Astral Limited (ASTRAL) Earnings Call Transcript & Summary

Thank you, Saeed. Good evening, everyone, and thank you for joining us on the Q2 and H1 FY '21 earnings conference call of Astral Poly Technik Limited. We have with us the management team comprising of Mr. Sandeep Engineer, Managing Director; and Mr. Hiranand Savlani, CFO of the company. We'll begin the call with the opening remarks from the management, following which we will have the forum open for an interactive Q&A session. I will now hand over the floor to Mr. Sandeep Engineer for his opening remarks. Over to you, sir.

Thank you, Nehal. And thank you all of you who joined this call for the Q2 results, and I hope you and your family members are safe and doing well and are healthy, fighting the pandemic. We all know that the world is passing through a tough time due to the pandemic, and everyone has passed through various challenges. Under this situation, I want to first congratulate and thank the entire team of Astral to support the organization in growth of the top line and without compromising the margin. At the same time, I want to thank all my investors, which have stood by us and put the confidence in the management in these difficult times. Now coming out to the business. First, I'll brief you on the pipe business. And then I'll be briefing you on adhesives business. Business was slow till August. And now as you see the chart, which we have given, has started picking up from September onwards, which you will see from the numbers as well as the growth pattern here. We will be answering more on this in our question-and-answer about the business there. But first let me brief you the plans of Orissa plant. The work at Orissa plant for the construction has just commenced, and the machine ordering process will start in the last quarter, and we will be ready with this plant in operation in Q2, and we will be seeing the revenues start from this plant in Q3. Our value-added products like the wire expansion plant, which is going on at Dholka is as per the schedule. The building is under construction, and it will be ready by May '21, and the production will start in Q2 of next fiscal. We are also doing minor expansion works at building and various balancing the capacity at Santej, Hosur and at Ghiloth plants. And all these work which were halted in the first quarter due to the pandemic have commenced and are going on schedule. We being a plumbing company, our growth started late compared to the agri pipe-dominated businesses in the piping sector. We are seeing a very good growth demand, and it looks that this will continue in the coming months for our plumbing products as well as our agriculture products and the PVC products which we manufacture. I would like to let everyone know that we are working on a few new product launches, which will be announced in the next few months, and we will -- we are in the last leg of launching these products. And once we are ready to launch, we'll surely update you and get connected with you. Now briefing on the Resinova and the adhesives business. The business has started picking up which you can obviously see from the numbers in the chart which we have given. And as we have continuously briefing everyone that the structural changes have been completed in the last quarter and even the quarter -- in the last quarter of the last fiscal and more changing and consolidation of the structural changes have taken place in these 2 quarters, and the results can be seen by you. The further changes in the distribution network, retail changes, new schemes, initiatives, new launches for the various applicators is also happening in the adhesive business. And we are getting a very positive response and a very positive outlook for this business with all the structural changes, the network changes and the various applications and the connection which we have brought for the application. We are also working for a few new product launches in this category, too. Once we are ready with the launch, we'll keep you updated again by connecting with all of you. And at this stage, these products are under trial stage at R&D as well as in connection with our U.K. plant to source out part of this technology, which they manufacture at the U.K. facilities or under their R&D facilities. U.K. is doing excellent in spite of pandemic situation in the country. Not only the demand is growing but the margins are getting better in U.K. U.S. subsidy has also started giving positive numbers, which is very encouraging for all of us, and we are expecting much more improvement in the coming year. Besides this, Astral is continuously doing a lot of CSR activities, such as supporting wildlife in Rajasthan MP, giving support to the flood-affected people in Bihar as well as company is also doing various activities on the nature, environment, weaker sections of the society and people who need help with the pandemic. We have taken initiative to take care of our employees at every plant, at every location and ensured by employing doctors, qualified doctors at every plant. And this has helped us a lot in seeing that our employees remain healthy, safe during the pandemic. We are equally serious of our carbon footprint, and we are trying to move our organization towards the use of renewable energy in coming time. We have already put this rooftop solar at all our plants. And we have just signed agreements to commence generating energy, 3-megawatt energy on the immediate base with the government power supply companies. So this energy, which will be generated, giving us a positive carbon footprint as well as saving us a lot in the team operation in coming few months. So again, I thank everyone for joining this call, and I will pass the line to our CFO, Mr. Savlani, and we'll be taking more on the question-and-answer session.

