AGI Greenpac Limited (AGI.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to HSIL Limited Q4 FY '21 Earnings Call hosted by Antique Stockbroking. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Zade from Antique Stockbroking Limited. Thank you, and over to you, sir.

Thank you, Malika, and good afternoon, everyone. On behalf of Antique Stockbroking, I would like to welcome all the participants on the earnings call of HSIL Limited. From the management, we have with us Mr. R B Kabra, President and CEO of Building Products; Mr. Rajesh Khosla, President and CEO, AGI Glaspac and Garden Polymer; Mr. Om Prakash Pandey, CFO, HSIL; and Mr. Sandeep Sikka, Group CFO. Without further ado, I would like to hand over the call to Mr. Kabra for opening remarks. Over to you, sir.

Yes. Thank you, Amit. Good afternoon, good evening to everyone, and I welcome you all to the Q4 and FY '21 results conference call of our company, HSIL Limited. I hope you and your family members and all loved ones are staying safe during this second wave of this pandemic, which is very, very infectious. And I pray for well-being of everyone. We have already circulated our earnings presentation, which is available on our website as well as on the stock exchange website. I hope you all had the opportunity to go through the presentation, and we would be happy to take any questions afterwards. I'm pleased to report that HSIL had closed the fiscal year on a strong note. The company delivered a total income of INR 638 crores in first quarter, registering a growth of 36.3% on Y-on-Y basis. Revenue growth during the quarter was primarily driven by controlled volumes, realization and better product mix. Volume growth was supported by the improving demand for glass container packaging from beer and food and the beverage industry. The company delivered EBITDA of INR 102 crore in Q4 as we see a robust growth of 65.5% on year-on-year basis with the margin improving to 15.9%. Margin improvement was driven by better product mix and higher operational efficiencies. Left by the first quarter, which is impacted due to pandemic, we maintained growth momentum in the subsequent quarters and managed to close the financial year without degrowth in revenue, thereby covering revenue loss during lockdown. Our continuous focus on process and cost optimization has allowed HSIL to deliver strong growth in the profitability. In terms of our business segment, I will quickly talk about building product division. And thereafter, Mr. Rajesh Khosla will talk about packaging product business. In building products, we are seeing a reasonable demand for products with a gradual opening of the economy, and we continue to move forward with our focus on introducing automation in business processes, reducing wastages and increasing overall efficiencies. Now I hand over the call to Mr. Rajesh Khosla for his remarks.

Thank you very much, Mr. Kabra. Welcome to the HSIL team, and firstly, I wish you a very safe and a healthy new year ahead. The segment of packaging products continue to be our major growth driver. And during the quarter, we saw a strong year-on-year growth in revenues in all the subsegments, led by the glass container business, which contributes almost 88% to the division revenue. Glass container plant capacity increased to 85% as compared to the 79% in the same quarter last year. Technological upgradation is another key focus area, where we have purchased 3 high technology, narrow neck press and blow machines, which have advanced control systems, and they are in much of the demand in the industry. Our customers have highlighted that they prefer NNBP bottles rather than the conventional glow and blow bottles, which are lighter, and these will address the demand specified, especially by the beer industry and other allied industries. Important aspect that I would like to highlight is our plants are capable to operate with alternative fuel and management on shift decision to use the best available fuel has allowed the HSIL to consistently improve and maintain its margin profile, though there was a huge fluctuation on the fuel side of the business. Now I would like to hand over the call to our CFO, Mr. OP Pandey, to discuss the financial results. Thank you once again, and Mr. Pandey, please take over and go ahead with that.

