Apcotex Industries Limited (523694) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '27 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 Ms. Purvangi Jain from Valorem Advisors. Thank you, and over to you, ma'am.

Thank you. Good afternoon, everyone, and a warm welcome to you all. My name is Purvangi Jain 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 call for the first quarter of the financial year 2027. Before we begin, a quick cautionary statement. Some of the statements made in today's con 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 belief as well as assumptions made by and information currently available to the management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Now I would like to introduce you to the management participating with us in today's earnings call and hand it over to them for their opening remarks. We have with us Mr. Abhiraj Choksey, Vice Chairman and Managing Director; and Mr. Vivek Thakur, Chief Financial Officer. Without any further delay, I would now like to hand over the call to Mr. Vivek Thakur for his opening remarks. Thank you, and over to you, sir.

Ladies and gentlemen, we have the management line disconnected. Please stay connected while we reconnected the management. [Audio Gap] Ladies and gentlemen, we have the management line reconnected. Sir, you may please go ahead.

Yes. Thank you, Purvangi, and sorry for this technical glitch. Good afternoon, everyone. It is a pleasure to welcome you all to the earnings conference call for the first quarter of financial year 2027. I hope you had an opportunity to review the financial statement and earnings presentation, which have been circulated and uploaded on our website and the stock exchange. Let me provide you with an -- with a brief overview of the financial and operational highlights for the first quarter of the financial year 2027. The company delivered an exceptional start to FY 2027, achieving its highest ever quarterly revenue of INR 526 crores, which represents a 40% year-on-year growth. This was driven by improved price realizations despite lower sales volumes. The quarter marked the historical financial milestone with the company reporting its highest ever EBITDA, profit before tax and profit after tax. Operating EBITDA stood at INR 117 crore, registering a growth of 203% year-on-year, with EBITDA margins improving to 22.3% from 10.3% in the corresponding quarter of the previous year. Profit after tax for the quarter stood at INR 79 crore. This compared with INR 19 crore in the corresponding quarter of the previous year reflects a growth of 311% year-on-year, with PAT margins improving to 15.01% from 5.11%. During the quarter, the export business encountered temporary headwinds as geopolitical developments in West Asia and the resulting logistic disruptions and increase in ocean freight costs adversely impacted the export volumes. Despite the challenges faced, strong financial performance was underpinned by our strategic operational resilience, disciplined inventory planning, proactive procurement and effective risk management, which enabled us to ensure uninterrupted customer service during industry-wide disruptions. This allowed us to capitalize on constrained market supply and deliver strong profitability. Alongside our operational performance, we also continued to execute our strategic CapEx plans during the quarter. Working capital requirements increased during the quarter, primarily due to higher raw material prices, which resulted in higher inventory values and receivables following the pass-through of increased input cost to the customers. With this, now I open the floor for questions-and-answer session. Thank you. Over to you.

[Operator Instructions] The first question is from the line of Aditya from SMIFS Institutional Equities.

Congrats on a good set of performance. Just a couple of questions. Sir, first, is it possible to quantify the inventory gains during the quarter? And subsequently, like how much in terms of margins like would have been better because of inventory gains? Some quantitative number like 3%, 4%, 5% jump is because of inventory gains. If you could highlight that, that would be great. Secondly, sir, how much would be the volume drop on sequential basis and on Y-o-Y basis?

Okay. Thank you. Thanks, Aditya. I'll take those questions. So I would say, yes, there has been some amount of inventory gain. I think if I'm not mistaken, in terms of EBITDA, maybe the EBITDA would have been 2% higher because of inventory gain. I think EBITDA is around 22%, 23%, if I'm not mistaken. So I hope that answers your first question. And your second question was on -- remind me again, sorry.

Sir, volume drop.

Volume -- yes, we had a volume drop mainly because of -- the export market, which we have developed, and I mentioned on previous calls before, the MENA region has been a strategic region for us and because of Strait of Hormuz being shut, a lot of our customers' production being down, of course, not being able to get material to them -- in some of them. So obviously, that's been a downer. So overall, volume has come down by 10%, 12%, but it's all because of exports. In fact, the domestic volume has gone up by 10%. So our view is that, once this war ends and it was in between -- as you know, there was a little bit of a lull in the war, and at that time, we got all our orders back. Unfortunately, the war again sort of seems to have erupted. So as and when the war stops, we expect that to reverse very quickly, but that has been a short-term blip in terms of volumes.

