Apcotex Industries Limited (523694) Earnings Call Transcript & Summary

Congratulations on a great set of numbers. I guess, you partly answered my question, but if you could maybe elaborate. So my concern really was that with NBR running at full capacity and 80% across latex, both in Taloja and Valia, we could potentially hit a volume air pocket sometime maybe this time next year if we continue on this 15%, 18% kind of volume growth. So maybe -- if it's not possible on this call, maybe next call, if you could just sort of help us understand how the volume and the capacity ramps up from, let's say, June quarter of FY '27, like you mentioned that it's coming up in phases. I think that would just be helpful to understand where things go. And on the antidumping, so obviously...

So just to answer that question. You're right, that could happen for a quarter or 2, but our sense is that we would have enough capacity. And there are other options possible in the short term like outsourcing certain products and so on, which obviously is not ideal because that reduces the margin, but that's something we could do for the short term. We think we have enough capacity for next year. There might be a situation where -- I'm talking about for the latex products, yes. For rubber, NBR, we are already at almost full capacity. So you're right, there we have already hit -- for the next year or so, we will hit -- or not a year, but about 3 quarters, we will hit a situation where we can't grow further than this. I hope that answers your question.

Yes. So I mean, in the past, I guess we've managed to juice this facility with significant debottlenecking, but I think you mentioned that like '21 we are pretty much as tight as we could run this ship. So that I appreciate. So is it fair to say that as and when this duty gets implemented by the Finance Ministry and gets notified as such, is that a significant boost to our margins, at least on the rubber side based on this? I'm just trying to understand what does this mean for us? Given we don't have the capacity, does it improve our realization in a significant manner?

That's what it was supposed to do. But unfortunately, as I mentioned to one of the previous callers, there has been a mixed bag for us in terms of the recommendation. We'll see what the final findings that are notified by the Finance Ministry. But one of our -- one of the manufacturers or one of the importers have not been levied any antidumping duty. So we don't know if margins will really improve. Of course, I think it will help us because from Russia, from China, reasonably good antidumping duties have been levied. So overall, we feel that's a fair thing for us to compete in India and we'll see how that impacts the margins. But all these expansions, all our workings that we have done are based on 0 antidumping duty and sort of assuming margins at current levels without antidumping duty. So I think even without that, it's justifiable and we are -- we've worked out a fairly innovative way. Earlier, our thinking was that only for NBR we would need a INR 200 crores to INR 225 crores expansion. But here with around INR 210 crores, we've been able to do NBR and synthetic latex, both. So we are quite confident that with or without antidumping, we are going to go ahead with this expansion.

So that's a big statement from you because I guess we’ve for about 6 quarters been waiting for this antidumping duty and you said once you have clarity on that, only then will you do NBR and now -- so obviously, significant work has happened for you to commit to this amount of CapEx with or without the antidumping.

We were waiting for that. And as I said, it's been a mixed bag. Had it been something which is absolutely negative, we may have even considered. But we were ready with these numbers for the last quarter or 2, I would say, but we were just waiting for the recommendation. In fact, ideally, we maybe should have waited till the December, Jan period. But I think right now, we feel pretty confident to go ahead with this.

Got it. And finally, margin back to sort of low double-digits. Our aspiration has always been closer to mid. Is that sort of path clearer now with demand as you see -- I guess, nitrile latex aside, are we sort of on the right track there?

Yes. I think nitrile latex aside, we are already in the mid-double-digits in this quarter. So if you don't include nitrile latex, nitrile latex is still pulling it down a little bit. But as nitrile latex improves over the next few quarters, I think that will also help. And the one challenge though that remains right now is we have seen our business and margins in certain industry segments affected because of U.S. tariffs. Not directly, but indirectly. Some of our customers in textiles, in technical textiles, in the tire industry, in carpet, their exports have been affected, especially to the U.S. So there are challenges in pockets, but we're hoping that it will sort itself out in the next 2, 3 months as far as the tariffs are concerned and nitrile latex will improve. So yes, I think we should see some improvement or not improvement, but continued reasonable margins in the next few quarters as well.

Okay. That's great to hear because exactly my question was about that only that CapEx have taken a big hit from India, especially. So if that has to come back, we would benefit from it.

Sorry? Yes, if that cycle comes back, we would benefit. Sure. Yes, absolutely.

And I guess 80% utilization is also kind of the level where significant amount of operating leverage starts to kick in as you go from 80% to 85% or is that number closer to 90% for you to be optimal on the plants?

No, frankly, operating leverage at every 5%, 10% higher, it increases. So that will increase from 80% to 90%, 90% to 100%. The one thing that -- more than operating leverage, I think it gives us the confidence to say no to certain orders, which are very low margins or customers that we just -- payments are very delayed, those kinds of things. I think that's where the really advantages and that's where sometimes margin can be bumped up by a percentage or 2%.