Thank you, Mr. Khosla. A very good afternoon to all the attendees. I will first present financial highlights of the quarter and will discuss the full year after that. In Q4 FY '21, our total income stood at INR 638 crores compared to INR 468 crores in last year, a growth of 36.3% on year-on-year basis. The revenue growth was supported by improved volumes, realization and better product mix. Revenue from the operation of packaging products was INR 418 crores, registering a growth of 31.5% on Y-o-Y basis. Revenue from operational of building products reported was INR 216 crores, registering a growth of 59.7% on year-on-year basis. EBITDA for the quarter was INR 102 crores with EBITDA margin improving to 15.9% as compared to 13.1% in Q4 FY '20. The margin improvement was driven by product -- better product mix and higher operational efficiences, resulting in lower fuel, power and other costs. EBIT for the period was INR 72 crores, with EBIT margin of 11.2% as compared to 5.6% in Q4 FY '20. PAT was INR 33 crores with PAT margin of 5.2% in Q4 FY '21 as compared to 0.7% in Q4 FY '20. Please note that the profitability in Q4 FY '20 was subdued as concept design during past year. Now moving to full year results. In FY '21, total income stood at INR 1,881 crores compared to INR 1,879 crores in last year, a stable figure despite Q1 adversely impacted by COVID-19 nationwide lockdown. EBITDA for the full year was INR 308 crores, with EBITDA margin improving to 16.4% compared to 15.5% in FY '20. Adjusted PAT was INR 73 crores with a margin of 3.9% in FY '21 as compared to 2.6% in FY '20. Reported PAT figure for FY '21 is high due to the income tax write-back of INR 14.7 crores. HSIL continues to generate a strong free cash flow from the operation of INR 298 crores in FY '21, registering a growth of 179% on a year-on-year basis. Please note that this is excluding a onetime income tax refund of INR 51 crores. In FY '21, our CapEx outflow was INR 117 crores which was primarily incurred for technological advancement, debottlenecking, operational efficiencies and our greenfield projects. In light of the company's performance, the Board of Directors have recommended a dividend of INR 4 per share for FY '21, subject to approval from the shareholders. This is equivalent to a payout at 200% on the face value of the shares. Thank you very much, and we are now ready to take any questions.

[Operator Instructions] The first question is from the line of Kaushik Poddar from KB Capital Market.

Yes. The building product profitability, why has it suffered compared to the packaging products?

So if you see building products profitability primarily consist of our B2B business. This was including guidance we had given on the manufacturers that doesn't have a brand. So the role of the building products is closely present in manufacturing comprising contractor. So what happened is if you see quarter 4, the margins are good. But during the year, the first -- even when we had the lockdown, so there was the fixed costs relating to the factories. And as per the industry standard, one would not pass it up -- inventory. So it was the same as the prior year. So that primarily resulted in the lower annual margins. But Q3 margins are in line with what has been approved by the percentage to benchmark all the related party transaction for us.

Okay. So that means we can only expect a 3% EBIT for building products in that?

Yes, 3% to 5% -- 3%, 4.5%, in the range recommended by 1 of the big relation on every year.

Okay. And when will -- what will be in the 3% to 4.5% because last quarter it was more or less a normal quarter, right?

So why I'm saying range of 3% to 4.5% is for different products, it's a different range because of the...

Okay. Okay. For different products, it's different range. Okay. And on the -- what are the expansion things that CPVC pipe, the project that we are putting up? That is already part of that building products or it's a separate thing all together?

It is a part of the building product. Right now, we have a capacity to produce from 35,000 to 38,000 tonnes. And primarily 35,000 to 38,000 depends on what diameter the pipes are being produced. So we are putting up a capacity, which will -- we're investing in the price, facility, so that we can generate more capacity in the first one. So this should be up and running. Another thing there was putting up 154 tonnes high end blast furnace, which is a clear blast furnace. So our focus there is to tap the pursuing market, the nail polish market and a part of the pharma market also. So that investment is also there of somewhere around INR 250 crores.

So what is the total capital investment you're looking for?

This is Rajesh. Apart from this, there are -- normal CapEx is also spread out. But I think our estimate is based on current situation, '21, '22, the total spend should be somewhere between INR 250 crores to INR 300 crores of CapEx in financial year.

Is that the final thing? Or do you have more to spend in '22, '23 also?

So that depends on how the things come out during the year.

Okay. Will this project be coming into operation in '21, '22 or...

No, they are likely to come up only in quarter 1 of -- the next quarter 1 of next financial year.

Okay. Okay. And how are you funding this because internal network...

