Balkrishna Industries Limited (502355) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Balkrishna Industries Q1 FY '21 Earnings Conference Call, hosted by IDFC Securities Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Chirag Jain of IDFC Securities Limited. Thank you, and over to you, sir.

Thank you, Ayesha. Good morning, everyone. On behalf of IDFC Securities, I would like to welcome you all to the first quarter FY '21 earnings conference call of Balkrishna Industries. The company is represented by Mr. Rajiv Poddar, Joint Managing Director; and Mr. B.K. Bansal, Director of Finance. I would like to hand over the call to the management for their initial remarks. And post that, we will open up for Q&A session. Over to you, sir.

Thank you, Chirag. Good morning, everybody. I welcome you all to the earnings call of our company for the first quarter. I'm joined by Mr. Rajiv Poddar, Joint Managing Director; and Shogun from SGA. Let me start with performance updates. Due to COVID-19, operations of the company remained suspended for most part of April 2020. The operations were resumed during the last week of April 2020 when lockdown was partially lifted by the government. After following stringent safety and security measures across all our plants, the company was able to gradually ramp up manufacturing activities in May 2020 and thereafter. The company has now gained normalcy in manufacturing activity as well as dispatches. Despite COVID-19, our Q1 FY '20 number -- has been a good quarter for us. The pickup in sales volume in May and June led to a total sales volume of 38,096 metric tons in Q1. The demand is strong in agriculture segment across geographies, reinforcing our belief on the potential of this segment, as well as the brand positioning of BKT in end market, which is continuously helping us to gain market share. The nonagriculture segment is moving slowly on account of low commodity prices and end-user demand, however we expect gradual economic activity increases across the globe. Our diversified product portfolio, strong presence across the globe, multiple sourcing basis of raw material and a strong balance sheet with no long-term debt makes our company resilient to face any challenges and to maintain competitive edge in the global market. In the current circumstances, we remain confident to maintain this momentum for the rest of the FY '21 and achieve sales volume at a similar level as FY '20. Let me now update you on the CapEx front. Post lifting of lockdown, the work on greenfield tire project at Waluj and other expansion activities at our Bhuj plant are progressing well. The company is trying to complete these projects as per schedule, that is before March 31, 2021, subject to delay of 1 quarter, provided there is no further lockdown or any unforeseen circumstances. With this, I now move on to performance highlights. Our sales volume for the quarter was 38,096 metric tons, showing a degrowth of around 26% Y-o-Y. This degrowth was on account of lower manufacturing activity in April '20 on account of lockdown restrictions. Our stand-alone revenue for the quarter stood at INR 942 crores, which includes realized gain on foreign exchange pertaining sales of INR 13 crores. The stand-alone EBITDA for the quarter was at INR 251 crores with a margin of 26.7%. The EBITDA was impacted on account of lower absorption of fixed cost owing to lower production and sales. Other income for the quarter stood INR 33 crore, which includes net loss on foreign exchange to the tune of INR 8 crore and other income from investment of INR 41 crore. Coming to net ForEx items. For the quarter, we incurred a net ForEx loss of INR 8 crore, which includes realized gain of INR 21 crore and unrealized loss of INR 29 crore. Profit after tax for the quarter was recorded at INR 122 crores, showing a margin of 12.9%. We are a net cash company. Our cash and cash equivalents was INR 1,175 crores, implying a net cash position on the overall side. The Board of Directors has declared an interim dividend of INR 3 per equity share. With this, I conclude my opening remarks and leave the floor open for question-and-answer. Thank you.

[Operator Instructions] The first question is from the line of Ashutosh Tiwari from Equirus.

Congrats on decent numbers. Firstly, I want to understand how is the domestic market shaping up? Because I think from other companies, we're hearing that tractor tire sales were very strong. So for us, in India, how much of the sales come from the tractor segment only? And also, our market share, if you can provide some color? And also in terms of reach, how we are spread as of now? And what is the scope for further expansion?

So firstly, now BKT's reach is pan-India. So we have our network across the country. Our market share would be -- in tractor tires would be roughly about 7%, and there is a potential scope to grow much higher, and we are focusing on that. And if you see, we've been slowly growing over the last 4 years and being able to reach these numbers. And we've got the product established now, we've got the network established, and we are slowly making -- gaining market share every year and growing in this segment.