Got it. And sir, what would be the sustainable numbers we can work on? Like, on the margins, you mentioned 2% jump was because of inventory gains. Plus subsequently, we are also witnessing spreads on the spot markets have also expanded. So when you see like, suppose if the crude oil prices fell and the demand also comes back to the normal levels, when you see these margins sustaining around? Because earlier, sir, we had even clocked around so between 9% to 12% margins, and we are at 22%. So stripping off all the, sir, benefits getting today, so what do you see the sustainable margins?

And I've again mentioned this in our kind of business. I would say, in sustainable margins, I think I would talk about average margins, and we are quite confident of 15%, 16% average margins that I've mentioned from before as well. And as we are growing, that may increase further. Obviously, you will have a few quarters where margins could be lower, a few quarters where margins could be really higher. And in the current context, look, I don't know what normalized is, right? So we'll have to see where things land. As I said, Q1 was a really good quarter. So we're grateful for that, and we'll have to see how things play out, honestly. Difficult to say.

Got it. Sir, my next question is on to the nitrile latex. Is it possible, sir, to quantify like where are we standing in terms of a cycle? We have seen the bottom in last year, wherein like spreads have fallen to multiyear lows. Now we are witnessing some slight improvement. So where we are exactly in the cycle? And secondly, on to your further CapEx, which you have outlined, any time lines and updates like when it can start and when can it start flowing to the top line?

So nitrile latex, I would say margins have improved. Obviously, this Q1 margins were much better than before as well for various reasons. I'm not sure, again, as you said, what will happen in the next 2, 3 quarters. But certainly, the situation is better than what it was in the previous year and the year before that. So things are improving. We are quite hopeful, and that was one of the things that was pulling our margins down, if you recall, Aditya, you've been on calls before. So that's improving slowly. Again, as I said, Q1, I don't want to specifically talk about one quarter, but in general, I would say things are improving there. And yes. I think that's it, right? You had one more question?

On to the CapEx side, sir. Like...

Sorry to interrupt...

The NBR will be on stream by Q1 next year as per plan right now, but I'll be able to confirm that maybe, frankly, in the Q3 con call. We'll have a final date. And the SB latex, other synthetic latex, CapEx would probably be just a couple of months after that. So maybe end of Q1 or so, probably.

Just one last question, sir, if you...

Sorry to interrupt, Mr. Aditya. May we request you to return to the question queue for a follow-up question.

Yes. Aditya, sorry, but we should give everyone else a chance as well, right?

Okay. Thank you.

[Operator Instructions] The next question is from the line of Sajal Kapoor from Antifragile Thinking.

Just two questions I have. First is -- I mean, this quarter showed that we remain highly profitable despite a major disruption to exports. I mean, what changed in the design of the business over the past few years that made the system resilient enough to absorb that shock above and beyond the gross margin expansion, even excluding the 2% inventory gains that you mentioned. Has something fundamentally changed in the system you reckon?

See, of course, while the quarter did include a favorable timing benefit, it was not purely incidental. This margin expansion this quarter was driven by operational resilience, and that's been intentionally developed over the last few years by us. And the strategic capability, which includes risk management, inventory management, procurement -- quick procurement decisions at such times, now that's all been intentional. And obviously, this quarter did give us some opportunity to implement those capabilities, which I think a lot of our competitors and other manufacturers were not able to do. Just to give you an example for -- our plants have 2 fuel sources, right? A lot of our competitors had only 1 fuel source. So when gas was in short supply, we were able to continue using coal and do that. So if tomorrow coal is in short supply, we can run the plant on gas. So these are the kinds of things that we have intentionally done and we have invested money and perhaps more CapEx than some of our competitors, but this is where it comes in handy. Quick procurement decisions, which I think large MNCs are unable to take or for whatever reason, were not able to take, those are things that we are able to do alternate raw materials. We have multiple raw material sources for each raw material, we have multiple sources. So if one geography shuts down, like in this case, MENA, we were able to get it from another source because we have good relations everywhere. So these are all kinds of things that we have done. So yes, to that extent, it's part of the system and it's sustainable. Obviously, these kinds of opportunities may not present itself all the time, but this is part of the company's strengths that are inbuilt into what we have built into the company. So we hope we'll be able to continue serving our customers as we did in Q1 without any supply disruptions in the future as well. And the supply was definitely constrained in Q1, and that helps us along with some inventory gains.

Yes. Understood. We were well-positioned...

Higher margins, I guess.

Yes, yes, yes. No, that's fine. So second question is, assuming exports recover fully, that's an assumption, right, what is one constraint that prevents Apcotex from then doubling throughput over the next 5 years? Let's assume a much more normal operating environment, which we may or may not get, but in that scenario, can we double our throughput in 5 years?

