Right. Hi Pulkit. So one of the reason what we have seen is that I think Mr. Banerjee mentioned that in terms of the product mix, which we have in overseas countries like Vietnam, the outerwear, therefore the price realization has been pretty good and improved. So there is a good amount of the product mix, which has changed in Vietnam, which has really led to higher FOB and then resulting into higher margin, that’s the one major one contributor.

The second is the style, which were manufactured in quarter four, which vis-a-vis what got shipped in quarter one. Normally, we don’t make a comparison from quarter four to quarter one because quarter four is largely summer spring, but to really address that question because some of the product as we mentioned, I think in the last quarter also in some of the discussion that those partnership factories were actually starting the first phase of production. So initially, it was very important to ensure that the ramp up of the production lines is there, so that the workers get used to producing those many number of pieces.

So initially the pieces, which were produced were on a lower margin side rather than the higher margin. That’s about India. And in Bangladesh also, if you really see from quarter four perspective, I think the product mix has slightly changed and the efficiencies has also come in. The volume which has shipped from the new factory has really gone up, which has resulted in operating efficiency really got kicking in. And this is precisely our whole thing — thinking was there in last time when we presented in a going forward, I think all these factor is likely to play out and will definitely help the company in improving the margins.

Pulkit Singhal — Dalmus Capital Management — Analyst

Right. Second question is Mr. Benerjee if you could just one other question which is on everyone’s mind is obviously how deep is the US issue. I mean it just one or two quarter kind of impact or will it be longer. So if you could throw some views on that. And second is, in that context of those issues. I mean how is Pearl placed. I mean, can we see this quarterly performance that you’ve shown in first quarter. Can that be suddenly impacted in another quarter via suddenly lower revenues, similarly, very low margins or do you think you have been able to kind of mitigate that significantly by alternate sourcing and various other aspects. So if you can touch upon that.

Pallab Banerjee — Managing Director

Yeah. So as I just mentioned, the US market like the big customers that we have like the Kohl’s, the Macy’s, the PVH. So they are predicting at this point of time a drop-in numbers anywhere between 10% to 15%. So at the same time like our focus is to grow the other markets, so that we do not get impacted completely due to this drop that is coming in. So that is point number one that we are working upon.

And the other benefit as I mentioned, is that, thankfully, Pearl has got the option of multiple countries. So the need of the product and the diversification of our production base, like for example, Bangladesh has got a duty advantage for the European market already. Like you know, the FTAs that we’re talking about, which we are definitely talking to our customers and asking them to build up the base from now. So those are some of the mitigation strategies that we are working upon. And this particular drop, what I see is for the next two quarters. So Q2 order book is already there with us, Q3 is also like now almost like confirmed or getting confirmed at this point of time. So we see a slight dip, but you see like we had a huge tailwind of utilizing more of our capacity, increasing with new customers and establishing ourselves with the old ones. So that momentum is continuing.

So if we talk about year-over-year, definitely the basis has grown, the number growth will be there. But yes, what we would have expected, if the market has been normal, then we would be less than that. We would have gone into a much bigger number if the market have continued to be like what it was.

Pulkit Singhal — Dalmus Capital Management — Analyst

Yeah, just to clarify on the revenue front, do you think there might be a slight dip depending by 3Q or whatever 4Q, but from a margin standpoint, do you see a risk to your margins from what you’ve just deliveried or that part you can mitigate through in that business.

Pallab Banerjee — Managing Director

So in terms of margin also like what Sanjay just mentioned, the challenges that we had or like of the new facilities, of a new whether our in-house facilities in Bangladesh or some of the partnership factories like, as we start new lines and production lines and all the first few months or quarters definitely it is slow and then it picks up the efficiency level goes up. So as Pearl our endeavor would be to continue to grow on those efficiencies and thus deliver you a better EBITDA or PAT. So that’s something as a journey that we have undertaken and you will see that continuity.

Pulkit Singhal — Dalmus Capital Management — Analyst

Got it. Thank you and all the best.

Pallab Banerjee — Managing Director

Thank you so much Mr. Singhal.

Operator

Thank you. We’ll take our next question from the line of Mohit Khanna from Banyan Capita. Please go ahead.

Mohit Khanna — Banyan Capita — Analyst

Hello.

Pallab Banerjee — Managing Director

Hello.

Mohit Khanna — Banyan Capita — Analyst

Good morning, sir, and congratulation for a good set of numbers. I just wanted to understand little bit more on what’s happening on the US side of the business. You said that you already have the quarter three bookings. So just talking a little bit more on that so, is it something that you are seeing in terms of rates that are coming down or this is a simple volume effect by the retailers. That could be the first question and I will come back.

