Apcotex Industries Limited (523694) Earnings Call Transcript & Summary

Okay. So see, backward integration, we are not able to do with our major raw materials because the petrochemicals, which are part of sort of big petrochemical plants or refining plants. As far as security is concerned, in general, there is -- for all our raw materials, even though styrene and acrylonitrile are not available in India currently, there is enough imports coming in from countries close by. And while there can be some short-term hedges, like currently, we are facing that in styrene, where a couple of plants, large plants that supply into India have gone down together. One was a planned shutdown, one is an unplanned shutdown. So there are some shortages, but short-term shortages are there. But otherwise, most of these raw materials that we have, have enough capacity for our requirements. And in general, long term, there's been -- we don't expect any issue. There can be short-term issues as far as security is concerned -- security of raw materials. The other question you asked is on raw material price volatility. Now that's here to stay. That's been going on for now 15, 20 years. I joined the business more than 20 years ago, and I've seen many cycles where prices have been from plus/minus 100%. So that we have continued to manage and we manage it quite well. We're able to pass along the prices if the raw material prices go up, and we are also forced to sometimes reduce our prices when prices come down drastically. So that's part of the game. And quarter-on-quarter, those kinds of pluses and minuses do happen in margin.

Okay. Okay. Any views on ApcoBuild?

No, I mean, it continues to do okay. This year has been more challenging for us because we had a few years of good growth. It's still a small part of our business, as I continue to say every time. This year has been a little bit more challenging for us. I think a lot of competition has also come into the construction chemicals segment recently. We are in a few geographies. So the growth hasn't been as great as previously. But we continue to sort of push through it and focus on the margins there. And there, we are backward integrated into the polymer. So that's where it's the additional margin that we get by supplying directly to a few regions in Western and Central India. So that's what we are focusing on.

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

Yes. Congratulations, great set. Sir, I wanted to get a qualitative outlook on different industries that we are supplying our products. Like you mentioned, paper is coming back. And so what's your outlook on other industries, maybe nitrile latex, glove suppliers or whatever else where we supply our products?

I think see paper in this, the industry, the paper industry is still going through a tough time because the Indian paper industry is facing a lot of dumping from what I understand. So their margins are under pressure compared to the last couple of years is what I understand from our customers. What I meant was that our latex margins, which were very low, have improved a bit because our capacity utilization has gone up and the extra capacity that were created at the same time are now at a higher capacity utilization level. So that's what I meant. Rest, construction continues to boom in India for us. Carpet, carpet and textiles has been one industry that's actually been a degrowth for us. I should have mentioned that earlier. So it's a good question. Carpet, textiles and tire, all 3 industries, we have seen a slight degrowth in volumes in this last quarter. And I think even for the 9-month period, it's flat, mainly because of these tariffs from the U.S. So a lot of the carpet manufacturers, not only in India, but in the Middle East have also been affected by these U.S. tariffs and the uncertainty around them. Similarly with textiles and tires, we see the same thing. But gloves continues to do well for us. The Chinese -- the U.S. imposing Chinese anti -- the duty on Chinese gloves has had some of our customers in Southeast Asia and South Asia. So that's been a good for us. Overall, the glove industry continues to grow. Obviously, it's an essential medical product. So I think that will continue to grow at 7%, 8% year-on-year for -- especially for nitrile gloves, at least 7%, 8%, if not 10%, 12%. I hope that gives you a flavor of the different industries.

Definitely. And do you see the demand-supply situation getting better in nitrile latex?

I think, look, there is still globally an overcapacity. China especially has created a lot of overcapacity. So we could see some Chinese latex now come out and come into East Asia, which was not -- Southeast Asia, which was not happening earlier. Even so far, we have not seen that much, but it could happen. So I think that will still take a couple of years for it to go back to sort of pre-COVID levels in terms of 80%, 90% capacity utilization levels. Maybe there will be some consolidation, some capacities may even shut down, which are not viable, the old ones. Recently, in the last 1 year, one capacity in Malaysia, for example, was shut down from what we heard, old plant, not commercially viable. 25-year-old plant, I think it was now. And so that could happen and then margins could improve even further quickly. But I think it's still overcapacity and it may take another couple of years. But at least right now, the margins have improved for sure for nitrile latex and the gloves from what I understand, from what they were in '23 and '24 and '25.

Understood. Sir, you also said...

Sorry to interrupt, Mr. Raheja. Sorry to interrupt. Please rejoin the queue for more questions.

Okay. Mr. Raheja, you can finish your last question since you started, I think, we'll allow.

