Apcotex Industries Limited (523694) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '20 Earnings Conference Call of Apcotex Industries Limited. [Operator Instructions] Please note that this conference is being recorded. At this time, I would like to hand over the conference to Mr. Anuj Sonpal, CEO of Valorem Advisors. Thank you. And over to you, sir.

Thank you. Good evening, everyone, and a warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. We represent the Investor Relations of Apcotex Industries Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings conference call for the third quarter of financial year 2020. Before we begin, I would like to mention a short cautionary statement as always. Some of the statements made in today's conference call may be forward looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. Our caution not to place undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. I would now like to introduce you to the management of Apcotex Industries Limited participating with us in today's earnings call. We have with us Mr. Abhiraj Choksey, Managing Director; and Mr. Anand Kumashi, Company Secretary. Without much delay, I request Mr. Kumashi to give his opening remarks. Thank you, and over to you, sir.

Thank you, Anuj. Good evening, and welcome, everyone, to this earnings conference call for Q3 FY '20 under the review. Along with me in today's earnings call, I have our Managing Director, Mr. Abhiraj Choksey. I hope you had an opportunity to look at the company's performance for Q3 FY '20 as well as earnings presentation, which has been circulated and uploaded on the website and the stock exchanges. Moving on to the financial performance for the third quarter. The net revenue stood at INR 110 crores. The operating EBITDA stood at INR 0.6 crores for the quarter and there was a loss recorded of around INR 1 crore. For 9 months ended FY '20, the net revenue stood at INR 380 crores, and operating EBITDA stood at INR 25 crores. The operating EBITDA margins were 6.68%. The PAT was around INR 14 crores with PAT margin of around 3.58%. Some of the key operating highlights for the quarter, as under. From the numbers, you can make out that this quarter definitely had quite a few challenges, which hit the company at the same time. We all are aware about the slowdown in the auto sector and allied industries, which has naturally had a trickle-down effect on our company as well as affected NBR volumes and margins. The overall slowdown in the Indian market has also affected our volumes in the paper, carpet and construction industry. However, the signs of smart recovery has been showing up in the fourth quarter. On the export front too, the company is adversely affected due to lower monomer prices in Europe compared to Asia, which has now started correcting in Q4. That said, the company is taking measures on all fronts to revive the financial growth and profitability. Although it's difficult to say that at this time how quickly the results of these efforts will show, but we are confident that it will happen. Lastly, we are happy to inform you that out of INR investment of about INR 100 crores CapEx for Phase 1, INR 85 crores has been deployed till 31st December 2019, and the rest will be completed by the end of this financial year. Captive Power plant will be commissioned soon which is expected to save power costs in Valia plant from April 2020. Also our debottlenecking project is expected to be completed in Q1 FY '21. This will improve our production capacity to about 20,000 metric tonnes per annum and will further help us to reduce the operational cost, while taking considerate step-ups in implementing several other cost-saving projects for next 1 or 2 quarters which will enable us to save the cost. For our 2 major projects in the pipeline, which are XNBR Latex and Polymerization Line 2, the designing and consent applications have already been started. With this, I would like to open the line for question and answers.

[Operator Instructions] We have a question from the line of Farokh from Avestha.

Abhiraj, I just had a couple of questions. Firstly, I just wanted to know why we have these continued delays on the CPP. And if you recall, we had discussed this in the last call as well, and I think we were talking about the present time or a little bit before the present time as being a potential start date or commissioning date for the CPP, and now in the presentation, I see that we're talking about April. So how...

Sorry, can you identify yourself again? What's...

Sorry, this is Farokh Pandole here from Avestha Fund Management.

Yes, yes. Farokh, go ahead.

So yes. So on the commissioning of the CPP, that was one question, and sort of how confident are we about that? And also what is our current net cash position? And just to -- related to that, is the INR 240 crores that we are planning on spending on the 2 projects, is that the sort of large CapEx that we've been discussing all along?

