APAR Industries Limited (APARINDS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Apar Industries Limited Q4 FY '21 Earnings Conference Call hosted by Four-S Services. [Operator Instructions] Please note that this conference is being recorded. At this time, I would now like to hand the conference over to Mr. Nitesh Kumar of Four-S Services. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone. Welcome to all the participants to the Apar Industries Q4 FY '21 Conference Call. Today on the conference, we have Mr. Kushal Desai, Chairman and Managing Director; Mr. Chaitanya Desai, Managing Director; and Mr. V.C. Diwadkar, CFO, Apar Industries. I would now like to hand over the call to Mr. Kushal Desai for his opening remarks. Over to you, sir.

Yes. Thank you. Good afternoon, everyone, and a very warm welcome to the Q4 FY '21 earnings call of Apar Industries. I would like to actually make a small tribute to our team who we fondly call the APAR Parivar, who really left no stone unturned to ensure that all our plants kept running through the pandemic, through both the first and the second wave and have serviced our customers well. We have continued to maintain very high fill rates through this period and have maintained very safe work practices throughout this whole period. So I cannot express how proud I am today to be a member of this Parivar and the way all the members have cooperated to run the businesses and the offices. So despite both the COVID-19 waves coming and hitting operations, we managed to grow our adjusted profit after tax by 27% year-on-year to INR 171 crores, and the return on equity for FY '21 was up by 106 basis points to 12.5%. This was also helped by a 42% reduction in the finance costs. Consolidated revenue for FY '21 came in at INR 6,405 crores. In the early part of the year, commodity prices are very low. In the second part of the year, they grew substantially. So this is around 14% lower than the previous period, mainly due to a 23% year-on-year decline in the domestic revenue side. The export revenues actually grew in the year by 3% to reach INR 2,637 crores. The EBITDA came in at INR 422 crores, and the EBITDA margin improved by 31 basis points to 6.6%. Our oil business recorded growing revenues and the highest ever EBITDA per kL post ForEx adjustments, which for the year came in at INR 7,032 per kL, partly aided by premiumization of our product mix as also with respect to favorable raw material prices. And, then, of course, a very strict focus on working capital management, which helped restrict the number of outstanding days and, in turn, has had a positive impact on the interest that we've paid. Our Conductor business, unfortunately, faced unprecedented headwinds, especially towards the end of the year. And this arose from a very steep rise in commodity prices, especially steel, which is something that we cannot hedge and also hit by a very sharp escalation in international shipping freight rates. In addition to this, for the HTLS projects business, there were several small lockdowns which happened, but more than that, the required outages were not possible to be obtained due to various COVID-related reasons, resulting in idle time and the execution not happening as per the plan. In Q4 FY '21, specifically looking at that quarter, Apar posted consolidated revenues of INR 1,907 crores, which is up 6% year-on-year. Here, the domestic business has grown by 12% during the fourth quarter. The EBITDA came in at INR 106 crores, which is 3% higher than the same period previous year. The EBITDA per kL for our oil business for that quarter actually crossed INR 10,000 per kL. Finance costs were down to INR 21 crores from INR 50 crores in the same period last year. And our profit after tax grew to INR 48 crores, which is 104% above the same period previous year. I'd also like to just touch upon a few industry highlights. There are new set of draft guidelines that have been issued of approximately INR 3 lakh crores reform based result linked scheme for DISCOMs. It targets the reduction of the AT&C losses to between 12% to 15% by FY '25. It also lays out a smart prepaid metering system and a reduction in ACS and ARR losses to 0 by FY '25. So the capital outlay for metering and infrastructure is stated to be about INR 1.5 lakh crores each. So INR 1.5 lakh crores for the metering infrastructure and INR 1.5 lakh crores for the transmission and distribution infrastructure over a period of 5 years. The outstanding dues of the DISCOMs has actually reduced by 3% and is at INR 78,379 crores as of March 31. About 16,750 circuit kilometers of new transmission lines were added in FY '21, which is up 44% from FY '20. The addition was 6% higher than planned. However, most of the ordering pertaining to the transmission lines, which came, especially towards the end of the year, have not taken place due to high commodity prices. The key T&D players reported an order inflow of about INR 15,800 crores in the fourth quarter. 4 LOIs have been issued in the FY '21 for new tariff-based competitive bidding projects. Power Grid has also approved investments of around INR 2,200 crores, which is actually quite small relative to the peak investments that they had. But this investment has been announced by them. And if you look at Q4 FY '21, about 7.8 gigawatts of solar tenders were auctioned, which is up 163% over Q3 FY '21, but down 32% over the same period previous year. And however, the actual completion of solar projects was much lower, and it was 15% lower than what was achieved in FY '20. I'd just like to now focus on specifically the segmental highlights of the 3 segments in the company. So in FY '21, the Conductor division revenue came in at INR 2,908 crores, which is down 19% year-on-year. The domestic revenues were down 37%, largely due to COVID-19 related issues, especially in the early part of the year, followed by delayed tendering and persistent rural demand. The price situation also was a bit -- was not favorable. So the focus actually moved to export revenues. So export revenues were 0.4% up year-on-year, but contributed to 52% of the total revenue and this compares to 41% in FY '20. So it's about an 11% increase as a percentage. The EBITDA per metric tonne post ForEx adjustment came in at INR 7,926 per metric tonne, which is 26% lower than year-on-year period. The share of the premium products was 13%, which includes the high-efficiency conductors and 14% for copper conductors for the railways. The other 2 new segments, which we had introduced in FY '19 and FY '20, which was OPGW and the copper transpose conductors, grew by 83% and 286% on a year-on-year basis. But of course, one does need to keep in mind that the base number was relatively low. We expect substantial growth in both of these product lines as we move into FY '22. The new order intake for the year came in at INR 2,425 crores. The order book as it stands on March 31, 2021, stood at INR 1,649 crores, with the export share at 55%. Having said that, substantial orders have come in, in the first quarter in the early days of Q1 FY '22, which are amounting to over INR 500 crores. The fourth quarter, the Conductor revenue clocked INR 837 crores. The HEC