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

Good day, ladies and gentlemen, and a very warm welcome to the HSIL Q2 FY 2022 Results Conference Call hosted by Dolat Capital. [Operator Instructions] I now hand the conference over to Mr. Umesh Raut from Dolat Capital. Thank you, and over to you, Umesh.

Thank you so much. Good evening, everyone. On the behalf of Dolat Capital, we welcome you all for HSIL Limited Q2 FY '22 post results conference call. We are pleased to have a senior management team from HSIL being represented by Mr. R.B. Kabra, our President and CEO of Building Products; Mr. Rajesh Khosla, President and CEO of AGI glaspac and Garden Polymers; Mr. Om Prakash Pandey, CFO, HSIL; Mr. Sandeep Sikka, our Group CFO. [Operator Instructions] I would like to hand over the call to Mr. O.P. Pandeyji for his opening remarks. Over to you, sir.

Good evening, everyone, and welcome to Q2 FY '22 earning call of HSIL Limited. I hope you and your family members are safe and healthy. We have already circulated our earnings presentation, which is available on our website as well as on the stock exchange website. I hope you had the opportunity to go through the presentation, and we would be happy to take any question after that. We will begin this call by providing you with the detail of company's financial performance. And then, I will hand over the call to Mr. Kabra and Mr. Khosla to share the details of their businesses -- divisions performance. During the quarter, the company delivered a total income of INR 566 crores, a growth of 29% on a year-on-year basis and 35% on a sequential basis. Quarter 2 saw an improvement on both sequential as the Y-on-Y basis as the economy recovers from the ADHOC impact of the second wave of the pandemic. It will be a fair assessment to say that there was a broad-based recovery with magnitude bearing for different end-user industries. As such, our revenue growth was supported by increased sales volume in both the divisions that is Packaging Product Division and the Building Product Division. We delivered EBITDA of INR 91 crores, registering a growth of 18% on year-on-year basis with EBITDA margin of 16%. The strong margin can be attributed to higher revenue, optimized product mix and higher operational efficiency across the plants. This is worth appreciating that the company delivered healthy operating margins, despite the fact that the fuel prices are on an increasing trend over the past 3 months. This is a result of our ability to use alternative fuels in the manufacturing processes. EBIT for the period was INR 63 crores with EBIT margin of 11.2%. Profit after tax stood at INR 30 crores, growth of 40% from adjusted profit of INR 22 crores in Q2 FY '21. For your reference, in Q2 of FY '21, the reported profit was INR 36 crores and included one-time income tax write back off which is INR 14.7 crore. PAT margin for the current period are 5.4%. We continue to generate strong cash flows. And in the first half of the fiscal year, cash from operations stood at INR 106 crores. The company incurred CapEx of INR 188 crore during the same period, which was primarily utilized for two upcoming greenfield projects and realigning of one of our new furnaces. Now, I will over -- hand over the call to Mr. Kabra to discuss the Building Product Division. Over to Mr. Kabra.

Thank you, Mr. Pandey. A very good afternoon to all of you once again. I will speak about the Building Products Division, which includes sanitaryware, faucets and pipes. In Q2 FY '22, revenue from this division was INR 237 crores, registering a growth of 72% on a year-on-year basis and 93% on quarter-on-quarter basis. Revenue growth was primarily due to sharp recovery in the real estate sector as reopening of the economy post the second wave rejuvenated the demand momentum. I would also like to update you on the initiatives we have undertaken and the progress. So last time, we mentioned that we have gone ahead sanctioned CapEx for installing two shuttle kilns, one at Bahadurgarh and one at Bibinagar, and also enhancing the casting capacity. The work on these two new shuttle kilns is progressing as prescheduled. Both the shuttle kins, one at Bahadurgarh and one at Bibinagar plant will be commissioned before the end of this financial year. The work on the enhancement of casting capacity at Bahadurgarh is also progressing well now after initial hiccups due to a second wave of COVID-19. Both these projects will help us in increasing the production of large pieces, demand for which is growing more than the normal pieces. Additionally, work on installation of robotic system for glazing is underway at Bibinagar plant, and we expect it to be commissioned before the end of this financial year. This is being done to reduce dependence on skilled glazers availability of which is becoming scarce. We expect that a favorable macroeconomic environment and upcoming festive season will drive sales, and we are well positioned to meet the pent-up demand. EBIT for the period was INR 9 crores with margins of 3.9%. Profitability for the period improved primarily in light of the better revenues. We are optimistic for the near term prospects, and there will be a continuous increase in the demand for our products. So this is in brief. Now, I would hand over this call to Mr. Khosla to talk about Packaging Product Division. Over to you Mr. Khosla.