Yes. So just starting with the CPP first. We're actually commissioning it in the next week, 26th or 27th is the date that we're looking at. And so the presentation says -- but by the time it sort of settles down, therefore, conservatively, we said we'd start sort of accruing the benefits of that fully from Q1 of next year. So we're by and large on target of our February date. And the second question, yes, the INR 240 crores that we're talking about are the 2 projects of Nitrile Latex and NBR Line 2. The 2 things we are in -- sorry, we're in the design phase, as we've mentioned last time. There has been some delay because the CPP has been delayed by 3 or 4 months from the original plan. There were a couple of reasons from that -- for that, some internal, some -- one of the other reasons was that the monsoon this time, which we had budgeted for some time in October, November, post monsoon to do some civil work. Unfortunately, it rained in Gujarat till almost the middle of November, November 20th or so. And therefore, some of the civil work was delayed, and therefore, the project has been delayed to about Feb end. Because of that, our project team has been sort of busy and diverted to that for a bit. Till that is over we're prioritizing that. But as far as the basic designing of at least one of the projects is already -- actually almost getting over, the Nitrile Latex project, and we will soon be doing detailed engineering for that project. The second thing, of course, has been -- the last 3 or 4 months has been extremely challenging. And as far as the cash flow position, we are in a -- company is quite healthy in terms of the balance sheet. We are a net cash positive company, as you would know from the balance sheet. But we were, of course, looking at the accruals, which haven't come in the last 3, 4 months, as expected, in the last quarter, as expected, to also fund part of the project, especially NBR Polymerization Line 2 where the -- we still believe, in the long run, it's a good project. But of course, in the short term, we have to manage our cash flow. So it will be a combination of debt and internal accruals that we had planned to do. But given the recent challenges, obviously, that also we are sort of relooking at it. Having said that, there is no rethinking strategically. It may be -- in just -- in terms of time line, there may be a delay.

So what is our current net cash position as of December?

No, net cash. So you are subtracting working capital debt also?

No. If we leave aside working capital.

If you leave aside working capital, it's about INR 50 crores, INR 55 crores.

Excluding the term loan of INR 20 crores.

INR 70 crore is the cash position, minus INR 20 crores is the term loan. So about INR 50 crores.

Okay. Got it. And just lastly, the -- you'd mentioned in the presentation that the differentials between Europe and Asia, which were a big issue in the previous quarter, and I guess, have also been an issue in this quarter, have at the end of this quarter started to reverse. So could you just sort of describe with a little bit of data, how bad things were and where we are at right now? And why you're more positive going forward?

Yes. So typically, we've seen that monomer prices are about 5% to 8% lower in Europe on average, some monomers are where sometimes 10% or 12%, some are even higher than in India, that's typically. But last quarter, we saw 2 things. One is monomer prices were coming down. And so as a percentage, the difference and even on dollar to dollar basis, the difference was as high as 25% for a period of 2 months, where Europe was much cheaper. So that resulted in not -- us not being able to export competitively in some of the markets where our European competitors also supply. Namely, Middle East, Southeast Asia, Europe, and that started reversing in December, and now we're back to normal levels or less -- below normal levels. So again, our Q4 exports are sort of extremely strong.

So you'd expect the Q4 of the export side to be obviously much stronger than this quarter and the previous quarter?

Absolutely, yes. And I'll just sort of preempt some question that will come, just taking your cue on that, Farokh. There were 3 or 4 reasons. One is the exports that I mentioned in Q3. The second was the slowdown in auto and allied industries that affected the entire Valia business, both in terms of volume and in term -- and more so in terms of margin. So both for NBR and all our allied projects -- all our allied products also, there was a period of 2 months where, in fact, we had a situation where the finished goods prices were lower than our variable cost. We've not seen that in the last 4 years since the acquisition. That, of course, started turning in December. So for some of our products, it was negative margins, and it was just not -- it was better to shut the plant than do business, frankly. And then besides auto also, at least in October, November and early part of December, there was overall sluggishness that we saw in the Indian market for the industries that we cater to, which is paper, carpet and construction and tires, all 4. Again, that has sharply recovered, I would say, towards the end of December, but more so in January. So besides the margins in the Valia business, the NBR business, which are still fairly challenging compared to, let's say, Q1 and FY '18, '19. At least right now, in Q4, the rest of it seems to have reversed. So we are quite sort of confident that Q4 will be reasonably better than Q3. However, there are still some challenges that do remain, mainly around the NBR margins business. I hope that answers your questions and for some of the other participants on the call.

Yes, that makes things much more clear. Just given everything that you've said, would you be able to hazard a revenue number for the fourth quarter that you're looking at?