Yes. You mentioned that we have done better on the rubber side as well, if I'm not wrong. Could you provide more details on that?

I think, look, after sort of the pandemic, we had a couple of good years and then the margins were again depressed. Now I think margins are a little bit better. That's what I meant compared to the last couple of years, slightly better. But overall, as I said, we are still hoping for an antidumping duty to be notified because it's been recommended. And there was a detailed investigation for a period of 1 year. The DGTR did agree with us on most countries, except one, they did recommend a reasonably good antidumping duty to support us for 5 years. We're not asking for it for full -- forever, but at least some support for 5 years to support an industry which is essential for India. But things are better for sure in the last 3, 4 months.

The next question is from the line of Saurabh Shroff from QRC Investment Advisors LLP.

Yes. Congratulations on a very strong performance. Abhiraj, just one request and a suggestion. If you could maybe more regularly disclose utilization across lines or geography, it will sort of [ augur our ] volume numbers because it will really help us appreciate if the business is moving in the right direction, and what I mean is that...

Sorry to interrupt, Saurabh. We are unable to hear you. Your voice is muffling.

I mean, I'm getting the gist of the question, but it definitely is not clear, very clear.

Yes, sorry. Is this better?

Yes, I think so. Go ahead.

Yes. So again, congratulations. Just one request, if you could perhaps give us some more details on volume and utilization, I think it will help us appreciate which direction the business is going in because we've sort of obviously, a long-term stated objective has been 13% to 15% margin, something that you said multiple times. We've reached it a few times. And given the volatility of, I guess, the end commodity and the raw material, it's far more important for us to look at the spread than the percentage is. But we can't do that if we don't have the volume numbers. So if you could maybe consider in whichever way, given the competitive, whatever you are profitable disclosing, I think it then gives us a far better idea that [Technical Difficulty] really should be margin accretive. I mean, nitrile latex, let's say, is a misfortunate event that otherwise should have been very profitable, but is not. And you did allude to that outside of nitrile latex last quarter, we were already at mid-teen kind of margins, if I remember correctly. So this will just help us understand where the business is going, when the leverage sort of kicks in and what we should expect. So otherwise, I mean, I guess all other questions have been answered. I do hope you would consider doing it.

Sure. So Saurabh, fair question. And honestly, as a company, we try to be as transparent as possible. But as I said again before that we try and balance out revealing all numbers because there's also something that we also have to worry about competitive -- what information we are providing to competitors through these very transparent dealings with investors and analysts. And that is actually counterproductive in the long run. So the reason why we don't give volume numbers because -- specific volume tonnage numbers is because we are in so many different industrial segments. And it could happen then once you go down the rabbit hole of revealing volumes, then it's easily decodable for some of our competitors. I'm being very honest here. And -- but we do provide volume growth overall because we do want to give the investors and analysts the flavor of -- like, for example, this quarter, the revenue growth, if you were just to see the revenue growth from the numbers, it's flat, but we've actually grown in volumes. For first 9 months, we've grown at 15%, but the revenue has been flat. So that's the kind of flavor that we do provide. As far as capacity utilization is concerned, I think we've been quite transparent, but noted and what we'll do is in the -- perhaps Vivek, in your opening remarks or in the investor presentation, maybe we can give a flavor of the capacity utilization of the various product lines.

Yes, that will be helpful. At least it gives us a handle, like I said, that the business is actually -- because it exactly like you said, it feels like the business is in much better shape it was than, let's say, 2 quarters ago. But it is something that doesn't come out in the presentation or in the speech. So this will be highly appreciated.

Noted.

Just to answer your question, for NBR, we at 100% capacity utilization, we have been now for the whole year. For nitrile latex, we're at about 75% -- 70%, 75% capacity utilization. 75%, perhaps closer to that for YTD, I would say the numbers. For the other products, which is construction, carpet, paper, textiles, it's all one plant. And overall, there also, we are at about 85%, 87% capacity utilization. So for nitrile latex and for other synthetic latex products, we have 1 -- at least 1 year of growth left. And then obviously, new -- the new capacity will come on stream. NBR, we're already out of capacity, but that capacity won't come on stream for another year. Yes, I think those are the 3 main product lines. We also have a separate tire cord, which is almost at, again, 85%, 90% capacity utilization. But that's a little bit of [Technical Difficulty] we can use it. So just broadly, we are at very high capacity utilization levels currently. We have 1 year of growth left in the latex side, and then we'll have new capacity come on stream.

