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

Good day, everyone. I am Amit Zade from Antique Stockbroking, and we welcome you all for HSIL Limited Q1 FY '22 Post Results Conference Call. We are pleased to have senior management team from HSIL represented by Mr. R B Kabra, President and CEO of Building Products; Mr. Rajesh Khosla, President and CEO, AGI Glaspac and Garden Polymer; Mr. OP Pandey, HSIL CFO; and Mr. Sandeep Sikka, Group CFO. [Operator Instructions] Please note that this conference is being recorded. I would like to hand over the call to Mr. OP Pandey for his opening remarks. Over to you, Pandey Ji. Post that, we can open the floor for Q&A session. Over to you, sir.

Good evening, everyone, and welcome to the Q1 FY '22 earning webinar of HSIL Limited. I hope you and your family members are safe during the second wave of the pandemic. We have already circulated our earnings presentation, which is available on our website as well as on the stock exchange websites. I hope you have had the opportunity to go through the presentation, and we would be happy to take any questions afterwards. We will begin this call by providing you details of company's financial performance, and then I will hand over the call to Mr. Khosla and Mr. Kabra to share the details of the business division's performance. Quarter 1 of the fiscal year begins on a mixed node as Q1 of last year was severely impacted and washed out by the first wave of COVID-19, with some of recovery is now visible on year-on-year basis across all the major metrics. However, with the advent of the second wave of COVID-19 during the quarter, sequential growth was impacted. Among these conditions, I am pleased to report company delivered total income of INR 420 crores in the first quarter, a growth of 64% on a year-on-year basis. Year-on-year revenue growth was driven by higher volumes, improved realization and a better product mix. We saw a significant recovery in demand for glass containers from pharma, wine and beer industries compared to Q1 FY '21. We delivered EBITDA of INR 65 crores, registering a growth of 128% on a year-on-year basis, with EBITDA margin of 15.4%. Margins improved on a year-on-year basis as well as visibility and despite top line impacted on quarter-on-quarter basis. Margin were stable on a sequential basis. The strong operating margin profile is a result of our continuous focus on the process and cost optimization and investment in higher operational efficiency in [indiscernible]. EBIT for the period was INR 33 crores, with EBIT margin of 7.9%. PAT stood at INR 11 crores, with a PAT margin of 2.7% in quarter 1 FY '22 as compared to a loss of INR 17 crores in quarter 1 FY '21. A brief update on our 2 upcoming greenfield projects. Construction of both the project is on track and is expected to be completed by June '22. Specialty glass packaging facility at Bhongir and capacity expansion of plastic pipes and [indiscernible] at Sangareddy plant will post of state-of-the-art facility in the department of [ advanced plant ], automation and full year operational efficiencies. I would like to highlight that the macroeconomic challenges due to the pandemic are still present and will [ set up ] how fast and quickly position and the economy revives. But as the vaccination [indiscernible] taking momentum, and state governments are easing lockdown restrictions, we are here to say how optimistic about the future outlook and revenue growth. We also remain confident of improving our margin profile, owing to higher operational efficiencies at the plant, supported by better product mix. Now I hand over the call to Mr. Kabra to talk about the building products division.

Thank you, Mr. Pandey. Good afternoon to all who are attending this call. In Q1 FY '22, revenue from operations of building products was INR 123 crores, registering a growth of 105% on a year-on-year basis. In terms of macroeconomic and business environment, we are better placed than Q1 of last year, which was wiped out by the first wave of COVID-19, as you all know. As the quarters are locked down across stage, time to time, it resulted in lower demand from the construction and infrastructure sector impacting negatively the building products division. On a sequential basis, our capacity utilization levels across plants were lower, which resulted in higher production costs, which affected the profitability. As the economy is opening up, we are expecting a consistent and improving demand for the products. Now I will hand over the call to Mr. Khosla to talk about packaging product division.

