APAR Industries Limited (APARINDS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Apar Industries Limited Q3 and 9 months ended December FY'22 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 day, everyone, and welcome to the Apar Industries Q3 FY'22 Earnings Conference Call. Through out the conference, we have with us Mr. Kushal Desai, Chairman and Managing Director; Mr. Chaitanya Desai, Managing Director; and Mr. Vivek Diwadkar, Chief Financial Officer of 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, Ritesh. Good afternoon, everyone, and a very warm welcome to the Q3 earnings call of Apar Industries. I would like to start with an overview of our performance and then follow that up with a few bullet points on key industry updates. And then I would like to give some details based on each of the three segmental performances that we have. Post that, we can open the floor to questions. So looking at some of the key macroeconomic indicators, they were gradually getting steady in the first half of FY'22. And right until December when we had some of this Omicron variant coming in and upsetting some of the inspection and dispatches just towards the last few days of December, even though there has been a bit of a stalling because of that and a challenging international freight environment, which has been affecting the growing export business that we have, Apar has delivered relatively a steady performance in this quarter. Overall, consolidated revenues for Q3 FY'22 came in at INR 2,235 crores, which is up 32% year-on-year. Of course, this has been helped by some of the increases in commodity prices also and it is 22% higher than the pre-COVID levels of Q3 FY'20. This has been largely driven by a 40% increase in the domestic business. Exports contributed to 35% versus 40% in Q3 FY'21. The EBITDA for the quarter came in at INR 127 crores, which is about 5.7%. Profit after tax came in at INR 55 crores, which is up 50% from the pre-COVID levels of Q3 FY'20 that had a 2.5% margin. Last year, of course, we had a very poor first quarter because of a lockdown and a catch-up taking place in the subsequent quarters. If you look at the 9 months FY'22, the consolidated revenue came in at INR 6,328 crores with an EBITDA of INR 393 crores, which is 24% higher than the previous year. The EBITDA margin stood at 6.2%. We continue to focus on the premiumization of our business mix and with some reduced financial costs helped both by working capital discipline as well as reduction in the interest rates. The profit has remained at a reasonable level, and the consolidated PAT for 9 months FY'22 came in at INR 174 crores, which is 56% higher than the pre-pandemic period of 9 months FY'20. I will now cover a few industry highlights as such. The outstanding dues of DISCOM continue to rise, unfortunately. It's risen 4.4% to INR 121,000 crores as of December 31. A fallout of this is that DISCOM continue to postpone the finalization of tenders for some of the wire infrastructure, especially we've seen a very low demand for distribution transformers as such, which in turn has had some effect on the transformer oil market and performance of our Oil division. We've seen 10,600 kilometers of transmission lines, which were added in the 9 months FY'22. That's 17% higher than the same period previous year. Transformation capacity addition came in at about 54,928 MVA, which is [ 81% ] higher than the previous year. The government has approved INR 12,000 crores of a green energy corridor Phase 2, which targets the addition of around 10,750 circuit kilometers of transmission lines, and 27,500 MVA of transformation capacity substations and other equipment. The key T&D players have reported an order inflow of about INR 13,000 crores in Q3 FY'22, almost doubling from the previous quarter. But still, if you consider it over a longer period of time, the number is relatively muted compared to the projections which have been indicated by the government. The Indian Railway is on track to achieve USD 15 billion capital investment by March '22 to enable the investment-driven recovery. And it has also announced that it's aiming to be a net-zero company by 2030. As per ICRA's latest bulletin, India is slated to add about 16 gigawatts of renewable energy capacity in FY'23 as compared to around 7.4 gigawatts in FY'21 and 12.5 gigawatts, which are expected to be in FY'22. Our expectation is that the wind energy CapEx will substantially increase. And if this happens, then the expansion which we plan in our Cable division, for producing cables that go inside windmills, will be quite well timed. And if you are able to fulfill this requirement, then it will give a major sell-up to this project. About 70% market share is what we have for Cables, which are used within the wind mills. I would now like to move over to the segmental highlights. So we'll cover the conductor division first. So Conductor division revenue in Q3 FY'22 grew 27% year-on-year to reach INR 939 crores, which was driven by a 73% growth in the domestic business. The export business here was impacted due to delay in order execution from logistics and inspection. And some of the projects being postponed by the clients due to the higher commodity prices and logistics costs. So here, we have tentatively quoted a price based on a certain London Metal Exchange rate for aluminum. And the customers, once they finalize the rate, the final prices are then settled. So in many of these cases since it's well out of the original budget that they had, some of these have been postponed. Exports contributed to 29% versus 50% in Q3 FY'21. The higher value products contribution increased to 44% from 34% in Q3 FY'21. The HTLS and high-efficiency Conductors revenue was up 55% year-on-year, contributing to 18% versus 15%. And revenue from copper conductors for railways was up 96% over the same period previous year. And it contributed 17% of the revenues versus 11% in Q3 FY'21. So the EBITDA per metric ton post adjustment, recorded a historical high for the second consecutive quarter at INR 16,987 per metric ton. So that's up 46% over the same period previous year. Consecutive quarter -- I'm sorry, at INR 18,987 per metric ton. The new order inflow came in at INR 1,886 crores, which is also up 80% over the same period previous year. The total order book remains healthy at INR 3,078 crores, which, value-wise, is the highest order book that we have in the last 5 years. It is up 45% year-on-year, with 54% of this order book coming from the more premium offerings. With increased competition for conventional Conductors in the domestic market, we continue to remain focused on improving the business mix towards the higher share of premium offerings as well as selected export markets, and this is clearly reflected in this current order book, which we had. In the 9 months FY'22 period, the Conductor revenue came in at INR 2,697 crores, which is up 30% year-on-year. EBITDA post-ForEx adjustment per metric ton came in at INR 16,863, up 63% year-on-year. The new order inflow in the 9 months has been INR 4,314 crores, which is up 99% over the same period previous year and is also a historical high for us in terms of