And we have presented all the SKUs, which are even in domestic market in tractors as of now?

Yes.

And roughly what percent of our domestic sales is purely tractor?

This would be roughly about...

It is around 40% to 45%, I believe.

Okay. And then secondly, if I look at the change in the stock during the quarter, there is INR 53 crore -- I think production was more than sales because there was a INR 53 crores stock buildup. So is it that we produced more in the maybe June month or so and then these prices were impacted? Because generally, in this quarter, we have seen that companies have consumed the stock of last quarter and now there's a change -- there's production higher than the sales.

No. Basically what happens, generally, we produce as per our customer order only. But as I've explained many times that the customer place order for, say, 20 different SKUs and suppose out of 20, only 10 have been produced. So till that remaining 10 are produced, this will remain into inventory and form part of the inventory. So that is how this kind of inventory is built up temporarily in the system.

Okay. Okay. So basically, that production will be converted into sales in this quarter, okay. Okay. I got it.

It always happens like that, yes.

[Operator Instructions] The next question is from the line of Kunal Sharma from Perfect Research.

Sir, please give some color on -- as you said that we will achieve the -- sir, could you please shed some light on that we'll achieve the same level of sales in FY '20 (sic) [ FY '21 ] as we achieved in FY '20, so what are the steps are we taking? Because your global competitor said on con-call that Europe and U.S. are still disruptive market due to the pandemic. And they also saw the same level of the degrowth. And the last one is, sir, our ad and promotion expense contribute 4% to 5% of the sales. So what -- so are we trying to cut the expense for FY '21 because many companies are taking the same step?

So basically, if you -- I'll answer your question in 2 parts. Firstly, on the sales, we are quite confident looking at what we've done in the last quarter and the last 2 months of the last quarter, we are quite confident we'll be able to hit the numbers of last year, and we are working hard towards that. That is where we are projecting and we are trying to get to. As far as the ad spend goes, we are not looking to cut our overall spend. There may be some shift in where we are spending that money. But overall, we will maintain the same percentage of spend in sponsorships and other promoting methods for our brand.

Okay. And sir, could you please share this for the current quarter, ad and promotion as a percentage of sales?

What do you want to know about the current quarter?

Ad and promotion expense as a percentage of sales.

It will be similar to what we've been spending.

It is around -- on an overall basis, so it is in the range of 2% to 3%.

The next question is from the line of Siddharth Bera from Nomura.

Sir, first, on the demand outlook. I mean we have seen a very strong good growth in June numbers for the export market. So can you throw some more color on how July and August are looking up? And I mean I understand that we have maintained our plan, but just wanted to understand now that how are the trends currently -- how much is the pent-up demand -- in case you can throw some more light on that?

So demand is holding up and is good. But being this quarter numbers, we can't discuss on this. But the overall demand looks positive at this side.

Okay. Got it. And how much will be the domestic value growth in the quarter, volume and value growth if you can indicate that?

So domestic was almost flat. You can say there was a marginal degrowth compared to same quarter of the last year.

Okay. On the volume side?

So overall, local volume-wise, yes, volume was, in the last year of the same quarter, 11,316 metric tons and -- which is now 9,402.

Okay. Okay. Sir, lastly, on the Carbon Black side, can you indicate -- we had already commenced our second phase of the plant of 80,000 tons. So how much could we sell to the external markets? And how are we thinking about this for the rest of the year?

So basically, if you see the overall Carbon Black was set up with an idea to control our own supply and manage the inventory, including having a better control over quality. And that was -- so that was the reason why we set it up. It was never set up with an objective to have a high number of sales outside. So we're maintaining that. And some portion of it will continue to be sold outside in the market to -- because you can't have an apple-to-apple quantity being produced.

The next question is from the line of Ronak Sarda from Systematix.

Sir, first question is on the RM and price side, I mean raw material side. I mean are we seeing any -- what's the direction of raw materials over the next few -- I mean, for Q2 and, let's say, Q3, are we seeing some inch up in commodities? And has there been any price action in YTD FY '21?

So in the current year, there has not been any pricing action. Raw material prices directionally have come down. Going forward, it is difficult to predict what would be the scenario. But considering the current scenario, it looks that it will remain in the range only.

