APAR Industries Limited (APARINDS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Apar Industries Limited Q1 FY '22 Earnings Conference Call hosted by Four-S Services. [Operator Instructions] Please note that this conference is being recorded. At this time, I now hand the conference over to Mr. Nitesh Kumar from Four-S Services. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone. On behalf of Four-S Services, I welcome all the participants to the Apar Industries Q1 FY '22 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, Chief Financial Officer of our 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 warm welcome to the Q1 FY '22 Earnings Call of Apar Industries. I will have, in the initial part of the call, a brief overview of our performance followed by an industry update, and then get into details of the segmental performance. Post that, we can open up the floor for questions. So we are happy to -- that the company has performed well in Q1 FY '22 despite the second wave having actually affected manufacturing operations and many of our customers more than the first wave. However, our consolidated revenues came in at INR 1,821 crores, which is 41% higher than the year-over-year period. Though the base, of course, was lower due to the major lockdown that was there in April and May of 2020, but it's 8% lower than the pre-COVID level in Q1 FY '20. The results actually have demonstrated a certain amount of resilience that Apar's businesses have had, especially given the focus that we've had on increasingly premiumizing the portfolio of products, as well as selecting customers and geographies more judiciously, especially through the last year. In terms of our product premiumization across segments and the stricter financial discipline, this has helped us to deliver a higher profitability, as can be seen from the numbers. The consolidated EBITDA came in at INR 138 crores, which is 291% higher than last year and 0.7% higher than Q1 FY '20, whereas the PAT has come in at INR 62 crores, which is up 51% compared to the Q1 FY '20 period last year, of course, was a loss in the first quarter. The Conductor business's EBITDA, which was very badly affected in the fourth quarter of FY '21, came in at INR 14,243 per metric tonne and is up by 17.4% compared to the pre-COVID levels of Q1 FY '20, even though the volume has been lower. In case of the Oil business, the EBITDA post-ForEx came in at INR 7,406 per KL, which is actually 89% higher than first quarter FY '20. I will just now cover a few of the industry highlights. In fact, there are quite a few to share with you all. The Indian government has actually approved the reform-based results linked revamp of the distribution sector with a scheme that has an outlay of INR 303,758 crores. The silver lining is that the total outstanding dues owned by DISCOM to the various power producers has fallen by 11.2%, down to INR 81,628 crores in April 2021 compared to -- it's 11.2% lower than the same period previous year. The outstanding views of DISCOM towards electricity producers had been increasing year-on-year for many years, indicating almost like a perennial stress in the sector. However, from February this year, it has started tapering off. In spite of this, we have not otherwise seen much ordering of transformers by the DISCOMs where we believe a disproportionate amount of resources were diverted towards fighting COVID in the first quarter. And this has resulted in a major drop in demand for distribution transformers. On the Cables front, we have had limited exposure to the state DISCOMs. Even in our oil business is really an indirect exposure to the OEM. But given that the transformer orders haven't come in, the demand for transformer oil for the distribution sector was subdued. On the other hand, the transmission companies have been more active in Q1 FY '22. And we saw an addition of 1,550 circuit kilometers of transmission lines, which is 42% higher than the same period previous year. Again, of course, the comparison being on a much lower base. Transformation capacity has been added of about 11,392 MVA. Our sales of transformer oil into this segment actually has been quite robust, but the fall in sales on the distribution transformer company size has been so steep that this has not been able to offset that difference, even though the profitability has been higher because these are more premium products that go into the generation side. ICRA expects renewable capacity addition in this year in FY '22 to improve to between 10.5 and 11 gigawatts. And there is a strong project pipeline of about 38 gigawatts that has been announced and various portions of it have been actually awarded. So we can clearly see an opportunity developing here, though the competition level is quite severe as far as Cables is concerned. Key T&D players have reported order inflows of approximately INR 10,600 crores in Q1 FY '22, which is a marked increase over the previous quarters. The government has also approved INR 19,041 crores funding support for implementation of the BharatNet project through the PPP model in 16 states. And this will have a total expenditure of INR 29,430 crores. The Indian Railways has proposed to spend INR 2.15 lakh crores in FY '22 for a revamp of overall infrastructure, which includes locomotives, railway tracks, coaches as well as the electrification. In terms of the automotive sector, we have seen domestic tractor sales, which is a segment that we are quite heavily focused on, having grown smartly by about 18.9% year-on-year. If you recall, last year also was a record quarter for most of the tractor companies in spite of the lockdown having happened in 2020. We see with a timely monsoon and an increase in the MSP rates for some of the key Kharif crop. And there is still strong government support to pretty much most agriculture activities. We are likely to continue to see a momentum in this tractor demand going forward. Now I'd like to actually come more specifically to the segmental performance of the 3 businesses. So our Conductor business saw a revenue decline of 3.6% year-on-year and revenues came in at INR 680 crores in Q1 of this year. Exports were down 28%, and this was largely due to disruption in the order execution, resulting from an abnormal increase in the freight rates and shortage of containers. The domestic side revenue was down by around 2.5%, largely from the second wave and the disruption that happened to execution of supplies and reconductoring projects that we had undertaken. However, there was an increased focus on higher-value products, which contributed towards 43.8% of the revenues in Q1 FY '21. Of this HEC, high-efficiency conductor revenue was at 14.6%. versus 14.4% in the previous period. Copper conductor revenues for railways actually