No, we don't -- I don't really give out exact numbers or we don't do that as a policy. But safe to say, it will be significantly better than Q3 in terms of revenue. However, as I said, for in our kind of business, revenue is also a function of the -- function of oil prices, so -- and downstream petrochemical prices. So for us, revenue, to some extent, is not the most critical number, it's the margins that's important. But in terms of volumes, we definitely see a significant growth in volumes and it -- of course, that'll affect revenue as well. There was one more reason. We also saw a significant fall in raw material prices over the last quarter, which led to some stock losses, which is normal. That just -- it wasn't significant, but it added to the losses to some extent. I just wanted to add that as an extra point. So there are 4 or 5 things that went wrong in Q3, mostly around the business environment that, unfortunately, all came together at one time.

[Operator Instructions] Next question comes from the line of Rohit Sinha from Emkay Global.

I think this quarter was a very much one-off kind of quarter everyone would be expecting. I just wanted to know that how much was the volume -- overall volume this quarter and the price taking impact on the revenue, if you could share.

Yes. Again, we don't share exact numbers, but what I'll give you is the broad indication. There has been a sort of low double digit, and by low double digit, I mean -- okay, I'll give it, about 10% to 15% reduction in volumes. The rest of it is just because of pricing. It's just the pricing coming down. But we've certainly seen a hit in volumes compared to Q3 of last year, corresponding period.

Okay, okay, okay. And in terms of export side, if you're saying that Q4 would be better, seeing strong growth. So is it only from the carpet side or from other segment also? And in carpet segment also, I would like to know whether our major customer in the Middle East has seen that or still we are looking for that?

No. So the -- that was actually not a carpet customer, it was more of a specialty product customer that had a fire about 2 years ago. They have not come back. There is some legal issue and they -- we are not -- we are no longer considering them as part of our strategic plan anymore. As and when they do come up, we'll see. But as of now, we have no hopes that they'll come back. There's some legal issues around that plant. We've had an export growth across sectors. Carpet has been especially strong, but across sectors in Q4, we've had good growth in export.

Okay. Okay. And next, only on the margin side, we are very much in tandem with the movement of the RM prices. So this quarter's margin contraction and even in last quarter also, there was a sharp margin contraction. So I think everyone would be also be looking at, at least on the margin front, we'll be able to sustain at certain level. So just on the ballpark numbers whether -- what kind of margins we'll be looking at in the Q4 or going forward. Since we were anticipating plus 10% kind of EBITDA margin for a long time.

Yes. Look, hard to say. Given the business environment, especially around auto and our NBR business, I think the -- so let me put it this way. The rest of the business, we expect the margins to be back to normal, around 11%, 12% EBITDA margins. The only problem, as a company, we may not be able to achieve that immediately because the NBR business margins, contribution margins are fairly -- it's fairly challenged right now. And so I think it will take some more time. Hard to predict how long, but certainly, Q4 margins will also be not back to normal, I would say, 11%, 12% that we've had. In fact, I think our last year, FY '18, '19 was close to 11%, if I'm not mistaken. So I think Q4 will be definitely better than Q3. But we'll have to wait and see what happens in the business environment and see if that improves. And talking about the actions that we have taken, we certainly expect from Q1 of next year, so Q1 of 2021, as we mentioned, the CPP will be commissioned. That will help in reduction of costs. We've also -- we'll also be completing -- finally completing all our debottlenecking projects, which will take our capacity up to 20,000 tonnes. So of course, if the productivity goes up, per unit costs go down as well. That will help in improving margins. We have certain other cost-saving ideas that we'll be implementing over the next 1 or 2 quarters, that will help with margins. We are also working with the government to -- there is a little bit of dumping going on from abroad for the NBR. So we are working with the right authorities to try and see how we can rectify that. So -- but of course, that will take a little longer, at least 6 to 8 months, but those are the few things that we have done.

And one last thing on the CapEx side. So as you mentioned that around INR 85 crores is deployed. So just a ballpark picture for FY '20 and '21 on how much would be the CapEx number.