Okay. So then maybe this quarter should be flat Q-o-Q maybe versus Q1?

Yes.

Okay. Sure. And sir, what was the production number for the quarter?

41,576.

Okay. And sir, last question. I mean we have seen decent demand. However, if you can just bifurcate that into agri and industrial because I believe industrial should have seen some slowdown? And is that reflected in your ASP and product mix as well? I mean the realizations?

So basically, realization on overall basis has been around -- below INR 247, which is better Q-on-Q and Y-o-Y. And what was your next question?

Sir, the demand momentum which you're highlighting, is this -- I mean is this -- the strength in demand is similar in both agri and industrial tires? Because I think industrial should have seen some impact due to projects being stuck or activities being -- not happening.

So agriculture has been better. But...

Yes, as I said in my...

With mining activities opening up, we are seeing -- we are hopeful that this will also pick up. And also as things start unlocking, construction activities at quarries, everything will start opening up. So we are positive on that. But definitely, agriculture is better at the moment.

Okay. Okay. So I mean, is that already happening? Like we are almost in July, August, now August mid-month now. So are we seeing that pickup happening in industrial as well?

Yes, there is some pickup. And -- but I think as the next phases of unlock open up more, you will see a much better demand coming in there.

The next question is from the line of Hitesh Goel from Kotak Securities.

Can you just give us some operational data, maybe I've missed it, like volume by region, Europe, America, rest of world and India, also agriculture, OTR and also the OEM replacement. So absolute numbers, please, so that we can analyze the results?

Yes. So Europe was 20,000 -- around 21,000.

Yes. America, rest of world, India?

India, I said -- America was around 4,000, 3,500, yes. India 9,400. And...

Yes, that's great. Okay.

The rest of the world...

And agriculture and OTR, sir?

Yes.

Roughly 60% of the share... [Technical Difficulty]

Sorry, sorry, I didn't get that.

Agriculture was around 60% of our volume. That is from agricultural sector, rest came from...

65%. 65% in this quarter, right?

Yes.

Okay. And OTR would be around 32%? And then there is others. That...

OTR mining, construction, industrial all put together would be about 32%, and the smaller tires would -- the other segments would make up the balance.

Sir. Finally, on the OEM and replacement.

OEM and replacement would be roughly...

OEM is around 27% and the replacement would be around 70%.

The next question is from the line of Sanjaya Satapathy from Ampersand Capital Partners.

Congratulation on a decent set of results given the circumstance. First thing that I just wanted to clarify, which I could not really hear properly. In quarter 2 you are looking at recovery, but did I got it -- get it right that you are looking at some flat number year-on-year?

Yes.

Yes. As I said in my opening remarks, that for the current year, we are looking at the similar volume number what we achieved in the last financial year.

Yes, that is for the full year. I'm talking about this July-September quarter. Did you also state that -- because your numbers suggest that you will grow 8%, 9%, in this...

No, no. So sorry, we do not talk on quarter-on-quarter basis. And particularly for the current quarter, we cannot talk anything. So we generally give full year guidance, and -- which is maintained.

Understood. Understood. And sir, can you share with us the market share that you have in agri products in different geographies like U.S.A. and Europe because you have mentioned that your market share in the North America region is particularly lower, and you are trying to kind of improve it. And we're trying to assess like what could have been the reason for your lesser market share in that region? And what are you doing about it?

Bansal ji, you are sharing something or should I?

No. Yes, you can go ahead. You can go ahead.

So basically, on the agricultural side, in Europe, our share would be in double digits. It would be in the -- about between 12% to 15%. In Americas, it would be around 7% to 10%.

Okay. So not -- only just about 200, 300 basis point difference.

Yes.

Okay. Okay. When you were talking about increasing the share there substantially, are you talking about agriculture? Or you were talking about everything? And where, really, it can go to? Because your overall acquisition of global market share rising from 5% to 10%, that must mean a substantial increase in market share in these 2 regions, right, where you are already at 10%, 12%?