So we'll use -- if you see our total long-term debt today is around INR 750 crores. If you see quarter 4 EBITDA is around INR 100 crores. So on an annualized run rate, we are around INR 400 crores as a base. Look, we can't take quarter 1 as quarter I we incurred a loss. And this is a forward. So we have an adequate amount of leveraging and our average volume next year is somewhere around INR 85 crores to INR 90 crores. So we'll raise on a certain debt to equity the long-term debt, and we'll use INR 400 crores also to fill the growth.

Okay. So as far as this company is concerned, the main profitability will come from the packaging products, right?

Yes.

That trend will -- is not going to change over the years?

No, no. You can -- we have given this as a part of our investor presentation also. You can refer to it in terms of market shares.

[Operator Instructions] The next question is from the line of [ Aditya Jhawar ], an individual investor.

Okay. Am I audible?

Yes, you're audible.

Yes. Sir, I just want to understand 2 things. One is the margin, what we achieved in packaging segment. That is 14.5% to 15%. Is it sustainable over 3 to 4 years, just to frame it?

So I can give you broader guidance. Nobody can predict the market. But based on the current market conditions, as on today, we feel that these margins are sustainable. In fact, as I told you, we are investing into newer furnace, which is 154-tonne furnace, which we feel that will give us better margins, better realization because we are trying to tap the high end of the markets here. So there are -- we are trying to work on product mix. We are trying to work on tapping the high end of the market. Investments are going towards that. And we feel that margin expansion should happen over the next 2 to 3 years in a range of around 2% to 3%.

Okay. And regarding the building product segment, I see very less EBITDA margins. So is that...

That's already covered as a part 1 of the question.

The next question is from the line of [ Lucky Hashim ], an individual investor.

First of all, congrats on a big, big quarter compared to the last quarter. Sir, during the last con call you had mentioned that your broad outlook for the current year would be EBITDA of INR 100 crores per quarter. So with -- would that continue and hold, considering that your top line has expanded considerably? The second part of my question is HSIL has a arrangement with Somany Home for the building products. Does that mean that we can also manufacture for another party? And would this be your final arrangement? Or would it -- would there be some kind of finality to the whole deal, sir?

So I'll answer your questions in a sequence. So as regards the previous con call, I think what I would have stated is that we -- in quarter 3, we had INR 100.6 crores. I think that we should be able to maintain that. And quarter 4, also the margins have come down slightly. It is due to the fact that many input prices have increased and the pass on effect happens with some lag, the negotiation for which happens with our customers. They may agree. They may not agree or they take time to sometimes to agree on us. But in terms of the guidance, it remains the same that the run rate shall be maintained. Run rate can slightly get disturbed during the financial year because we have 1 blast furnace, which may be coming up for repair. And during that repair, we do the tonnage and the sales for that particular period. But once it is repaired then the life of the furnace is good to go for next 8 to 10 years. Second question is in terms of arrangement with [indiscernible] which is a wholly owned subsidiary of [indiscernible]. This is a contract on a arm length basis. This is really making that third-parties really go and also approval of shareholders. Company is independent to sell any of its product. But excluding the brands, Hindware, which belongs to Somany Home Innovation Limited. So we can go for any third-party brand, to anybody, and manufacture. So 2 companies are independent of each other in terms of the brand name.

And sir, in terms of your long-term debt, you mentioned it's INR 750 crores. What is the figure which you have in mind for another 2 years in terms of comfort level on the balance sheet, sir?

So as we are investing money into further expansion because our capacities are already reaching 85%, 87%, we have to spend as we -- we'll invest in the growth part of the business. So we are investing in the development of the last facility. So the debt level remains as on 31st March '22 because the money would have been invested, but the plant would have not started. So maybe in 3-year time, it will come down substantially because, right now, our repayment is lower at somewhere around INR 90 crores per annum. But in coming years, the repayments will increase from this INR 750 crore. But broad models that we should be adequately leveraged. We should be able to maintain a good amount of debt because debt is coming at a good cost to us, which is around 7% to 8% pre-tax costs. So post-tax cost is much lower. So we will be able to create a lot of shareholder value using appropriate amount of leveraging the balance sheet.

Fantastic. And 1 last small question, sir. The CPVC capacity of 35,000 to 38,000 tonnes. Does this have the same arrangements like the other building products with Somany Home or does -- can HSIL sell this independently in the market, sir?

