Balkrishna Industries Limited (502355) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '21 Earnings Conference Call of Balkrishna Industries Limited, hosted by IIFL Capital 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. Joseph George from IIFL Capital Limited. Thank you, and over to you, sir.

Thank you, Margaret. Good morning, everyone. On behalf of IIFL, I welcome you all to the 3Q FY '21 results conference call of Balkrishna Industries. I also welcome the management of Balkrishna Industries to this call. I request Mr. Rajiv Poddar, Joint Managing Director, to make the opening remarks. Management remarks will be followed by Q&A. Over to you, sir.

Thank you, Joseph. Good morning, everyone. I welcome you all to the Q3 financial year '21 earnings call of Balkrishna Industries Limited. Hope all of you, along with your near and dear ones, are safe and healthy. Along with me, I have Mr. Bajaj, President, Commercial, and CFO; and SGA, our investor relationship advisers. Let me begin with performance updates. The demand continues to be strong in agricultural segment across geographies. In other segments, demand has remained more or less stable post the recovery in the end markets of industrial, construction and mining segments. With 9 months for the financial year '21, volumes of 159,130 metric tons, we are increasing our guidance for the financial year '21 and expect to end financial year '21 with sales volume between 215,000 to 220,000 metric tons per annum. We strongly believe that this demand trend is likely to continue in financial year '22 and years to come. It is, therefore, important for us to plan our CapEx now so that we do not face capacity constraints from financial year '23 onwards. Before I talk about our new CapEx plan, I will quickly give a snapshot on the status of the ongoing CapEx. First, ultra large giant tire plant at Bhuj. Project for 51- and 57-inch ultra large giant all-steel radial tire plant of 5,000 tonnes per annum has completed. The tires are under various tests -- stages of testing. Second, carbon black second phase at Bhuj. The trial production was commenced in March 2020. This was ahead of its schedule. With this, our total achievable capacity stood at 115,000 metric tons per annum. Post-lockdown, the plant has been running at full capacity as third-party sales has also commenced, and there is strong acceptance on the quality of our product. Third, greenfield tire plant at Waluj. The replacement tire project for 30,000 metric tons per annum is likely to commence in quarter 1 of financial '22. We expect gradual ramp-up in the quarters to come. Fourth, U.S. project. The Board of Directors has decided to shelve the said project. With this, let me now talk about the new CapEx plan of INR 1,900 crore, which the Board has already approved yesterday. Firstly, there is a CapEx of up to INR INR 800 crore for a tire plant. CapEx spend towards debottlenecking and brownfield expansion, along with addition of balancing and ancillary equipment at Bhuj, the expansion will add a capacity of 50,000 metric tons per annum. This CapEx is envisaged to be completed during half year of '23 -- financial year '23. The completion of the CapEx will result in our total achievable capacity for tire plant to reach 335,000 metric tons per annum. The payback period for this CapEx is envisaged to be around 4 years. Second, a CapEx of up to INR 650 crores for carbon black and captive power plant. The response to our carbon black product has been very good, and we've been successfully adding many customers. Our current achievable capacity is 115,000 metric tons per annum of carbon black. With the success of this project, we are increasing our carbon black capacity at Bhuj to 200,000 metric ton per annum, which also includes 30,000 metric tons per annum of high-value advanced carbon material targeted for third-party sales with state-of-the-art machinery and power plant. The power plant will be at full capacity of approximately 20 megawatts and is required to meet the increased tire CapEx as well as the new carbon black CapEx. In addition to this, the carbon black facility will also allow us to complete our full internal sourcing even on the enhanced capacities in future for our tire manufacturing, leading to better control over supply chain and improving the quality of our tires. The total CapEx spend is envisaged at INR 650 crores and will be completed in the first half of financial year '23. We expect a payback of around 5 to 6 years on this investment. Third, CapEx of about up to INR 450 crores for modernization, automation and technology upgradation of equipment and material handling. The CapEx will be spent over modernization, automation, technology upgradation of certain existing equipment, better automated material handling systems, shift of certain manual processes to automation, et cetera. This will be done at the existing facilities at Bhuj and particularly at Rajasthan, where we established 2 of our plants in 2001 and 2006. There will be no capacity enhancement but improvement in quality and efficiency. This CapEx will be completed by first half of '23 -- the financial year '23. This CapEx will improve our margin profile and, accordingly, we expect a payback of around 5 to 6 years on this investment. We envisage the entire CapEx of around INR 1,900 crores to be funded by internal accruals and some debt if needed. With this, I now move on to operational highlights. Our sales volume for the quarter was 59,810 metric tons, a growth of 26% year-on-year. For the 9 months of this financial year, the sales volume stood at 159,310 metric tons, a growth of 11% year-on-year. Our stand-alone revenue for the quarter stood at INR 1,497 crore, which includes realized loss on foreign exchange pertaining to sales of INR 8 crores. For the 9 months of the financial year, the revenue stood at 3,990 crore INR, which includes a ForEx exchange loss pertaining to sales of INR 22 crores. In the 9 months of this financial year, 49% of the sales has come from Europe, 23% has come from India, 15% from Americas and the balance from rest of the world. In terms of channel contribution, 71% was contributed from replacement segment in this 9 months of this year, while OEM contributed to 25% of the sales, with the balance coming from offtake. In terms of category, agriculture contributed to 64% and OTR contributed to 33%. The balance came from the other segments. This is for 9 months of this financial year. The stand-alone EBITDA for the quarter stood at INR 477 crore with a margin of 31.9%; while for the 9 months of this year, the EBITDA stood at INR 1,256 crore with a margin of 31.5%. Other income for the quarter stood at INR 51 crore, which includes unrealized gain of INR 15 crores and other income from investments of INR 36 crores. For 9 months financial year '21, other income stood at INR 91 crore, which includes unrealized loss of INR 5 crores and other income from investments of INR 90 crores. Coming to the net ForEx items. For the quarter, we incurred a net ForEx gain of INR 15 crores, which includes realized gain of INR 60 lakh and unrealized gain of INR 14.5 crores. For the 9 months in this financial year, we incurred a net ForEx gain of INR 3 crores, which includes realized gain of INR 8 crores and unrealized loss of up to INR 5 crores. Profit after tax stood for the quarter was recorded at INR 322 crore with a margin of 21.5%, while for the 9 months in this financial year, it stood at INR 783 crore with a margin of INR 19.6 crores. Our gross debt stood at INR 842 crores, and our cash and cash equivalents were at INR 423 crores (sic) [ INR 1,423 crores ], implying a net cash position. The Board of Directors have declared a third interim dividend of INR 5 per equity in addition to the INR 7 per equity share it had paid in the first half of the financial year. With this, I conclude my opening remarks and leave the floor open to questions.