So if you see that what we talk about a 10% growth is -- market share is for the private tire industry as a whole, not just agriculture. So agriculture, we are getting there in most of the geographies. But other industrial, mining segments, which are -- construction segments, which are larger in terms of value and volume, both weight wise, so in those, we need to get there, and we will -- that's why we aspire to grow in those segments in these geographies and hit our number of -- vision of 10% market share.

[Operator Instructions] The next question is from the line of Shashank Kanodia from ICICI Securities.

Congratulations for a resilient performance. Just wanted to check, sir, time and again, there are some news item mentioning about restriction being placed on imported rubber. So one of the key USPs of our business model is we have been able to import duty-free because of high share of exports. So if it were to happen, how would it impact our business model? And is it practically possible for India to place a restriction on rubber imports?

So basically, there are no restriction as of now. As of now, we are getting rubber on a duty-free basis. And I think this will -- this may happen. And if it happens, it happens with a very little amount of duty. So that is also exempted under Advance License Scheme, which we are enjoying. So I can say, that it should not have any negative impact on our business.

Okay. Okay. Okay. Secondly, sir, last sort of -- CapEx will be behind us in this financial year, right? So we'll generate substantial amount of FCF next year. So do you intend to maintain the same dividend payout? Can we see an increase in dividend payout side, going forward for next year?

I think that we'll let the Board -- we'll take a call. So I think we'll wait and watch what happens on that. It's difficult to give an answer today on that.

The next question is from the line of Mayur Milak from BOB Capital.

So just wanted to understand, we've been hearing that there could be some impact of demand on the Chinese, with the COVID thing going on. So just wanted to understand, would we have any kind of flavor where we believe that our share has gone up because of the Chinese slowdown in Europe, or you believe that the overall market has been expanding, and we've expanded in line with the market demand?

So we have definitely taken some market share gain as well in the last quarter also. But -- so there is both the factors. There is definitely some strong demand and -- as well as we've taken market share. So we have grown at a rate higher than the market has grown, but it will be difficult to attribute it to any particular point. That why we've gone ahead, there are multiple factors, so -- which have impacted our growth in the market share gain.

Right. Could you give a ballpark, maybe just some kind of difference as in what could be the gain in terms of -- so what I'm trying to understand here is that are we looking at an incremental gain because this is here to stay, from the demand perspective? Or we are riding the benefit of the Chinese slowdown?

So as I mentioned, it's both. So definitely, we are riding on strong demand as well as we are gaining market share from our competitors because our quality is better accepted, people are using it more and more and the brand -- the branding that we've been doing, the brand awareness has been growing. So the brand recollect is there. So all these things are attributing to our gaining market share over our competitors also.

Right. And you believe that this gain of market share could definitely be sustainable with the kind of branding exercise and quality acceptance that you've achieved?

Yes. So definitely sustainable.

The next question is from the line of Abhishek Jain from Dolat Capital.

Congrats for decent set of numbers. Sir, what is the current channel inventory in volume and days terms? If there was any growth in target volume for the last quarter, which was not booked in the first quarter and that will be booked in the second quarter? As the production is looking higher than the dispatches, and probably you would have a past inventory as well.

Sorry, I could not hear your question. Could you repeat that again? Because your line was muffled.

Sir, my first question is that what is the current channel inventory in volume and days terms? And second question is that if there was any goods in transit volume for the last quarter, which was not booked in first quarter as production is looking higher than the dispatches and probably would be past inventory as well.

There is no change in the channel inventory. And yes, there is some overlap between, as Mr. Bansal clarified, that some items are produced but not necessarily shipped in that quarter due to the order completion not being there. So you will see some benefit of that coming up in this quarter, but we have to wait and watch for the numbers to come up.

So what is the current channel inventory in the U.S. and Europe versus the normal...

That would be around -- yes, that is around 3 months.

So, it's 3 months. And what is the normal...

Generally, they maintain inventory according to the procurement cycle. So it ranges between 2 to 3 months.

Okay. My second question is that -- related with the Carbon Black plant. What is the current utilization level of Carbon Black plant? And how much was -- is the captive use?

Sorry, what was your first question on the Carbon Black? Your line is very muffled.

So what was the utilization level of Carbon Black plant in first quarter? And how much was captive use?

So Carbon plant, we are using optimize -- it is running on optimal levels. That's being done. And we've -- that's been running on optimal levels. And roughly about 15% is what we are selling in the marketplace.