Good evening, everybody. Thank you very much, Mr. Kabra. The packaging products division was a major growth driver for the top line and profitability during the quarter. Revenue from operation was INR 293 crores in quarter 1 financial year '22, registering a growth of 54% on year-on-year basis and contributed 70% of the total revenue. The division saw increased volumes, demand for glass containers from the pharma, wine, beer industry on a year-on-year basis. However, revenue declined on the sequential basis due to muted demand as a statewide lockdown impacted these segments drastically. Despite the challenging macro environments, the packaging division has delivered a strong EBIT margins of 13.3%. Glass container capacity utilization stood at 89% as compared to 63% in the same quarter last year. Our focus on manufacturing excellence is a part of our growth strategy. And recently, we received 2 national awards for our efforts and endeavors. National Feathers Touch in association with The Economic Times awarded AGI Glaspac back with the Best in Class Manufacturing Award for glass manufacturing category. We have also received the ISO 50001 2018 certificate for strong energy management system put in place across the manufacturing plants. I would like to share and update you, operating plants at higher efficiency level and lower operating costs require and timely maintenance. Therefore, in Q2 financial year '22, one of the furnace will be shut down for the scheduled rebuild of a refractory lining, onetime maintenance which happens in 8- to 9-year period. Now looking ahead, quicker recovery in demand for the key industries is expected with the relaxation of lockdown restrictions. In addition, long-term growth drivers of packaging divisions are: we are catering to consumer product, post per capita consumption is on the growth trajectory; two, for all these industries, be it pharma, alcohol, food, beverages, product execution is on the rising trend, where customer preference is moving from plastic to glass packaging. These factors will drive HSIL packaging division growth, and HSIL is well positioned to remain a profitable market leader. Thank you very much, and we are now ready to take any questions for the team.

[Operator Instructions] We have one question from Nikhil Gada.

Can you hear me?

Yes, yes, Nikhil.

Yes. Sir, my first question is we are giving this capacity utilization number of -- is this a production capacity utilization or the sales utilization?

So these are production-linked utilization. So all the capacity utilizations are production-linked only.

Exactly. Okay. So sir, in that context, when we have seen this 54% growth in packaging, can you break it up in terms of how much for the volume growth and value, sir?

So generally, we don't give volume and value separately as a part of the disclosures. So I think the selling prices more or less remained same as not substantial increase on a quarter-to-quarter basis, although we are expecting them going forward. Because of price hikes, there can be some, but that is subject to our customers agreeing to it.

Sir, have you passed on any price hikes as of now? Or it's still in the [ course ] because of the lockdown issues?

Rajesh, can you take this question, please? Rajesh?

Yes. Now this question is regarding the price increase or the price passed on to the customers. Am I right, like this?

Yes, sir. Yes, sir.

Sir, in the recent time, there has been an increase in the cost factor. And what happens is whatever cost is increased on a permanent basis or on a long-term basis, those things are being passed on to the customers. And a lot of things are being worked out by our efficiencies, effectiveness and productivity. So our discussions with the customer is on. And we are -- partly we have watched it, and partly, we [indiscernible]. Partly means not only value term but of the number of customers I'm talking because everything takes time, where one-to-one negotiation happens, and then the discussions are finalized. So we have already finalized with a lot of customers, and that is customer we will be finalizing. So it's in the process.

If you don't mind me asking, what would this hike be in terms of [indiscernible]?

Till the time we finalize with the customers, everything remains confidential, even in numbers and even the name of the customers. So I will like that this part can be excused on the [ after tax ], but certainly is going to cover up enough to cover up our extra cost, which is going to happen and even increase in margin sales.

Sure, sir. So only reason for asking is that our margins, while they have -- in packaging, while they've improved year-over-year, definitely, when we look at 4Q, we were close to 18-odd percent, which has gone down to 13%. I understand there is some impact of lockdown. But is there any other reason as also the power and fuel cost also sort of impacting?

Mr. Nikhil, can you repeat the last 2 lines, please?

Sir, what I'm trying to understand here is that apart from impact of RM inflation, is it that the increase in power cost has also impacted our margins for the quarter in packaging?

Okay. The power cost -- in the fuel cost, there is a power cost and there is a hydrocarbon fuel cost. As far as power cost is concerned, it has remained the same. But as far as hydrocarbon is concerned, there has been fluctuation up and down in that case. The major reason of the sequential less profit as compared to last year is more on the lockdown and less of the sales part, which have entered in our inventory. There is nothing more than that, sir.

Just one we would like to add here is that over the last 2 to 3 years, we have invested in development of various facilities wherein we can use alternate fuels, where we are capable of using furnace oil, LPG, coal gas, normal natural gas, so wherever we feel it is the best optimization. So we have now capability in-house to use the best mix which we can do.