Frankly, the CapEx, we -- it will be -- the major CapEx will be the Nitrile Latex project, which is about INR 60 crores that we are budgeting for now. The basic engineering is going on, final numbers will be out in a couple of months -- a couple of weeks maybe, maybe by next month. And other than that, we don't really have any major projects. Otherwise, there will be maintenance CapEx, as we call it, which is generally about INR 10 crores, INR 12 crores a year. We don't have any other major CapEx plans. We have not exactly worked out annual numbers for '20-'21 and '21-'22 just yet. We've just started the process of budgeting for next year. So I think you should have -- I should have a clear answer by the next con call, where we can give you exact breakup of the CapEx over 2 years.

Next question comes from the line of Ankit from Smart Sync Services.

I wanted to know about your brand ApcoBuild. So we don't find any mention in the annual report or presentation. So can you just throw some light how is it doing in terms of revenue?

Yes, thanks for pointing out, we'll certainly mention it. No, we're very excited about it. We've seen some good growth. We're -- actually, it's, of course, still a small part of the business. We don't give out separate numbers yet. But we've had our best years that we've had for ApcoBuild in a long time -- not a long time, because the last year was better than the year before. So it was best year, '19-'20 will be our best in terms of revenue as well as our bottom line. We should mention it in our annual report, and we've been remiss in doing that. We will make that correction. So it's going well. Do you have any specific question? I'm sorry, I can't give you the exact number. Yes, I can tell you that we have expanded from -- we were earlier only in the Mumbai region, we have expanded to Pune and now to Gujarat as well, part -- some parts of Gujarat that we're looking at. So we're slowly expanding the region that we operate in. But so far, we've been more in the Mumbai region only, Mumbai and Pune.

Is it possible for you to share as in what kind of numbers -- I'm not asking for the exact numbers. Say, how much of your turnover it would be having -- in the next couple of years down the line?

Okay. I don't want to venture a guess, but I can safely say, it's very small in terms of revenue. What we are excited about is actually the synergies between the 2 businesses because a lot of the materials we're able to make or we have developed the business to outsource the ones that we don't and create new products out of the materials that we do make. So the idea would be to capture the margin, and the profitability of the business is quite good, but it's still a very small part of our -- in the single digits in terms of percentage of our total business.

Okay. And are we looking at expanding it in the next couple of years or 3 years?

Yes, yes, absolutely. So the expansion would be more in terms of entering new markets and building the team. And the B2B business would support it, of course.

And we don't need any extra capacity addition from our -- no CapEx requirement from our side for this specifically, right?

No. It will be part of what we already have.

[Operator Instructions] Next question comes from the line of Dhavan Shah from ICICI Securities (sic) [ ICICIdirect.com ].

So I have a question on the gross margins. So the Butadiene prices have come down to around $800 per tonne in South Asia market versus around $1,000 per tonne last quarter. So firstly, what is the inventory loss? I mean, this INR 11.6 crore mention in the changes in inventory, so this entire is the inventory loss? And secondly, how much old high cost inventory is in the overall books? And given that the prices have come down, so can we see the gross margins moving to around 30-odd percent from the next 1 or 2 quarters?

Difficult to predict what gross margins will come back to. But yes, certainly, we did have not so much Butadiene stock. But because of -- whenever -- and it's not just Butadiene, Butadiene is one of our raw materials. There is styrene-acrylonitrile, 2 VP, we have a bunch of other raw materials also now that are equally as important. And with raw material prices coming down, it's not so much raw material stocks that we had, it's more about the finished good stock at higher prices that we had. Certainly that was an impact, as I mentioned in my earlier statements. As far as your -- I'm not sure where that INR 11.6 crores you have...

In the income statement, in the changes in inventory, this is minus INR 11.65 crores.

But that's change in inventory, right?

The inventory revaluation or something has that come or...

It's not revaluation. It's only difference between opening and closing, yes, that's what they tell me right now.

Okay. Okay. Okay. And about the gross margins? I mean, given that Butadiene prices may remain at around this level, so is it safe to assume that we'll reach to the earlier gross margin level?

Well, Butadiene has come down, but as I mentioned, it's also a factor of what NBR prices and other finished goods prices are. The other finished goods are -- we are quite happy with the gross margins for all of our other products. The only product where there's a challenge has been NBR, where the gross margins are not as good as they used to be and unlikely to recover at least in Q4. We're not seeing that significant recovery. While it's improved a little bit, we're not seeing a significant recovery in Q4. There's been a lot of dumping happening from imports, especially from Korea. So we did file an antidumping petition in early January, which was accepted. And prima facie, that is a good case is what the designated authority has ruled. And the initiation for that case has started just -- in early February. But as I said, that will take a few months before -- at least 6 to 8 months before we -- before that will come into fruition.