reconducting work was impacted due to the lack of shutdowns as continuous power was not -- had to be given to various hospitals and other important COVID response related, including oxygen plants, et cetera. We -- one of the highlights of the quarter is that we executed a 220 circuit kilometers gap conductor line for PGCIL, which is the first line of this size that has been executed by an Indian company. So this added another milestone in our journey. However, the EBITDA per metric tonne post ForEx adjustments fell by 97% in this quarter, and there were a few very unfavorable and significant factors that affected this. The first was the steep increase that took place in the international freight costs, which the company was not able to pass on because it was part of a CFR or a DDP contract. The second is actually aluminum premium has also substantially increased and, again, was a fallout of the same factor, which is the international freight. So one of them is on the outgoing product, the other one is on the incoming material. The third is steel prices, which, as all of you know, steel prices have been at record highs, and there is no hedgeable mechanism, unfortunately, for steel. And then lastly, the availability of containers also difficult to come by as well as at the end of the year, inspections got delayed due to the lack of travel since the second wave of COVID had already started taking effect. The export orders, which were actually profitable when received turned to be quite loss-making due to these unhedgable impacts that I mentioned above. There were also delays in customers' clearances to inspect and dispatch goods, as I mentioned, due to travel restrictions. And finally, the MEIS benefit, which was an export-related incentive scheme that the Government of India had, that resulted in a 2% benefit on the FOB value of exports was withdrawn by the government in Q3. And unfortunately, the alternate scheme has not come in to replace the MEIS. So at the moment, the exports are happening without any incentives, and this is equal to about 2% of the FOB value of the goods. The new order inflow for the quarter came in at INR 256 crores. But as I mentioned in the early -- in the first few days of April, we received orders worth about INR 500-plus crores. EPC players have also delayed ordering due to the steep increase in the aluminum and steel prices. So even though TBCB orders, et cetera, have been awarded, but the downstream ordering is still something, which has been withheld, at this stage, I guess, looking for more favorable price points. If I come to the Specialty Oil division, the situation was a little different. It happened to be actually the best-performing year that the Oil division has had in its history. Revenue was up 2% year-on-year in FY '21, and this was driven by an 11% year-on-year growth in the overseas business, that was spread across various subverticals that we have. The overseas business contributed 41% compared to 37% of the previous year. Our plant in Hamriyah had a utilization of 79% compared to 69% in FY '20. The white oil business sales volume was up 16%, driven largely by growth in exports. The lubricants business, which comprises of our automotive oils and industrial oils, also grew by 15% year-on-year. In Q4, the Specialty Oil division recorded a 33% growth to INR 719 crores as we gained market share as well as a share of business from major customers. The domestic revenue was 43% -- was up 43%. And the export revenue was up 18% during the fourth quarter. The EBITDA post ForEx adjustment came in at INR 104 crores, which was fourfold up compared to the same period previous year. Of course, we need to keep in mind that the previous year, we were impacted because the end of the year was truncated, where a lot of industrial and automotive sales were restricted. If you look at the Cable business, the Cable business had an overall reasonably difficult year, pretty much from the beginning, due to the impact of COVID-19. The revenue for the year came in at INR 1,270 crores, which was 21% lower than the same period previous year. Power cables continues to be highly competitive, but the elastomeric E-beam business, which really covers the solar wind, railways and defense side of the business were all affected due to COVID-related issues. These segments are also the most profitable segments for the company's business. So thereby, impacting both the top line and the bottom line. The Optical Fiber division though had revenues that grew by 21% year-on-year. During this period, we've installed the third E-beam machine, which is of 2.5 MeV class. And our expectation is that in FY '22, as we continue to focus on growing the export business and some of our premium products, which are medium voltage covered conductor, introduction of automotive cables and harnesses, and increased sales, which we are already starting to see from our solar wind, railways and defense customers, starting up from June, July of this year onwards, we expect this year to be a much better year. We have further increased our export thrust in the business. And during the last 1 year, we've received various U.S. approvals, which are mandatory for the sale of electrical cables to the U.S. market. And we've received global supply approvals from some of the largest windmill producers in the world, including General Electric and Vestas, who are the 2 largest. There is a significant CapEx plan, which we have just approved in the Board meeting of yesterday to substantially increase cables that would go into the wind and solar segments as well as target the U.S. market. The CapEx for the Cable business planned is at approximately INR 95 crores, which we plan to spend over the next 12 to 18 months. We see a window of opportunity has clearly opened up, and the China Plus One strategy actually presents the company with a fairly strong opportunity. Coming to the fourth quarter. Q4 for the Cable division, the revenues came in at INR 443 crores, which is 7% higher than the same period previous year. The EBITDA post-ForEx was at INR 14 crores, and the EBITDA margin came in at 3.2%. We expect, as I mentioned, a much better FY '22 in the Cables vertical, with already reasonably strong traction of order inflows that have started coming in. So to conclude, for us, FY '22 has been a challenging -- FY '21 has been a challenging year. FY '22 has started off a little bit difficult because of the second wave. But as I mentioned, as we progress through the year, we expect things to improve substantially. We would like to continue to broaden our focus on the export markets. Our portfolio of products has increasingly been targeted to be focused around safety first, more environmentally friendly products and more energy-efficient products as the ESG theme dominates infrastructure investments. We are also actually awaiting the details of the mega investment pushed by the Biden government in the United States. And we are very well placed to actually service this opportunity as it unfolds. So with this, I would like to come to the end of my comments. I thank you all for joining the call. Wish you the best of health. We could please open up the floor to questions, if any.