order booking in a 9-month period. As I mentioned, this is aided to some extent by higher commodity prices. But not to take away from that, the product mix has also improved in favor of HTLS as well as OPGW and some of these higher-value products. Now coming to the oil revenue side. The oil revenues in Q3 FY'22 came in at INR 905 crores, which is up 31% year-on-year and 54% from the pre-COVID levels. The volumes have remained relatively flat. And here, we've had some amount of impact due to higher freight in exports as well as foreign exchange issues in some of the larger target markets which we have like in Africa. The export contribution came in at 42% in Q3 FY'21. The Hamriyah plant ran at a slightly reduced utilization at 83% in the quarter. White oil sales volume was up 4% year-on-year, whereas transformer oil volume was down 16%, largely due to a weak domestic demand, which I mentioned earlier, has been [ elevating ] from lower tenders for distribution transformers. The lubricant business revenues came in at INR 199 crores, which is 11% higher than year-on-year. The industrial oil volumes were at 4,800 kL for the quarter. Automotive volumes, however, reduced by around 26%, partly due to a slower retail sales as well as our substantially lower demand from the Tractor OEM where we do have a concentration. The EBITDA per kL post adjustment continued at a healthy level of INR 6,743 per kL. So that's up 119% from the pre-COVID of Q3 FY'20. The second half, FY'21, that is in the last year or the second half, oil segment had a historical high, given the acute shortage of base oils, which allowed for the highest pricing and margins that we had ever in the history of the company. After the supply chains have been restored, this 9-month period, the performance has been more in terms of a steady state. And it's representative actually being higher than the INR 5,000 per kL, which is our targeted margin. It's been higher at INR 6,743. As we navigate the fourth quarter of FY'22, there may be some challenges from higher crude prices, which are at a 7-year high. This is also getting added in terms of base oil prices, and an expectation that in the budget that tend to be the increase in the custom duty for base oils, which will be effective from May of 2022 onwards. And also there has been elevated freight for exports. But the silver lining for us is that we have inventory, which we are carrying at competitive price levels. And this should help cushion the effect in this fourth quarter of FY'22. Further, in the 9-month period, the oil revenues have come in at INR 2,632 crores which is 60% higher than the same period previous year. The volumes have increased in this 9-month period by 17% at INR 344,568 kL. The EBITDA per kL post-ForEx adjustment was also at a good number of INR 6,472, which is up 6% year-on-year. We diversified product offering as well as the geographic spread has enabled to steady the performance for the oil division across this 9-month period. Now I come to the Cable division, which has had the maximum impact in the third quarter from a negative standpoint, where the revenues have come in quite healthy at INR 486 crores, which is up 51% year-on-year and 24% over the pre-COVID levels. We have an unbilled revenue of INR 121 crores of exports, most of which are in transit to the United States and to Australia, which are both far off market. And these are on a GDP basis based on the negotiated terms. The export business is at around 35% in this quarter versus 16% in the same period previous year. The XLPE business in India still remains competitive. But the light-duty cables, which are sold through our distribution setup in a B2C sort of environment, has been improving for the company given the greater focus that we've had. So the value in this segment was small, has grown from INR 17 crores in the quarter a year ago to INR 32 crores in this quarter. There is a continued focus to expand the retail distribution and increased local and digital branding activities, which we have commenced. The EBITDA margin, post-FX, came in at 3.2%. And here, there was an impact of INR 75 crores of orders, which were executed at a negative EBITDA of INR 13 crores, and these were largely due to effects of higher freight, increase in certain polymer prices and other raw material costs. So in this particular quarter, we've actually taken a fairly large hit on the chin and adjusted most of the -- executed a large portion of orders, which seem to be relatively unfavorable. So that, along with this INR 121 crores of export in transit, have both impacted the bottom line negatively in the way in which the accounting systems are required to be followed. So the impact of this INR 75 crores of orders as we executed with the INR 13 crores EBITDA -- INR 13 crores negative EBITDA has impacted the EBITDA for the quarter by about 4%. Demand for cables in the renewable energy installations and execution of orders for Defence as well as the railways that is the rolling stock cable will benefit in the fourth quarter of FY'22. There is a reasonably good amount of execution that is expected to happen in this fourth quarter of these products. Looking at the 9-month FY'22, the Cable revenue came in at INR 1,310 crores, which is up 59% year-on-year. Focused export strategy has driven export revenue to grow by 140% and its overall contribution is 28% in the 9 months versus 18% in the 9 months previous year. The EBITDA margin post-ForEx adjustment came in at 4.4%. The benefits from higher sales in exports so far has not really been fully realized because of the higher freight costs that we had to pick up in the previous period. The company plans, however, to continue to focus on these opportunities over the next several years as it is a very attractive long-term opportunity even though there has been a temporary setback due to freight. However, export orders, which are now being booked are at the current rate levels as well as the adjusted raw material prices of today. So in summary, we expect the fourth quarter FY'22 to -- with a healthy order book, both in the Conductor and Cable business. Our program of improving the premiumization of products and focusing on the export business will definitely show positive results. These initiatives have a long-term positive impact on the business. Also the growing B2C part of the wires and lubricant business, we continue to invest in that. And we are sure that there will be substantial growth coming from those segments in FY'23 and FY'24. So with this, I'd like to come to the end of my comments. I would also, at this stage, like to mention and solicit, Mr. V.C. Diwadkar, who has been the CFO of our company, and he has completed a long innings of 27 years with Apar in various positions finally culminating in the position of CFO. He is due to retire in -- on 31st March and his successor, Mr. [ Ramesh Iyer ], is also on the call at this stage, listening on the call. And so we wish Mr. Diwadkar all the very best and like to welcome [ Ramesh Iyer ] to the company. So with that, I'd like to come to the end of my comments. Thank you, everyone, for joining the call. And we may now open up the floor for questions.