[Operator Instructions] The first question is from the line of Siddhartha Bera from Nomura.

Congrats for a very good set of numbers. My first question is on the CapEx side. So just first wanted to understand your thoughts on the carbon black project. We already had some extra supply available for selling to external parties and now we have expanded it further. So first question, how are we thinking about this? Is it that we will now continue to pursue this as a business model? Or how to [ think ] in terms of the future ramp-up? And second, again, on the tech CapEx also, how -- if you can quantify how much benefit can we see on the margin side from this? And any more investments we can expect of this sort if we may?

Sorry, your second question we could not -- I could not hear.

So basically, on this tech CapEx, how much benefit on the margin side can we sustainably get after we had done with the CapEx? And going ahead also, if you can directionally let us know that if any more such CapEx will be required also?

Sure. So I'll answer your first question. On the carbon black side, we have been seeing a good demand from -- for carbon black. Our customers have been accepting our quality very well. So we've decided to enhance our capacity to further fulfill the market. Thirdly, also with BKT enhancing its own production lines and looking at some future requirement, we would need to set up our own line of carbon black. Thereby, we've looked at getting the full thing completed. And also for the payback period, it's been relatively good. We are looking at about 5- to 6-year payback in carbon black. So we are looking to fulfill this line. Regarding the tire plant, on your second question, the payback is about 4 years.

So I was, actually, sir, talking on the technology upgradation which we are doing for INR 450 crores?

INR 450 crores. So basically, on that, we are expecting a payback of about 5 years. Basically, you will have more -- you will have improved quality, so that will be able to allow you to produce higher-quality tires, better tires, better end-use results. And there will be savings on automation, which will be -- brought in manpower reduction. Manual process is being shifted to automation. So it will have savings over the years, and we are envisaging a payback of 5 years.