[Operator Instructions] The first question is from the line of Nemish Shah from Emkay Investment Managers.

Sir, I had a few questions. So just firstly on this delisting of our copper wire by railways. So just wanted to understand how much of an impact that we have on our top line? And is that in the Conductors segment or it's in the Cables business?

So the copper conductor is in the Conductors business. And in terms of the top line, it may impact, in the worst-case scenario, to the tune of about INR 400 crores. And it is something that the company has already appealed against, because it was more of a procedural issue, which has been brought up, which is disputed. So we are reasonably confident that we would actually be able to mitigate some of that hit.

Okay. Understood. Yes. And so -- and one more thing. So I just wanted to understand if you could give us some breakup in terms of our Cables business? So how much of say, solar or wind would be contributing towards our revenues and say, how much will be telecom, railways and defense? Some ballpark numbers will be helpful.

Telecom is around 13%, actually. Solar is closer to 18%. And wind is -- at present, wind is only 3% to 4%.

Okay. And the balance will be, sir?

The balance, utility is there, EPC contractors, EPC is there, Defense is there, shipping is there. Lot of things are there.

Okay. Understood.

Even the railway segment is...

Railway is also substantial.

Railways for the Cables are comprising of 2 parts. One is supply of cables to the railways, and the second is supply of harness to the railways, which is wired up cables on a frame that's delivered directly to the railways. And these are used both in -- largely in passenger compartments. And we've also got qualified to supply to the locomotive side for harness.

Sure. And like you mentioned that you will be focusing on automotive via harnesses. So is that a new product that we have introduced or...

We already had that -- even in previous earnings calls, I had brought it up that we are focusing on supplying electron-beam cured cables into the automotive segment. So one segment where it's already started is in all the electric vehicles. So we have been supplying JBM Auto, who are supplying these buses to the various government bodies. In fact, they have a reasonable amount of orders, so that -- so the wiring of all of the JBM buses is coming through us. Also, there are some of the scooter companies, who we've supplied that. As well as we've got our products ARAI approved for supply to the mainstream trucks and passenger car companies. So we are working with the auto companies and the harness manufacturers to supply automotive cables into the wiring of the vehicles itself, besides the EVs. The EVs is something that we've already advanced quite a bit.

Sure. And just on one more thing. Also the CapEx plan in the Cables division. So are we planning to -- also this is largely so incremental. So are we planning to add capacities in the current plan or...