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

A couple of questions. On the cable side, you mentioned that this one order, which contributed to the negative EBITDA. Do you have any such more orders are there in the order book?

So Maulik, it's not one order. There were a few orders, which were picked up in the early part of the pandemic when everything had fallen substantially. So there were some -- so a large portion of what was clearly identified by us has been actually taken in this quarter. So there are a few more orders where we do have negotiating going on with customers on the freight side, but you will not have such a big negative impact happening. So there is nothing that we see that would have such big impact. It so happened that we tried -- we cleared all these off to try to keep as clean as freight as possible going forward. because the commodity price reginal seems to be following an inflationary trend. So the sooner that we got this out of the books, the better. We thought it was more prudent.

And Cable has been under pressure. If you look at from the margin perspective, the two businesses have recovered fairly substantially. Thought and the premiumisation is also working. But in cable, the margin which we used to have around 9% to 10%. And even if you look at on one of the best margin, what we did post-pandemic has been in the range of 6%. So is it because of this too much of competition in the market? Or is it because the orders which you are getting it is more about of the commodity product and less on E-beam cable or the some specialty cable?

So let me answer that in two parts. We had seen that the competition in the domestic market would be reasonably severe, especially coming from EBC, contractors and utilities. And that's why we decided to focus on the export markets, including trying to capitalize on the [ China plus 1 ] strategy. Now from a qualitative standpoint, that has worked because out of this INR 121 crores, INR 90 crores is in transit just to the U.S. And a chunk of the remaining is in transit to Australia. So we've managed to get into various new accounts there, et cetera. But because of the freight impact primarily, some of these margins have got eaten up. So that's one factor. The second factor is that the Defence part of the business has been very slow during this whole pandemic period. And that is a very profitable segment for us, even though it's about 5%, 6% of the revenues, the margin and profitability on the business is quite substantial. As we go into Q4 onwards, we are seeing some of that coming back on track. It has taken a very long time for it to fall in place, but the pace seems to be now picking up. So that's the reason why in my opening comments, I specifically mentioned that in Q4, we will find that some of the Defence will play a bigger role. The third thing is that even though we are a large player in the solar -- the PV, the photovoltaic cable side, that is the -- there are a number of players there and that is a little bit more competitive compared to the cables which we supply that go into the wind mill. So the wind side has been a little bit slow. But again, now that has started picking up, and we see a much better offtake in Q4 as well as an order book on the wind side coming up thereafter, especially since many of the tenders which have been floated in the last couple of years are not just all solar, but they are hybrid, which has a combination of wind and solar. So I think going forward, on the cable side, I know the current Q3 numbers are very disappointing. But if you add back that INR 13 crores for the quarter, is the profitability would be at 7.2%. At the end of the day of course, one has to take into account bad orders also, but I'm just as a matter of reference, and the revenue is going to the U.S. at INR 121 crores is almost 20-plus percent of the revenues that would have been there if they had been built. Now these contracts are on a GDP basis, and that's the way the U.S. market runs. So you find that in this quarter, you have a larger portion of unbilled revenues. In future, if this level of business continues, it will go into a rolling cycle. So you're kind of taking on a bigger hit in the first quarter and then after that, it reaches a steady state. So a few of these things are unfortunately come together in this quarter. But in Q4, we don't see the same impacts, and you will see a better -- a much better number on the profitability front.

One thing I have noticed that our interest cost has declined, generally being a converter of base oil and aluminum. With inflationary pressure on raw material, the working capital has to move up. Is it because of your strategy towards the premiumization, the working capital is not rising proportionally to the increase in the raw material prices? Historically, we have seen that increase in the raw material prices led to the increase in the working capital and higher interest costs.

So there are two factors in here allow Mr. Diwadkar to actually elaborate on this. One is that we have been fairly disciplined in terms of the -- especially the data side of the equation. Secondly, we have had the tailwind in terms of the interest rate based on the previous LIBOR, et cetera, which continues to be at a decent level. But the discipline on the working capital has also helped. So Diwadkar would you like to comment?

Number of days have also gone down actually. So we are sitting on some money, actually, close to about right now, you can say around INR 465 crores is there actually, cash and cash equivalents. Money line in mutual fund, et cetera. So even if -- so as Kushal has explained, although the commodity prices have increased, so value increase will have an impact on the interest, but that impact is not there because we were sitting on a good amount of mutual funds, et cetera, as that money has been used.

Okay. And the last question, if you allow me. What is the CapEx we spent on this year and what will likely to be the next year?

We have -- as of now, we have spent close to about INR 65 crores to INR 70 crores. Our budget was INR 140 crores, but we have not spent the total budget actually, but INR 70 crores has been spent and something we will be spending. But that INR 140 crores, we will be spending, but it is possible that we will not be able to spend the entire amount in this year.

The large portion of that, moles coming in from two areas. One is putting in equipment to manufacture wind mill cables, not only for the domestic market, but also for the export market. I mentioned on one of the previous calls that with a lot of effort, we've now got approvals from the top 5 wind mill producers in the world. So we service that installations in India also, but now we've got approval to start servicing their overseas requirements. So we don't have the requisite capacity in place if we want to take it on, on a full scale. And secondly, we installed one electron beam machine last year, and we are installing another electron beam machine, which will get commissioned around the middle of '22. So around the June, July, August time frame. So this we've taken a little bit in advance for two reasons: One is that we see, again, solar cable, rolling stock, Defence, all of this picking up. And secondly, the retail offering that we have is of e-beam-based house wire, which is a unique -- the only one at the moment marketing that house wire. And the initial response has been quite good. So this year -- last year, we did around INR 60 crores of revenues in the LDC, building wires and high-duty tables. This year, we are targeting INR 100 crores and the infrastructure is being set up so that in FY'23, it will get closer to INR 200 crores. So that's one part of the business, which is also growing rapidly. So some of these CapExs are actually targeted towards the more premium offerings in the cable side.

Got it. Got it. And now with this the E-beam machine, which you expect to commission in middle of 2022, you will have on 4 machines, right?

Yes, we will have 4 machines.

Okay. Okay. And any CapEx plan for the FY '23, which you probably have finalized? Any CapEx number?

So FY'23, there's on one other -- besides what is being completed on the cable side, there is one project that's on the Conductor side, where we are going to manufacture in-house some components for the OPGW. So that's about INR 10 crores investment. The rest of it is all basically just maintenance CapEx. So the CapEx plan will start moving down. We had a plan of actually not spending this much on CapEx, but given the few opportunities and this whole climate change movement taking place, it was better for us to make these investments sooner than later. And I think the timing of some of these investments will hopefully show up in our FY '23 numbers.

The next question is from the line of [ Shreya Mehta ] individual investor.

So for the conductor segment, I just wanted to understand how do we look at margins here. Like initially, a few quarters back, our HEC contribution, basically value-added product contribution was lower and the margin standard impacted then. Now that the contribution has come up while the EBITDA per ton has increased, margins still remain subdued. So how do I generally look at margins in this segment?