Yes. I mean, look, obviously, the market has to support. We have high market share in India. We have -- we are working towards higher market share in these other certain strategic geographies as well. The investments that we have already announced and which will be on stream in 2027 will come -- both will come on stream in 2027, will both have -- will help us add another probably about INR 600 crores to our top line. So I don't know about doubling throughput, but from what we have already announced, it will definitely maybe increase of maybe 40% or so.

Sure, sure. That's helpful.

But further investments, yes, as and when the market supports and we see the opportunities in the market, we -- there is no reason. I mean, I have no -- I see no reason to be able to double as well.

Of course. I mean, yes, our balance sheet is very healthy anyway.

Exactly. Balance sheet is strong. We're low debt-to-equity company. We, I mean, barely have any debt. In fact, we are net cash as of now. So in spite of this higher working capital requirement in Q1, we've managed it well. So there's no reason, and we're looking at other opportunities, as I've been mentioning, nothing has panned out yet. But as and when -- so we are looking at ambitious growth targets. And when I have certain other numbers, we'll come back to you with specific numbers and plans.

The next question is from the line of Deepak Poddar from Sapphire Capital.

Sir, I just wanted to understand -- I mean, what led to the, I mean, our product price spikes, I mean, and then how sustainable would those be?

I think I've already sort of mentioned it to the previous couple of things. It's -- look, there is -- as I mentioned, there is definitely a favorable timing benefit. I'll be honest, we wouldn't annualize this level of benefit. But certainly, the execution, the quick decision-making has helped. The exact magnitude of what's sustainable and what's not is remains to be seen. But what's important is our approach to risk management and procurement as a competitive capability, core competitive capability will continue on. So there are certain things that we've built into the company that are not easy to replicate. So as and when these opportunities do arise, we'll do that. And as I said, in our kind of business, as we grow and as we scale up, margins should continue to improve. There can be certain things that happened in the last couple of years, where it's like low margins in the nitrile latex segment. From time to time, dumping does happen. Those kind of things we fought quite well. Even right now, we have no antidumping, nothing. And so we are quite competitive, not only in India, but also regionally and in some cases, globally. So that's what we'll continue to do.

Okay. Understood. But as you mentioned, I mean, this 22% EBITDA margin is not a sustainable one. I mean, 15%, 16% is more EBITDA sustainability that as a business will look, right?

Well, in the past, that's what I've mentioned. I mean, frankly, I don't know, given the current situation with the war and overall. Maybe with oil prices at such high prices, maybe our volumes may not grow, but margins could be sustainable. So honestly, I -- it's a difficult one to answer for this year at least.

Okay. Understood. And sir, you mentioned about 2 -- a couple of CapEx. So that can add about INR 600 crores to your top line, right? So what's the total CapEx amount there?

About INR 200-odd crores, INR 220 crores.

INR 220 crores?

Yes.

Sir, what led to a decline in your other expense this quarter? I mean, fourth quarter was close to INR 55 crores. This quarter, it's close to INR 45 crores, right?

I think we made some provisions in Q4. If you -- I think it's in our notes to account. So that was the main reason. But Vivek, can you confirm this?

There was a one-off impairment provision, which was done about INR 4 crore last quarter. Apart from that, the major differences is quarter 4 generally is usually a high maintenance kind of a quarter, so we incurred a lot of repair costs there. So broadly, these were the reasons why the reduction you are seeing in this quarter.

The next question is from the line of Harsh Shah from Merisis Advisors.

Yes. Sorry. So most of my questions are answered.

The next question is from the line of Farokh Pandole from Avestha Fund Management.

Abhiraj, congratulations on the historic best results, really great numbers. I just had a question on the nitrile business. If we are in a situation where clearly the market has moved in our favor, and as you highlighted, we've -- from a balance sheet standpoint, we are clearly in a reasonably strong position, what is the thought on accelerating the Stage 2 of the capacity that we had envisaged at the start while getting into this project?

Yes, absolutely. So it's on the card. We have the project plan completely ready and ready to go. That would, of course, be a third expansion project that we would have to undertake and it would probably take less time than the others because there's not much civil required in that. As I told you -- like, in the last call, as I mentioned as well as the -- we'd like to see sort of a little bit longer-term view on margins and how things are playing out. There is the China factor. There is some additional capacity that has also come up in Malaysia recently, so -- or coming up in June, July, right -- July, August right now. So I think we'll wait for another 3, 4 months and then take a call on that. But I think the project plan is ready. We know how much the investment is going to cost now and what is the additional volume that will come about. So I think we'll take a call shortly on that.