It's all coming up in our plant, which is in the Khatalwad plant. And the focus is all on -- as we've got these global approvals for the wind side, as Mr. Diwadkar mentioned earlier. Currently, the Indian demand has been a little bit muted. FY '22 is expected to be a lot more demand on the wind side. Because today, the projects are being bid on an integrated basis, which is a composition of solar and wind, but overseas, the wind capacity increase is likely to be in most of the western countries, significantly higher than solars, given the nature of the sunshine that they get through the year. So this capacity will actually go into being able to supply windmills, both onshore and offshore as well as augmenting capacity for solar cables as well as a lot of the E-beam cables get supplied into the United States market also. So as this whole infrastructure program in the U.S. is opening up, we don't know the exact details of it, but it looks like the demand will substantially increase. So we want to make sure that all the investment goes in as early as possible, so that as that program is rolled out, we are in a position to participate in it.

The next question is from the line of Himanshu Upadhyay from PGIM Mutual Fund.

I have a question on the Conductor's side. We have stated that there has been a significant inflation in almost all the segments, I mean, aluminum pricing and logistic costs. And how are -- and we still have an existing order book of INR 1,600 crores, okay? So how -- what is the outlook on the margins? Or can we raise the prices and incremental orders what we are tendering? Are we seeing that we are able to increase the prices for the tender, because of the inflation being so high across the board what we have stated? Lastly on...

So the book actually consists of orders, which were tendered and filled in fundamentally prior to -- in the previous year, that is in 2020. They carried at that point in time freight rates, steel prices, et cetera, which existed then. Subsequently, as new tenders are being filed in, obviously, all of these get corrected upward as we bid on it. Where the problem lies is that most of these are on a fixed price basis to EPC contractors. And international freight, steel prices are not hedgeable as things stand today.

So would it be right to say that the new orders, what we have got of INR 256 crores would be at a better margin and where we would be back to normalized numbers?

So there will be a more significant impact in the first half of the year, because that's where the vintage of the orders, which are being executed, are older, which are impacted by this, unless there is a debottlenecking of freight, which is expected to happen as all these economies open up. But the newer orders, which are there, obviously, have all these components factored into it. So once you are locked in, you don't have an ability to change. But whenever you quote for a new tender, obviously, each of these parameters is then -- is corrected.

Okay. Okay. And on the Specialty Oil and Lubricants. In lubricants, what would be our breakup between industrial and auto side?

So we combine the 2 together. And the volumes are a little over -- Mr. Diwadkar can give you exact number, but it's a little over 60,000 kiloliters. I mean 60 million liters a year.

65,000, 66,000 kiloliters.

And are we seeing traction on -- because of what we are hearing more on the manufacturing side, traction is happening. So do you think lubricants should continue to do well, both on industrial and automotive? And are the margins sustainable in the market, because what we hear some of the players have not raised prices for the automotive side? So what is the outlook here? Or what you are seeing in market?

So on the automotive -- so let me just split it into 2 parts. The automotive side and the industrial side. So on the automotive side, actually, we have a relatively strong position and a focus on the agriculture side of the automotive. So fundamentally, product sales to tractor manufacturers, harvesters, combines, et cetera. So our bigger clients would be ITL Sonalika Tractors, Escorts, Eicher. So these are the main OEMs that we service. So we don't see actually the demand for -- from whatever the projections that are coming from the agriculture side is they're expecting a stronger '21 compared to '20. Obviously, the first quarter has been affected, but just yesterday, most of the states have started opening up the agri side, starting up from 1st of June. So I think that side is quite secure and will continue to grow as some amount of mechanization and things improve in India. On the industrial side, I would imagine that industrial sales will continue to increase. As you know, a lot of expansions are happening. CapEx expansion is taking place. So both first fill as well as lubrication requirements on the industrial side will grow. And if you look specifically at the industrial oil segment, after the oil PSUs and Castrol, we are one of the larger industrial oil players in the country. Many others like Gulf Oil and the MNCs are more automotive focused. It's only Shell and Mobil amongst the MNCs, who focus on industrials.

The next question is from the line of Saurabh Patwa from HDFC.

I just want -- I have two questions. One is regarding this Cables business CapEx. Can you just throw some more light on the details of it as in what would be the post -- what would be the revenue capability of these INR 95 crores CapEx, which we are doing? What kind of ROCs we are expecting as in these -- these are the -- we're doing CapEx in businesses where we won't have any operating leverage, because current revenue is very small. So -- and we'll be targeting U.S. markets. So something on that side. Second, how long you believe this current margins in oil business are sustainable? Because -- and how much of this you would attribute to this rising spread to the inventory with the low-cost inventory in case you had? Or is it because you're getting more share from unorganized players, who may not be getting -- able to procure the base oil in current scenario?