So you should not look at margins on a percentage basis. Because when the commodity price increase, the EBITDA margin we are looking at on per ton basis as far as conductor business is concerned. And we should look at only on per ton basis only because...

But I think one statement which we are making that the EBITDA has increased, but then the overall margins on the conductor business remains relatively low. That is not correct. The bottom line has moved up pretty much in confidence with the increase in the EBITDA per metric ton.

I think that's around 5%, 6% margins earlier and that...

The other thing is don't look at it as a percentage. We've got to look at it on a per ton basis. Because right now, aluminum is at historic -- at an all-time high. Copper also is at an all-time high. So a percentage is not the correct way of looking at it. You look at it on a per ton basis. Because at the end of the day, the business gets a conversion margin and then a premium for a product that is a value-added product.

Okay. Understand. So what would be -- given these aluminum and copper prices right now, what is a good way to look at? Like earlier, we used to say that we used to target INR 12,500 for EBITDA per ton. With these kind of commodity prices, what is the rate that we should look at? Would it be a target here?

So I mean, we're still targeting INR 12,500 a ton as a minimum, but we have been getting higher as the mix of particularly these high-efficiency conductors, et cetera, have been increasing. And I will ask Chaitanya to comment on this.

Also, it has -- EBITDA per ton has gone up also because we have reduced some of the exports of the conventional conductors for the reasons that were explained above. So when that conventional business comes back on track because now we are getting the new business at the prevailing freight rates and costs, which are existing, then that will again have a tendency to bring down the weighted average EBITDA because of the volume which is having gone up of the conventional conductors.

We will still target INR 12,500 as a minimum and try to beat that number. So I think what Chaitanya is saying that as the conventional because now we see people wanting to price, they are running out of time on the projects that they have. So they price the conventional conductor obviously to show [indiscernible] volumes are not taking place. so it will be accretive to the bottom line. But the top line will then come down from the 18000-level to some extent.

Understandable. Okay and in terms of our execution period, Generally, I thought I understand is that the execution period is about two quarters. So with the order book now coming up to INR 3,000 crores, do we see the execution -- like this executable in the next 6 months?

10-month orders are there, actually. Right now, we are having 98,373 metric tons of pending orders. That is equivalent to 10 months actually.

Okay. Okay. All right. My next question is actually on oil front. Like you mentioned, I think that with the coming quarter, impact of high crude oil prices will start coming in. And you also mentioned that there will be inventory. So generally, in the last 6, 7 quarters, we've seen like INR 1,000 per kL EBITDA. And then actually we've seen almost INR 10,000. So the -- is it good to assume that the volatility is kind of taken care of and now we'll be in a steady part of passing it over with whatever lag that we may see?

Yes. So I'll answer that question in two parts. One is that what you've seen in the last 9 months has been a little bit more steady state in terms of availability of raw materials and there have been ups and downs in crude like you had crude going up then it went down or again come up. But the product mix has actually helped as we've added more volumes coming on the lubricant side as well as the business in the Middle East from the Hamriyah plant also has increased. The second part, specifically with respect to the crude prices and all that going up. What happens is that we buy quite a lot of products on contract, almost 70% of our base oils are bought on contract. So the contract has a lag effect. So the increase takes place slower than in the spot market. And when the prices fall then the reverse order takes place. So my point here was that even though crude has been going up and has shot up in the beginning of this quarter, because of the inventory as well as the contracts which we run, we hopefully should not see much of an adverse impact in Q4 of FY'22. It is going to give us that cushion for us to be able to handle and ease through the increases in prices to customers.

Generally, we would be able to pass on these increases to the customers also, right? So that would...

You usually -- we are able to pass them on. But what happens is that if your inventory levels are unfavorable in terms of the quantity as well as the price level, then you end up having a leakage. You end up absorbing given the time that it takes for the increase to take place. But this time, we feel that we have adequate amount of time available on hand to be able to increase the prices in the market.

Okay. And if you could just elaborate on the impact of the budget amendment on import duty?

The duty on the base oil, as per tariff, was 10%. But through a notification, they have reduced it to 5%. So presently, we were paying 5%. But it is said that from 1st of May, all these notifications where the exemption has been given or the duty has been reduced. These notifications will be withdrawn. We are still studying the budget actually just has come actually. So we have to see very much in fine print also in details. But that is what has happened, and that is across board, they have done like that actually. So many products actually, the duty is likely to increase.

So that actually for us will be a pass-through because it actually hits everybody in the business. And the way the public sector oil companies, which run the refineries here for base oil, they also priced their product against CFR India sort of price point. The only reason for bringing it up is that actually adds to the product inflation because you not only have the crude going up, which will affect base oils. But in addition to that, there will be a 5% increase happening in the prices of base oil as one goes forward.

[Operator Instructions] The next question is from the line of Anand Shah from GK [indiscernible].

My question was that as you mentioned that the orders have been delayed. So do you expect the orders to be delayed in the following quarter as well? Or are you expecting them to fall in line?

No, there is no -- we don't expect a delay in terms of order execution because in many cases, customers have already delayed placing the orders. And that's why if you would see in some of the previous periods, commentary and details, the order book has gone down to some extent. But there are certain time lines in which these contracts have to be executed, the transmission lines and things like that. So we don't really expect a delay. The fourth quarter execution should be reasonably smooth. The only thing that can derail this and it doesn't look like it will happen in this quarter is in case there is a further delay on international travel for some of the inspections which are there. But given the current scenario of COVID, it seems like every country, things are improving as opposed to getting worse. So our sense is that Q4 order execution should be pretty much on track, both Conductor and Cable.

Right, sir. And lastly, I will ask, what is your forecast of the Conductor business in the quarter 4 and for next year financial year '23?

We are likely to do around [ 30,000 ] actually as far as volumes is concerned in the Q4, as it stands now. And we are working on the budget right now for the '22, '23 actually, and it has not been formed up as of now.