Okay. Okay. Is it possible to quantify what will be the amount of higher margins or better margins we can get from this?

So I think we are, I mean, working on the -- it may not be always easy to justify it in terms of margin because it will have quality impact also. So your tire is improving, you will be able to produce higher-category tires, higher demand tire -- high-technology tires. So those kind of things will happen. We are yet working out on the exact numbers; we envisage it to be a 5-year payback period for us.

Okay. Okay. On this carbon black, so after this, do we think that it can be expanded further depending on -- if there is a strong demand for our products in the market?

At this moment, we are looking at these numbers. Once this is done, once it is out rolling and we reach capacity, we can -- we will be open to seeing what can be done or not, but it's too early to take a call in the future -- such -- so much of future now.

[Operator Instructions] The next question is from the line of Nitin Arora from Axis Mutual Fund.

Sorry, sir, just one clarification needed here. When you said your -- let me put it this way. When your core CapEx has a payback period of 4 years and your maintenance CapEx or, let's say, the technology upgradation CapEx is taking payback of 5 years and when you did already a CapEx 2 years back, what is that technology which suddenly has changed? Are you putting robots in the plant? What has changed which is giving you such high CapEx, sir? If you can elaborate.

So yes, there are 2 or 3 things that we are doing. One, as the markets are moving more towards radialization and higher -- higher technology and radialization, so those are the equipment upgradation that we are doing. On the other aspect of automation we are doing for material movement and material handling systems, we are looking at automation to enhance -- to reduce the touch points of -- manual touch points over there. So those are the kind of work that we are proposing to do. We may not particularly be looking at robots, but we may be looking at some sort of material movement systems, which will help us reduce manual touch points.

But, sir, material handling itself is an automated machine, right? So manual touch points in any which way is -- because it's a machine, right?

Yes.

So manual touch points in any which way would be very less.

Yes. So that's -- we don't have that -- I mean we don't have such high-tech material movement systems in our plants, and that is what we are looking at doing, which will reduce these touch points as we install these. That's what I'm trying to get to.

Okay. All right. And sir, second, in terms of market share, can you elaborate a little bit? Both in U.S. and Europe, how market share has moved and how you are looking at least for the next 1 year in terms of market share?

So our market share continues to be in the vicinity of 5% to -- between 5% to 6% that we've been looking at. And gradually, as our capacities are increasing, we are -- acceptance is going up and brand is becoming stronger. We look to take this up further. And as our vision is to become a 10% market share holder in the marketplace, so we are working towards that. But currently, we are between 5% and 6%.

The next question is from the line of Vimal Gohil from Union AMC.

Sir, just on the carbon black plant, what would be the incremental carbon black volume available to us for third-party sales post the completion of the new plant that you have envisaged?

So we are going to be roughly about -- between 25% and 30% of the total capacity would be available for third-party sales.

Right. Right. And sir, the profitability of carbon black would be somewhere near to company average?

So it will be -- not so much as the company average, it will be lower. It will be between 15% to 16%, which is the industry average -- for carbon black is the industry average.

So is it at the gross -- the turnover -- so fixed asset turnover of this business maybe is probably lower than company average, which will probably make it ROCE-neutral for us?

Yes, it will. But also, you have to see that for 80% of the -- between 75% and 80% of the materials is for self-consumption. So that way, you will get the benefit because you will have other advantages of being near to having your own plant in terms of quality, in terms of -- which is the reason why we actually put this up.

So the point where I'm coming from is maybe -- the reason why you are going for third-party sales, if that is ROCE-neutral at least or maybe ROCE-accretive, only then will it make sense to go for third-party sales.

Yes. So it is going to be neutral.

Okay. Okay. Fair enough. And sir, this INR 1,900 crores CapEx, apart from -- until '23. So what would be our maintenance CapEx over and above this? Or does this include the maintenance CapEx as well?

No, maintenance CapEx will be over and above that. I think that range is in -- the normal range is INR 100 crores to -- between about INR 100 crores or INR 200 crores, which will continue, per year, yes.