Okay. And what is your medium-term target for the volume in the domestic front, sir? Can you give...

On the -- I'm assuming this question is for tire.

Yes, yes.

So yes, on the tire, as we said, that we see India has a growth potential to grow this substantially to numbers higher than last year. And roughly our -- currently, we are -- about 20%, 22% of our sales is coming from India, and we're looking to grow this further.

[Operator Instructions] The next question is from the line of Rajesh Kothari from AlfAccurate Advisors.

Congratulations for a great set of numbers. Just wanted to know, when I look at the global players' conference calls and presentations, they talk about channel inventory issues, and they are expecting further reduction in inventory by the channel partners and also the reduced demand outlook, both in North America as well as Western Europe. In that environment, is it possible for you to give some more insights into why we are looking for a better demand growth outlook from the market perspective?

Rajiv ji, can you answer this?

Yes. Sorry. So basically, there is a lot of factors which will come in. So there is -- the overall...

Sorry to interrupt. Your audio is echoing. Are you [ with your phone ] right now, Mr. Poddar? [Technical Difficulty]

Bansal ji, can you answer? I'll just reconnect.

Yes, sir.

Sir, you can go ahead now.

Yes. So basically, if you go to see where the demand, we are seeing that currently, the numbers -- the demand on the agri side is quite strong. And we don't know about our competitors. But for us, we are seeing a good traction in the agriculture side. And on that, we are -- on those basis -- and as we said, we're gaining market share, so we are pushing for -- trying hard to achieve the same levels as last year, and that's where we maintain at this stage.

Got it. So is it -- since you are gaining market share, is it possible for you to give -- what is the growth of the industry, in which you are operating compared to your growth?

So industry is basically growing at a CAGR of around 4% to 5%.

The next question is from the line of Bharat Shah from ASK Investment Managers.

You mentioned that current year sales will match the last year. And in the first quarter, we have done about 38,000 tons. Therefore, it will imply we have to do an average of roughly 55,000 per quarter for the remaining 3 quarters. Is that math holding up?

Yes. As of now, we are quite we are quite confident to hit that number -- come close or hit that number.

And second question, one of the earlier participants asked, but there was so much of background chaos. I couldn't hear the answer properly. What is the breakup of the turnover geographically and end-user industry wise that you've narrated?

Yes. So geography-wise Europe is around 55%. America is around 10%, 12%. India is around 24%, 25%, and balance is rest of the world.

Okay. And end-user wise?

And as far as end-user wise, so replacement is around 70% and OEM is around 27%.

Yes, I heard that. Then on the user industry breakup?

Yes. So agriculture is around 65% and OTR is around 35%.

Sorry, agri is 65% and?

OTR is 35%.

OTR is 35%. Construction and mining, yes.

The next question is from the line of Sunil Shah from Turtle Star Portfolio.

Sir, I have one question. Since last 2 years, we have been hearing that monsoons in Europe actually are not in favor, and that end of the year results in our volume is not picking up to our expectations. Sir, what is the situation this year because we're almost in mid of August, if you could give us some sense on that side, so that we are not in for some kind of negative surprises later on.

So far, the year that the monsoons, et cetera, in Europe are okay. So we don't think that should be any bad spell there or negative use there. So we are keeping a close watch on that.

Okay. Sir, my one more question was on the margin side. FY '22, we had a 28% margin. And in this first quarter, also, our margins are very healthy despite low volumes. So is this a fair assumption that given our Carbon Black and various other things, activities that you've taken up in the company, 28% should be a base margin for us from this level going forward? EBITDA margin is what I'm talking about.

Yes. So EBITDA, we have been always saying that the margin range for the near term, that is for the current year and next year, there's a good visibility of around 28% to 30%.

Okay. So despite flattish volumes, given the margins, we'll have better numbers at the bottom line for sure. That's what it looks.

Yes. Yes.

The next question is from the line of Viraj Kacharia from Securities Investment Management.

Just have 2 questions. First one, you talked about seeing degrowth of 20%, 25% in Q1 in India business. So if you could just talk about something, how is the trend in July, August so far? And for us, when we say we are in market share, is it largely a function of us able to deal with the supply chain or production better than the competition? Or just kind of some other element? There are 2 questions.