But I will just specifically mentioned a couple of things in there that for the first half of the next year, there is a certain amount of visibility given the order book that's already in place. That order book has a good component. It's about 54% of the current order book has products like high-efficiency conductor, HTLS, OPGW and some of these raw [indiscernible], which are more premium. So the next 9 months, the execution looks relatively good. There are more tenders and orders coming up. And the trend for these two products especially, which is high-efficiency conductors through HTLS and OPGW, is only going to increase with time. So I think the outlook for conductor actually looks relatively good for next year in general.

The next question is from the line of Nemish Shah from Emkay Investment Managers.

Congratulations for a good set of numbers in this challenging time. I had a question related to the Conductor business. Also like you mentioned that the order book for the next 9 months almost 54%...

Sorry to interrupt you. The audio is not clear from your line, sir.

Can you hear me?

Please go ahead.

So I had a question on the Conductor segment side. So like you mentioned that the current order book, almost 54% of your orders comprise of the premier products. So I just wanted to understand the coming pipeline. Do you anticipate a similar mix also for us going forward?

No. Actually, going forward, I expect more of the conventional orders coming in, which last several quarters was subdued. So as a percentage, we may see a lot more of conventional orders. But having said that, the growth of the specialty products relative to conventional will also grow. But it just that last few years, we saw a huge drop in the conventional order that does sort of come back.

Okay. Got that.

Just to sort of explain it just from a slightly different angle is that you have a certain quantity of HTLS, OPGW, et cetera, which is already there in this order book. So that quantity is likely to be there and grow because the trend is a lot of these getting finalized. At the moment, there is less conventional conductor orders in the order book, that will go up. So the percentage may reduce of this from 54%, but the overall HTLS as a premium product has an absolute number will not necessarily go down by that much. It will still continue to grow. So I hope that kind of puts it in the right perspective.

Yes, I got that. So just -- so like a question mentioned that this pending order book will be executed from the coming next 9 to 10 months. So is it fair to assume -- and given that at this quarter revenue almost [ INR 40 crores, 40%, 45% ] of the revenues are contributed by the premium product, so is it fair to assume that at least for coming 2, 3 quarters, the EBITDA per ton will be similar to what we have delivered this quarter?

No, the EBITDA per ton was go down slightly because as Chaitanya mentioned earlier that some of the conventional conductor execution is going to start from Q4 onwards, which is also a part of this order book. It will be well over that INR 12,500 per ton, which is what we are targeting. So what you will see is that the per ton may go down, but the total volume will go up.

And total EBITDA will also go up and the bottom line will go up, but the EBITDA the conventional conductor is lower. That is why we will bring down the overall EBITDA.

Per ton.

Per ton.

Yes. Sir, lastly, a few data points. Can you just share what was the LC numbers for this quarter and the net debt position for this quarter?

The long-term debt is INR 250 crores. Short term is INR 51 crores. Cash and cash equivalents is INR 465 crores. And the LC -- interest bearing LC ForEx is INR 996 crores and domestic is INR 1,123 crores.

The next question is from the line of Vikas Khemani from Carnelian Capital.

Sir, I had a slightly broader question. See, if you see from 2017 to now, broadly, we are in a broader EBITDA range of in and around INR 450 crores to INR 500 crores, right? Now I think there's a very big -- and rightfully, I think there has been a very, very sort of mutual investment cycle and environment was not so good. But with the environment changing substantially, a, I think, first of all, your view on that, how are you seeing environment over the next couple of years changing? And if that were to sort of happen, what does it mean for Apar? Where we can be in, let's say, next 2, 3 years? Because we have also done CapEx in the last 4 to 5 years, significant CapEx of INR 400 crores, INR 500 crores. So how do you see that keeping in my broader environment?

Yes. So Vikas, in terms of the way we look at it is that in the next few years, we will see certain segments growing at a fairly good pace, especially those which are falling into this whole -- energies that are being added on this whole ESG side. You will see a lot of wind power getting added. You'll see solar continuing to get added transmission lines also getting added evacuating path from these into the grid. So plus you will see this optical fiber because today, data is like the new oil. So all the lines are also having this fiber optic core in it, which is in the OPGW. So we see the conductor side of the business continuing to -- at least a premium offering is continuing to grow. Our strategy on the conventional conductors is where we want a certain minimum margin if it doesn't fall into that economic model will allow the business to drop. But the premium offerings, which we have, we expect that to continue to grow on the conductor side. Similarly, on the cable side, we are actually very bullish on the cable business because two areas: One is that you've got a lot of infrastructure that's getting added in India as well as overseas. And the two markets that we have targeted is the U.S. and Australia where there was a very, very strong presence of Chinese cable companies and the customers are also very interested in diversifying their sourcing base. Both of the economies are actually very advanced in terms of the kind of requirements we have, quality standards, et cetera, et cetera. So we see, again, electric infrastructure on the cable side driving one side of the business. Secondly, as the carbon footprint has to be reduced, you will see the entire public sector -- not public sector, public transport sector growing. So there will be more trains and networks every city in the world will have metros. We have a presence in cables on the metro side. In fact, the Australia jobs are running in our -- the main customer there is Sydney Metro. And they're rebuilding and expanding there metro systems there. So we expect this to happen across geographies around the world because the carbon footprint of an electric run metro is much, much lower than if people are using any other form of transportation. We also see this EV and electrification coming up, especially in urban centers. And on the cable side, we have not only a focus in terms of cables that go into the charging infrastructure. But also, we have been -- we've developed a set of cables for batteries as well as electric vehicles, which we are in the process of getting approved from various manufacturers in India as well as we started showcasing the product to even some people overseas. So the bottom line is that both of these areas on the cable side will grow. The third dimension that we're looking at on cable is to grow the LDC business. So some of our competitors who've come up with better numbers, not only in terms of more steady profitability but also a better cash flow cycle. In cables have had a large LDC business, which is a building wire and light-duty cable business. So that's something which we are growing. We have a good offering in the form of e-beam house wires, which are the best-in-class in terms of short circuits and other technical performance. And so we have seeded it in certain markets have been successful there and now have been growing. So by FY'24, you will have like pretty much a Pan-India presence on the LDC side. So these are some of the areas where I see big growth taking place on the cable and conductor side. As far as our oil business is concerned, our lubricant side of the business continues to otherwise gain in market share, the industrial and the automotive side. And then if all these electric infrastructure comes in, then transformer oil will be an automatic beneficiary. So to answer your question, where you're saying what will happen to the EBITDA of the company. So the EBITDA of the company can easily grow 15%, 20% a year if these things fall in place.