Great. And INR 220 crores that we are looking to spend, that includes both projects, right? Or is it just NBR?

No, both.

Both?

Yes.

The next question is from the line of Mehul Panjwani from [ 40 Cents ].

Congratulations on a great set of numbers. Sir, as I'm not -- I'm tracking this company very lately. I just want to understand when the post-COVID, we saw a cyclical upside in the profitability of our company, and now we have seen a robust comeback. So what -- how would you -- if you can put those 2 phases in layman's terms, like what went right for us post-COVID when we saw the upside in our profitability and now that we have come up with a great quarter again. So if you can just put down in simple terms, what is the difference in the 2 phases?

Sure. Yes, as in maybe since you're following it lately, but -- the company lately, but I mean, we have covered this in the past. So to quickly summarize, what happened sort of post-COVID is people were sitting at home and ordering goods. So all manufacturing companies, obviously, the demand was great. Services was down at that time for the 2 years from 2020 to '22, '23 around that time. So at that time, we saw that we quickly moved to 100% capacity utilization across all our products, which was not expected. After that -- so therefore, the margins were fairly good for those 2, 3 years. After that, what happened was not only us, but globally, some of our competitors, everyone added capacity altogether. And so that resulted in overall margins, of course, normalizing or coming down for -- not even normalizing, coming down below the normal, what I would consider for most of our products and specifically one product, nitrile latex where -- which is for the -- mainly for the medical glove industry, where we saw a really large amount of capacity addition because of COVID. And that is -- that whole market, the whole glove industry as well as the supply chain for gloves is still in that overcapacity mode, even after -- 3 years after COVID -- 3, 4 years after COVID. So that's normalizing now. So I think both those things have normalized now overcapacity in the rest of the products and overcapacity in nitrile gloves, which to some extent still continues, but it's much better now than it used to be. So as capacity utilizations go up, things are improving again. As far as Q1 is concerned, I'm repeating again what I said, there are, of course, certain events that occurred in Q1 that were more beneficial to our company because we were better prepared, of course. And we took advantage of that. So I hope that answers your question, and it's a good summary of what you're looking for.

Yes, that's fantastic. One follow-up question, sir. So have we added any new products in this phase of growth compared to post-COVID? I mean, have you added any new product which is adding to the significant upside?

This one is -- post-COVID, nitrile latex is a grade -- is a big range of products. So it's a range of 6 or 7 grades of nitrile latex, which goes into different types of gloves, medical gloves, industrial gloves, household gloves. So we have added that range. In addition to that, we've added another probably 25 new products in the markets that we already cater to, whether it's construction; there's some specialty applications like oilfield -- oil drilling applications; carpet and textiles, we've added a few products. So that we continue to do as we go along. So today, we cater to 8 different industries largely. And of course, there are some more specialty industries, but largely 8 different industries. All of this is available on our website. But if you want more detail, you can send an e-mail and you can get more information on this.

Great, sir. Last question, sir. How -- when is the CapEx schedule -- when the capacity expansion is coming online?

As I mentioned to one of the previous callers, it's -- it will be -- one of them will be in Q1 of next year, early Q1, probably April, and the second will be end of Q1, maybe by June or so.

[Operator Instructions] The next question is from the line of Karan from Kredent. Mr. Karan, your line has been unmuted. Please go ahead with your question. As there is no response, moving on to the next question. The next question is from the line of Abhishek, an individual investor.

Sir, how does the current working capital cycle and inventory holding period look compared to the previous quarter?

Vivek, can you answer this question?

In terms of days, it remains on the similar trajectory like last quarter. But as we were explaining, the prices of raw material have gone up in value terms. So the quantities remain the same, number of days of inventory we are holding is remains the same. Just that the value has gone up -- significantly up.

Okay. And sir, my next question. Given our strong balance sheet and the cash generation, what is the management capital allocation priority between organic growth, debt reduction or shareholder returns?

Look, for us, the return on capital is most important as and when we take any big investment decisions. So we're quite prudent on that, and we want to ensure that we get good -- or we expect good return on capital. Of course, sometimes things don't work out as planned and sometimes things work out better than planned. But if you see over the last 15, 20 -- 15 years, I would say, 16 years, we've had -- as far as shareholder return is concerned, which, to some extent, is a reflection on return on capital, has been fairly good. So I think we're quite happy with the decisions that we have taken so far and the execution of those decisions. I hope that answers your question. But return on capital remains the primary driver for any capital decision -- capital allocation decision.

[Operator Instructions] The next question is from the line of Aditya from SMIFS Institutional Equities.