Thank you, Mr. Kabra, and good afternoon, everybody. The Packaging Product Division saw a healthy growth across all major key metrics in terms of sales volume, revenue and profitability. Revenue from operation was INR 308 crore in Q2 FY '22, registering a growth of 6.7% on year-on-year basis and 4.9% on quarter-on-quarter basis. Revenue growth for the period was driven by the beer, liquor and the wine industry. As one of the furnace was shut down during a significant part of the quarter for maintenance, efficient and effective operational planning has helped us to continue the growth momentum. We proactively created inventories in the previous quarter, and as such, have been able to successfully meet the demand of the second quarter. The realigning process started in the last week of August and was completed in the first week of October. The segment contributed 56% of the total revenue. EBIT margin also improved to 20.2% in Q2 FY '22 from 14.2% in Q2 FY '21. We continue to maintain the highest operating margin in the glass container manufacturing, underpinned by strong operational efficiencies in the manufacturing process and our capability to use alternative fuel. In light of realigning of furnace, glass container capacity utilization during the quarter was 66% as compared to 72% in the same quarter last year, and 89% in the previous quarters. As the COVID-19 cases are receding, economic recovery is expected to be faster, and subsequent increasing the consumption will support our growth momentum. Also, evolving consumer behavior with preference shifting towards quality, safety and premiumization of the products. And these emerging trends are driving the glass industry growth. HSIL being the leading profitable player is well positioned to capitalize on the growing market opportunities and deliver sustainable growth in the coming quarters. Thank you very much, and we are now ready to take any questions.

[Operator Instructions] First question is from the line of Aditya Dhawal, an individual investor.

I have a couple of questions. Like, right now, with the specialty glass when we are doing, we are majorly focusing on domestic or export because I want to understand that right now, our export contention is less or how we are looking forward to this one.

Rajesh, please?

Yes. If I understand your question properly, you are asking that what is our export contribution and what is the profitability in each port? This is what the question is?

Yes. And going forward also, in the specialty glass, how we are going to capture this export market?

Okay. We -- our export is quite small. Right now, our export volume is around 3% to 4% of our total sales. This has been done purposely 2 years back when the domestic market was growing very fast, and there was a robust demand in the domestic market, we purposely ignore the export market and focus on the domestic market. This has been a very fruitful in this year and the last year when the trade rates, particularly in the international market has skyrocketed. Otherwise, we would have been greedy in this context. So this is the status as on today. But going forward, in our specialty glass, our first concern will be, we will be stabilizing our operations with the domestic market where there is a robust demand. And once we stabilize in the domestic market, we will start looking forward in the export market, which is going to be very lucrative, and we are going to cater there. Going by the numbers, everything will depend upon how the freight rates and the relative profitability of domestic and export markets open up. But overall, we will be open to both the markets, and we will be focusing more on sustainable and consistent profitability of the company.

Okay. That makes sense, sir. And regarding the debt, I see, for this year, our debt will be around INR 1,200 crores. Is that INR 200 crores is for specialty glass and INR 100 crores is for Building Product segment. The majority is for -- can you do something upon it? Because I think only there is INR 300 crores up north and some operations in Q2. But other than where it is being used on, I want to get some clarity.

So today, if you see on 31st -- 30th of September, we have a total long-term debt of around INR 925 crore long-term debt and another INR 115 crores to INR 120 crores of working capital limits being utilized. So that makes the overall debt, banking sector, including the same tax federal loans at around INR 1,025 crores to INR 1,050 crores. Part of the -- like the specialty glass project is underway [indiscernible] is underway, full level of expenses has not yet been done. So this is the status as such. And the other debt, which we had done is because historically, we have spent in building the capacities, like few year back, we made some investments towards building our various fuel mix opportunities, like we set up a coal gasification plant. Similarly, all these investments have been made historically. Apart from it, the other debt, which has been -- which is there on the balance sheet is the debt which is relating to the pipes division, which was set up in 2018, and then some expansion, which happened on the -- our sanitaryware plant as well as the faucet's plants.

Okay. So it's like in 2018 [indiscernible] focusing on our working capital requirement, we are having this debt. And of...

Your voice is not clear to me.

Yes. Right now, now?

Yes. Please go ahead.

So this for maintaining like working capital requirement and to maintain the operations, we have taken this debt. But then, this INR 200 crores at specialty and for building costs when it is operations, then not the individual traders, right? Is that correct? In that categories. Then, it will be reduced right with cash flow?

Yes, yes. Because if you see from next year onwards, the repayment is also coming through. Until now we had lesser repayments, so there will be one incremental EBITDA relating to all these investments. Secondly, the repayment factor will come into the picture. So the quantum of debt, which we are contracting, like the total debt which remained in next 3 years will be somewhere around 300 to 400. And once [indiscernible] we have given a guidance here that the debt level as on March 22 may enhance, but then, it will taper down substantially over the next few years.