So what is the price differentiation between the dumping amount and your selling value?

Sorry, can you repeat the question?

I mean, what is the pricing differentiation between the NBR import from the South Korea and your selling price? I mean -- and if the antidumping comes in, then what kind of antidumping duty do you envisage? I mean, that will...

Again -- so there is -- we have actually had to depress our prices. There is not -- we have to depress our prices to compete with them. But compared to 6 months ago, the prices are down by at least 20% to 25% in terms of what they should have been. So unfortunately, it's not for us to envisage what the dumping margins will be, the DA, the Designated Authority, in the Ministry of Commerce, part of the Ministry of Commerce decide that.

The quasi-judicial body.

Next question comes from the line of Karan Bhatelia from Asian Market Securities.

Can you throw some light on the revenue mix, how has that shaped in this quarter and for 9 months FY '20?

Can you be more specific in terms of what you're looking for?

So in the previous quarter, we saw our Latex revenue share increasing, and this is where we had some impact on realizations and margins. So like, are we back to 50-50, 50 latex and 50 synthetic rubber, or we are still tilted to latex?

I'm just looking at percentage numbers, just 1 second. I would say that in the last quarter also, I think we are more -- still more towards latex because the NBR business has not done well in terms of volumes as well. Still a larger chunk would be latex. I don't have the exact number, I'm sorry, in terms of percentage. I'm just trying to calculate, but I -- yes, I'm sorry, I don't have the exact...

So is it to the similar number for 2Q?

Yes. Do you recall the 6 -- Q2 numbers? Sometimes you all know the numbers better than I do. It was at Q2 numbers as they've mentioned.

55% coming from...

Yes, it. Must be about...

So that number remains constant?

My guess would be, it would be about the same in Q3 as well.

Okay. And sir, can you throw some light on prices of our key raw materials? How much it was down for Q3 on an average basis? And how much improvement or dip till date has happened?

In the raw material prices?

Correct. In Q3, how much it was down for our key raw materials?

It varies, but I think it was down by about 15% to 20% across the board for most of our raw materials. No, actually, I have that. It was down by about -- exactly, yes, it was down by about 20%.

And how this quarter has shaped up? We are almost 40 days to 4Q and how has the prices...

Well, it's funny. In, actually, January, it went up marginally. But in February, it's coming down again because of this whole coronavirus situation and oil coming down. So it's hard to predict. It's up and down. What the average will be, hard to say.

Correct. And any benefit of the corona thing, directly or indirectly?

No, not generally. We don't compete with China nor do we have a lot of customers in -- we don't export much to China. So no real benefit as such. In fact, what we are worried about is, in the long run if this coronavirus situation is not controlled, it's not good for the world economy. It's not good for the world supply chain because so much stuff is made in China. We have some suppliers in China that have already delayed their shipments. And if they delay it further, then there is a big problem because we have to then suddenly import this from U.S. and Europe, where the lead times are longer. So while we are okay till March end, if this coronavirus thing is not resolved soon, it will certainly have an impact on some of our supply chains temporarily. And I would say, worldwide, it will have an impact on a lot of supply chain. So it's really not good if it is not brought under control soon, and if shipments from China -- ships from China don't start moving soon.

Correct. Sir, any update on the new product launches? We had recently XNBR for latex. So how has things shaped up there?

Yes, good. We've had fairly large bulk trials that have -- that are going on. The first set of trials in Malaysia and India have been very successful. Of course, there were some issues like any new product launch, but we have overcome those, and we are going for larger bulk trials that are going on. So we are selling good quantities from our Taloja plant. As I mentioned in my previous statements, we have almost finished basic engineering for that project, and we will soon start detailed engineering. And once we get some environmental consent that we are waiting on, we will break ground, hopefully, in Q1 of FY 2021.

All right. So FY '20 CapEx number will include the CapEx for this -- XNBR Latex, INR 16 crores?

There is -- no, no, no. FY '20, we've not started CapEx. Besides some small cost of basic engineering, we have not really done anything.

So I think the balance INR 15 crore is for the Valia plant and INR 10 crore, INR 12 crore of maintenance, so somewhere INR 25 crore to INR 30 crores CapEx for '20 is doable?