The next question is from the line of Rudraksh Raheja from iThought Financial Consulting.

Sir, could you give us more details on the synthetic latex expansion? Like for what applications are we expanding this time?

The same application. So we have about 100,000 tons -- or actually, I would say about 90,000 tons plant for the synthetic latex production. The 2 main products we make there are styrene butadiene latex and styrene acrylic latexes. And we -- and that's why I said we are close to 80% capacity utilization there. It would be for similar carpet, construction, paper, textiles and there are a lot of specialty applications as well that we are now focusing on -- a few specialty applications that we're now focusing on. So it would be for similar products. It's just that instead of Taloja, we are doing it in Valia. One is to derisk from Taloja, which has become a large site for synthetic latex and globally, I would say, globally comparable site. So we just wanted to manufacture this product at another site and we have enough space and buildings and all that in Valia. So we decided to do it in Valia. Whereas for the NBR, we need economies of scale at the same plant. We're still below optimal sort of global capacity, which is what I mentioned to one of the previous callers. So there, we are continuing to Valia. So the entire -- the next 16 months, 18 months focus on expansion is going to be in Valia, Gujarat.

Got it, sir. Sir, I think last time when we expanded in paper, some other players also expanded at the same time and this led to some sort of lower prices in the market. And again, we have announced our CapEx in synthetic latex and another listed player in this space has also announced CapEx in the latex segment. So how do you see this playing out in the future and affecting our margins and all?

I'm not sure who you're referring to. But look, I mean, there's always cycles. I think what happened post-COVID was not just in India, but globally, everyone also added latex. So while we don't compete globally, I think it does affect -- there's always an option, right, for people to go abroad. And I think it's -- I think if that does happen, depending on the timing, and I'm not aware of the timing and who you are referring to specifically. But I don't think it's going to be like what happened post-COVID where if you remember what happened in COVID is between '20 and '21 there was -- everything was shut, right? There was nobody expanding. In fact, people were not going out of the house. So -- and then suddenly, the demand picked up very quickly because people were sitting at home and ordering goods. So manufacturing demand picked up. So that was a very unique case. And in that euphoria, I think a lot of capacity expansion worldwide in India happened with large numbers. This time, we are increasing capacity by about 35%, 40%, I would say, about 35% to 40%. Last time, I think we are -- our percentage expansion was much larger and as it was for the other player. So we'll have to see. That's a cycle that will play out. We have decided that we have certain strengths in this segment and we're going to go ahead no matter what everyone else is doing. And sure, a couple of quarters then at that point, margins may be affected. We'll see. We'll have to deal with it.

Understood, sir.

But I must also mention that, who you're referring to, there may be others that have entered, but we believe that the technology that -- and the next level of technology is going to be even sort of the next-generation technology better than what we have today. I think we are quite confident that what we're doing in the synthetic latex segment now going forward will be revolutionary for India. It's never been seen in India. And the productivity, the cost, the quality, all of it will be at a different scale. So we are quite confident that we'll not only compete this time, but we'll have significantly better products at perhaps a little lower cost as well.

So are we entering more sort of specialized segments that are margin accretive than what we have done previously?

We will be, but obviously, investing on 37,000 tons capacity, it cannot only be for specialized segments. We would need the segments which provide the volumes as well.

Got it, sir. I think you have mentioned this number, I'm repeating this. With this sort of CapEx, what would be the revenue potential that would unlock?

About INR 550 crores to INR 600 crores.

Got it. Got it. And sir, assuming at this point of time there is no pricing improvement in any of our segments, what is the peak revenue that we can do with existing capacity?

I mean, I know we had worked it out last year and it was about INR 1,600 crores, INR 1,700 crores. I think it would -- obviously, in the current context, prices are very depressed, but in this Q2, but that kind of will -- at some point, it will start going up again. But I'm assuming around the same, probably say in [indiscernible]

The next question is from the line of Arun Arora from [ NV Investment. ]

Congratulations on a good performance. I had 2 questions. One is regarding the ADD. Last time it so happened in spite DGTR recommending for this ADD, Finance Ministry did not issue a circular imposing that. So is there any possibility that it can be repeated again this time also?

Yes, that can be a possibility. But from what we understand what's happening through our lawyers and basically watching that in that period of 2020-'21, I think the percentage of cases that were not being notified were much higher and now it's like 1 out of 20 or -- I mean, much lower. So there's a higher level of confidence, and that's the reason why we again apply for antidumping because we saw that there seems to be now some kind of alignment and we feel that majority of cases are now being notified. However, as you said, there always remains a risk, but the risk is low from what we understand on what we have been advised.