reduced in the quarter, down to 25.6%. And this was due to the delisting that we had spoken about in the last call of the 107 square MM contact via by RDSO. However, subsequent to that, we have been granted a stay order by the high court, which came in at the end of the quarter. And now supplies for the old orders, which we were holding, they have been recommenced. So you will see a revenue increase happening in Q2 as we execute some of these orders where the clearances have been given. We are also able to continue to participate in new tenders, as we had mentioned in the last call. If you look specifically at the new order inflow, the new order inflow stood at INR 1,551 crores, which is up 161% from the pre-COVID levels of Q1 FY '20. And this has really come on the back of finalization of a number of tenders with high-efficiency conductors involved. So if you see the HEC orders have contributed almost 51% of this order inflow of INR 1,551 crores which has come in, in the quarter. The total order book stands at INR 2,119 crores. And of this, 56% come from products which are non-conventional ACSR conductors. So ACSR conductor is 44%, all the other more premium products is 56%. One of the other areas the company is focusing on right now is to pass on the volatility risk of the international freight to clients to the maximum extent possible. And we have also been looking at increasing our focus on the domestic business, especially in these higher value-added products. If you look at the specialty oil side, our revenue increased to INR 832 crores, that's 137% higher than same period last year and 34% over the pre-COVID levels of Q1 FY '20. The overseas business for oil division actually witnessed higher volumes than the domestic business for the first time ever. So 52% of our revenues came from products that were sold outside India and 48% in the domestic region. The EBITDA per KL continues at a healthy level of INR 7,406 per KL with good contribution margins having come from our Industrial and Automotive segment. The Hamriyah plant ran at 120% of its nameplate capacity with quarterly sales of 29,256 KL. So some of this volume increased because orders had to be moved from India to the Hamriyah plant, given the logistics which were smoother from there relative to India, including during the lockdown period that we had in the month of April and May. The quarter also saw us launch a new plant-based natural ester transformer oil, keeping with the new environmental concerns, which are increasingly coming up from utilities around the world. This oil is currently the best-performing natural ester transformer oil in the world with excellent cooling characteristics, a very high degree of safety because it's fire point is beyond 300 degrees. It is 99% biodegradable. It also has the lowest carbon footprint in its manufacture and has the best viscosity and oxidation stability parameters, which are key parameters to determine the life of an oil. So it has the best performance in its class globally from all the products, which are commercially available today. This is a premium product, and we have started all our business development activities around promoting this product both in India and overseas with all the global utilities and OEM. If you look at the lubricant part of the Specialty Oil division, that contributed towards 20% of revenues of the division, with industrial volumes up almost 96% over the year ago period and automotive volumes up 62% over the year over period. We've also commissioned a new, more automated mega warehouse, which is located at Bhiwandi from where we will be centrally storing and supplying industrial and automotive oils. And this should help us improve the velocity of inventory in the system as well as allow us larger production runs in the automotive industrial plant, which will result in lower cost and higher productivities. And finally, coming to the Cable Solutions business. Their revenues were up 60% over the same period previous year. But compared to FY '20 first quarter, the volumes were 12% lower. The domestic market environment remains competitive for all varieties of cables. There is a fair amount of excess capacity available in the system and there are still some payment issues that remain. However, the company has increased focus on its light-duty cables and wires business, and this has a B2C component to it. We also have a representation now on various online channels for our cables and some of our selected specialty oil products, which is notably IndiaMART. And we have started seeing some improved visibility and access to some new customers and distribution through this channel. Sales volume should increase in the Cables business for the remaining 3 quarters of this year, led by a focus on export sales, where we have an increasingly growing order book. We also see manufactured railways and defense starting to pick up from their deep slump that it has had right up to Q1 FY '22. So overall, our expectation is that the revenues in FY '22 will be higher than the revenues in FY '20, which is primarily the pre-COVID period as far as the Cable Solutions business is concerned. So I'd like to conclude by saying that Q1 FY '22 has seen a good recovery. We have a strong base. And despite some headwinds, which we can't preclude coming up even in the future in case there is a third wave. But we are still optimistic, and we continue to improve as we progress through the year. There are 6 major areas where we see the growth drivers coming from, which is the rising global ESG investments, both in India as well as overseas, driving all -- business from all the 3 verticals. The accelerating CapEx of the Indian railways, not only in electrification but the addition of locomotives and coaches, which should benefit our Cable Solutions business. And a strong pullback from the automotive sector, especially the agriculture side. Further investments happening in the telecom industry, particularly around the communication products, which is optical fiber and the OPGW ground wire. The fifth one would be the infra spending that is happening on the defense side, and we would see increased offtake of cables taking place given the slowdown that existed in the last 12 months as part of a catch-up. And then finally, the sixth area is the multiple opportunities in the export side around ESG and the China plus 1 strategy, which is allowing us to see increased revenues coming from nontraditional markets for us like North America and Australia in addition to Africa and some of these other more traditional markets. So with that, I'd like to come to the end of my comments. I thank you all for joining the call, and wish you all the best of health. At this stage, I think we could open up the floor to questions, please.