And for this, I think most of the investment is in place, right? We don't need to do anything in CapEx?

We have a large amount of the investment. So the investment going forward, our lubricant business will require almost just maintenance CapEx. Conductor business also doesn't require a very large amount. It's just...

Debottlenecking.

Debottlenecking. And as the product mix changes, then you've got to make certain investments to be able to cater to specifications that utilities come up with, but no big ticket item. It's the cable side where we will continue to invest, but you will see, again, there also a drop. So the free cash flow in the company should start substantially increasing from FY'23 onwards. In fact, even this year, there is a more positive cash flow that will come compared to previous years. Even though we have made these investments because of the discipline on managing cash.

The EBITDA margin should be -- I mean if all these things happen, then EBITDA margin also will tend to expand, right? We should probably go with a more value-add, more towards 8%, 9%? Or will remain 13% kind of range?

So percentages are a little tricky for us to be able to take a call on. But if you look at the absolute rupee value of EBITDA per ton or per kL basis, and you aggregate that, then that should go up by at least 15%, 20% over what we will see this year. We are already at INR 393 crores in the 9-month period. It will be more and proportionally, it will grow in the fourth quarter. And then you can see 15%, 20% growth in the years coming after that.

So in a 2, 3-year time frame, we can kind of have a good shot at hitting INR 1,000 crores EBITDA bascially?

Well, INR 1,000 crores is a little -- I mean, I wouldn't be hanging my hat on that. But as I said, 15%, 20% growth is very much possible over the next couple of years. So we'll be at close to INR 500 crores this year. And then you get to INR 600 crores , INR 700 crores.

The next question is from the line of [indiscernible], Individual Investor.

Sir, now that the base oil prices have gone up, obviously, transformer oil price would have all gone up. You have inventory of base oil at low air pressure. So do you expect a substantial price in the carton margins in transformer oil in the current quarter. And whatever inventory health. How long it will happen because you have a low cost inventory a higher EBITDA margin, obviously. So with the current book how many monies of requirements will be taken care of.

So we have -- if you look at the pipeline, which is there between the inventory which we hold in the tanks and what is on the water is arriving into India, the inventory that we have, which is already firmly priced is a little over 2 months. So now I don't see us being able to make some sort of massive windfall with this because they are not the only guys holding inventory even competitors are holding inventory. And it takes time to go to all the customers and increase prices. Some of the sales take place against price variation clauses that EMA has. The point I am making is that we don't expect that with this increase in the crude, we will have a very unfavorable situation where there is a big price leakage that takes place. Where your costs are not other customers haven't increased the prices. So this whole scenario has happened in the past, but we don't believe that it will happen this time because we have the 60 days worth of stock with us, which is sufficient time, I believe, to be able to get prices adjusted in the market.

On this segment, sequentially, we can see better margin? Can I put it that way?

We can -- we will see a steady market. So you will see the EBITDA per kL will be in the same -- at least in the same vicinity, even though you'll have an inflationary environment.

The second question is on the scale. Now that the budget has said about optical fiber cable as such to relate, how big is our OPG network so that we can capture on a very large can. Are we [indiscernible] we're -- only rich player will have very high margin in OPG and that'a all or we may be able to scale up significantly in line with [indiscernible] and make the optimum benefit out of that.

So the OPG -- so there are 2 separate products. OPGW is one product line and an optical fiber cable is another product line. The OPGW is basically an earth wire that runs on a conductor network that carries a fiber optic in its core. So companies like power grid, railways, other, people who adopt this OPGW as an earth wire, the is in the old days, the earth wire was just a steel wire, galvanized steel wire. Now in this case, it's a galvanized steel wire with a core in it, which is fiber optic. So it is a niche product, but today, every new transmission line is being looked at with an OPGW cost. And so the market itself is expanding. The market size, as we mentioned on previous calls, could expand as much as about 50,000 kilometers a year, and we have capacity in place to be able to pick up about at least 25% to 30% of that market share. So you will see that as a steadily growing line item in our conductor business is sort of revenue. The other big competitor based in India is Sterlite, which is now Sterlite -- this is under Sterlite transmission, which is part of the power business. So they are the largest manufacturer of fiber optic cables as well as the optical fiber in the country. So obviously, they do have some benefit over competition. But we expect and we are targeting 25%, 30% market share at least going forward. And requisite capacity being expanded right now. That was what I mentioned earlier in the call, so that we are in a position to cater to these increasing requirements.

Will be maintaining our market share or will be able to increase our market sale in a growing market?

So the current market share that -- the market at the moment is relatively small. It's only from the last quarter that the order book of OPGW has started increasing. So our market share also has been increasing because previously, this was dominated by players from China who used to import. But with the current tendering structure, which is in place and the Atma Nirbhar project, domestic manufacturers actually benefiting from it. So our market share is relatively very low in OPGW historically, now it's in that 25% range, and we expect it to be in that 25%, 30% range going forward.

We will be growing in line with the market?

Yes. I mean, it will be growing faster than the market because we had like a 10% share previously. Now it will be in 25%, 30% range.

We are saying it will be remaining in that range going further? And the market is also growing. So that means you are expecting to grow in line with the market?

Yes, in a way.

Fair enough. And the speciality oils are we not focusing much on that gain margins are much higher, white oil?

No. So white oil the margins are, except for the high-end pharmaceutical range of products, white oils are the most commodity -- most commoditized of the offering that we have. So our focus is to actually grow some of the high-end transformer oil and industrial and automotive lubricant side, which is where the margins are relatively better. And that is something that we have continued to do. So you will see that even in the 9 month numbers, the industrial and automotive per metric ton or per square margins have been reasonably good. And now they are reaching a certain level of steady performance.

Between industrial or the automotive, where do you see growth to be faster, margin terms?

Your voice is not clear at all. I'm not able to comprehend the question.

Between industry and oil and automobiles, where do you expect the faster growth for your company in terms of margins?