The next question is from the line of Nikunj Gala from Principal AMC.

My first question is on Bhuj expansion. So when we did our greenfield at Bhuj, 140,000 of effective capacity, we incurred approximately INR 2,800 crores of CapEx, which is coming out to be INR 2 lakh CapEx per tonne. And now when we are doing the brownfield expansion of 50,000 tonnes and again incurring INR 1,800 crores, so which is like 160,000 CapEx per tonne. So ideally, these brownfields should have come at a lower rate than what we are doing right now? So just want a clarity on that.

So I think a very valid question. We've also looked at that -- why it is so high because the new plant will have already incorporated some of the automation, modernization that we are doing in the older plants. So those will be incorporated in the new plant from day 1 itself. The machinery will be more automated. So reducing the impact of manual touch points, reducing the impact and reliance on man and quality improvement will be there. So those things, which we are doing now, is already going to be incorporated in the brownfield project. So it may be a brownfield, but a lot of those upgraded parts will come. So if I looked at incorporating that in the -- way back in the greenfield, the cost would have been high compared to what we spent.

And secondly, sir, on the carbon black front, when you are saying your effective capacity would be 200,000 tonnes and you're saying only 25% to 30% will be for the third-party sales, which is like 60,000. So 140,000, you will be using for internal purpose, which is like 140,000 when you are using for carbon black for internal consumption, your production should be at 560,000, which is like way longer than when it can be achieved. So for the immediate period, say, for the next 2 to 3 years, your capacity, when this plant comes up, you have the very high additional capacity for the third-party sales, right?

No. So basically, if you see that from 2 lakh or 200,000 tonnes, you remove the 30,000, which is your advanced carbon black, so from the 170,000, then you look at 30% and then you look at BKT's consumption. So you will get the math then. So if you remove 30,000, so if you look at it from 170,000, if I reduce 30,000, so you're looking at 120,000 approximately.

Sir, just wanted to understand the rationale, like, what is the urgency of doing it -- getting into the carbon black. Our requirement is very limited in that case because getting into the ROCE dilutive, where you can generate a better ROCE in your tire itself. Sir, just wanted to understand some of the rationale for getting into the more ROCE-dilutive business?

So basically, if you look at it -- I'll answer your question in 2 parts. Firstly, we are not doing expansion of carbon black at the cost of tire plant or our core business, which is tire, which will always remain the core. What we are saying is that there is a strong demand. Our customers are accepting our quality well. So we are looking at this -- we put it up and said, keep it ready, so tomorrow when the tire plant expansions come in, maybe 5 years, 6 years, 7 years down the line, at that stage, you're not looking to go out and source against carbon black from the third market or something. So we are looking to create that capacity today. Anyway, we would have to do a power plant also for the new brownfield project. So it sort of co-integrates itself because you are -- for the power plant -- power would be required. For that, you need power plant. For the power plant, you need some fuel. So then you do the -- burn the fuel and generate carbon black. That was the whole -- that's how the whole thing goes in. And at the moment, yes, we will look at -- if there is a market available for it, why not look at that and continue. So you're getting the benefit to create your own capacities for future. And at the same time, if you're able to service the market and do it, why not? And that's the whole circus over there? And also, carbon black cannot be done in stages of 10,000, 20,000, 30,000. It needs to be done of a certain size to give the economies. So then you've got to do it at some stage. So we said we might as well take it all together and create the reason for the power plant to be beneficial and use for the power to be used for the tire plant. So it creates a circle very well for us.

The next question is from the line of Gaurav Khandelwal from Mirae Asset.

Thanks, Rajiv, for the opportunity. So Rajiv, is there a difference between achievable capacity and vacant capacity of carbon black plant? Because the reason I'm asking this question is because in the earlier interaction with management, I think you people have guided that the Phase 1 carbon black is 60,000 tonnes and Phase 2 is 80,000 tonnes. So we were under the impression that the total carbon black capacity is 140,000 tonnes.