[Operator Instructions] The first question is from the line of Nagraj Chandrasekar from Laburnum Capital Advisors.

Congratulations on very good numbers and very good inflows, conductor side. Just my first question is on conductors. In the last quarter, because of the seaborne freight issues, you guided to a couple of quarters of muted margins here. And now what we've seen is lower volumes and very good margins. So what has happened is have you given up some of the export orders where you saw the economic trends make sense? And have you seen some of the HEC orders that you started booking during the quarter run through the revenues this quarter itself? And does this 50% order book -- 50-plus percent HEC order book now means you can go the next 2, 3 quarters with 35 -- 30,000, 35,000 tonnes a quarter at the sort of INR 14,000, INR 15,000 per -- EBITDA per tonne sort of run rate?

So actually, during the course of the last quarter, the freight rates went up still more. So then we had to actually suspend the production for orders on hand and we took up with the clients to see if they were ready to postpone the deliveries. And also, we were trying to see if they can pay for the extra freight cost. So as a result of that, we actually had less production than we thought we would do in the first quarter. And that is the reason why some of the loss-making orders, which we had anticipated, that has got sort of postponed out. There are some cases where the clients have said that they don't need the material right now. They can afford to wait because their projects have also got somewhat delayed. So therefore, we mutually worked out with the clients to postpone out those deliveries. This is one of the reasons why there's been less production. And as a result, those loss-making orders, when they did not come into the weighted average equation, therefore, the EBITDA per tonne improved. So that explains as to why what we thought initially would happen actually during the course of the quarter, we had to change that. But in this coming quarter, we have a similar situation as the previous quarter, because the orders which we have booked, not all of it will be for immediate execution. And also some of the orders which had been taken on hand as of 1st of April this year, those also will not be actually executed in this Q2 as well because the clients, as I said, are ready to wait for longer until the international freight market stabilize a little bit. So that neither we nor the clients have to pay for these extra costs, which are going around nowadays. In terms of the new order inflow of HEC, that will definitely help in improving our overall profitability. Similar is the case for the copper conductors. The bulk of the new orders will actually start getting executed in the second half of this year starting from Q3. And in terms of volumes, as I mentioned, Q2 will not be again that great in terms of volumes overall. There will be some areas where there will be an improvement, like we explained about the copper railways side where now we have been getting clearances. And last quarter, we had much reduction in the volume. But now this quarter, things will sort of come back on track. So this is in short as to what is likely to happen in the future.

Perfect. So we might see a lower quarter again, volume-wise, and then better second half, got it.

Exactly. Yes, you will see -- in the second quarter, volumes will still be a little bit muted other than copper conductors for the electrification where Q1 backlog will get made up now given the clearance. But HEC and some of these new order books, as Chaitanya mentioned, really Q3, Q4 onwards. The premiumization of the product though will remain as you look through the year, because the order inflow itself has been 56% coming in from the nonconventional conductor. So that will actually offset some of these gaps, which are there particularly from this overseas freight increases. There's some amount of easing up that has been seen from the Chinese market, where the freights were even higher than from India. So if that is any indication, then I guess in the next few months, there could be some green shoots in terms of freight reducing. But so far, we haven't seen any specific signs.

Understood. Understood. Understood. And just on coming to Cables. You, in the presentation, said and you mentioned the volumes are still 12% below 1Q '20. But it seemed like you were saying that FY '22 overall could end with volumes being above FY '20 to a sharp pickup towards the end. Is that what you are seeing? And how quickly can we get back to a 10% margin on the cable side, given what you've mentioned about competition?

So we'll see a pickup in volume happening from Q2 onwards itself on the -- in the Cable business. So -- and as you move from Q2 to Q3 and then Q3 to Q4, the volume trajectory will increase. Our expectation is that we should do more than, as I said, more than FY '20 in terms of revenue. Margins is a little bit more difficult. Getting to 10% is not something that we foresee happening in the immediate future. Our plan is more in the range of 6.5% to 7.5%, which is similar. 6.8% is what came in the quarter. There are still a number of inflationary factors which include freight and steel and various other products, which polymer prices have gone up, et cetera. But the silver lining is that the export side is clearly picking up. And these contracts on the cable side are not long-term priced on freight like in the case of conductor. So it's a moving freight rate, which is relatively more current. You will see increased volume, but the margins will be in that range of between 6.5% and 7.5%.