Okay, good. My second question is almost a year back or so when some participants had asked for the future capacity expansion, you had mentioned that we do not have space except for that nitrile latex, the additional 50,000 capacity or so, you may have to venture out for a new land or so. So I was getting a little bit confused. So Valia, we are doing and Taloja. So is it being done in the existing plant sites only?

Yes, it's been done in the existing plant site at Valia. So maybe there was some misunderstanding. But in Taloja, yes, we are tight on space. We can perhaps do a few things as well there. But as of now, our decision is to do it in -- do the entire expansion in Valia. And obviously, we are utilizing some current buildings that have already been built and we are going to build some additional structures as well for this expansion. So we do have space in Valia.

Okay. So after this expansion, plus the 50,000, that space what is there for the nitrile latex, do we have still some more space left or we are done with the all whatever the remaining space?

No, we will have some more space left.

Some more space. Okay. Sir lastly, regarding nitrile latex margins now that we are at 80%, is it fair to assume that in the coming quarters, the margins would slowly and steadily would keep going up?

Difficult to assume that. I don't know. The answer is I don't -- we don't know. No one can exactly predict the future. But at least we hope it remains stable and perhaps over time as capacity utilization globally or in Asia goes up, that it should technically happen because nitrile latex margins are still much lower than what they were pre-COVID. So technically, it should go up. I don't know when.

Okay. So for you to start this second phase of the CapEx, are you looking at the improvement in the margins or the increase in the capacity utilization?

Look, we should be at -- see, selling product is not a problem, because at a price, you can sell anything, right? So it's not more about the volumes, but sure, now our capacity utilization is already at 80%. We can go up to 100% immediately if you just give a little bit more discount and all, but we are trying to balance between pricing margins and volumes. So it's more about the market than internal at this stage.

So what you are trying to say is the improvement in the margins only will make you to go for the Phase 2 CapEx?

Right. Correct.

The next question is from the line of Manav Vijay from MV Investment.

Sir, my first question is regarding the expansion that you are doing. Now you just mentioned to the last caller that even after doing this expansion, you will have some space left in Valia. So are we in the process of, let's say, figuring out even a third piece of land so that as and when we take the decision to expand further, we will have land available?

I think we have land available in Valia even now. We obviously will explore, but I think the decision is around decision. But the thinking is that until we have a clear idea on what we want to do with the land, we would not be purchasing it. I think we have a reasonable amount of land in Valia where we can further expand if we so choose to, but it depends on what products. So if it's in the same products like latex and all, I think we have enough land in Valia. But if it's completely something different, then we may look at the third site. As of now, there is no decision on that. But yes, we're always on the lookout.

Sure. Okay. Sir, the second question is regarding the raw material price decline that we are witnessing now for last 3 quarters. So I believe that actually quarter 4 we had a 3% price decline, quarter 1, we had 13% and in this quarter we had roughly 15% kind of a price decline. Now this 3 quarters continuously is a slightly, I would say, longer period. So in history, have you seen such a long period of price decline continuously happening? If you can elaborate on that?

Yes, I think so. There have been -- I think in the last 20 years, there have been 3 or 4 periods like, not very uncommon. Of course, it doesn't happen all the time, but not very uncommon. We saw it during -- at least for 3 quarters during the COVID period from Jan to March and then after that as well for a couple of quarters. And then it started moving up again quickly. We saw it in 2009-'10, I think in between as well. In 2014-'15, suddenly prices have gone up and then it came down. So 3 quarters, sometimes 4 quarters is not uncommon. Well, it's not common, but it's not uncommon either. Every 4, 5 years, this does happen. But as I said, I mean, we are okay with that. Sometimes it does help us. This price decrease is good for us in terms of, for example, one of the reasons why our working capital management is better, right, because of lower prices. So that helped. At the same time, we probably have had some stock losses because we bought at a higher rate. And in spite of that, margins have been reasonably okay. We've been able to manage that. It's not so much of a concern. Any specific reason why you're asking this question?

No, no. Sir, for the simple reason, actually -- so actually, since our sales to an extent is also dependent on the price growth as well. So while we have been, let's say, getting a good volume growth, so along with that, if we had pricing growth as well, then the bump up in margins would have been much better. That's why I'm asking that, I would say, 3 continuous quarters of price decline.

Actually margins and revenues are 2 different things, right? So we can still hold on to the margins even if prices are declining or going up. I'm talking about margins on an absolute level, not on a percentage level. So in fact, when prices decline, our margins on a percentage level sometimes seem better, good because we try and hold on to the absolute margins. Sometimes it doesn't happen, we have to also reduce our absolute margins. And vice versa. Sometimes when prices go up dramatically, we are not able to increase percentage margin at the same pace. But absolute, we are at least able to increase. And therefore, our EBITDA margins -- so EBITDA margins for us is the key, not so much contribution margin.