Yes. So that is correct. That is the rated capacity of the equipment installed. But what I'm talking now is the achievable capacity. So achievable capacity would be about 115,000 capacity. That is the one which you can actually produce because there are great changes which are required. There are -- every annum, you have some shutdown to be done as per the norms of the pollution boards, et cetera. So whenever you have those things and then you have -- the machine gets derated, so 115,000 is our achievable capacity and 140,000 is our installed capacity. And the 115,000, which is achievable, will go up to 200,000. So we give you a number which is what we can actually achieve as opposed to the machine-rated capacity.

Okay. All right. All right. And this question was asked by an earlier participant also. So on 335,000 tonnes, I think your carbon black requirement internally should be -- as per my understanding, should be around 85,000 to 90,000, but then also you will have 110,000 -- let's say, probably 100,000 carbon black capacity to be available for outside customers. But you -- I think you have guided a number which is much lower. So I couldn't understand the difference between...

So our capacity achieved -- requirement for our own self with enhanced capacity should be about between 100,000 and 110,000 tonnes, depending on the grades that we make of tire, [ whether it is a ] mining tire, construction tire. So you can't go so close-to-close. So we have envisaged that -- we've kept a capacity of between 110,000 to 120,000, roughly, for our self-use and the balance for market. That's what I've been saying that roughly 30,000, which is the advanced one, will be for third-party sales. The balance, which is 170,000, 30% of that will be for third party and the balance is for us. And of course, if there is 5,000 tonnes, 7,000 tonnes extra, which is there, which is not being utilized, then we will, of course, go and sell that. But the rough math is because you can't keep things -- if I need 110,000 tonnes, I can't keep purely 110,000 tonnes for myself. I'll have to keep some extra because it's not neck-to-neck. You can't run production on neck-to-neck capacities.

Just one last question is that is -- I mean this question was also asked by earlier participant. So looking at next 4, 5 years, what's the broad plan for carbon black? Is it a new line of business altogether that you are seeing for yourself? And how much more capital you are willing to commit to this business?

So I'll tell you. So firstly, our core business was tire, today is tire and will remain tire. So we don't want to move out of our core. But at the same time, what we are seeing is some sort of a tailwind behind us on the carbon black because mainly we are doing main consumption for self. And then we are keeping some balance because there is a good demand. And there is -- customers are coming to us asking us for carbon black. That is the reason why we have looked at this thing. And also, we are -- we need to generate power for the expense capacity at Bhuj. So for the fuel, we are using the oil as a fuel as opposed to some other fuel, whereby we are also generating carbon black. So that circle is coming. So it is not that we are looking at it as a stand-alone business or a stand-alone, like, tomorrow, we will put X amount or Y amount or something. It is a business calculated move that where your backward integration is coming and you are getting savings in your main business, that's why we are doing it. Now going forward, I cannot make such forward statements where we say that 5 years down the line, how much more will you put, not put, we will take a call that day. But it is purely a backward integration where we have some tailwinds behind us. And the investment is giving us a fairly decent return. And we are getting good business sense in our tire plant also. We are able to control the tire quality better. The raw material quality today, in times when there are shortages, we have our secured quality supply. So all those things are giving us the benefit. That's why we are looking at it.

So just as per your internal calculation, what would be the ROCE of the plant, the existing CapEx that you have already done, what would be the ROCE of that plant?

For which, the carbon or...

Carbon black Phase 1 and Phase 2.

So the -- as we said, the payback will be between 5 to 6 years.

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

Yes. Sir, congrats on a strong set of numbers. I think we have seen a call as well, the main concern is coming on the carbon black plant. Now -- so if I look at the 2 listed companies which are doing carbon black business, their ROIC over the last 10 years, obviously, last 3, 4 years have been decent ROIC. But there's a period of 5 years from FY '12 to '16, '17 when ROIC was single digit and even lower than 5%. So I mean this is cyclical business. Our business, the beauty is that this is basically a high-category business with good ROIC over a cycle. But probably you are missing more in this business which is very cyclical and low ROIC when it basically goes down the hill. So I mean -- so that is the concern that we have that, I mean, obviously, maybe near term [indiscernible] is looking good, but is it really something which we can generate similar or even, say, 3/4 or even 1/2 the ROIC over a cycle compared to tire business?