Good afternoon, everyone. I hope everybody is safe, and I wish the entire world should come out quickly from the pandemic and the announcement of vaccine happen very soon. Press release is with you. So I don't want to take much of the time to discuss each and every number. Instead of that, we wish that I give more and more time to the Q&A session because I understand that in this difficult environment, everybody is having their questions in mind to ask from the management. So I will give only a few numbers, and then we will quickly move to the Q&A session. And I will only highlight for the -- whatever the things has happened in this particular quarter. So stand-alone number on Y-o-Y has grown up by 4.11% in top line and the EBITDA, 16.29% and the PBT, 25.31%. Once again, we repeatedly are communicating to all our investor community that Astral's focus is now to grow the bottom line or maybe EBITDA higher than the top line. And that is, again, this is repeated in this quarter also, and we will keep continuing doing that till we reach at a certain ballpark figure. PAT was lower compared to last year in percentage terms. That is mainly because of the readjustment effect of tax which the government of India reduced last time from 35% to 25%, the corporate tax. So because of that, some write-back was there last year. That's why it is showing. But otherwise, you see the operational level, it was a very healthy growth. Similarly on the consolidated basis, if you see the number, the top line has grown up by 10.14% and the EBITDA, 18.31%, and EBITDA at a robust level of 36%. And again, there also, at the consol level, the PAT was affected mainly because of the tax-free adjustment from 35% to 25% in the corporate tax by Indian government. Market demand in pipe segment was robust from September onward, which you can very well see in the monthly data. That is why we know this time, given the monthly data, so that every investor can transparently see that the real pickup in the plumbing sector has started from September onwards. So far, whatever the pickup was there, that was mainly related to the agriculture side of the business. But now the plumbing has also started giving us a reasonably good growth. September, we were up by 30%, and in the month of October, the lifetime high of 85%. I'm again repeating the 85% growth in the month of October. Similarly, we are seeing a similar trend into the adhesive side of the business. The entire quarter was stable, moving somewhere around 28%, 29% growth. And again, from the October onwards, it has started giving us a robust number, and we have delivered a 55% growth, which is the, I can say, the highest growth in a single month in percentage terms. We are clearly seeing that the migrant labor have started coming back to the system, and many sites have started working. And we are of the view that most of the labor force should come back post-Diwali back to the all sites, and all the sites will start functioning on a regular way post-Diwali, unless something abnormal happen on the pandemic side. Otherwise, I think the demand will keep picking up in the coming months, and now the metro cities will start contributing. So far, metros are not giving contribution. And hopefully, from now onwards, the metro city will start giving contribution. So the demand scenario will remain healthy in the coming months. EBITDA margins are better compared to last year. Looking to the situation, it should be maintained. Normally, margins in the pipe industries are 15% to 16%, but in the present situation, because of, you can say, the PVC uptrend, because of that, some gain is there into the inventory level also. Of course, Astral will be having the lowest gain into the PVC side because of our major revenue coming from the CPVC side. But still, yes, definitely, some gain will be there, so that can be the one of the reasons. And now the CPVC demand will start picking up. And still, Astral is controlling on the overhead side. So because of that, margins will be very, very healthy in the coming quarters also. Adhesive EBITDA margin was better compared to last year and now looking to better growth in top line in the coming months. We are expecting the margin to be maintained at this level, and there is a room for improvement in the coming quarters. So we are expecting a further improvement into the EBITDA margin, into the adhesive side of the business. We are very positive about the adhesive business in coming months. As slowly and gradually, our structural correction, what we have done, and still, we are doing some corrections, which has started giving us some results. But we are still waiting for a few more quarters to complete all the structural correction. And then after, we want to see how it is going to help us. Infra business was very slow because government projects were on hold. Now it has started picking up. Particularly from the month of October, we are seeing at least a growth in the adhesive business. So first time in the last 7 months, October was the double-digit growth in the infra business. But so far, it was not giving us a good number. But from October onwards, again, it has started, giving us the growth. Margins are stable, somewhere around 15% kind of level. So we are of the view that we will be able to maintain this kind of margin, and there can be a room for further improvement from here on. Cash position has substantially improved in Q2. As of September 30, we have a INR 260 crore of cash on books, and we are very seriously looking into this number. So as Sandeep bhai said that we are already working on a few new products, and hopefully, within a quarter time, once this -- we will be ready to launch, we will be updating you the new product launch also. And at the same time, we are improving the dividend payout also. And hopefully, by year-end, we will be working on the dividend payout policies also because now there will be a robust free cash flow available with the management. So definitely, we have to improve the payout ratio also. But exactly, we -- Board will decide by year-end, and then we will be keeping communicating to you. In the first half, the CapEx was only INR 37 crores. As usual, we always communicated that Astral is very, very serious about the quality of the balance sheet and which is reflected in this number also that in spite of the pandemic situation, we have improved our working capital management or the balance sheet quality, whether it is the reduction of debt, whether it's improvement into the cash level, whether it is the receivable side, whether it is the inventory side. All front, we have done the improvement. I can give a few of the number that you can see that the cash level has substantially improved to INR 260 crore level. Receivable last year September, balance sheet, you can see, was INR 275 crore, which had drastically dropped to INR 211 crore in this September in spite of 10% Y-on-Y growth on a consolidated basis. So you can understand the kind of drop taken place in the receivable days. Similarly, in the inventory side, last year, September, it was INR 485 crore, inventory, which has come down to INR 441 crore in spite of increase of 10% in top line and in spite of increasing substantial price rise into PVC. In spite of that, we are able to reduce our inventory level. So that is a clear signal that we are very, very serious about the quality of the balance sheet and the working capital cycle. Payable day sale reduced from INR 407 crore to INR 371 crore, mainly because this quarter, the currency was in our favor, rupee appreciated, and we were sitting on a happy cash. So we utilized that cash to pay off our foreign currency payables so to take the advantage of foreign currency gains because we were sitting on the cash. So because of that, the payable days has come down, otherwise payable, we could have extended that also, but we thought that the currency gain was sizable. So because of that, we don't want to take a risk on the currency because we are not expert into the currency side. And we were very much into -- in the money. So we thought that better to encash that gain and which can be seen very well into the Q2 number, we have gained INR 3.9 crore into the foreign currency in the previous quarter. Now with this, I want to close my initial remarks, and again, go back to the moderator for -- to open the floor for the question-and-answer session. Thank you very much.