Sir Sandeep Sikka, I may like to add further. We are one of the organization in the whole globe, not India, the whole globe, which are using so many multiple of the fuel and the drop of the hat. We can use pet coke. We can use furnace oil. We can use natural gas. We can use coal gas. We can use LPG. We can use [ H2O ], and that, too, in a very short span of switching over from them. We have a very global system by which the cost optimization are being worked out on a regular basis once in 15 days. And whatever is the best combination for our profitability, we work accordingly on that. So that's where we are on a very, very strong [indiscernible]. And even if there's a fluctuation in the world market, we are the last one to get impacted of that level, what other companies of the similar nature can get impacted.

All right, sir. Got it. Sir, so just this -- it's more of an aberration and this -- the 17% sort of a trajectory should stand [indiscernible].

Yes.

Is that [indiscernible]?

What 17%? We couldn't get your question.

Sir, I'm trying to say the 17% EBIT margin trajectory that we had...

Yes. So if you see quarter 3, quarter 4 of last financial year, we feel that we should be able to maintain in the range-bound of that. But that is based on market conditions.

Got it, sir. And just, sir, last question, because of this plant shutdown that we are having, how much of sales we might lose in the quarter?

Nikhil, we are not going for a plant shutdown. We are going to have a furnace shutdown. Right now, we have 2 furnaces, and one of the furnace is under shutdown. It's not a -- it's a very planned shutdown because every 9 to 10 years or 8 to 9 years, this furnace has to be rebuild and reline. So it has come -- or the stage has come where we have to do that. Regarding the loss in sales, revenue, I think there is not going to be much loss in the sales because we have the inventories, and from the inventory, we will try to capture whatever the loss in production will be there. So all these things are being planned accordingly.

[Operator Instructions] So, yes, we'll take the next question from the line of [ Shreyas Virani ].

Yes. Can you hear me, sir?

Yes.

Okay, okay. So very well done. First quarter result, we just got the results in front of us now. There has been a drop in top line on a quarter-on-quarter basis, right? I understand it's because of the pandemic. But going forward, if you could please share with us -- for the month of July, are we back to the normal sales pattern? Or you're still struggling because of the pandemic?

No. Market has normalized. But other than this, because we are already in the current quarter because we don't want to make this as an unpublished price-sensitive information, so we are restrained to talk about the current quarter. But based -- we lost some turnover in the month of May, and the recovery has been good in the month of June. And going forward, we are confident that the way we recovered last year in the same trajectory we should be able to recover. So current market conditions look fine. This can be impacted by, if any other wave come through that is outside what we are talking out -- talking right now here. So giving a guidance on the current figure, please excuse us. We can't do that as per the part of the governance.

Right. I do understand that. So I was just trying to figure out, are we going to be hitting INR 600 crores quarterly that we did in the month of March? Or as you said, you can't share. But just a broader outlook, just to get a sense of what...

So I think the guidance here is based on the current market conditions, we are confident that what we did in Q3, Q4 of the last financial year, we should be around that.

Mr. Sandeep, I may like to help you a little in that case. Our business, as to be understood, it is a little of cyclical nature. So normally, our quarter 3 and quarter 4 are because of the demand cycle is a bit higher than the quarter 1 and quarter 2.

Excellent. I appreciate. One more question. As compared to our competitors, Kajaria Ceramics, okay, last year, they posted INR 2,523 crores of sales, and they had a bottom line of INR 301 crores. Whereas we had INR 1,860 crores and we had INR 88 crores of bottom line. We are doing 16.6% operating versus their 19.2%. So is there -- are they more efficient? Or what makes them so more attractive in terms of operating margins?

So, [ Shreyas ], I think one point I think we need to update you is that we did a scheme of a demerger in the year '19, 2019, in the 1st April 2018, post which the major part of our business other than manufacturing of the building products is now a part of a different entity. So this split was already done. So today, HSIL is a more focused packaging product company, although we have a building products division which is purely OEM manufacturing for the other company. So the results with the competitors, which you are naming here, are not comparable for our building product because that is just an OEM business here. We are more comparable now with the packaging product companies, which is part of our packaging product companies because major [indiscernible] in HSIL today is coming from packaging products today.

Mr. Sandeep Sikka, in my address, I have already indicated that 70% of our revenue is from the packaging product division.