Okay. So let me answer the 2 questions separately. As far as the CapEx is concerned on the Cables side, there are 2 major projects, which are there. So the -- and by the way, the fundamental infrastructure is fungible to produce various types of products. So there are new lines going in to produce these elastomeric cables that go into wind. They can also be used in solar installations, but they're more tuned for producing the larger cables that go into wind installations. We see actually a pretty rapid ramp-up because the key milestone is actually to go ahead and get it approved. We have already started supplies from existing infrastructure that we have. But the capacity will end up manyfold increasing once these 2 new lines are put in place for servicing windmills. The paybacks on all these projects are in the 4-year kind of time frame. As far as the E-beam capacity that goes in that can be used, of course, across all E-beam -- various types of E-beam products. But the size of the machine has been selected such that a lot of the sizes that are expected to pick up in volume in the U.S. markets pick up. We have already started exporting to the U.S. markets in this year. So all this infrastructure coming in is going to augment capacity to service customers, who would have already started in FY '22. Some of the business has already come in the fourth quarter of FY '21 also.

Okay. Just something more on this same thing. So how long it would have taken for us to become L1 in many of these customers?

That's not really an L1 situation here, because this is all negotiated. It goes into -- customers are people like General Electric, Vestas, Siemens, Gamesa, Nordex, these type of companies. So it's all a negotiated deal. We were of course supplying them in the domestic market in India. But for us to be able to service the global market, it had to undergo certain time frame of supply in India and then additional testing and requirements, which would go into those overseas markets. So both of those have been completed.

And who would be our competitors in these businesses overseas?

So our competitors in this are companies like Nexan, Prysmian and they're all overseas players, LS Cable, et cetera. Because nobody from -- we have almost 70% market share in the domestics market at the moment. You just said that market has been relatively small at this stage, but as you know, the wind segment in India also is growing. So coming to the second question, which is the sustainability in the oil business. So there has obviously been a tailwind in terms of inventory, as the market prices have been continuously rising, the raw material prices. So there has been some benefit from the inventory side of things. But as you see, the finished lubricant business has also grown substantially. So both the automotive and industrial businesses of ours have grown through this year in spite of all the pandemic-related issues. Our share of business with all the 3 tractor companies has increased and the commitments, which we have, as we get into FY '22 is higher than what we have in terms of share of business compared to FY '21. Also, our industrial business, I think, will grow primarily with new CapEx coming in. And a lot of it has to be driven by CapEx that goes into manufacturing infrastructure. And so whatever I've heard from our product managers and sales teams is that for the first time, we are seeing brownfield and greenfield expansions happening in terms of the manufacturing infrastructure. So lot of first fill requirements being floated, et cetera. So I think the lubricant side, the finished lubricant side is quite sustainable. In terms of our overseas operations, the Hamriyah plant actually has received a lot of more approvals through this pandemic period as people have tried to balance the geographic risk. And now with the second wave in India, you will see that the first quarter as of FY '22, the volumes out of our Hamriyah plant have even gone up further, because many companies are insisting that the split should take place between 2 locations and 2 countries, given the fact that a lot of container freight ships are also missing India because of this second wave that we've faced. So I think these are structural changes. They are not going to be something that will disappear overnight. We've also increased our presence as far as transformer oils is concerned in some of the markets like Australia, Turkey, et cetera, where the demand for transformers that go into the ESG projects has started, again, increasing. So we see that the domestic side of transformer oil has gone down substantially, because of the lack of funding to the utilities, but the overseas side of transformer oil is still doing well.

Right, sir. So from a medium-term point of view, maybe not be '22. But so, historically, our last 10 years average, maybe close to like INR 4,500, a peak of around INR 6,000 and maybe bottom of around like INR 2,500 type. But -- so as you mentioned that this is sort of a structural change. So going forward, what is the range of EBITDA per kL, which you would want -- which you believe is more sustainable?

So between INR 5,000 a kL is something that is -- is something that has been historically a sustainable number, especially in the absence of a lot of violent movements on the foreign exchange side. So when the FX environment is stable, INR 5,000 a kL is not something that's out of place. So this year, if you see, the numbers were closer to INR 7,300, but our operating plan for next year is in the INR 5,000-odd range.

Perfect. So this would be -- that would be a substantial discount to what we reported in last 2 quarters?

Yes. So actually, some of it was a bounce-back. If you go through some of the previous earnings calls, we had issues where we had some of the customers defer their deliveries. So we used the expensive raw materials for new orders which we got at the current lower prices in Q2, particularly, and those deferred orders, which executed in Q3 were then at relatively high prices, but with cheaper raw materials. So I would really look at the full period. And so that is a number, which is a INR 7,300 per kL number. And whatever we work should then be benchmarked against that. So about INR 5,000-odd a kL is something that's very sustainable.