The next question is from the line of Pratiksha Daftari from Aequitas Investments.

So my first question is for the Conductor segment. So I just wanted to understand a little bit about the margins of OPGW conductors, like where do they stand in terms of pecking order of margins and the contribution from these conductors to the order book?

So OPGW is less compared to the HEC, but it is a growing business for us. Overall, volumes are much lower compared to HEC, but it is growing because the government is pushing not only here in India, the Indian government, but also elsewhere infrastructure globally, where the transmission companies are putting up the OPGW for transfer of data, so as an additional revenue. And currently, what has happened is there are effectively 3 Indian players now, because there were a few more who had been temporarily suspended because of certain notifications from the government side. So therefore, the margins in India have somewhat improved also after this new change in the notification. So the Chinese players are still debarred from quoting on this. So fundamentally, pecking order wise, after HEC, the next would be OPGW.

Okay. And on the oil front, we've seen some rationalization in our margins this time, which probably was expected. I just wanted to understand that whether we expect this trajectory to continue and what earlier guided for in terms of sustainable margin, does it remain the same? And secondly, do we see -- how do we look at transformer or heat demand coming up? Like will we see that picking up soon?

So our guidance for the margins on the Specialty Oil business is closer to INR 5,000 a KL. The drop that you've seen is fundamentally catch-up, which has been happening in terms of the differential between selling price and raw material costs, as higher cost base oils come in. So it will levelize in the INR 5,000 per KL range. That's what our target is. In terms of your question on transformer oil, as I mentioned, the transmission side still remains reasonably strong and we have a good presence there. But the distribution side is going through a massive drop. And we don't have clear visibility yet in terms of -- the lead indicator for us is transformer tenders getting finalized and transformer tenders in the distribution side has been extremely slow. And even the total number of tenders that are actively floated itself is a bit low. So our sense is that really the improvement on that will happen only in Q3 and Q4. And especially if there is no major third wave and if the state governments don't have to end up spending too much money on fighting COVID, we will start seeing a higher spending coming into the infrastructure projects. And in this particular case, notably on the electrification and distribution transformer side. But so far, the visibility is still a bit muted on that front. When you come to the export market, the export markets are -- the demand is better. However, certain countries, the freight from India has increased very substantially. It gives a benefit to either a local player or someone who is in the closer geographic vicinity where the freight hasn't increased. Having said that, we've still seen a reasonable demand, and that's how export sales for the first time ever came in with a higher volume than domestic. In Q2, that will not happen because the automotive industry will actually further pick up.

Okay.

So does that -- that's your question?

Yes, yes, yes. Just 1 more question on the new product that we've launched, the natural transformer. I just wanted to understand the opportunity size here and like is this going to be a significant product going ahead?

So there is already natural esters and biodegradable oils that are starting to pick up in terms of their consumption. Even though today on a worldwide basis, it probably doesn't contribute more than a little over 1%. But with this whole ESG focus, which is there, it's definitely starting to pick up. Where we see the opportunities to be the best is where you have generation taking place on water. So in India, NTPC and a few utilities are setting up solar panels, et cetera, which are floating solar panels on the river. Similarly, there are offshore windmills coming up, especially in the Northern Hemisphere. So you will have transformers, which are also located on the platform in the sea. And that's where we see these biodegradability -- high biodegradability products finding a way into it. And the other area would be, as there is more and more legislation that comes in for reducing carbon footprint and consumption of hydrocarbon-based products for industries and just across the board, there will be more demand for biodegradable products. And this one that we have, it's a plant-based natural ester, and it has 99% biodegradability and almost the lowest carbon footprint that you can get for an oil because it's made out of a plant. So we see this as a little bit more futuristic. I think what we are most excited about is that the product which we have is better than the products that anybody else has out there in the market. It is more expensive, but we think that the cost versus benefit for some of these utilities will play in favor of them buying this product. Because one of the key problems that has been there with natural esters is that its life is a fraction of the life of a mineral oil. And when we look at our natural ester product, which is out there, it has a life which is in the comparable range. So that makes a big difference. But I would see this market slowly developing over the next 5 to 7 years, as the whole ESG movement picks up.

Okay. All right. Just 1 last bookkeeping question. I wanted to understand what is our debt -- working capital debt and total debt right now, along with breakup of LC -- domestic LC and foreign LC.

Pratiksha, our long-term debt is INR 215 crores. Short term is INR 113 crores. And cash on the book is INR 547 crores. And LC, interest-bearing LC, ForEx interest-bearing LC is INR 1,218 crores, and domestic interest-bearing LC is INR 637 crores.

Okay. And how does this number compare to 31st March sir, the LC number?

It has slightly increased, actually. It has increased, actually.

[Operator Instructions] The next question is from the line of Maulik Patel from Equirus Securities.