So HSIL can sell any of it products independently into the market.

But the CPVC also -- does it have a branding arrangement with people on anything or we sell directly in the market?

No. I think it's important for everybody to clarify on HSIL. So the brand Hindware now is part of the demerger. It's not part of HSIL. So it is a part of Somany Home Innovations Limited and it's only subsidiary, Brilloca. So whatever is manufactured is under the branding licensing contracts. So any product, which is manufactured by HSIL for Brilloca -- under the brand Hindware can only be sold to them, but not in the market. But if for any third party brand, they want to get anything manufactured from HSIL, it can be done by HSIL.

So the CPVC, we are doing under Hindware?

Yes, yes.

[Operator Instructions] The next question is from the line of [ Rajesh Shah ], an individual investor.

Sir, congratulations for the good set of numbers for Q4. Just 2 questions I have. One is regarding the EBITDA margin. The guidance that you -- in your last con call you have given the guidance of 18% in the quarter. But this time because of the expenses has gone up and some arrangement of inventory, that has gone down to 15%. So will we maintain the same guidance in the next subsequent quarters? Or how is your -- how you see the subsequent part of future?

So when we give a guidance, I think there was a disclaimer with the guidance that it was medium to long-term figure, because it's very difficult for any organization to give any type of guidance. And generally it is not our habit to give a quarterly guidance. So just to explain that why is the markets are slightly lower, as I explained, some input prices of raw material has increased drastically in last 1 quarter. But there is a beat and a lag some of the times on all these things in terms of passing on to the market.

But we have taken the price increase in the product, right, and in the throughput?.

Yes. But these price increases are not absolute one-to-one arrangement. You have to see the market. You have to see how the market is also behaving. And then only you can work around it. Especially on the glass, when we deal with all the multinational client, it's a time taking process for seeking any approval for any price hike. So we are working towards that. And as far as the guidance of margin is concerned, our guidance is always on a medium to long-term range. So it is not on a quarterly thing.

Okay. And sir, second question is when we have a building margin of, let's say, you have given -- already given the answer of 3% to 4%. So every time whenever the margin expansion happens, will it be in that division only, right?

Primarily because that is the largest entity now in the organization the packaging product entity. And there's a market opportunity on an overall basis in the [indiscernible].

Okay. Okay. So because of the -- once we have a guidance of, let's say, 18%, so with the comparison of peer, our market capitalization also will be like in the next coming 2, 3 years it will be more than -- it would be INR 4,000 crores to INR 5,000 crores?

It's always our practice. Whenever we are giving the market guidance, it's always on a medium to long-term [Foreign Language].

The next question is from the line of Saurabh Shroff from QRC Assurance and Solutions.

Sir, my first question is on the packaging division. What are the demand trends that you are seeing, let's say, in the last 3, 4 weeks, since these lockdowns have started to spread? How are your customers reacting to this?

Yes. I'll request Mr. Rajesh Khosla, our CEO of the glass business, if we can take this question.

Okay. Thank you, Mr. Sikka. You're asking the sensitivity between a lockdown and the consumption pattern of the glass products. Am I right?

Yes, that's correct. Correct me if I'm wrong, but where I'm coming from is that December quarter was a lot of normalization. Even up until middle of March or almost till end of March, life was pretty normal, coming back to normal and then you obviously had the shock with regional lockdowns. And thus, we are sort of in the summer season for, let's say, the beverages companies. So I'm just trying to get a sense that how are your customers reacting to those lockdowns?