So who are our competitors in the packaging product division, just to get a better understanding? If you can name that -- the market leader who is in the packaging?

There are companies like Haldyn Glass, a listed one, or the other one is Hindusthan National Glass. These are 2 primarily big companies. Like we are #2 player in glass today, in terms of the capacity. #1 is Hindusthan National Glass.

Excellent. And there was a buyback last year. Any possibility of another buyback?

Anything which is not approved by the Board, actually, we cannot comment on it. But as per the law, once the buyback is closed for another year, you [ can ] do it, actually.

Sir, we'll take the next question from [ Zaki ].

I think congrats to the management on a reasonably healthy set of numbers despite the pandemic. Sir, I have 2 questions, one relating to the numbers and one, a general question. So you have indicated that the packaging product division did 89% capacity, which is around INR 294 crores against INR 418 crores of the preceding quarter. So is it that preceding quarter, we did more than 100% capacity utilization? Because if you also see the segment-wise profit, it has dropped a little more than the proportionate way. So do you think that the last quarter was an exceptional quarter in terms of margins? It's my question number one, sir. And...

If we take -- answer your question one first question, actually, if you allow me. So basically, if you see, the normal production was happening, we generally operate our plants -- glass plants at around 90% capacity utilization. So during the pandemic, plants were not closed. Also, markets were closed. So like the liquor events were closed. The restaurants were closed. Then the disposal of material did not happen. So we lost some turnover in the month of May, but the production continues. So we build up the inventories. So this has come as a blessing in disguise. Now we had a planned shutdown, so we can use these inventories now during those furnace shutdown period to dilute them and service our customers. So the production continues, and it is not that the Q4 is an exceptional thing in terms of production. But Q4, as Mr. Khosla said, is generally Q3, Q4 is exceptional because of the seasonality because the beer season picks up [indiscernible] on a high. So Q4 numbers are generally higher as such, but nothing in terms of the production. We have a steady production schedule. And I hope I answered your question.

So I -- Mr. [ Zaki ], the production is mostly flat. The production is mostly flat across the quarters. It is only the sales volumes, they go little up, little down on the basis of the cyclic nature of the business.

So would it be safe to assume that the Q1 was a little squeezed quarter in terms of margin and sales, sir?

Yes.

Sales, it is already down. It's a known fact. Yes, Mr. Sikka?

Yes. So because when sales are down, there is an operating cost. So that is why margins are also looking slightly down [indiscernible].

And what about the inventory figure, sir? We have a figure of INR 67 crores on the inventory negative. So what would that be? I mean, that will also slightly standout kind of thing, sir.

So this inventory will dilute in quarter 2 because we have a planned shutdown. So furnace tonnage will not -- one of the furnace tonnage will not be available. And the current buildup in inventory will use to dilute the inventories and make service our customers.

So sir, would it be safe to assume that we will at least cover the sales of last year? I know it's also a forward-looking thing. But on a broad level, do you think last year can be covered in terms of overall sales, sir?

Based on the current market conditions, I can say, yes, we are confident we can do that.

And one more broad question, sir. This building products is -- constitutes 30% of our covenant. And I know the arrangement with Somany Home. But at least it should be -- it should not be EBITDA negative for HSIL, sir. I mean, are you looking at that aspect of the whole deal, sir? Because I agree, we have an arrangement.

As per our arrangement, it will not be EBITDA negative. But there is a margin, which is a transfer pricing margin based on the report of an individual consultant, one of them [indiscernible]. But what happens is when a position like it comes through, where market gets closed, but you cannot shut down the plants fully. So there is an unabsorbed cost, which as per the accounting standards, we cannot load down to the product. Let's say, plant is designed to operate at 80%, 90%. If the capacity drops down, there are [indiscernible] relating to the plant which doesn't get loaded on to the plant. So these are exceptional period wherein you see this abrasions. But over a period of time, when next quarters if they are normal quarters without any COVID impact, you will see the margins coming on -- the EBIT margins coming on to the good numbers.

So the building products is not EBITDA negative for HSIL?

No, it is not as per the plan. So if -- see, our arrangement with HSIL is that we have an EBIT margin of around ranging between 3.5% to 4.5% depending on various products. This is EBIT, so we cover depreciation also. So the corresponding EBITDA margins should be in the range of around 10% to 12%.