Great. And so just -- then sort of addition to that, so this does mean that you can further optimize on clients on slightly higher margins or better terms of business, just given that now we are running at pretty close to full up, right? And that's something that will be the endeavor for the next [ 15 ] months.

We have the option to do that, yes, we would have. Next year, for sure.

The next question is from the line of Sani Vishe from Axis Securities.

Yes. I just have a couple of bookkeeping questions. One is on the interest part. I can see the interest has dropped significantly this quarter. So what is our expectation? And what is the reason behind this? And secondly, on what is your expected tax for the year?

Okay. May I request Vivek to take these questions? Vivek, on interest and tax, please?

So basically, on interest, at the beginning, we mentioned that the year has been good from a profitability point of view. So good cash generation. So that cash, which is generated out of profitability plus the working capital release, that has been used for repayment of some of the borrowings. So the borrowings have come down. Also, the interest rates have fallen, and we have been able to negotiate better rates from the banks. So a mix of these 2 factors have led to a reduction in finance cost. I would say 75% of the reduction in interest cost is through the reduction in borrowings. The rest is all interest rate related. On the second question of yours on the tax. So we expect an effective tax rate of about 27%, 28% for the year.

And also to add that, obviously, look, we will -- now for the new projects, we will be raising more sort of long-term debt for this project. Partly it will be through internal accruals, but we will be raising some debt. So now interest rate -- interest cost may go up also in the next sort of next year.

Yes, of course. But that will move with the debt levels, right? So in terms of the effect to interest rate also, I think this should be a comfortable level.

And just to add to Vivek, we are also net debt free. So we have -- in fact, we have a reasonable amount of excess cash right now in the books, which we will be deploying for these new CapEx projects, of course.

And the working capital may go -- may increase towards the end of the year, right? Or does it tend to be similar?

Yes, for sure, because prices going up, certainly that I think it will -- that's another thing that helps is overall raw material price in the last 6 months has been quite low, lowest we've seen here. So that again started to move up. So I think our working capital utilization will also go up, I think, in the next 3, 4 months.

The next question is from the line of Karan Sharma from Credent.

Yes, Abhiraj, thanks for the follow-up.

Yes, go ahead.

Question was on nitrile latex. You mentioned that this year -- sorry, in FY '25, we get 100% utilization. And if I go back to pre-COVID, this was a business where we had big plans. So now that the market is shifting, and we are a very small player in the global market, considering the global size is huge, and we are not even 1% of the capacity. Are there now again thinking on expanding capacity in the nitrile side?

Just to clarify, first of all, I mentioned NBR, which is NBR solid rubber, we are 100% capacity utilization. For nitrile latex, we still have some capacity left. And I expect that at some point next year, we will hit a run rate of full capacity utilization. But for the year, we will have to see how that goes. As far as additional capacity is concerned, as I mentioned to one of the previous callers, look, globally, there's a lot of overcapacity. So it doesn't make sense to add capacity right now, maybe in a couple of years, and we have left some space for that. Unfortunately, the margins don't warrant -- currently don't justify additional capacity at this stage.

Yes. My question was that only if the pricing comes back, how soon can that new capacity kick in, I guess since you had...

So once -- we'll come back and once the decision is taken, I see it take us about 9 to 10 months. And really, the long lead time will be just certain equipment, specifically reactors, which take that long, 8, 9 months. But otherwise, civil structure, everything is ready. So we don't need that much. So it would depend on how long some of these long lead time equipment take. I suspect 9, 10 months.

Okay. And our current capacity is 50,000 tons, right?

Yes, about 48,000 tons to -- depending on, yes, 48,000 tons to 50,000 tons. Correct.

And how much can that expand then?

Sorry to interrupt, Karan. Please rejoin the queue for more questions.

So just to answer the last question, how much can we expand that by? We can probably expand it by about 50%, 50% to 60%. But we'll have to rework the cost at the time we take the decision and see if it justifies doing it. So we will see at that time. As I mentioned earlier that we have taken certain assets from the nitrile latex plant because towards this new styrene -- the synthetic latex that we are developing in Valia. So it's going to get a little complicated going forward, which I don't want to get into now. As and when the decision -- we take the decision to expand, I'll let you know. I seriously doubt will happen in the next year or 2.

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

Yes. I wanted to get a sense on the EBITDA margin front. Like, this is the highest that we have done in the last 11, 12 quarters. How do you see that sustaining or what kind of risk that you still foresee in the market that we could fall behind again?

No, honesty, I'm so sorry, but there was a -- I couldn't hear the question properly. I think I've got this, but if you can repeat the question, please.