A couple of things. Last con call, relatively, the commentary was relatively very, very cautious given that we were passing through the pandemic and particularly more on both Cable and the Conductor side. However, the numbers are very good. And you mentioned that the volume has declined, but overall, the profitability has gone up. And the guidance is that given in Q2, the volume might not recover to the earlier level or pre-pandemic level, but the operating profit could be on a healthier side or the margin could be healthier side. Once you see -- I mean the new orders which are coming into the -- for the conductor, are they more profitable than what we had in the past? And particularly within logistics, what kind of for you know clauses in this because logistics is in a large part of your overall cost now. So what kind of clauses we have for the logistics?

Yes. First of all, the new business, which came in last quarter, had a higher component of more value-added products. So yes, the margins will be better. And in terms of the clauses, what we are trying to do is put a variable clause that we have a tentative CIF price in the export market. And when we come closer to the date of delivery, if our client is ready to pick it up on an FOB basis and manage the logistics at a cheaper price compared to what we can at that point of time, then the client would be able to do so. And we would not have to have a leakage in our profitability. There are some clients who have agreed to this, but some clients have still not been ready for this system. So we are trying our best to pass on this risk of volatility. But as of now, we have the mixed results. So those clients where we feel that it is very risky, we have actually not gone for that business. So that has also maybe resulted in lower inflow of business, which may result in losses. So -- but on the other hand, globally, we think that this situation may remain for a little while. So wherever we can execute the orders relatively quickly after receipt of orders, then we may not have that kind of risk. So we are trying to stay away from orders with a very large staggered deliveries because we cannot predict what the freight rates will be in due course of time. So these are the kind of strategies or clauses we are trying to put in place.

And in percentage terms, what is the freight cost for this export order, approximate? And was it there before the pre-pandemic?

So it varies, Maulik, dramatically, because there's no logic to the current freight costs also. So in some cases, the freight has increased by 300%, 400%, especially to the Americas. So you can't really put a number to this. And we are exporting all over the world to over 100 countries. So definitely, the freight rates will be very different. One thing is clear that in the closer geographic vicinity, as you get to the Middle East Africa, Southeast Asia, there, the freight rates haven't increased that dramatically. Australia is in between. And then as you go to Latin America and North America, the freights have really shot up. It's really a function of the transshipment point. So if the transshipment points, as the pileup of containers reduces, I guess the freight rates will then start easing. So that has happened only in very few corridors that we have seen so far. Then also a bit of a focus and most of this high-efficiency conductor order book is domestic and just near India. So we've -- as Chaitanya mentioned, we're clearly looking at de-risking by going closer to the geographic vicinity of India or within India to mitigate this.

And just to add the same thing. When you say that for the post-COVID, you have seen some recovery in the Indian market. And in your interaction with utilities and the state governments, do you think that if there could be a significant -- because last year, there was hardly any inflow. Given that there was not much spending last year, do you think that the inflow can be significantly higher than one can -- or the industry can absorb in a shorter period of time? Because historically, we have seen that there are periods in certain years where the inflows are so high that the industry is not able to absorb all the inflows of order and automatically margin expand. Are we in that kind of a situation or are we going into that kind of situation?

So one can't rule that out. But at the moment, the signs on the -- see, on the transmission side, there is still a steady flow, which is happening. The problem is on the distribution side. And they're difficult to tell because we're not seeing any clear sign. As I mentioned at the beginning of the call, there is this reform-based results linked revamp distribution scheme, and it's got a massive outlay. And it's all focused around distribution more than transmission, because the transmission sector of India is actually very healthy. Now there are a lot of riders that are there in this. And unless those riders are fulfilled by the various state governments, I don't think they will have access to this pot of money. So it's still a couple of quarters, I think, before which there will be full clarity. But there is a pent-up demand. There's a massive pent-up demand. And also, alongside that, there is a good amount of capacity, which is unutilized in the distribution transformer side. So if the order flow comes in, some of these things get resolved, there will be a kicker in terms of demand for sure. But when it did happen, it's a little unclear because it's based on a lot of riders. I think the last time the central government were forced to reduce the conditions because of GST and trying to find a compromise with the states on GST. So this time around, they don't have that sort of a hangover. So I think they will not be giving much leeway in terms of ensuring that these reforms are much more deep rooted. So it may take a little bit of time. But as we know that, whenever there is a pent-up demand and then it opens up -- then there's a very good sale that takes place. So that will happen, but can't predict the time frame in which it will happen. In the meantime, we see that on the transmission side, it should continue at a reasonably steady pace.

Okay. And sir, last question is on the Cable side. Last year, you commissioned the third e-Beam machine. So how -- in terms of can you just again help us going through the opportunity in this market, what kind of additional services you are seeing, what kind of an attraction one could have expected from the installation of this third machine, something like -- on that?