[Operator Instructions] The first question is from the line of [ Nitin Jain from SK Capital ].

My question is regarding the pipe business. So some of your competitors, they have shown stronger volume growth in the pipe business. So would you like to comment on that? Like their growth is upwards of 10%. And yes, that's my first question, sir.

Can you please give us the name of company, which has given the 10% volume growth?

Sir, APL Apollo pipes.

Okay. So they are basically into the agriculture business. Rest, if you see the plumbing pipe company, no company has given the double-digit growth. So I think the market situation was not that great, but now definitely from September onwards, the growth has started coming back to the system, which you can see very well into the numbers also that in the September and October numbers are in front of you, I'm sure you must have seen that number. So industry per se, if the demand will come, then definitely, everybody is going to grow. So we cannot claim that only Astral will grow. Every company will grow because the industry per se is going to grow. So we are of the view that if the plumbing demand will start picking up, then every company will grow. And it is always good that in industry, every organized players are growing. That is always a healthy thing rather than unorganized people grow. So we always welcome that any company is growing. That is always a good thing for the industry per se. And definitely, for a leader like Astral, it is always better that if the other people are going to grow, then we are also definitely going to grow. So we are very positive on that side. And anybody in the industry is going to grow in the plumbing side, we will be happy.

Sir, even I would add a thing that we always welcome our double-digit growth, and we are happy about that. But you have to also see the size and the peer-wise, if you look at the growth of the number because the size and the volumes do matter in the percentage when just go through the numbers. Thank you.

Okay. Sir, my second question is on the Orissa plant. So in the previous quarter, you had mentioned that production is expected to start by Q1. So now the press release is saying it will start by Q2. So have there been any delays? Or like would you like to update?

Yes. It is delayed because of the pandemic situation, the construction activity was not possible to do there because the Orissa government was not giving the permission. So now they have started giving the permission. That's why now we are going very fast. That is possible we can finish early also. But we want to be playing safe. That's why we are saying that. But quite possible that if nothing will go wrong in the coming day, we can finish early also.

Next question is from the line of Madhav Marda from Fidelity.