So I mean I don't know about -- I can't comment about competitors, but for us, the -- for us, the thing is we are looking at it as a backward integration for which we are creating capacities. Along with that, we have a power requirement which we are able to fulfill by these additional capacities. And there is a demand. So if you look at the whole thing, that's why we are seeing good ROIC on this, and we are expecting it to give us a 5- to 6-year payback in the current scenario.

And sir, secondly, if I look at -- we spent almost INR 425 crores for that 115,000 tonnes, the last carbon black CapEx, and this time around, it is almost -- for 85,000 tonnes, it is almost INR 650 crores, including power plant. So...

So last time, we didn't have to do the power plant since we already had it in our tire plant. So that is an additional capacity of 20 megawatts which is being created. So that CapEx is also coming. And then in this current capacity, 30,000 is on the high advanced carbon black also. So that costing will also be impacted in that.

So is the margin very high in advanced carbon black compared to normal?

So it is higher than the regular one, for sure, but we are getting into not the high-end one, we are getting into slightly higher version to what we are doing currently, so over the rubber and plastic rates. And we have already got to that mid-level -- in our labs, we've already developed the carbon black for those mid-levels and our quality and acceptance is there in that also. So that's why we are seeing it. As regards the margins, we're expecting it to be between 4% to 5% better than the lower end -- lower rung suppliers.

And sir, do you have separate thing -- sir, what is the CapEx for this advanced carbon black and what is for the power plant?

We are working out on the breakup because we just got the approval yesterday. So we are working on that.

The next question is from the line of Arvind Sharma from Citi.

Sir, first question, just beyond numbers. If you could explain, you have done in the past the modernization part, but will it be a recurring theme now because we just had a modernization in one of the earlier plants, so it was very old. But now that you're saying that the tire technology is improving by the year, so is this modernization a recurring theme now on? And do we expect a modernization every 3, 4 years? Because that's a pretty high CapEx for modernizing a plant which was already working quite well at a very high profitability. So that's part one of the question. I'll probably come and ask another question after this, sir.

So do you want to ask all the questions? Or should I answer this and then you will ask me?

Sir, if you could answer this question...

Yes, so thank you for your question, Mr. Sharma. So basically, if you see that our plants in Bhiwadi, Chopanki, Rajasthan area were as old as 2001 and '03. So once we first we took up the Aurangabad plant for modernization and we are sort of seeing some benefit that we are expecting in the quarters to come, newer machinery, newer, more automated stuff coming in the plant will have its own impact and benefits. So that's the reason why we are looking at it. And also as technology is moving more towards radialization, the bigger tires, so we are looking at that and we said rather than becoming redundant 4 or 5 years later, if you look at it today and with less money, you can achieve similar milestones, then what we had to do. So we are learning from the past and seeing that it's giving us benefits, and that's why we are taking it forward. Now if the technologies and things keep on changing, I don't think it will change as quickly as 3 to 4 years. But yes, between 7 to 10 years, you -- we should or may expect some sort of further changes coming up, modernization coming up in the machinery, et cetera. So it may not be a recurring theme every 2 to 3 years or 3 to 5 years, but over time maybe 7 to 8 years, you may see one cycle of this coming in.

Sure, sir. And could you explain the impact on profitability, if any, in terms of margins?

For the automation?

Yes, for the modernization. Yes.

So for modernization, we are seeing that, again, we are estimating our payback to be within 5 years. So that is the kind of impact it will have on our bottom line.

All right. So in terms of profitability, I think we'll have to wait again.

Yes.

Sure. Sir, second question would be on -- sorry, you've answered lots of questions on carbon black. Sir, given your high expectations from carbon black, especially third party, is it possible that over the next 2 or 3 years, unless your overall tire capacity increases massively, carbon black revenues could be a decent part of your top line? So if possible, going forward, if you could share the carbon black revenues as well because it kind of tends to inflate the ASPs of -- the synthetic ASP of revenue divided by tonnage. So if that's -- because I guess maybe next year, carbon black would be around 10% to 12% of the revenues, if not more. Sir, if possible, if you could do that going forward or if you have the numbers right now for third quarter, carbon black revenues versus total revenues.

Yes. So I think -- thank you for that. I think we'll consider your point from next year. At the current levels, it's less than 2% of the overall sales. So it is not really having that kind of an impact. But yes, as the sales go up and as it becomes a bigger chunk, we will definitely give the numbers separately.