So we've installed a third e-Beam machine, which is already up and it got commissioned in the last quarter, just before the annual earnings call that we had. And we've ordered a fourth one, which as I mentioned in the last earnings call. The opportunities are actually the same. You have solar cables that are used -- the photovoltaic cables that are used for the solar panel wiring. So those are electron beam. The cables which are used by the Indian railways for locomotives as well as coaches are e-beam and so -- for the defense. So we are seeing that both in railways and defense because we've had really poor production in the last 15 months since the pandemic started. There is a big pile up which is there. And we are starting to see call-ups of the product taking place. So there is a good movement that has happened in June. And similarly, we see that in the next few months. So our sense is that really these products which are there, just the volume of these products are going to increase. In addition to that, there are overseas opportunities also coming up for the photovoltaic requirement. So we've taken some -- we've taken some orders from the United States where -- And right now, the infrastructure plan of the Biden government is still under negotiation. But in spite of that, there are some projects which have already taken off. And when that gets approved and cleared, we see a big increase in demand taking place. So we don't see new products. It's the same set of products, but a much larger volume expected.

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

Can I request that you speak a little louder and congratulations for the great set of numbers. I just wanted to understand 2 things. One is, see, in the last few years, you had done -- we invested a lot in increasing capabilities in conductor side, invested in the Hamriyah plan, but -- and this resulted in a good top line growth. However, I think there were various factors like weak liquidity in the system, credit -- weak credit environment, which lead to the Conductor business doing -- had taken some challenges. Similarly, utilization in Hamriyah was weak compared to what we would have earlier envisaged. And moreover, apart from this, this also led to a higher share of supplier to bear LC-based expense, which resulted in the flow to PBT much lower than compared to when we see the top line growth. So now many of these things behind, where do you see ourselves in the next 2 years in terms of -- we're also seeing now improving product mix. So what should be the ideal EBITDA margin per tonne, per KL and cable margin which we are targeting to achieve? And also, where do we see the interest cost as we move forward? And this interest cost, I mean, including the LC-based credit charges?

Right. Okay. So in terms of the -- our target for margin profiles has kind of remained the same. It starts off with us wanting to get closer to 18% to 20% return on our equity. And for these businesses to remain at that level sustainably, we need the Oil business to be at around INR 5,000 a KL, the Conductor business to be between -- around INR 12,000-odd a KL -- sorry, per metric tonne. And the Cable business to be at around 7.5% EBITDA on growing volumes. So that's the sort of spot. Other than the Cable business where we mentioned in the last call, some major investments which are being planned all around this whole ESG theme. The Oil and Conductor business, actually, now we're just focusing on plant utilization and making sure that the more premium products is where we are getting after. We've been talking for last several years that this high-efficiency conductors, OPGW, all these things will actually kick in. Even CTC conductors has increased substantially in Q1 compared to the previous period. So all of this is going to happen. And you will see that this quarter itself, our return on equity for the quarter is around 17%. And with the volumes increasing, we are hopeful that we will be in that -- we'll be coming closer to that 17%, 18% range. We want to be more bothered about that figure than just the top line figure.

Right, sir. So that is exactly what I was trying to understand. See, even if you see the absolute numbers, even we exclude the COVID year, so our EBITDA actually improved, as you said, like with improving product mix and the new capabilities which we created. We actually improved our EBITDA from INR 360 crores in FY '16 to close to INR 480 crores in FY '20. However, the conversion to PBT was actually not there because this came with a cost, a higher interest and as well as depreciation. So and as we are moving -- I think in the last call as well as today's call, you mentioned that we plan to focus more on the premium product. However, all of these products, we have added the capacity, but the traditional products which you are originally selling, their volumes have been on a decline. So sir, the utilization will continue to remain low. So how will we -- while our EBITDA per tonne may continue to increase, but how do you see, sir, this anomaly to improve as we move ahead?

No. So we don't really see that as anomaly. We -- if you see the Cable side, the volume will continue to grow and so will the value. In terms of -- and the utilization of the assets we have, our Oil business is not degrowing, it's continuing to grow. It's only in the Conductor business where we find knocking off the conventional conductor thing where if it doesn't make sense, we won't get after it. You'll see that the interest cost and Mr. Diwadkar can shed light on that, will be lower than what you have seen definitely in FY '19 and FY '20. A, because the interest rates itself are lower. And b, the financial discipline that has been put around is also a lot higher. So if you see the -- we've knocked out a whole lot of clients who -- where the payment uncertainties are there, et cetera. So that is where really the leakage happened where customers were to open LCs, they could open LCs, they had promised to make payments, but they couldn't make payments on time. So that discipline has been put in place. So even though the depreciation is around INR 93 crores or so, the -- when you take the interest cost, it has dramatically fallen and the cash position that the company has, has also improved. So you will see the delta between EBITDA and PBT actually remaining at a -- fairly tight.