There are 2 parts of that. One is the industrial averages and 1 is our company performance in that time. So these are 2 separate things we have to understand. Now I'll answer first about the industry averages. When I say when there will be a lockdown, it's very typical of that is 30% to 35% of the consumption of beverages, particularly beer and liquor and all, they happen in a restaurant, pub and bar and hotels. And around 65% -- it happens with people who consume in their house and parties and closed parties and all. So with the lockdown, this 65% remains intact and slightly goes down. So the demand, basically from 65% home consumption goes to 70% and the other consumption, it comes down to 5%, 7%. So the total net effect comes out to be 75%. Demand remains 25% is going down. In the case of the beer segment, which is quite a big segment. So what happens is the demand, particularly in the Northern region, like Delhi, is struggling and the whole Punjab, Delhi, UP struggling. The demand has fallen by around 40% -- 40% to 45%. And secondly, in the Southern part, it has dropped by 25%. And in other parts, around 30%, something like that. So these are the numbers. So typically, when there is an absolute lockdown, you can very well assume that the consumptions will come down to 70%. But the problem is, it's not only the consumption by the consumer. The problem is the whole supply chain gets disturbed sometime depending upon the type of lockdowns we are forcing. If there is no transportation, if there are no facilities, if the people are not coming in the factories to fill up the bottles and all, probably, the supply chain will dry up. Though there is an end consumer demand, but the supply chain cannot sustain with that part. So this is 1 part. Second part is we were talking how we are -- how has our company, I mean the HSIL, respond to that. We have the long-term contracts with our customers. And we are always in an advantageous position. Even though there is a fall in the demand, basically because of the lockdowns, but we try to get some extra share from our customers, so you can say, on a long-term basis and other arrangement business. So that is how we are managing the issue.

And I guess, given our leading market share, that obviously puts us in a good position.

So we have a wonderful team, and they work very hard. And I hope that even in this lockdown, these numbers will be better than what it should be.

Understood. And my second question is on the building material side. So just to clarify, are we as of now doing any contract manufacturing for a third-party or are we...

Mr. Shroff, sir, this is the operator. There is a slight disturbance coming from your line. Request you to mute your line after the questions, so that the management answers your question.

Okay, sure. Are you able to hear me right now?

Yes, we can -- I heard your question. So right now, we are doing only for Brilloca. We may do for a third-party as and when the return of -- when demand comes forward.

And what is our capacity utilization in this segment?

So we have been -- in building products, we have been able to build up good capacity, the utilization of somewhere around 85% to 87% during the quarter 4.

And any plans to add capacity to this particular segment?

Pipes, we are adding capacity. That I already explained.

No I am talking in the ceramic...

No, right now no.

So sir, listen. I will just come in here. We are adding a capacity of around 1,50,000 pieces between both our plants by putting a 2 shuttle chains and by expanding our casting capacity, which we announced last year, and the work has just started. And I think by end of the year it will go on the shelf.

New capacity announcement is not done. This is already announced...

So how much is this addition on the existing base?

That will be around 7%. But it will be also large pieces and big pieces for this demand is growing in the marketplace because people are going for better and better products and high-end products. So we are building capacity for producing more high-end products.

Okay. Okay. So sir, 1 final question on this. I'm sorry, I'm a little bit new to the company. So maybe you have answered this in the past, so I apologize in advance. What was the rationale for sort of keeping the manufacturing in this business and the marketing in the other business, if you can just help in fact that for me briefly?

So if you see before demerger, HSIL had around 5 businesses. So we had a sanitaryware business. We had faucets. We had pipes. In our consumer products, we had EVOK furniture, and then we had a glass packaging, PET packaging and other packaging products. So whenever we are talking to any investor communities, there was a mix of a B2B and a B2C business within HSIL. We've worked extensively for 2 years along with Wipro to understand how we can demerge it. So 1 important point is that there are B2C businesses and there are B2B businesses. And also to make it efficient from a stamp duty impact, if we transfer the license of land and other fees, so they would have been an outflow in terms of the stamp duty. So based on the recommendation of the legal counsel, based on the recommendation of the market players, so outsourcing is a new -- is not new, not to India. And this is an excellent thing which we are working on today. So that's why we retained the manufacturing part here, so that the team is more efficient in terms of [indiscernible].

The next question is from the line of Manan Shah from Moneybee.

Congratulations for a good set of numbers. My question is pertaining the building products division. Sir, if you could tell me how much of our capacity is earmarked for HSIL currently?

There is no marking of capacity as such -- that we are marking the capacity for Brilloca and HSIL. So it is based on an annual contract and is also based on a monthly contract. So that is how the contracts are run between HSIL and Brilloca [Foreign Language].

That we have to supply on a monthly basis?

And also the annual contracts.

And annually also?

Yes.