Sir, 150 may go to 200 and the commensurate increase in third party would be much higher. So I was coming from there.

So we will definitely consider that. And from next year, once this third phase of line is up and running, then we may do. But currently, it is less than 2% of the overall sales. So it doesn't have that kind of impact.

Sure, sir. That's on CapEx. I guess one question on the demand outlook. You've given a very strong demand for FY '21. Any outlook or anything you can share about FY '22, initial themes in Europe and the U.S?

So I think, as I mentioned that we are seeing the demand to be strong, but further guidance or numbers or anything that we could give you only after we end this financial year.

The next question is from the line of Kaushal Maroo from DSP Mutual Fund.

Just a few more questions on the carbon black business itself. There has been a sharp improvement in the margins of carbon black as an industry, and we are currently also looking at 15% margin. Are there any structural tailwinds to this business which makes you positive on that this 15% margin is something which will continue without any cyclical downturn out there?

Mr. Maroo, sorry, your question was not very clear. Your voice was cracking in the middle. Could you please repeat your sir?

I'll just repeat. Sir, what I was saying was that 15% margin is what the carbon black business make as of now, but this used to be like almost 0 or negative 5 years back. Are there any structural tailwinds to the carbon black industry which is helping the sustainable margin of 15%, which you expect for the next 5 years?

Yes. So I think -- sorry for asking you to repeat. It was just -- so yes, there has been structural -- there is a strong tailwind, there is strong demand and -- that is there. And then looking at all those things, we are seeing that this margin -- this business will give us this kind of return.

Is there any sourcing from China which has got blocked and because of which there are opportunities in the domestic market? And are there any benefits from PLI, which the government will announce on this business of yours?

No, not at this stage, not at this stage.

Got it. Sir, and on this advanced carbon, is it something for internal usage as well? Or were you currently sourcing it from outside?

No, advanced carbon is purely, at this moment, third party, but not for our internal use.

It is not used in tire making, is it?

No, no, no. Tire grades, we are already -- we've been -- because of our own self-consumption, we've already been able to upgrade our own carbon black for self-consumption, but they don't classify as higher grade, auto and advanced grade.

Understood. Sir, and the last question is on Bhuj. We have brought in a carbon black plant there and also taken this new round of capacity expansion. Does it have further scope for brownfield expansions in the future? Or we'll have to look for new greenfield after this 335,000 capacity is used up?

No, we have some availability of line around that. So once we decide what is the capacity that we'll be needing, what is there, then we can take a call whether it will sit in here or we'll need to look at a greenfield. So it's too early to comment, but we can always -- at that stage, depending on the quality of capacity that we're looking at, we can explore either some capacities at Bhuj or then possible of a greenfield plant. But again, it's too early, as I said, because we have to first set up this 50,000, get that in the marketplace and then grow from there.

[Operator Instructions] The next question is from the line of Sachin Trivedi from UTI.

Sir, most of the questions are answered. Just maybe slightly repetitive, but you alluded to the fact that the old capacities are getting automated and new capacities also will be substantially automated. Just trying to understand, is this resulting in material cost savings on the labor force or is this basically a quality issue that we are trying to address? Maybe how do we justify internally and the financial metrics? If you can just help us understand that.

So it is both because the moment you have processes being automated or processes being done, so your reliance on the labor force goes down, where -- skilled labor goes down. So all those things will come up. And also, certain material movement issues, material movement manpower will come down because they will be sort of automated. So it's a mix of both. And we see that the payback for this kind of automation will be in 5 years' period and could be -- I mean, too early to say, but could be between 100 to 150 basis points on an enhanced capacity.

So sir, just trying to understand here is that when you do that financial metrics in-house, are you accounting for better business because of the quality? Or are you accounting for savings on the employee cost and other expenditures? So if you can give some color.

Yes. So I think there are -- as I said, it's both because you will get quality input also because your -- the chances of error-proofing go up because it's machine-made as opposed to man-made. So the machine is doing a lot more of the skilled activities as opposed to men doing the skilled activities. So that is the kind of modernization in the machines that we are looking at. So your chances of error-proofing go down, then that will have an impact in the marketplace because more and more tires will be consistently manufactured. And the material handling part will also come in because that will then save some labor, it will reduce touch points. The -- so it's going to be an impact of both.