That's nice. And then just 1 or 2 questions, a small question I just want to -- if you can just allow me to add. One is -- on this -- in the annual report, you have mentioned 2 data points. So royalty number, though it is not a very large number, but that number has increased almost 3x. So does this mean that lubricants revenue has increased very sharply? Is it linked to that? It's from INR 13.5 crores in FY '20, it's INR 40 crores in FY '21.

Yes. So actually, that difference is coming primarily because of the aftermarket business, which we are doing in the automotive side. So we are doing the aftermarket for Sonalika and Escorts. And so there, the product that is actually sold through our supply chain, we are ending up paying a royalty to them. So it's a variable base. It's not a fixed. So as you sell more, it's doing by the top.

Yes. That's what I want.

We've seen substantial growth happening on the agriculture side. That's been primarily the main driver for the volume growth in our automotive side. We've had 2 major segments where our products are amongst the best in the country. So 1 has been in the case of 3-wheelers and the other 1 is in case of tractors, where we probably have the best OIB or oil immersed break oil in the country today, better than any of the other players. So -- but the 3-wheeler side has actually gone down because of COVID, and it's being used largely as a taxi for transportation in the B class towns and rural areas. So COVID actually doesn't permit that. So if you see in the automotive table, 3-wheelers have fallen the most. But they've been more than compensated by the agriculture side, which is your tractors, harvesters, et cetera.

Right. Sir, also our presentation as well as annual report sound very cautious on the industry. You mentioned various factors on what could be the challenges in coming quarters, but our results have been pretty strong. So is this some way indicator of that, while the industry will face some challenging times, Apar as a company, will continue to benefit because of the few steps which we have taken in the last few years?

So our strategy has always been that we want to have the most relevant set of products address the most premium segments or whatever markets we are able to address and ensure that our cost position is strong so that we remain amongst the last people standing. So we've been cautious simply because the times are so uncertain. You don't know what is going to happen in the future. We never -- we moved into this whole export strategy, it's not realizing or not knowing or being able to predict that actually freight is going to -- highly profitable orders have become unprofitable just because of the increase in the freight. So I don't think the threat has actually gone away from COVID. It seems to have reduced. We have tried to do whatever best is in our own -- under our own control. So 95-plus percent of our employees, including contract workers in our factory and offices, have taken the first vaccination shot. By the 15th of September, the whole company will be fully vaccinated. So we've taken all the precautions which are there. We don't want to come up with very optimistic numbers and then fall flat. But if you don't see any major challenges, the third wave doesn't disrupt India and most of the world, then you'll keep on seeing increased performance quarter-on-quarter.

So if the third -- assuming that what you said like right now, so we should be well ahead of our 18% to 20% ROE target because all the 3 -- especially Oil and Conductor, we should be able to do reasonably well ahead of what our targets are. That would be a fair assessment, sir?

Well, I think the numbers should speak for themselves, let the -- as the quarters pass by and as we are able to actually put these numbers under our belt. Because we don't want to count our chickens before the eggs are hatched. It's been -- it's too uncertain for that. All I can say is that we kind of structure ourselves to the best of what the macro amount of resilience that's possible in our business, we've kind of fortified it to that extent.

So just last 1 question, sir. Just like you just highlighted in your opening comments on ESG and defense part. Can you just throw more light on that opportunity in terms of demand drivers?

So the key demand -- we see that there are 2 major areas which will drive this ESG that is relevant to us. The first one is the addition of nonconventional energy capacity, which is solar and wind. And depending on which geography you're looking at, there will be in certain areas, more solar and in certain areas, more wind. So this is clearly 1 driver. As a corollary to that, there are assets which are going on the water, as I mentioned earlier. So therefore, that brings in a new set of products, which is like a natural ester. But fundamentally, this is what is going to be a big driver. In addition to that, you have new transmission lines and systems for evacuating the power and putting it into a grid or delivering it to where customers are located. So that is what is driving actually the Conductor business. The third thing is that electric power being cleaner is being more and more relied upon. So we would expect that public transportation, just like whatever went through CNG in India will actually get replaced with electricity in due course of time. So again, you need a lot of more power coming in if you have to charge up all the buses and taxis and things like that. So again, high-efficiency conductors will come into play. And that's why you're starting to see increased demand for that coming in also. So -- and then, of course, I mentioned the other demand drivers, OPGW and optical fiber because data is the new oil. And then the Atmanirbhar projects are actually requiring you to put a percentage of the domestic component or the Indian component when you bid on the government portal. So as a consequence, more and more India value addition is coming in also. So we are seeing more manufacturing happening in India, driving industrial lubricants, more components being manufactured in India from that standpoint. So the local content has to be displayed in that. And depending on what your local content is, you can get a price reference and a purchase preference on that GeM portal. So these are pretty much the key drivers around this.

[Operator Instructions] The next question is from the line of Adit Shah from Vibrant Securities.