Understood. And just last one question which can be just -- how long do you believe -- of course, you mentioned in the previous answer itself that by second half, you believe the current order should come. But when you say that, sir, does that mean that the profitability will be sharply higher assuming things remain here or come down, as you said, like the freight rates are going to come down and the current...

So just to give you a perspective, these export orders, which we've executed in Q4 of last year and which will come in the next few months of this year, they were all profitable when the orders were taken. Nobody expected freight rates to the U.S. to increase 3x and to some of these markets, it is 3x, 4x. So the impact per tonne of that itself is INR 8,000 to INR 10,000 a tonne in some locations. Also, one of the things we're not able to hedge is the premium on aluminum. And the premium on aluminum has also increased fundamentally, because of the same ocean freight, because that's what the premium captures. So it's really both for incoming and outgoing material, the same parameters and it's actually hitting that. Just as we think that margins on our oil business are not sustainable and they will correct downward, I don't think these freight rates are sustainable either. They will also back down, may not go to the levels which existed pre-COVID. But when you had containers going on a route, which is $1,000 per container, and today, you're paying $6,000 a container is certainly not a sustainable type of equation.

Absolutely, absolutely. Sir, my question was slightly different actually. So I was -- I just wanted to understand, like, so when we are bidding for a new project now or when we are taking orders for new conductor project now, so we are taking the normalized freight levels or normalized spreads or we are taking the current spread and current freight level?

So we are taking the current levels at the moment. And also increasing the...

Okay. In normalize assets the profitability will increase sharply, is that...

So it's on the current -- because if it's a DDP contract, you will take the current rate. There's also a freight Baltic index, which is something that is declared, which we are now talking to various customers and utilities globally, to see what is the level of acceptance they have of that. Because it's not only a conductor manufacturer, but if you see all the EPC guys, everybody is now trying to figure out what to do, because never in the history before was such a delta on freight. So it's a completely new problem that has risen. There has been an impact also in terms of steel, but the steel comes and impacts only our conventional -- largely our conventional type of conductors, the ACCC and AL59 and these sort of conductors have a lower or no element of steel in them. So as the sophistication of the conductor and premiumization increases, the steel component will keep going down. And the last thing is that in this year, we expect a much higher order book on the HTLS and the premium high-efficiency conductors. And actually, some of that has already started coming in. And finally, we were expecting more orders to come in, in OPGW wires. But those tenders had to be retendered in the past, because it entailed a number of Chinese players, who were participating previously in those tenders. And today, they're debarred from quoting. So those tenders have been refloated, and they would have got finalized, but because of these last few months COVID-related matters, so our expectation is that it should happen in the next few months, with deliveries commencing in this financial year itself.

The next question is from the line of Sanjay Pandit from 1729 Capital.

My question is by when does the company overall expect to achieve say, 18% to 20% return on equity, which is the [indiscernible] had sort of talked about a while ago? And related to that, what kind of sort of return on capital threshold -- sort of long-term return on capital threshold do you have when making new capital expenditures overall by division?

So typically, we would look at -- it depends on how strategic the investment is. But paybacks, which are in the range of 4 years is what one would typically look at if you're setting up something, which is a significant brownfield expansion. And if it's just expansion in existing product lines, you're looking at something, which is sub-3 years in terms of a return on the Capex. In this particular case, we've actually brought forward, and we've also bunched the CapEx together, because we physically see that there is maybe an opportunity of a lifetime that's going to come up in this area. The U.S. market has never really been that accessible to Indian cable companies, because of differential tariffs that India has faced, especially relative to China. There was a 5% difference -- 5% to 7.5% difference in tariffs. And also, the infrastructure spending in the U.S. has been talked about for many, many years. But the sense is now that it's really time for them to press the button. And the seriousness with which the discussions are going on, there will be a big increase in the electrical infrastructure. In addition to this, the whole electric vehicle movement, which even though it may be relatively slow in India, is starting to pick up in these markets, overseas markets. So all of that put together is what has accelerated us putting the CapEx in place. Our depreciation itself is about INR 90 crores a year. So the cash generation that comes from the depreciation itself can be used to fund this. And we have already taken a line of credit, an ECB. So together, I think it makes sense for us to actually press the button sooner than later. The groundwork for this has already been done, as I mentioned earlier, in terms of both cables that go into wind mills as well as just general electrical cables going into the U.S. market. In terms of your -- our clear plan is to get to -- target is to get to a 20% return on equity. And our sense is that in FY '22 itself, we will make a progress towards that, not getting to 20%, but moving up in terms of -- because the Cables business is really going to do a lot better than -- in FY '21. And in the second half, we expect the Conductor business also to do -- to come back into more normalized working. It's difficult to give you an exact time frame, but I think we are clearly moving in that direction.