So basically on the India part, yes, the number is lower than last year. That is because, as Mr. Bansal said in his opening remarks, that practically, India was under lockdown for a significant portion of the quarter. 3 weeks was a national lockdown, then we had other phases of lockdown before unlock started. So that impacted the results. June -- July, August time, we cannot discuss about the quarter numbers for the current quarter because it's ongoing. However, things are looking positive. And we are quite confident of India reaching growth numbers. So that's what I can comment on for this quarter. As far as your second question goes about the -- whether we were able to supply and manage our supply chain better. So yes, we were able to take care of that and ramp up quickly once government approvals came in, and so we were definitely able to do that. But it was a mix of a lot of things, which attributed to this. Of course, supply chain contributed to that, but better ranked brand recollect, better brand recognition due to the achievement of spend that we are doing. And also the quality acceptance, which was there, is being reinforced. So all these things put together has impacted the better numbers for us.

In India business, who have you been gaining share from? And again, on the India business, you talked about distribution expansion, SKU. So are we done with that in terms of whatever gaps we had in the portfolio or in terms of distribution? Or that is still a lever for in coming years?

So in India, the demand itself has been strong. And it's -- generally, we've been growing because we had a small base. So that's why the -- we're growing our base and fulfilling the pan-India network, which was missing. So now, as I mentioned earlier that now our network is spread across India, which about a year back was spread to about 80% -- 75%, 80% of India. So these things are helping us fill the gap and, of course, the demand itself in India strongly is growing. So both these factors are contributing to India's growth.

The next question is from the line of Dhaval Shah of Girik Capital.

Sir, my question is on the Carbon Black project. Can you just briefly explain what sort of payback period do we -- are we looking at in this project on the investments what we have made? And yes, this is the question.

So basically, yes, you should not look at this project from the payback point of view. The main objective to set up this project was to ensure uninterrupted supply of good quality Carbon Black because in the past, we had faced a lot of problem in sourcing of it. So that has been the main objective. And the benefit of it from the third-party sales will automatically accrue to us according to the market condition.

Also just to add on to that, it also gives us a lot more control over the quality of the raw material that we're using. So it was a strategic call as opposed to a financial call. That's what we are trying to imply.

Got it, sir. And sir, your input-output ratio in Carbon Black in the tire manufacturing process will be roughly 30%?

Around 27%.

Around 27%. Okay. And sir, currently, our achievable capacity is 3 lakh. Am I correct?

Correct, in tire business, yes.

In tires. And we are expanding by another 5,000 tons at Bhuj?

Yes.

Yes.

The next question is from the line of Lokesh Manik from Vallum Capital.

My question was -- one is on the outlook on the global mining industry. So pre-COVID situation, we saw revival -- we were seeing signs of revival after a long period of time. So what is your reading currently? I mean what feedback you're getting from the customer? Are they seeing the situation as temporary or they are assuming the damage to continue into FY '21 as well, based on the inventory stocking levels from them? Similar situation experienced in agri in Europe last year. So just your reading of this situation in the mining industry.

So basically, what sense we're getting is that there is yet a lot of uncertainty in the market and in the marketplace, people are not willing to commit on the long-term because a lot of things are yet open as to when the vaccination, if it ever comes out, the medication comes out -- when that comes up, will things go back to normal, not go back to normal. So it will be difficult to predict or give a definitive answer from the end user as well. But yes, what people are saying is that when the whole world has sort of locked out, those things are starting to unlock and the demand, which have come to practically essential, is coming back. Now we see the numbers to be -- overall be flat for this year, and that's what we are maintaining, that we will be close to last year's numbers, we will be at those levels. And those are the basis that people are expecting market to come back to those levels and be there. So that's the basis that we are talking about.

Understood. Sir, my second question is, so our realization is pretty volatile. We are at INR 247 a kg today. Same quarter last year would be INR 220, if I'm not mistaken. So when we are looking at profitability and -- how do we set our realization then? And do we look at profitability on a margin basis or a per ton basis? Either gross profit or EBITDA.

Yes. So first, let me correct, the last year realization for the same quarter was INR 237, not INR 222, which now stands at INR 247. I think going forward, for the -- at least for the current financial year, we can look at the similar kind of realization, based on the currency conversion, et cetera and assuming that there is no pricing action.