FY '20? No, it's only the...

We have INR 15 crores of balance CapEx for Valia, right? And apart from that INR 10 crore, INR 12 crore maintenance CapEx, you mentioned earlier...

No. INR 10 crores, INR 12 crores is for the whole year. For the quarter, maybe another INR 1 crores or INR 2 crores. Yes, it's around INR 16 crores, INR 17 crores is left for Q4. INR 17 crores is what we have left for Q4.

And slightly higher CapEx for FY '21?

Not really. I -- we'll see. I don't know. It depends on how the NBR Polymerization Line 2 progresses and how quickly we can do that, because we'll need an environmental clearance for that as well. But if that happens, yes, maybe, but without that, I don't think we'll have more than INR 70 crores, INR 75 crores CapEx in FY '20, assuming -- FY '21, sorry, FY 2021, assuming we finish our entire Nitrile Latex project also in FY 2021. So as I said, I'll have more clarity on the next con call regarding all that. But it will be about -- I don't think it will be more than INR 60 crores, INR 70 crores.

Next question comes from the line of [ Rohit Prakash from Marshmallow Capital ].

Following up on the previous participant's question on B2C business of ApcoBuild, could you give us a little more flavor on how many products do we sell right now? What are the barriers to entry that you enjoy in this segment right now? And are you increasing the number of offerings to the customer in addition to expanding the distribution network?

Yes. So we have about 20 to 25 products in this segment. We have 2 or 3 things that we're working on because, as you know, the segment is competitive, there are already players in place who have been there for many years before we started. We are focusing on our strengths. Some of the products that we do have are extremely innovative and not offered in the market, so we're looking at exclusive and value-added products that are really adding value to the way construction chemicals are being used today. We are focusing on the regions where we are strong in, where our plant is -- our plants are in the west, so we're looking at Maharashtra and Gujarat. The market is large enough. As I said, our main objective for this business is not really revenue, we don't expect a huge amount of revenue, INR 300 crores, INR 400 crores to come from this business. But it's more so using the synergies of both the businesses and really capturing the margin. And we are looking to grow this business. We don't give out specific numbers of this business. But again, I'm mentioning again that it's a much smaller business in terms of revenue.

Understood. I remember, I think in one con call, in the past, you had mentioned that concentrating the management bandwidth on, I think, the latex as well as the NBR project at that point of time and this was not getting enough. So with the NBR project, I mean, sort of maybe in the backbone, and now do you want to put a lot of energy into scaling this up profitability-wise much further?

Absolutely. And frankly, we have done that in the last 1, 1.5 years. Once the acquisition sort of settled down, we did put in a lot of effort, and we have added a lot of manpower to sort of grow this business. But we also want to grow it smartly and profitably and not just grow for the sake of growth because that's quite easy to do. And we want to introduce with good smart products that are actually adding value that are in our own space, and we're not really competing head-to-head with some of the bigger players in the space. And in our own small way, I think we have been quite successful in the Mumbai region. We've rolled out the Pune and we are now rolling out to Gujarat. So we'll focus on the few products that we do have and keep building on innovative products through R&D. And in the next annual report, we'll make sure that we do give a little bit more information about ApcoBuild and tell you all about how that's going.

Great. So again, following up on this, so in addition to differentiated products using the in-house R&D that you have, do we also enjoy lower cost of production in the products or any other such advantage as well?

Yes, because we are backward integrated for some of the products that we do have, we outsource some products, but some of the products we do have a backward integration. So certainly, we do have some cost advantages. In fact, we supply some products to the same people that we're competing with in the B2C segment. In fact, all the major B2C players today, large and medium-sized, all buy some of our latex products for their waterproofing needs from us, and they in turn, rebrand it and sell it into the market. But of course, they have a much stronger worldwide -- not worldwide I would say, but nationwide distribution network and a much stronger brand.

So you're not competing with them head-on, on this product that you supply to them, but differentiated products where the problem is the volumes are lower and that's not lucrative for them is where you're playing, is it?

Right, something like that.

Understood. And could you give also a flavor on the -- and you did mention that the profitability is very good. But overall, on a return on capital, is your working capital cycle better than for your mainstay business that is primarily B2B? So overall, is the return characteristics of B2C business much better than the B2B business is what I'm trying to understand.