So my question was, if we see the October revenue growth that we have for plastic pipes, which is very strong, how much of this would be volume versus price growth? Because I'm not able to understand 85%. How do we break that out?

So like volume will be roughly about 15% lower than the price growth.

Okay. Okay. And sir, what is driving the -- such a strong volume growth? Is it basically plumbing end market is opening up a bit? Like, how should we sort of digest this number?

Yes, yes. 2 things are there. One is the end market is opening up. And second is that the develop likely come from companies like Astral, we are having proper inventories of all the products ready, and that is also helping us, and our network also is being more robust in a lot of ways, which is also helping us. So there are many factors which have helps us, and we are continuously working to improve this.

Okay. Okay. Got it. And maybe on these new product launches that we're talking about in pipes and adhesives. Could you just help us understand the nature of the product, especially in classifieds? Like molds is one product, for example, which we are doing. But what kind of products will there be? Any broad idea?

So in both categories, we are going to launch the new products. So we are at the last leg. So hopefully, next quarter, we will do the announcement because we don't want to unnecessarily do the announcement early without launching that thing. So once we will be launching, we will be doing the announcement.

Next question is from the line of Sonali Salgaonkar from Jefferies India.

Sir, my question is, again, towards the October growth in pipes of 85% and adhesives at 55%. Sir, is there anything in the base of October '19, which has led to this kind of strong growth, especially in pipes?

So some maybe base effect will also be there. But last year, all this pandemic and all started from March. So that kind of -- will not be there. But of course, the growth base will be -- compared to the normal, it was low. So even last quarter, month, year -- October also we were growing. So it is not that low base also.

Right. Sir, and about November or say, December, you expect similar growth rates to sustain or probably to revert to steady state?

No, no, no. This cannot be 85% kind of growth, cannot be sustained every month. So we have to see how much it is going to sustain. But yes, it is still on the higher territory. So -- but we cannot expect that you guys pick up the 1 month and multiply by 12 or multiply by 3 for the quarter, not going to be like that.

So we are just trying to understand probably, what difference have we done in October that has led to this kind of growth. Is it because of the pent-up demand, which probably did not unleash because of the lockdown in the earlier months?

Yes, definitely some element of pent-up demand will be there because many new cities, new states have opened up. So naturally, demand will be there. See, our products are such that you can postpone. You cannot cancel the demand. Whether it is a repairing replacement demand or whether it's a new construction demand. You can postpone that thing, but you cannot cancel. So when there is an opportunity and things get open, the pent-up demand will always be there. So there can be some element of pent-up demand. And secondly, metros and all were closed. So because of that, that demand was missing. So now they all started coming back to the system. So they are also going to contribute. So all the backlogs are going to be get cleared. How many months it will continue, very difficult to define at this stage. But definitely, some period, it will be there because ultimately, everyone has to close the backlog.

I understand. Sir, and in our overall portfolio, how much is contributed by the agri pipes, and secondly, infra verticals?

We don't share individual products number, but it is very, very low. Agri percentage-wise, it is very low. And infra, again, it's -- compared to the consol number, it is very low.

I understand. Sir, lastly, any color on our rural versus urban mix and also the CapEx for the year?

I think rural is still contributing good. And now onward, we are expecting that the urban should start contributing to us. And as far as this CapEx is concerned, I think we will be able to give you the exact number in the next quarter because we are working on a few new products line also. So there also some CapEx we have to give. So originally, our plan was that to somewhere around INR 70 crore to INR 80 crore, but now it can extend a little bit.

The next question is from the line of Sneha Talreja from Edelweiss Securities.

Congratulations on very good set of numbers. Sir, my question was pertaining to your adhesives segment. Like, why you explained it for 85% sort of a number for pipes. What could be the number for adhesives one, 55%. Is it something which is because of the structural changes that you have done in the past? Or there is some element of another market opening up or the pent-up demand coming back? What would you attribute it to the most?

I would attribute it to the structural demand and the systems and a lot of initiatives which we have taken in getting the business back on track. And we are not doing anything which is like pent-up demand to push the products to the market. We are actually working this business with a very, very controlled credit now, very controlled inventory cycles and in a very perfect manner with the expansion of network happening and the work with initiatives that we've taken at all levels, the involvement of all of us in this business. And we had continuously promised that we're taking it back on track, both in growth and the margins also, and we are all working towards it. And I can say that this demand is from the hard work, it's not from any other specifics.