Yes. I think this is the highest that we have done in the last 11, 12 quarters, this 13%. And generally, we believe 13% to 16% is what we should do in the normal course of the business. So you see this 13% sustaining going forward? If -- and what kind of rate you foresee there that would make us fall behind that number?

Yes. Look, I think given the current -- where we are currently, I don't see any reason why EBITDA -- overall EBITDA should reduce. One thing that could happen is like what's happening now is suddenly the raw material prices are going up by 20%, 30% very quickly, in which case, we focus on EBITDA per ton. So you could see the percentage margin come down, but overall EBITDA, PBT, ROCE being quite healthy. So we -- look, as a company, we don't only look at EBITDA percentage margins, we look at EBITDA per ton and ROCE is very important for us. So as long as ROCE is healthy, sometimes we are okay with EBITDA percentage margins falling. So for example, oil was at [ $60 ], now it's become [ $70 ]. Let's say it goes to [ $90 ]. So that means oil -- if oil goes to [ $90 ], there's an increase of 50% in raw material prices. We're not sure if we get the 50% increase in finished goods prices to keep the EBITDA the same. It may be less. So the EBITDA percentage may reduce, but ROCE will still remain strong. But overall, we're quite positive of -- that at least in the next year, 1.5 years until new capacity comes on stream and we have limited capacity, we're able to take the advantage of picking and choosing the right customers with higher margins, with good payment terms and payment performance. So I think, I don't see any reason. Of course, other risk could be, again, if this antidumping doesn't come through and suddenly, there could be some dumping of rubber products. For latex, it's a little harder, but for rubber products, that could happen. So there are, of course, inherent risks. Again, in the annual report, if you see there are certain risks that we look at. All those factors are there. Raw material risks in terms of sometimes raw material is not available and our plant is shut for some time. All these kinds of risks are there, of course. But there are, I think, low probability risks at this point that we see.

[Operator Instructions]

So I think we're almost done with an hour. So if there are no further questions...

Yes, sir. Yes.

Is there anyone in the question queue now?

Yes, sir. We got one question from Aditya Khetan from SMIFS Institutional Equities.

Yes. Sir, my question is on to the per ton, per kg like you mentioned to earlier participants. If sir, you can give some flavor like how has that been fared over the last 3 to 4 years? And are we nearing that range of INR 15, like I think we have said some -- quite a few years back. How are we like standing in terms of per kg today?

So honestly, I'm not able to give you the exact number. And I certainly don't have numbers from the last 3, 4 years in front of me. But overall, as I said, it's gone to reasonably healthy levels, perhaps not as high as what we had in FY '22, '23, but reasonably healthy levels and with the volumes going up, I think we're quite comfortable with these margins. And of course, our endeavor will be to improve these further.

Sir, just one question on ApcoBuild. Like how serious are we like to build this business because we have seen like no material contribution to top line. Do you think like to work on such a smaller business, which has no meaningful scale for us, should we focus our energies towards this sort of business or like focus on the core businesses like the latex and all?

Yes. As I told you before, our strategy for the ApcoBuild business has been a little different. It is actually quite related to the core business. So I would not say that it's very far from the core business. We are focusing on mostly products that we are manufacturing and is where we have technical expertise. We do have some outsourced products as well in our product range. But really, the focus has been to capture the additional margins that we -- that anyway we are supplying to some of the customers that have a brand. So the endeavor has been to capture that additional margin. And while we may not see it on the top line as being significant, but it's a reasonably healthy bottom line, and it's still a small percentage of the bottom line as well. But we are capturing that additional contribution at a low cost. So I think we will continue the business. Whether we choose to invest large amounts and become a large player in that, that I agree that it's something that's not our focus or chosen not to focus on it right now. But we'll continue to manage and grow this business.

Got it, sir. Sir, just one last question. Sir, is there any plans to like forward integrate to make gloves also because we are into latex and directly, we should manufacture gloves and export it to the global markets. Any sort of an understanding on this?

So we had considered it earlier. We said, first, let's focus on manufacturing latex and get that right. And as I mentioned earlier, also, given the current entire glove industry and the glove supply chain, including latex, there is so much additional capacity at this stage, it doesn't make sense to add more capacity, both in latex and [Technical Difficulty]. Maybe at a future date, if it makes sense, yes.

Ladies and gentlemen, we'll take this as the last question for today. I now hand the conference over to the management for closing remarks.

Thank you, everyone, for joining us in this Q3 conference call. We look forward to seeing you at the end of the financial year. Happy New Year to everyone, and thank you again. Thank you once again for joining us.

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