Yes, certainly, because we don't give the kind of credit we give in the B2B business. In the B2B business, we are forced to give credit of 60 days and -- or so, sometimes higher, mainly because some of our competitors do the same. And some of the import competitors actually have 90 days LC, 120 days LC in the B2B business. Whereas in our B2C business, we actually barely give any credit. So it's almost a negative cash flow. I don't think it's negative, but it's because we do have inventory, but the working capital cycle is definitely much better than our B2B business.

And the margin profile is similar?

Margin profile is better in contribution margin and -- yes. The B2C...

Okay. And I'm assuming the -- I mean, the operation expenses restriction, manpower would be higher. So even the EBITDA margins are broadly similar? Or is it better still?

EBITDA margins are also better.

Understood. Okay. So I mean, so could you then -- I mean, strategically, I would like to understand the board and the management point of view. I mean, if the profile of the business is so much better than the -- so much better, why -- I mean, why not focus the bandwidth that you have here and give this -- is it that you don't see this business scaling up as quickly as probably the B2B NBR business being able to scale up at this...

No, we're doing both. Now we are doing both. We are focusing on both. But the nature of this business is such that it's building a distribution network, building a sales network, building a sales team internally takes some time. Getting the products approved, marketing these products take some time. So it's -- and we are doing it in the best way possible. But again, as I said, I don't -- we don't want to do it by slashing prices and just throwing it in the market. I don't think that's good in the long run. So we're building a long-term business profitably and in a healthy manner.

Okay. So...

Hello? Hello, I think the line got...

The line got disconnect. Shall I take the next question?

Yes, sure.

Next question comes from the line of [ Umang Parekh from Excel Group Investment ].

Yes, my question has been answered.

Next question comes from the line of Nikhil Porwal from Perpetual Wealth Management.

I just like to continue asking about ApcoBuild. If I may ask, can you tell me how does the product portfolio of ApcoBuild differentiate itself from the likes of Dr. Fixit or any other company?

Well, obviously, some of the products we have are similar. Where we are differentiated is that today, we are selling some of the B2B products to some of the companies that you know of and that you mentioned. And obviously, we are backward integrated, so we have that advantage. The other thing is we do have some specialty products that we do not sell in our B2B space, that we are only focusing on to our B2C space. And we are looking at growing those through demonstrations and marketing. And we're doing that quite well so far. But of course, as I said, the -- in terms of percentage, the growth we see in the last couple of years has been pretty good. But in absolute terms, it's a much smaller percentage of the Apcotex business.

Okay. And if I may again ask how does it differ in terms of pricing as compared to your competitors?

Look, it's -- there are so many different products, so it's hard to say. For each product, we have a different pricing strategy. In some products, we have to compete head-on, in some products, we have really good innovative products by which pricing is almost immaterial for the customer because of the value that we are giving them. So it's a question of convincing them, building the distribution and sales and marketing network.

Okay. And you are targeting primarily B2B customers? Or this is...

No, this is all B2C, and you would understand. I think you would appreciate that the construction segment in India is fairly fragmented. It's highly regional and fairly fragmented. So we are focusing only on the western region for now because one of the other challenges is to -- is freight. The freight component is also important. And we have to see how we can be as competitive in the south, east and north. But we said with this market that is big enough in the west itself, so we're just going to focus on the western states for now. And we continue to do that, yes.

That's because our plants are primarily based in Maharashtra and Gujarat. And how many dealers do you currently have for ApcoBuild?

These are things that we don't really give out in public.

Okay. Okay. And the margin profile, you answered it before, but can I ask that what is the range of the margins, EBITDA margins, if you can share that?

Well, it varies from year-to-year. But for the first 9 -- I don't have the numbers -- exact numbers in front of me, but certainly above 20%, 25%.

Okay. Okay. No problem. I hope that it grows faster than the rest of the business. No problem. No problem.

Sometimes specialty businesses are hard to grow fast as the nature of the specialty.

Yes, yes. I understand. Since this is a B2C business, this will take some time to grow.

Thank you.

[Operator Instructions] We have a question from the line of [ Rohit Prakash from Marshmallow Capital ].