Right. So here, we can continue with a strong growth trajectory, maybe not 55%, but at least since last 3 months, you've been doing at least upwards of 25%. So that can be still continued over the period. That's the right assumption, sir?

Yes, very.

It's doable. It's doable, but again, subject to the situation of the pandemic on the ground. Otherwise, we think 20%, 25% is doable.

Right. Sir, got that. Sir, my second question was relating to distribution network, both in your pipes business and adhesives business. Any significant distribution addition that we have done in this particular quarter or maybe in the last 2 quarters, which is leading to some amount of high growth? And the reason I'm asking is a lot of smaller players are getting out of the market. So I'm sure that you must be adding more and more distributors at this particular point. So if at all, we could get some color on that.

Yes, that is a regular exercise. We keep adding the new distributor. We keep adding the new dealer in both the segments, whether it is a pipe or adhesive. So that phenomena will be continued for the next 10 years. Because every year, we are going to add because our base is very low. So on a lower base, there is still a lot to do. We have to do still lot hard work. Because it's not the end of the journey or it's not a saturation point where we will reach. I can say it is just the beginning of the journey. Look at the size of the business, it's in both segments. And again, that what is the market share of Astral? It is hardly anything. So we are seeing a lot of opportunity in the market, and that is why I'm repeatedly saying that this is the beginning of the journey. In next 10 years, we will keep adding the new dealers, new distributors in both the segment.

Next question is from the line of Dushyant Mishra from SageOne Investments.

I just wanted to understand what are some challenges you're facing in the expansion in the agri market? Kind of wanted to get a sense of -- for a company like Astral with the size and scale that we are and the kind of footprint we've established, what are some of the challenges that we've faced in expansion into the rural, especially our agri market with PVC pipes?

So agri market is good, definitely, and the opportunity is also very high into the agri segment. But Astral being a plumbing company and within farming also, we are focused on the CPVC side. So our focus toward the agriculture side will be always low. We will never be going to give the priority to the agri sector for our company. But yes, definitely, we cannot say that we are not interested into that business. We are doing that business also, but our focus will remain into the plumbing side. But yes, opportunities are very high into the agri side of the business also for Astral.

And we are also focusing on the growth in that business, adding -- completing the product line. Now we are almost having the same product line. But our priority in agri is to sell at a better price realization, which is happening. And at the same time, we are also gaining growth in that.

Okay. Got it. And have you seen a reluctance in some of your [indiscernible]?

Your voice is not clear, sir. Can you speak a little loudly?

Is this any better?

Yes, yes.

Okay. I was just asking if you've seen reluctance in taking on debt in some of your large distributors.

We cannot understand this.

So what large distributor?

I was just asking if you see reluctance in your large distributors in taking on more debt?

No, I don't think so.

Because of the model mostly.

No, no. If you see the market condition in this pandemic, every channel partner had reduced the receivable days, whether it is a dealer, whether it is a distributor, whether it is a company like Astral. So everyone has reduced the working capital cycle because nobody wants to take a risk in this market. So you can...

What I want to know, if you've seen a large distributor...

Exactly. So I don't think distributor is required to take the extra debt in this market. Anyway, volumes are -- compared to last year is still low. Normally, Astral is known for growth of 15% kind of run rate. So we are still not reaching a 15% kind of run rate. So I don't think any distributor has to borrow much because anyway, he has also reduced the working capital cycle. So it is good for the industry per se.

Next question is from the line of Kunal Lakhan from CLSA.

So I just missed out on the volume growth number for pipes that you gave earlier. Can you just repeat that for me in October?

Volume growth, exact number, I don't have it handy. But it was, I think, compared to like, value, it was 85%, then volume should be somewhere around 68% or 70%.

Okay. 68%, 70% higher?

Yes, yes, yes.

Okay. That's very interesting because like you said -- and you mentioned earlier that we don't expect that to sustain, but the fact that you also mentioned that the metro demand is kind of picking up versus so far, it's been more driven by rural. So how do you see this -- I mean this is going ahead? Like I understand 68% is something that cannot be sustained. But in the mid- to long run, right, say, next 12 months, where do you see this settling down?