So then perhaps sometime in FY '23, you can have a run rate ROE of maybe 18% to 20%?

That would clearly be an aspirational -- it would clearly be a target, and it is quite feasible. Because we don't expect a very long gestation period to load the equipments that come in this Cable CapEx that we are talking about. Both the Oil business and the Conductors business has limited CapEx that is going in. And in fact, the plan was to just sweat the current assets. But in order for us to be able to optimize this opportunity, we need to put this CapEx in place. And it can add to a revenue that exceeds INR 500 crores, putting in this INR 95 crores CapEx.

Yes. No, absolutely. It looks like the CapEx is an excellent thing to pursue provided it fetches attractive returns on capital, which is what appears to be the case. Even Warren Buffett talked about major CapEx happening in the United States with respect to power transmission. And so there ought to be an opportunity for the whole industry.

So we expect the CapEx to happen not only on power transmission, but also on the distribution side. For example, in Mumbai, I have been informed that new parking that's going into buildings, 20% of it leads through buildings and malls, malls actually. 20% of the parking has to have an electrical charging point for an EV. So with these sort of things coming in, the distribution infrastructure also will increase, not only in India, but everywhere around the world.

So based on what you're seeing today, if you were to look out say 3 to 5 years, what kind of sort of revenue and operating margins do you think Apar could get to? And what kind of CapEx would it require to get there?

So our CapEx plan, actually, we didn't have a plan to invest such a large amount of another INR 95 crores. We've just come through with a reasonably large CapEx plan over the last 5 years. Our expectation is that you will see this big jump on the cable side in the next 2 years. You can easily see the top line growing by INR 500 crores to INR 700 crores. Some of it coming from this CapEx and some of it coming from the underutilized capacity that already exists. In the Cables business -- in the Conductor and Oil business, the growth will be more tempered. And our Oil business will continue to grow at 7%, 8% a year. The focus continues to remain on premiumizing whatever offering we have. Our Conductor business, we really don't want to focus on any top line growth. We are really focused on just improving the product mix. So as you see all the new product lines, which have gone in, that's where we expect the growth to come from a higher value addition. The CTC is now growing. The OPGW will actually kick in this year with a lot of new tenders, where it's restricted to pretty much Indian players. And HTLS, which is the premium conductors that we have, this year, you will see a very large growth on that conductor side. In addition to that, the services, which were involved, which is actually designing the whole line and executing it, the reconductoring business, that has actually -- it was hit very badly last year because of the COVID-related outages. And with the hope that some of this falls in place, as we get into the second half of this year, that will also start kicking in. There are already tenders, which are being finalized, as we speak. And so in the next few months, we'll probably have a much better order book on these HTLS to report also. So all this premiumization is going on, and that should help increase the -- finally the return on equity at our end.

Correct. And finally, what kind of weighted average cost of borrowing, can you fund this CapEx at?

Mr. Diwadkar, do you want to take that question?

We have taken an ECB loan, which is closer to around -- say, around 3% or so. And if you add maybe -- today, forward -- we don't take forward cover cost actually -- forward cover for a long-term loan actually, because today's forward cover cost is around 5% actually.

The next question is from the line of Maulik Patel from Equirus Securities. As there is no reply from the current participant, we move to the next question from the line of Nilesh Jethani from Envision Capital.

So my question is on the Conductor business. So what I have observed that there has been a huge swing in the EBITDA per tonne we have seen in the Conductor business. So what comes to my mind, is like the sharp decline in the railways business could be one of the reasons apart from the sharp rises in commodity and freight prices going up. So I wanted to understand, so what are the price hikes for probably the new orders which we have, so approximately 55%, again, is coming from the export side. So what could be the impact on EBITDA per tonne going forward? What the inventory we currently have as far as the low-cost commodities inventory we have? That's the second question. And third would be, can you give some color on what is the difference in the EBITDA per tonne we earn in the railways versus the conventional T&D Conductor?