Sure. Okay. Sir, my next question is regarding the working capital. So in this quarter, in our cash flow from operations, we had INR 61 crores coming in from receivables, which I believe is the best that you have done in last few many, many years. So any specific reason because of which you could receive so much of money from the customers?

No, no specific reason. I must commend my sales team. They're doing a good job.

One of the reason is because of the lower price at which the finished goods are being sold. So that is one of the reasons why in absolute value the receivables are much lesser. If you see the number of days, there also is an improvement, but absolute value what we are comparing is because of -- largely because of the lower FG prices.

Because the fact that -- so actually -- so in this quarter, you have turned net cash positive and this INR 61 crores has helped you a lot to turn actually cash flow -- to actually cash positive. That's why asking, so what is the -- so what you believe is the probability of continuity of this huge cash flow generation. Like, you have done INR 107 crores in this quarter, I would say, in H1, which you have never done.

How have you calculated this number of INR 107 crores? What is that?

Sir, so in this H1, you have generated INR 107 crores of actually cash flow from operations that you have never done in last 15 years of your history. So I would just like to figure out whether this number is actually abnormal or this is what, let's say, the business should look like even going forward because now the business dynamics are turning in your favor?

So I think as Vivek mentioned that the reduction in prices of raw materials has definitely helped us in this. So in that sense, yes, it is -- I mean, if prices go up suddenly, our working capital requirement also will go up, right? If prices -- let's say, from now that were to climb by 30%, 40%, our working capital requirement would also climb that much. So certainly, that has helped us, yes. Vivek, I hope I've answered Manav's question okay?

Yes, that's correct. And just to also clarify, a large portion of INR 107 crores is from profits, which is EBITDA, which has come back into the kitty, so the internal accruals and about INR 20 crores, which is released from working capital on a net basis.

Yes. So that's what you would say is like a little bit of a bump, right, we have had? Is that right? Sorry, I'm asking the question in our own conference call, sorry.

Sir, I think the mood point is that the cash from operations were actually fantastic in this year first half. Does it help you to actually turn cash positive, which in turn should help you to have cash for the upcoming CapEx, sir.

Exactly. Thank you, Manav.

The next question is from the line of Ankit Minocha from Adezi Ventures Family Office.

Congratulations on the good set of numbers. I joined the call a little late, so apologies if this is slightly a repeat. But I just wanted to understand currently what is the ongoing status of the ADD? And when are we anticipating that this might kind of come to fruition if we have any estimates?

Can you repeat the last part of your question? What is the current status of ADD I understood. What is the second part of the question?

Yes. And when do we anticipate if we have any estimates when this might come to fruition?

Yes. So I mentioned to one of the previous callers that as of now, the DGTR has recommended through their final findings antidumping duties on certain countries and certain companies. One company or one importer has not been subjected to any antidumping duty. The rest have been subjected to a reasonable antidumping duty. We expect that the Finance -- we are told that the Finance Ministry typically notifies within 3 months of the final finding. So we expect by December end.

Okay, right. That's helpful. And usually, I mean, what kind of -- if something like this has happened in the past, what kind of impact can you expect on pricing and margins from something like this coming through?

As I said, it's been a mixed bag. So we're not quite certain how the market will play out because one of the big importers has not been subjected to any antidumping. So that will continue as it is. The rest, we'll see how it plays out. But we'll -- instead of speculating and seeing, let us first finally see what the final notification says because there can be changes there as well, and then we'll comment on it. And honestly, we'll have to also just see what happens in the market because we're not the only player in the market, right? So there are many things that other players can also do in terms of pricing. So we'll have to see how that impacts. As of now, our plans, our expansion plans, all our projections are based on no real benefit or bonus from this antidumping duty. That we had asked for because we are the only manufacturer of NBR in India. We are subscale in terms of global production. And we wanted and we wanted some help from the government for a short period of time of 5 years to be able to invest and recoup our money and make reasonable margins and profits and returns on our investments. So we have found an innovative way to do that at least for another 14,000, 15,000 tons, but after that, we'll see. And we could do that because we have a brownfield -- it's a brownfield expansion. Had it been a greenfield, then we would definitely have not been able to do it with the current market. There would not be any justification for additional CapEx.

And this one person who has not been subjected to the DGTR, what percentage of the imports or the market would they contribute? Do you have any estimates?

I'm not sure, but a large percentage, 30%, 35%, perhaps. 30% at least of the Indian market.

That was the last question for the day. I would now like to hand the conference over to the management for the closing comments. Over to you, sir.

Thank you very much for joining our Q2 investor and analyst conference. We look forward to seeing you all in Q3 and updating you on any other major further updates. Thank you.

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