Sir, but do we look at it from a margin basis or a per ton basis, EBITDA or gross profit? When you are setting prices.

It is not -- yes, actually, it is not a sellers market. So we cannot dictate all the things or we cannot benchmark those things. Yes, we always try to achieve the best out of everything. We lock currency, we try to cover up our raw material cost, and we try to control our other costs so that the end result is better.

Understood. So, you have to sell at whatever price you are getting and then backward, you can -- okay, understood.

Yes, yes.

The next question is from the line of Sabyasachi Mukerji from Centrum PMS.

I just had one question. So we are actually hearing from a lot of OEs as well as ancillaries in the automobile segment that they are facing supply side constraints. Even if we hear the tractor OEMs, they are actually saying that demand is robust, farm demand is robust, but they are facing supply side constraints. So on that thing, are we facing any similar constraints or is it absolutely fine for us?

So we have a good amount of supply side for the raw material engine. So we don't have a concern on that. As far as the demand goes, we are trying to manage our supply to them and trying to improve -- build that up constantly and send it out to them.

So overall, there are no logistic issues from the dispatch point of view and from the sourcing point of view. And we are somehow able to get their services in time. So I can say that our operations are, by and large, smooth.

Great to hear. And the similar thing is observed in European or maybe the U.S. geography where you're not facing any kind of logistical issue. Is that a fair assessment?

Yes, you can -- yes. That is why we are able to make this kind of dispatches.

The next question is from the line of Ajit Motwani from Pinpoint Asset Management.

So my question is, if I look at our realizations, they have improved and our costs have also improved. But our margins have not improved because the volumes have -- are not really higher. So is the competitive scenario decent enough or benign enough for us to capture this increase in gross margin to our EBITDA margin in the near future?

See, gross margin is already at a very healthy level. Current quarter -- if I see the current quarter, it is around 60%. And most of the things have already been priced into it. So I don't see any significant scope of improvement over there. But as the volume increases, the other cost elements will come down and -- which will improve the margin.

So on this other cost, if I look at your volumes are about 38,000 today, and correspondingly, our other expenses are about INR 250 crores, INR 260-odd crores similar to 2Q levels, 2Q FY '20 levels where we had done 45,000, and our other expenses were also similar, INR 260-odd crores. So is there some spend that we have not been able to curtail and hence, there is some scope there to save off? Would you elaborate on that?

Yes, I understood your question. So basically, most of our cost is variable in nature. Even within the other expenditures, there are a lot of variable expenditures which are clubbed, like freight cost, sales and distribution costs, stores, et cetera. And around 10% is our fixed cost element at EBITDA level. So that is more or less constant, and that is amortized over a larger base once the overall volume increases.

So in that case, there is no pricing pressure then for us as of now. So we can...

Yes.

We could be able to capture this gross margin expansion going ahead.

Right. Yes.

The next question is from the line of Navin Matta from Mahindra Manulife Investment Management.

Sir, I just wanted to check what was your currency realization for the quarter?

It's around INR 84.

Okay. And given that spot is higher, do we expect this to move up further? Or how are ours hedges placed currently?

Yes. So as you know, we are hedging continuously. So the current level would be captured in the next financial year.

Okay. So for FY '21, we should be around this INR 84 level?

INR 84 to INR 85, yes.

Okay. And then secondly, I just wanted to know if in our gross margins, are they reflecting the entire benefit of the softening in commodity prices?

Yes, more or less reflecting.

Okay. And I missed your comment on the fixed costs, which you were explaining to the previous participant. So basically, just looking at your other expenses, the drop year-on-year is not very significant. So I just wanted to know in terms of direction, is there scope there for an improvement?

See, the absolute number -- I mean the overall number will remain same because the variable cost will increase in proportion, and other costs would remain same. And we are that way, very cost-efficient company. So there is no much scope of any kind of significant cost improvement. Having said that, we always make endeavor to keep our cost under control and try to improve it further to the extent possible.

The next question is from the line of [ Varun Arora ] from [ Safe Enterprises. ]

Congrats on good numbers. Sir, my question is related to the EBITDA margin guidance. Did you say 28% to 30%, that's looking ahead? I mean that's the medium term guidance?