Pallab Banerjee — Managing Director

So yes, the volumes are coming down. In terms of rate, what happens is certain portion is market driven, if like the big players like Walmart or a Target or some of the other big players, drops in number then suddenly market has got more capacity and less orders. So during that time, definitely the price becomes more competitive. But thankfully in our industry, normally, the cost — the selling cost has got proportionately to the raw material price. So the customers normally don’t expect us to absorb the raw material prices or like the increase in raw material price.

And again the second part is that, when the demand becomes little softer, even the raw material prices also comes down. So we don’t expect that just to survive or just to have the capacity feel like we have to really take a huge hit on our margins. Some definitely it would be, when you are trying to utilize most of your capacity and maybe a little bit more competitive to get — ensure that. But I don’t see a major change or a major fluctuation in that.

Mohit Khanna — Banyan Capita — Analyst

Understood. And when you said that these retailers are blocked up with inventory glut so to say. Can you pinpoint in certain categories where you see the inventory is little bit more than others. I mean the winter wears or the summer wears or maybe in the kids or the women’s section.

Pallab Banerjee — Managing Director

Yeah. See like historically, if we look at US market in 2021 what was happening was definitely the pent-up demand was high and people were going into the shops and most of the goods were delayed at that point of time to reach the store. Most of the retailers went into a holiday season of US, which is one of the largest season with about 50%, 60%, 70% of the inventory in stock. So that means almost 30% to 50% of the goods had not reached them at that point of time when they went on sale for the holiday season. So those goods were received by them in the month of January, February, and even in March. Holiday season is supposed to be October, November, and December. And by March, definitely it is spring and the goods for holiday and spring is very different. So most of the US retailers preserved those goods and they are bringing those goods in this particular holiday, the plan to bring in this particular holiday season.

So, that’s one impact that we saw that the demand started slowing down. And then the cascading effect happens in the spring season as well. So, those are the two seasons which we are seeing majorly this correction would need to happen. From the summer onwards, I think they should be able to plan better and most probably they would be exhausting this the stocks which is lying there. So, if you talk of today, the US market, there are very high markdowns in most of the retailers to liquidate most of these inventory, because for a retailer to have so much of inventory is also killing isn’t it. So, that’s what is undergoing at this point of time. August is an important month, because this is back to school for them and it’s a big season again for the US retailers. So, let’s see how this particular month goes and we should be able to — this is the month where they should be able to liquidate most of their spring summer inventory that they have.

Mohit Khanna — Banyan Capita — Analyst

Any categories in this let’s say?

Pallab Banerjee — Managing Director

Yes. Category wise if you need to get into detail then during the pandemic and immediate post pandemic was there was a huge demand in athleisure product that was those heavy knits and all, a lot of these brands have been bought, which then immediately they had to cut down. So, they have asked us to reduce as much as possible, hold some inventory for them, some numbers, smaller numbers, but yes, from this year to next year. So, those kind of things they have requested and those decisions are on. On the other hand, the product which I just mentioned in earlier part of the call is that the bottom or denim, which was not selling much because most of the work was happening on video calls and all, where the tops were more important than the pants and denims. So, those kinds of goods definitely we saw an uptick in the in the demand and which is still continuing.

Mohit Khanna — Banyan Capita — Analyst

Thank you so much. I will come back in the queue.

Pallab Banerjee — Managing Director

Thank you Mr. Khanna.

Operator

Thank you. Our next question is from the line of Shubham Jain from Revanta Funds Management. Please go ahead.

Shubham Jain — Revanta Funds Management — Analyst

Sir, I had one simple question picking on from the earlier participant on the quarter on quarter movement of margin. You mentioned that the outerwear contribution was a little higher this quarter. So on an H2, H1 basis, will the margins again start moving downwards because H2 will start serving summer, spring where the outerwear will be lower. So even though if you have a higher revenue in the second half, but our margins can be a little subdued.

Pallab Banerjee — Managing Director

So you see this is where a company like Pearl is able to make a balance because on one hand we have the outerwear production that we majorly undertake in Vietnam, Indonesia and some in Bangladesh and which is very much in this particular quarters is heavy, because now all the goods are getting shipped for the holiday season. And then comes the spring summer product which is majorly coming out a lot of fashion goes out of India and some out of Bangladesh and Indonesia as well which comes because of our presence in all the four locations so we are able to balance that. And going forward we are more confident that we have the right customer mix and the right product mix we should be able to balance it better. So, that’s the opportunity that Pearl has been working on for many years and now those factories are able to churn out these expectations. So, you will see that like you know one season like when the winter season the foreign holiday imagines like which would be coming out of from the outerwear and spring summer it will be coming out from the other products like the fashion tops, dresses, the bands. So, that’s the fluctuation that we can absorb.