So some of the business, as explained earlier, has been taken earlier when the costs of various components like the ocean freight, the aluminum premium, the steel, those were at lower numbers. And now we have those orders, which we are executing, and some of it will be happening during this first couple of quarters in this year. So it is difficult to predict what the rates of the ocean freight will be ultimately. So depending on what they are, accordingly, there will be some plus or minus going on with regard to those old orders. The second part is with regard to the orders which we've taken in the last quarter and in this quarter, we have been pricing basis the current market of these costs. So again, hopefully, as long as the rates of these steel and other things are remaining in this range, we may not see any -- much hit on those fronts. The copper conductor, which you mentioned, that has not really hit us in the last quarter. This is more of a phenomena, which is going to probably affect us in the future if we are not successful in our legal efforts. So the other point, which was mentioned, is that new businesses come in of the more value-added products like the HEC as well as -- we are envisaging some OPGW business coming in. So that will get executed also. So some of the orders, they will sort of have a weighted average impact on our ultimate results. Some would be coming in at better current prices and some at the old prices. So the whole thing will be like a weighted average impact. Also, I'd like to mention that as far as the copper conductors, there are 2 parts to it. One is the catenary wires and the other is one type of contact wire, for which currently we have been not permitted to get the business, unless the appeal comes in our favor, although we are quoting for it, and we are allowed to quote for it. So that situation may sort of slightly improve the profitability going forward, if we are successful in our efforts to get this overturned in the railways.

Understood. And sir, some color on what is the differential in the EBITDA per tonne we make when we supply conductors to railways versus the other conventional conductors? Is the differential too high?

We don't give the breakup like that actually. But the conventional conductor is having the lowest EBITDA and the copper conductor is higher than the conventional conductor. And the highest is the HTLS conductor. Highest EBITDA is in HTLS conductors.

In terms of the pecking order, we've got HTLS, OPGW, which are at the top of the pack. Then followed by the copper transpose conductors, which are going into transformer manufacturing. And then of the 2 conductors to the railways, you have catenary and contacts. So catenary is more profitable than contacts, because contacts has got more players in the industry. So to just clarify the current situation, the RDSO took objection to a certain procedural matter, which, even though the RITES, which is the inspection agency of the railways had cleared. So we've got an appeal. So we are actually able to participate in every tender that's out there, and none of those tenders can be finalized unless the decision comes finally in this regard. So we are still working our way towards seeing whether they're actually going to have any impact or not on this. Yes. So it's not that the business is actually lost already, but it could potentially be lost, the contact wire business for a certain period of time, if the judgment goes against us. So past the appellate, then it can go to the High Court. And it's actually nothing to do with the technical supply, it's to do with the procedural matter.

Period is 1 year from April 1, '21.

Yes.

So what about the EBITDA per tonne we aspire to achieve in the Conductor segments in FY '22?

So we've been focused on trying to achieve INR 12,000 per tonne. That's the target which we would like to achieve based on the mix of these products which we have and on a sustainable basis.

Understood. And sir, what is the sustainable EBITDA margins for the Cables business?

So the Cables business for the mix of products that we have, we can -- sustainable margin would be in the 10% range, 10% to 12% range.

We are already doing 11%. We have done in FY '20, FY '19 also, closer to 10.5%.

Well in the Cable business, you also had the same hits also, which has come in and hit. Our export portion has gone up, so container freight has increased. We have significant orders from some of the Latin American countries where freight rate or box rates have increased. So -- but unlike in the conductor case, there, when the quarter passes by, we have applied for now revision in the rates. There's also been an increase in the case of Cable, a very substantial increase with respect to polymer costs, which don't necessarily get captured in any price variation. And steel, of course, is also a component. But the difference between Conductor and Cable is generally that Cables supplies and value of a single order is smaller in size. So as a consequence, you can correct your pricing and strategy as you go forward. So that's why the hits are smaller, and we expect actually a faster recovery there and followed by the recovery happening on the conductor side. So I hope that explains the sort of framework.

The next question is from the line of Mayank Bhandari from Nirmal Bang Securities.

Sir, I just wanted to understand in the Conductor side of the business, as the government is focusing more on the localized domestic manufacturing and banning more of the Chinese imports. So from the conductor point of view, aren't we slated to benefit from government move? I just wanted to understand from industry perspective.

Yes. So the product line, which gets the most affected as far as Chinese is concerned and the most favorable as far as the Indian manufacturers is concerned is the OPGW wire. And today the data is the new oil. So every overhead line is actually carrying an OPGW earth wire. So that data transmission happens on the fiberoptic link there. So the benefit of this is actually going to come this year. Because last year, there were a lot of Chinese companies that had participated in the tender. So all of those tenders have got scrapped. The government refloated tenders, but there were some technical issues, which were there in the refloated tenders. So the government themselves scrapped those and have now for a second time refloated the tenders. So in the next few months, we would expect OPGW tender finalization. And there are -- principally Apar and Sterlite are the 2 major manufacturers in the country. And even though one of the Chinese companies has a subsidiary in India, given the ownership rule, which is there, they can't participate. So we would expect that a reasonable amount of OPGW business would come by as it gets finalized in the next few months. The other product, there is no Chinese competition, which is conventional conductors, HTLS, copper conductors for the railways, CTC for the Conductor -- meaning transformer companies, et cetera. But OPGW is quite a significant benefit, which will come.

So what would be the market size of this OPGW [indiscernible]?