My first question is that I see the finance cost, which was hovering at around INR 22-odd crores, if I note the exceptional item in fourth quarter of '21 -- it was around INR 22-odd crores in fourth quarter '21. And then even before that, it was somewhere around mid-20s. However, this quarter, we have seen that jump to INR 38-odd crores. So one is if I can get the breakup of the INR 38 crores into the 4 components, that will be helpful. And also some thoughts around where should we see this number settle at. Right now, it's around 2% of the revenue. So is that a fair assumption to make going forward? Because I believe containing the finance cost would be a key element of receivable ROE target of 17% to 18%. That is the first question. Second question is on the other income, which has been around INR 10 crores to INR 12 crores over the last current quarter and the previous quarter. Generally, this number was much lower at INR 3 crores to INR 4 crores historically. But last 2 quarters, it was around INR 10 crores to INR 12 crores. So I want to understand what exactly this other income is and how this should be viewed going forward? I'll ask my remaining questions maybe after these 2 are addressed.

Regarding interest cost, if you see out of the total finance cost which is there, about INR 9 crores, we are adjusting in the form of open period ForEx, and which we are adjusting in EBITDA. So if you remove that INR 9 crores, which is there, then what remains is around INR 28 crores. So out of the INR 28 crores which is there, the ForEx cost -- forward cover cost is about INR 3 crores for the revenue and INR 2 crores for the capital. We had an ECB actually. On that ECB, we have incurred INR 2 crores mark-to-market. It is a mark-to-market actually. We have not taken any forward cover for that actually. So that is there actually, 3 plus 2, 5 actually. And the other borrowing cost is INR 9 crores and balance is the interest cost. So if you remove this foreign exchange cost, which is there actually, this INR 9 crores and that ECB 2 crores, actually. After that, you can take the close to around 2% to 2.5% of the turnover. That should be okay actually for projecting the interest cost. It will be closer to 2% actually. But sometimes it can go up to 2.25%, something like that also. So as far as your other income is concerned, other income has -- this -- we have this money lying in mutual fund actually. So I said earlier that cash on the balance sheet is INR 547 crores, cash on the buyer balance sheet is there actually. So we have about close to about INR 300 crores at any point of time lying in our mutual fund actually. So whatever income is there actually. So that itself -- that has increased the other income actually. So that comes to about INR 2 crores, INR 2.5 crores per quarter nowadays actually.

Okay. So but...

Diwadkar, right, it's really an overnight...

Yes, yes.

And the exist -- mainly that you know there is sometimes a pile up of this income that happens or collection that happens and then there's big outflows as the LCs fall due.

Correct.

Okay. Okay. Sure. And sir, the cash which you are saying is right now at around INR 500-plus crores. I think as of end of March, that cash was around INR 250-odd crores. Is it correct?

Correct. Correct. Correct.

We have seen a sharp uptick?

Yes.

Is that because of collection of receivables?

It's not that -- always this much amount of cash will always be there actually. It depends upon your working capital cycle actually. So maybe by the time we reach September, the cash on the balance sheet will go down actually.

Okay. Got it. Sure, sir. My next question is that, on the Conductor side, we have seen the volumes are actually like near to 5- to 7-year low. However, the profitability has been very impressive. So what the question is, has there been any postponement of delivery of, say, export orders, which will, say, come in the coming quarters? Or those orders have been sort of canceled and we are not going ahead with that? What exactly is the right understanding there?

So as I mentioned earlier to some questions that we have postponed the deliveries of some of the orders where the freight rates have gone up very substantially. So where we took up with the clients and we requested for either postponement or an increase in the freight rates in case they wanted the deliveries. So the clients said that they were okay with they're being postponed out.

Yes. Yes. Okay. Got it. Got it. At some point...

The quantification of that differential will only get crystallized as and when the delivery is mutually agreed upon. So it's been pushed out. Hopefully, the rates will be lower than what they are now. And things normalize or move a little bit closer to normal over the next couple of quarters. So it's difficult to put a number to it, but that's the way it will be. So it's -- the profit is slightly higher than it should have been, given that some of these orders where the freight was creating a loss has been pushed out.

Sure, sure. And the overall guidance of INR 12,000 per tonne EBITDA, this incorporates the significant change in the order mix towards non-ASCR (sic) [ non-ACSR ] conductors, around 56% is non-ASCR (sic) [ non-ACSR ]?

I just want to correct that it's not a guidance. It's -- that's the aspiration, which we have. That's what we want to get to. And so while looking at the premiumization of the products, the net result is we want to get to that level. So we're not actually offering a very specific guidance, but that's where we want to get to.

Ladies and gentlemen, as there are no further questions, I will now hand the conference over to the management for closing comments.

Yes. Thank you. Thank you, everyone, for joining our call. And I hope we've been able to answer most of the questions. As I mentioned, we do have the 6 levers where we see opportunities going forward. And I think with each quarter, if there are no unseen or unforeseen events, we should see an improvement happening in our performance with a target of getting to 18% to 20% return on equity. Thank you, everybody, for your time.

Thank you very much. On behalf of Apar Industries Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.