Both of them go on different tracks. The industrial oil consumption increases with the industrial activity in the country. More manufacturing taking place automatically, industrialized consumption is higher. The automotive side is fundamentally a function of how much growth on the commercial vehicle side and to some extent, on the passenger car side. So our sense is that both of them will grow. Industrial is something that we would expect where the growth -- the longevity of growth is much higher. Because as more and more industrialization in India takes place more and more automated manufacturing takes place, the amount of an industrial oil required will go up. If you look at the pecking order, we are actually higher in the pecking order in terms of industrial oils compared to automotive, where on the automotive side are a number of big MNC companies also like Valvoline and Total that are present whereas they have relatively a much smaller industrial oil offering. Same thing with Castrol. Castrol is very, very strong on the automotive side. They have a smaller industrial oil offering. So our expectation is that the two are mutually exclusive. If you try to grow industrial oil, it doesn't take away anything from you growing automotive oil. So we are pushing both parallel.

It's slightly different. I'm just asking whether now you are able to grow faster than industrial where you already have an age or in automotive where there is intense competition as far both are not complementary as supplement these are 2 different directions I do agree with you. But where do you see growth faster?

We are growing at almost a similar pace. Because on the industrial side, we are focusing more on specialized products and the margins are higher. So the sales cycle is a little bit longer. In the case of the automotive, our market share is relatively not very high. So there is a lot of wide space available for us to fill in. So I think both of the products will grow at a similar pace.

The next question is from the line of Pawan Nahar, Individual Investor.

Thank you, gentlemen. First, I wanted to thank and best wishes to Mr. Diwadkar for all the years and the amount of learning and patience with -- in the patience with which he answered. Second was Kushal, Chaitanya, I just wanted to ask a few questions. One was, there was a mention about the fourth quarter conductor volumes. Was it 30,000 or 40,000 ball park?

30,000.

30,000. Okay. Got it. Then the other thing I wanted to ask was the oil business overall volumes have been pretty robust in terms of growth this year, right? So for next year, what do you think we could do in terms of volumes? And per kL, of course, we'll revisit it later given so many changes, but I'm just trying to have a breakup.

So Pawan in the oil segment, there are certain groups where we want to target a systematic growth in volume. So on the industrial and the automotive side, we are targeting a 10% volume growth to take place between the domestic and the export market. On the transformer oil side, we would see at least my expectation is that there should be at least a 10% growth because we've degrown from previous periods. And there is, again, I mentioned in the budget. I don't know what the fine print will be and how soon it will be rolled out. But as the privatization of DISCOMs takes place, there is a lot of improvement that is required on the distribution transformer infrastructure. So when that kicks in, you will see a function growth happening there. We continue to win more business overseas at the moment, where the difficulty of predicting the growth is that the freight costs have become very high to certain geographies where we were seeing increased market share like, for example, in Australia and Latin America, we were growing our market share in transformer oil. Today, the freight from India or from Jebel Ali is almost 30%, 40% higher than the freight from a U.S. port or a European port to these locations. I guess, largely because the reverse hall is cheaper with a lot of containers stuck in these places. So these are the areas, notwithstanding that the areas where we are focusing on growth is the auto industrial side and the transformer oil side. The white oil is a little bit of a filler where it tactically makes sense for us to sell product and we make the minimum margins required, we will then push the product. But we just don't want to push volumes just to hit total number of kiloliters that we end up selling if we don't make the right margin levels.

Okay. So we've done about 345,000 kL in the 9-month period, right, which is 17% up Y-o-Y. I understand last year was a decline, right? So we are pretty much coming back at 10% more than, let's say, FY'20 levels, right? So next year on this [ 450 ], assuming that the trend continues and we do about 450,000 kL this year. So can we -- again, I understand that there are challenges. And in fact, there are serious challenges that -- and despite which these numbers are coming, so that's [indiscernible] complement. But can we assume like a 10% growth, so ballpark, let's say, 500,000 kL next year?

So let me answer the question. I may not answer it exactly, but we are -- for next year's plan, we are targeting at least a 10% growth in our auto industrial and our transformer oil side. So these two would contribute to approximately 65% of the revenues of the company. So in that 65% by volume, you should see a 10% growth. For the remaining 35%, we will take a tactical fall because freight and other things bear important role on the white oil and transformer oil side of the business. One other segment that I didn't mention where we are seeing growth taking place on the automotive side. Again, this year, the automotive numbers are slightly subdued. As you see more delivery of passenger vehicles and commercial vehicles taking place, our [indiscernible] process or segment will also automatically grow. Because there are some product offerings which we have there where we have a very strong market share and position. So if the market category grows automatically, we grow there.

Got it. So basically, let's say -- so overall -- and in terms of per kL, do we think we can maintain this number next year? Ballpark [ 6,500 ]?

Our target is to be able to maintain it, 6,000. 5,000 is like a minimum that we like. But I think at the moment, we are upward of [ 6,000 ] and we would like to be in that ballpark. One last thing I mentioned, Pawan, is that besides the per KL number in our oil business, the free cash flow coming out of the oil business will continue to improve year-on-year because there's very little CapEx investment that's required. Is getting generated is going to be -- and we intend to use some of that to improve the LDC business and things like that, which are -- and the retail side of our automotive business.

So let me then use this absolute number. You've done 9 months, INR 220 crores of EBITDA in the oil business, which is the largest segment for us now at this moment. And so we can -- can we assume that this trend of INR [ 70 crores ], INR 80 crores continues per quarter?

Yes.

INR 300 crores. Yes. I mean, even without growth, this INR 300 crore number should hold?

Yes.

Okay. Then the conductor side of the business, I mean short enough, the fourth quarter we'll see more traditional conductor [indiscernible]. But for next year, right, what is our best guess in terms of volume? so from, let's say, about 100,000, 105,000 ton this year, where could we be next year and in terms of EBITDA per ton? So just if you want to answer that.

Be more like 120,000 ton or so for the year. And in terms of EBITDA, as we've been mentioning, it should be north of INR 12,500 per ton.

Okay. Fine. I'll take that number. Then Kushal, I mean, for the cable business somehow in my notes or my spreadsheet, what I see is that we had at an additional number of INR 2,500 crores of revenues, was it for FY'23?

Yes. So this year, we will cross INR 2,000 crores in revenues. And for FY'24, our expectation was to target a growth of at least -- about 15%. So we will be in the range of around INR 2,300 crores, INR 2,400 crores based on the current commodity price level. With an EBITDA, which is at least in the 8% to 10% range on that number. So if you take 8% on that, you're looking at...