I apologize, I got dropped off the call. So this is my actual last question for the ApcoBuild part of the business. So given the attractive economics of the business, I mean, you -- so what I respect about the management here is that you really think long term. So would I be right in thinking that over the next, let's say, 5 to 7 years, you want to make this a material portion of the business? Or do you think it's too special of a meter right now to see out that far?

No, absolutely, we do want to make it a significant business where there is value for -- where -- not only for the shareholders, but also for the employees and our team internally that it's a reasonably significant part of our business. Now in value terms, who knows, it still may be a small part of the Apcotex total turnover 5 years from now. But it should still be substantial enough to make it an exciting independent business, and therefore, create shareholder value. And we think we can do that.

Understood. Fair enough. Okay. That was helpful. And coming back to the NBR business. So I believe there are multiple headwinds. You mentioned the dumping, and then I believe the auto slowdown is also not helping. Sir, then -- I mean, other than that, overall, are the prices stable right now? Last year, you mentioned that the realizations in NBR had gone down quite dramatically.

The realizations have gone down. Is that what you're saying?

Yes. Last con call, you had mentioned that the realizations had gone down quite drastically. So...

Yes, absolutely. So it started from end of Q1 and -- sorry, end of Q2 and continued on to Q3 as well. And therefore, as you can see, Q3 margins were for -- our -- I mean, the profitability of that has been affected. One of the major reasons has been the NBR business. I would say that has been the #1 significant reason. The margins continue to be challenging. They're a little better than what Q3 were, but they continue to be challenging. There's no question that it's still a tough environment for NBR.

So with -- and I believe you're increasing the capacity here to 20,000, 21,000, depending on the product. So...

Yes. We've already invested -- again, that is a long-term view. We've already invested in -- we had sort of already done that and we have taken those steps a while ago.

Yes. So what I was asking -- wanting to know was that with that increased scale, one might probably think that you would have improved the efficiency or productivity. Do you see some benefit accruing from that in this challenging environment, and hopefully, the profile will not be as bad as the Q2 and Q3 for the business?

Yes, absolutely. So I think starting from Q1 of FY '21, we will see because of this increased productivity, of course, it'll help the operating cost per unit reduction as well, plus the CPP coming in will also help overall in terms of profitability. We'll see most of the benefits in Q1 of next year.

Next question comes from the line of Karan Bhatelia from Asian Market Securities.

[Technical Difficulty] Debottlenecking will increase capacity by 20,000 metric tonnes, but we have been highlighting that there will be increase of 5,000 metrics tonnes in each of the product vertical. So like from 10,000 metric tonnes to 20,000 metric tonnes, so what is the rationale for that?

I'm sorry, I missed the first part of your question, maybe your voice...

Our latest presentation mentions that the debottlenecking exercise will increase capacity by 20,000 metric tonnes from Q1. But till last con call, we were highlighting that there will be capacity expansion of 10,000 metric tonne in total for both the verticals.

No, no, no, we never said so. It was always -- it is not by 20,000 tonnes, it's to 20,000 tonnes. So earlier, we were at about 15,000 tonnes, 16,000 tonnes. 16,000 tonnes is the number...

That is for the NBR portfolio?

Yes, NBR portfolio, which is going up to 20,000 tonnes.

Okay. And there was some expansion in latex as well, small, small portion of it? Because debottlenecking was supposed to happen for both the verticals.

Yes. Well, our latex capacity is 55,000 tonnes currently. And once we are making Nitrile Latex in our -- we did debottleneck that as well, but we are using Nitrile Latex being made there. And once we move Nitrile Latex to our Gujarat facility, then we will have significantly more capacity in Taloja for latex as well, which -- I think that's a little premature. We're working on it, but we'll come back to you with the right numbers on that front.

Correct, correct. Okay. I thought it is the combined capacity expansion of 20,000 metric tonnes.

No, no.

Sir, that was the last question in the queue.

Okay. So thank you, everyone, for joining us in our Q3 con call. We just -- as I mentioned, these are challenging times, and we are quite confident that with the steps that we've taken, and with some of the business environment already changing worldwide and in India, we think that Q4 will definitely be better than Q3 and Q1, again, with some of the CapEx that we have made will be even stronger. Notwithstanding the coronavirus issue, which is again a black swan come from left field, I think we are quite confident of improvement in performance over the next couple of quarters, and we look forward to seeing you in Q4 during the Q4 con call again. Thank you.

Thank you. On behalf of Apcotex Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you all.