Okay. Okay, sir. The last question I have is slightly long-term growth. So for the long term, we are focusing on 150 tonnes of specialty glass, where we have the higher realization and higher margins. Apart from this, sir, where are we focusing on opportunities? Can you give you some things on it for long term like 3 to 5 years per city, one at a time?

So I think, HSIL today is emerging as a clear leader into the glass business. We were already leaders on the profitability and of late, we have been utilizing our capacity very efficiently. We are investing -- making some investments to increase our throughput. That means we can expect more production from our existing plants. We are also investing into debottlenecking of the plants. And many opportunities may come through in the market. When I -- very recently, this is a public news, that one of the largest players in the glass have been admitted into IBC. They may go on the way of IBC proceedings for a period of time. So which gives an ample opportunity to many players in the market to further expand, grow the horizons. This is all subject on the proceedings under the IBC. But other than that, the company has opportunities to expand capacity otherwise into the newer segment. We are right now only south-based producer of glass. Maybe over a period of time, we make investments into east and north and further fortify our positions into this market.

[Operator Instructions] Next question is from the line of Himanshu Shah from Dolat Capital.

Sir, can you just provide some color on glass bottle prices on a either per metric ton basis? Basically, how has been the realization during the quarter? How much was it last year same quarter, and where shall we see it in 3 to 6 months' time? Basically, we believe that gas prices have been increased quite significantly by almost 60%. And even the outlook on gas prices and global prices seems to be on a higher side and that too in India. So how should we see the trend on glass bottle prices?

Okay, Mr. Sikka.

Yes, Rajesh. Rajesh, you please take this.

Yes. The prices of glass is different for the different customer because it depends upon so many various factors, it can be a quantity, it can be a type of bottle, it can be the volume of the bottle, and it can be so many more value additions. So giving a one particular price back to anyone, it will be very, very difficult because we have a different range. As far as range is concerned, our range starts from INR 23,000 per metric ton to INR 50,000 per metric ton. So this is the range in which we are operating and we are selling to different various segments. Regarding the gas prices, yes, the gas prices have gone up. And in this half yearly, I mean to say, up to September, so we have a system, we have a tie-up with the gas supply. And because of that, we had a fixed pricing and we got the advantage of that. Going forward, we have the various type of mechanism by which we recover the increase in the cost from the customer, either it is in the form of price deration formula or one-to-one negotiation or one-to-one understanding. So this price increase, which is across the industry, across the globe, those price will be absorbed by the customer, but there will be certainly time lag and time gap between increase and the assessment.

Okay. Sir, can you just provide some color like, for a particular range of a product if the prices acts like what was it maybe a year back, and where should we see it in a 3 to 6 months' time post the kind of cost?

As far as the price as compared to last year, it has gone up by only INR 500 per metric ton up to September. But yes, there will be a steep increase in these prices from second quarter to third quarter or fourth quarter. So there will be a steep increase.

Okay. And how much should that increase be, sir?

It can be close to up to 10% of the prices.

Okay. And do we see, sir, since alcobev industry is one of a large customer. Now with maybe the reused bottles coming back or company utilizing more amount of...

It's already there in the market. Used bottles are already there in alcobev segment. Beer segment consumes a lot of old bottles, they reuse the bottle and same with the alcohol segment. So it is not anything new thing, which is going to be in the market. It is already there. So whatever best they can use it, they are already using, so I don't think so there is any more very high potential of this shift of using the old bottles.

Fair enough. So basically, it is, sir, around 8% to 10% is what kind of the prices may go up, and this would be largely to absorb the cost? Or this would also benefit us in terms of slightly some more flow through for us also?

No. Since you told the gas prices are going up and basically, because of the cost increase, so those things can be passed on to the customers.

Okay. And sir, just because as you highlighted, one of the largest players, they have gone to IBC. So do we foresee some kind of capacity reduction taking place in the industry and -- which should benefit us in terms of both higher volumes as well as maybe more demand from the current consumers because of the one player going to IBC, and therefore, higher pricing benefit also to us.

Okay, as Mr. Sikka informed, the company has gone -- one of the big company has gone to IBC. It means they still will be running their operations, but those operations may be available for the other companies to be taken over. So we see the opportunity from the market point of view. As far as capacity is concerned, yes, there can be possibly reduction in the capacity if the capacities are not being done at economical manner. So yes, there is a possibility. But then, there are small increases in the various segments also by the other manufacturers on a pan-India basis. Regarding the pricing, yes, there can be a benefit in the price this thing. But I think looking to the consistent and long-term policy of our company, where we may like to integrate ourselves with the -- our buyers and our markets, so probably exploitation things will not be there, but it will be more of the opportunity things.