Yes, at least for the current financial year.

Sure. And sir, just on this guidance, are you being on the conservative side? The reason I'm asking this question is because if -- I feel like in FY '17 and FY '18 period, we were doing margins of around 29% to 31%. And since then, we've moved to a more efficient plant, we've got the Carbon Black, so that Carbon Black in itself should give 1% extra margin and there is efficiency of better plant, which -- also like operating leverage should also kick in. So just trying to see if we are being on the conservative side as far as margins are concerned? I guess raw materials are also at the similar levels.

Yes. So I understood. Basically, what we are saying is the directional view about the margin. Having said that, it does not mean that it will be remaining under this range only. If there is a scope, it will -- it can improve also.

Right. And any levers, sir, which kind -- like I mean you mentioned some of the levers, which should kind of push the margins higher, but any levers, which is kind of pushing it down? Has anything changed, I mean what is different compared to back then, which should put pressure in margin, is there any lever?

No, no. I don't think there are any such levers which can put any kind of pressure, at least in the short term. Raw material prices are also range bound, ASP is better, so that way, visibility is good. But the overall environment is so dynamic that it is difficult to take long-term call.

Sure. But -- so under the current environment, would you say, I mean, like ignoring the first quarter because it was impacted, but I mean, we are on track to do 30% plus EBITDA margin, at least 30% plus?

I mean it's difficult to say exact number. But definitely, I can say that the margin in the subsequent quarter will be better than first quarter.

The next question is from the line of Bhaskar Bukrediwala from ASK Investments.

Sir, just wanted to understand, you have been talking about taking a lot of initiatives in the mining sector, particularly in U.S. and other markets. So how has been the traction for you in terms of -- if you could give us a sense, even qualitatively, are you being able to make inroads, have you been able to get some bit of additional market share from where you were, that would be helpful, sir.

Yes. So on the mining side, yes, our efforts have been getting us to good inroads, and we've been able to gain more entry point in the mining sector and all. And our products are now running, and they're giving good results. So there's a good traction coming back. Repeat orders are coming back. So we are definitely increasing our market share. And for us, the market in this segment also is looking up now, and we'll continue to grow. So our bets, what we were planning to do in the segment is working now. So you should see results coming.

Sir, just 2 small follow-up. What would be your current market share in the mining sector? And if you could give us a sense what is your -- what do you think that you would be able to achieve, let's say, in the next 3 to 4 years from where you are?

So currently, we are at about roughly 2% to 3% in this. And we envisage to go to about 5% to 6% in the next 2 to 3 years, in the mining sector, I'm talking about particularly.

The next question is from the line of Jeetendra Khatri from Quantum Advisors Private Limited. [Operator Instructions] The next question is from the line of Bharat Gianani from Sharekhan.

Congrats on a good set of number in such a challenging scenario. Sir, my first question is the currency hedges. What was the euro rate that we realized in FY '20, sir?

FY '20, it was around INR 78, INR 79.

Okay. Okay. Okay. And sir, Carbon Black -- coming on the Carbon Black plant, what's the current, like, we have -- we had initiated Phase II as well. So can you give us an update on the production? What was the production of Carbon Black? Or what you have reached in terms of metric tons as of now, combining first phase and second phase?

So basically, both the phases went, as we've said, is we -- there was a project in March and commissioned it. And both those phases put together combine to 140, and we're running both of them at optimal levels.

Okay. So current production would have reached like 1 -- I mean, what's the current production level, sir, on an annualized basis?

It would -- on annualized basis, it could be around 110 to 115 because 140 is the installed capacity and achievable is 120. So we should be close to about 110 to 118 because we could ramp it up slowly. So we lost the first month in that.

Okay. Okay. And sir, you said in the earlier -- I think that out of this, 15% is sold outside, right?

Yes, 15% to 18%, yes.

That was the last question. I will request the management to please add any closing comments.

I would thank you, everyone, for taking out their time and joining our call, and urge everyone to take care of themselves and be safe. Thank you.

Thank you.

Thank you. On behalf of IDFC Securities, that concludes today's conference call. Thank you for joining us, and you may now disconnect your lines.