INR 190 crores, INR 200 crores.

That is why when Vikas had asked the question earlier, why this thing was at INR 600 crores of EBITDA is what one can look at.

Absolutely. Because the comparison I'm getting after doing that math. And then the other question I would ask here.

Sorry to interrupt.

No, no. I'm pretty much done. So thank you. Thank you once again. and looking forward to reaching that 20% ROE number.

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

Just wanted to confirm the LC line borrowing?

As for LC INR 996 crores and the domestic LC INR 1,123 crores.

INR 1,123 crores. Okay. INR 996 crores and -- LIBOR is INR 996 crores and domestic is INR 1,123 crores?

Correct.

The next question is from the line of Praveen Agarwal, Individual Investor.

I have a couple of questions. One is on the cables side, right? Say, a couple of years ago, we were looking at, say, around we were making 10% around EBITDA margins. And I understand that our current -- currently in the market, there is a lot of competitiveness and there's not offtake for some type of cables you make. But do we think that in the next couple of years, we'll go back to that 10% EBITDA margin range on the Cable division side?

So there was -- our sense is, as I mentioned, by answering Pawan's question that our target is to get to 8% to 10% with the current values of metal and polymers, et cetera. One thing that actually has led to this getting reduced also in this year is that there are certain components like polymers, for example, which are not necessarily covered under the price variation formula. You never had polymers going up in this year. In the last 12 months, PVC and some of these XLP compounds in all have gone up by 90%. So whenever you have a bidding kind of environment, you would have this sort of a pressure taking place because there is no formula to pass on the polymer. The way we are mitigating it today is we are quoting only for shorter periods of time. And if there is a longer period of time, we are asking for a new variation close to be put in or the desisting from it. So longer term, our expectation is that with the current level of polymer and metals, et cetera, targeting around between 8% and 10% EBITDA of receivable. And so stability can come up, provided, we end up getting a steady state of business coming on the wind and defense and some of these segments. We've had a very low proportion of that in the last 4, 5 quarters. But from Q4 onwards, it's showing a higher percentage based on inquiries order book success.

So with the prices going up, let's say, if you were running a plant at for the Cable division at 100% capacity. What would that translate to revenues if, say, for a quarter, we run that at 100% capacity, what would that translate to in terms of revenues?

So after we complete the expansion on the wind mill for the cables that go in to the wind, et cetera, then you are looking at around between INR 2,700 crores and INR 3,000 crores. The current -- with the current mix.

Understood. See, the other question I had around the defense revenue. I understand over the last few years, that's something which you -- while small, it has grown quite rapidly. Last, I remember some time during last year as we mentioned, if I remember correctly, around INR 170-odd crores I thought -- in that ballpark you're making for Defence?

No, no. Defence, we had reached up to about INR 40-odd crores on the Defence side. And this year, if you look at -- let me just pull out the numbers here. So we were at -- you will get to around INR 50 crores in FY'23. So this year, the number is relatively very muted because most of the business is coming in only in Q4 on that Defence side. There are also -- it also depends on the speed with which especially you see the intensity of cables are the highest in the Indian Navy. So depending on the rollout of submarines and frigates and all these sort of things, the cable requirements come up. So at the moment, there are some very aggressive plans in place, but we need to focus. One of the things that has been brought up in today's budget is an increase in the Make in India portion of what the Defence establishment buys. So that is being targeted to be higher than 65% now. So if those things happen, then our cable requirements to Defence also will start increasing. But I think FY'24 will go back to around INR 50-odd crores. This year, we will be in the range of around INR 25 crores, INR 27 crores only.

Okay. Okay. On my final question or point I want your thoughts on is targeting. We have a -- we target per kiloliters or EBITDA per ton in the conductor or the lubricants division. But let's say, I mean I have a more critical question on this. if raw material prices go up by say 100%. And if we target the same EBITDA per ton or EBITDA per kilo liter. Our return on equity will probably go down by half because our capital outlay will increase just double. So is there any thought around that, that we should, at some level also target some absolute EBITDA percentage levels for each division rather than just only looking at per liter or per metric ton only.

What we end up doing is when we do our internal costing is that we target an EBITDA per ton. But then depending on the finance cost associated with the execution of the order there is a modification that we would make as we quote for. So if the prices of all the metals and everything goes up higher, then the EBITDA per ton that we would target from that customer would be adjusted upwards to compensate for the cost. So here, what has been happening today is as the metal prices, et cetera, have been going up, but the interest cost has been lower simply because of the lower interest rates, which are involved. So that's why we're still seeing INR 12,500 a ton. If the interest rates go up and the metal prices also remain elevated, then obviously, we will revisit that number to make an adjustment for the finance costs involved in running the business. I hope that addresses your question.

So 15% to 20% ROE is something which we -- the aspiration number, we continue to target back.

Everything is to be worked backwards from that. That is the target. And then based on that target, we are trying to work backwards. 9 months, we are at 15%.

15% ROE.

And I think the fourth quarter hopefully will be a little bit better. So we are in that 15%, 20% ballpark number that we are talking about.

Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.

Thank you. Thank you, everyone, for participating in our Q3 FY'22 earnings call. Just as closing remarks, we are reasonably optimistic in terms of the way we see business going forward. Hopefully, with Omicron not creating as much of a disruption. As when it came on, I think the fourth quarter of this year should be a little bit more predictable in our executions. And we go in with a reasonably healthy order book in our cable and conductor business as we enter the next financial year. The oil business also, as I mentioned, is on a fairly strong wicket and should deliver good free cash flow. Also, you will see a lot of more branding going on, at least on digital media as well as in BPL activities, in the next 2 years around our offerings of LDC and lubricants. And if those offerings are successful, then that will improve the earnings quality of the company and hopefully the valuations as that percentage grows. So with that, I'd just like to thank everyone and publicly thank Mr. Diwadkar for -- he's still with us for a couple of months. But this may be his last earnings call, in which he will be taking an active role. So thank you, Mr. Diwadkar. And thank you, everyone, for your time.

Thank you. Ladies and gentlemen, on behalf of Apar Industries Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.