Shubham Jain — Revanta Funds Management — Analyst

Okay. To frame it in a different way, right, what I am trying to understand is essentially, we have done an 8% margin this quarter, and there’s an improvement of 400 bps more or less at gross margin level quarter-on-quarter, which has helped us improve our margins. So, in the second half, when we will do a summer-spring kind of collection, can we still expect to do this 8% kind of margin or it will still be lower?

Pallab Banerjee — Managing Director

As I mentioned, the Vietnam acquisition had happened about four to five years back, so which has played. So, that’s why this particular H1 numbers used to be affected earlier, because the non-existence of the Vietnam profit that was there. So, if that has come up, so that doesn’t mean

That we should lose out on the benefits that we already had in the second half, where like our India Fashions and Bangladesh Fashions would continue to give us that margin.

Shubham Jain — Revanta Funds Management — Analyst

Okay. So we believe we can sustain in the second half?

Pallab Banerjee — Managing Director

Yes. As of now, we are on that path. As I mentioned, like the risk is definitely like if the war happens or another some — that kind of big, I would say, macro changes If it doesn’t happen, then we are on our path.

Shubham Jain — Revanta Funds Management — Analyst

Got it. My second question is just an accounting question. In our segments that we report there is another piece which is around INR130 to INR140 crores of revenue, but the profit is quite volatile. So, what gets accounted for over there, because we did like INR4 crores of loss in the first Quarter

22 and the fourth Quarter 22, but this quarter, we have reported a INR12 to INR13 crores profit at an EBIT level.

Pallab Banerjee — Managing Director

Actually, the segmental part of others it include our overseas company like Vietnam and there are certain standalone revenue also get combined there. So, actually speaking, our segmental, there is a line item for inter-company elimination. So, if you look at the structure of our transaction probably the segmental will not give the clear picture unless we do the inter-company elimination and reach a final number there. Currently, the regulation requires us to put in this way, but if you really look at it, because most of our sales from the Bangladesh and Vietnam, Indonesia is billed through Hong Kong entity and that’s why the other category will have certain portion of the sale which is being routed directly. So, it does not really reflect in that way the segmentation allocation in terms of the profitability unless we do the inter-company elimination.

Operator

Thank you. Ladies and gentlemen, we will take our last question from the line of Nirmal Shah from Seraphic Management. Please go ahead.

Nirmal Shah — Seraphic Management — Analyst

Congratulations sir, for the good set of numbers. Just I had two questions sir, just to summarize what you mentioned during your opening comments, is it fair to assume that Bangladesh, Vietnam and Indonesia, from a margin seasonality point of view, the first half would be at peak and probably second half would be at a little bit lesser than what you show in the first half; while the India operations would achieve its peak margins in the second half of the financial year, is it fair to assume?

Pallab Banerjee — Managing Director

See that’s the trend of the industry, like when I was explaining to, I think Mr. Jain earlier was that if you talk of the seasonality of the market, then these markets are poised to do this kind of product. Now, as a company, our endeavor would be to go for better margins, better product with better customers, so independent of the season or the location. So, yes, like what you are talking about are the general setup of the industry and the countries. And of course, then we come in where we have to work and we have to build up our strategies so that we can deliver the best on all the four quarters

Nirmal Shah — Seraphic Management — Analyst

All right. Just follow up to that, like when we will enter the second half of current year where it’s probably the cotton basket would be significant from our overall spring summer collection. And if at all the various forecasts, what they are talking about some 40% to 60%, sort of a drop in cotton price. If at all that scenario plays out, then, despite let’s say you retain the similar volumes, can there be an impact on the top-line? And if that happens, how will your profitability overall look like, if the cotton prices really fall through once the cotton arrival start coming from the month of October?

Pallab Banerjee — Managing Director

So, Mr. Shah, what happens in the apparel product when these big retailers are sourcing from us so they do a lot of nominated fabrics and they do a lot of negotiation along with the vendors. So, that is why a direct impact of cotton, major impact doesn’t come or should not come. Whereas, if you talk of a spinner or a textile fabric manufacturer, maybe I think more in the spinner’s case like it definitely would affect more, my guess I am not an expert on that. But generally for apparel manufacturer, our negotiation is to pass on the raw material prices fluctuation to the retailers and at most we have to absorb it for one season that means the order has been placed and by the time that we are looking at raw materials if there is a fluctuation, which is normally a very small percentage, or should be low percentage.

Operator

Thank you. Ladies and gentlemen, due to time constraints, that was the last question. I now hand over the floor back to the management for closing comments.

Pallab Banerjee — Managing Director

Thank you. Thank you, everyone. I hope we have been able to answer all your questions satisfactorily. However, should you need any further clarification or would like to know more about the company, please feel free to contact our team or NCA or Investor Relation Advisors. Thank you once again for taking the time to join us on the call.

Operator

[Operator Closing Remarks]