Fair enough, sir. Sir, and just a last question surrounding this. 2 years back when there was a healthy price increase, which was provided to the glass and glass industry, after that lot of capacity had came up, especially from the unorganized player or from players in the northern markets like Firozabad, et cetera. Are we seeing -- still seeing that continuing in the sense new capacity is coming up from unorganized players and they do benefit to some extent on few of the things. So are we seeing high competitive intensity from them?

Glass is a very high CapEx industry. So the people are going to put the CapEx only when there is a demand available in the market. So it all depends upon the demand and supply gaps. Regarding the Firozabad. Firozabad has been bagging majority on the APM gas, which is a cheap gas available to them. That gas is already finished. It has a limitation. It cannot go beyond some capacity. So all the further gas will be at the market prices. So things will become uncompetitive if the capacities are added without any backup on the demand part.

[Operator Instructions] The next question is from the line of Nikhil Gada from Abakkus Asset Management.

Sir, the first question is regarding the margins on the packaging business. So we have seen EBIT margins grow upward of 20%. And when we look at past historical quarters, there has been one of the best margins. Is there any benefit of -- we have taken price increase, and we have got some low-cost inventory, which has helped this margins. Or this is purely operational benefits, which are at fore here?

Yes, Rajesh. Yes, Rajesh.

Regarding the inventory advantage, we have not decreased our inventory substantially. So there is no such -- much benefit on the inventory part. Regarding the performance part, it is basically because of a very strong planning and commitment to the customers, adding the new value-added, having a multiple fuel system and the furnace is running with quite efficiently. And our commitment and our CapExes and our different money we put up to upgrade our systems has generate such results to us. And in the times to come, you will see, these results will further become strong because of these commitments. So we continuously upgrade our technology and less of the fuel dependency.

Understood, sir. So had we taken any price increase in the current quarter?

Not really. It is only with the product mix where we have gone more towards the value-added products in that quarters.

Understood, sir. Sir, second question is pertaining to our fuel cost. While we have a lot of alternate fuels, as you have mentioned in the past as well, just wanted to understand on a raw material cost perspective, how much would the gas cost be overall as a percentage. If I'm saying 100 is my raw material, how much would gas contribute to that in terms of usage?

Mr. Pandey, can you please explain what is the fuel percentage in our total cost structure?

So when we look at the other expenses or the power and fuel cost that we give separately as a line item, so which has -- if you see the current quarter, it has gone down, and it has been something which we have worked on very efficiently. But the question more is from the perspective that we are seeing the gas price -- the sharp run-up in gas prices. And a lot of the other, let's say, glass manufacturing companies are seeing an impact of that. So just from that perspective, wanted to understand what kind of impact would be there because of this? And what would be the...

Regarding the increase in the gas prices, increase and decrease of fuel is a part of the business, and it happens very regularly -- earlier it also happened, and this time, also, it is happening. This time, things have been little sharp and the prices of the gas and other fuel material is not stabilized. Every day, every week and every month, things are changing because of the demand and supply on a global level, not only India level, but on a global level. And this has certainly distort and disturb the total equilibrium of price and cost. Now this equilibrium, cost and price, will certainly be coming up, but it is going to take some time for such equilibrium to come up. So that time, whatever you call it, a time lag between the cost increase and the price settlement in the market. So that time -- given that time lag, the things will be back to the normal, and everything will be as we had planned. So regarding your second question, what percentage of the fuel is the part of the total cost? I think, Mr. Pandey, you can answer this question.

Yes. Approximately, the power and fuel cost constitute about -- in the range of 24% to 28%, depending upon the price fluctuation. And we are able to control within this range because of the various alternative fuels available with us and we have made our furnaces. We could take all the flexibility to take this fuel, whichever is cost-efficient for us. And we are one of the glass factory -- glass container factory in the world, one of the glass -- which are using many type of multiple fuels, and that too, we can switch over very, very fast. So that is the advantage we are getting now.

Understood, sir. Sir, just while you mentioned about the inflation in gas prices and how it can impact us. Any ballpoint estimate how much price I will have to take, so that our margins are not...

Sir, it is all one-to-one with customer. We are into B2B business, and we negotiate with each customer separately. So the final price with any of the customer or any increase depends on so many factors. So it is very difficult to say any particular amount on the price increase.

Understood, sir. Understood. Sir, secondly, on the building manufacturing division. First question is that while we -- the growth has been very, very strong, wanted to understand, is there also an impact that because our other company have SHIL, where we supply our products, might have had some impact of sourcing issue, and that is the reason a lot of more manufacturing was done in-house by us. Was there such kind of situation in this particular...

As per the contract with them, we cannot comment on what SHIL is. We can answer your questions from HSIL, not from the SHIL's perspective.