Okay. Sir, the next question is with respect to the U.S. CapEx, I guess, maybe a couple of years back when we announced that CapEx, one of the justifications for that CapEx was that we could have -- win more business if we are closer to client. So now that we've decided the way of cutting that or not doing it, is there any material plan that we have already put in place so that we don't lose out on that optionality? If you can share anything on that.

Yes. So we are working out the possibilities of making our distributors stronger and getting them to stock more material. So it's -- we are working closely in -- with our channel partners to do that so we don't lose the marketplace.

But working closer to the client, that is actually not going to hamper us? Or any color that you can share?

No. So basically, what we are doing is instead of setting up our facility, we have shelved that. We have spoken to all our channel partners, our distributors, and we are making a stronger relationship between them and BKT so that they are in their warehouse calling more material, planning better. We are working with them closely so that they have sufficient stock to feed the distributors, the dealers further and reach the end market. So we are working closer with them as opposed to creating a facility closer to them. We are using their facilities -- we are going to be using their facilities more to reach the end users.

Okay. Sir, one final question, and maybe I'm also missing some color here. But you said in your opening remarks that your maintenance CapEx is going to be, let's say, INR 100 crores each year...

INR 100 crores to INR 200 crores.

Yes. But when I look at the line item, actually, that's the run rate of depreciation each quarter. So I'm just confused, is that -- in future, do we -- should we expect a substantial jump in our depreciation run rate? Or is that -- is just that -- or the accounting policy for us is maybe -- or should have been more aggressive or any color that you can give?

So we are not seeing a big, I mean, jump in such sense on the depreciation part. We expect it to be stable. We are not seeing or foreseeing a big jump over there.

The next question is from the line of Neelesh Dhamnaskar from Invesco Mutual Fund.

Some of my questions have been answered. But on this advanced carbon material, so just -- you said you'll give these CapEx numbers separately for this. Maybe we would also want to know. And secondly, these products, have you already developed them and they have been approved? Or this will start post the commissioning of this project?

So we have developed some very small trial lots in our own labs and -- with the feedback of those testing -- test samples. That's why we are so confident of this 30,000 high advanced carbon black. So it's not very high. It's a mid-category -- just a couple of categories above the grades that we are using for tire and plastic. And those samples have been made, and we received well, and we are looking to now pursue that further.

Okay. Fair enough. And second, again, more on the operational aspects. Sir, this quarter, broadly, I could see, the realization trends were a bit weak, I think just about flattish or a percentage down the realizations were on a Q-o-Q basis. So -- and in light of the fact that the raw material prices have been going up as well as freight costs, so have you -- what's your take on that? And have you taken sufficient price increases to alleviate these rising cost pressures?

Yes. So in the starting of this quarter, we have taken some price increase to negate these enhanced costs. And as we said, over a period of time, our sustainable EBITDA levels would be between 28% to 30%. So you will see that in the period of time also, that will be there. There has been a price increase of 2 to -- sorry?

Yes, what's the extent of the price hike?

Yes. So I was just answering it. The price hike would be between 2% to 3%, which has already kicked in from the start of this year -- quarter.

Okay. Okay. Got it. Got it. All the best. I mean it would be good that if you could give more granular breakup of these CapExs, that will help us in our own math and decision-making.

Sure. I will incorporate that next time.

The next question is from the line of Nishit Jalan from Axis Capital.

Sir, my question is also on CapEx. You talked about INR 450 crores modernization CapEx and a 5-year payback, which means almost INR 90 crores accretion to earnings you are looking at from this CapEx, right? And your top line is around INR 6,000 crores, which means almost 1.5% incremental margin at the overall company level. So do you think that this plant will lead to margins above our overall guidance of 28% to 30%? Or do you think that these kind of CapEx are necessary just to maintain the margins between 28% to 30%?

So firstly, you're right that if you recollect my earlier statements where I said that 1.5 basis points is what we are looking at, and these activities are being done so that we can sustain these levels and retain the levels that we've been enjoying. So that is why it is being done and that is the whole [ proof ]. So that's why we are confidently saying that if we are doing these activities to reach a sustainable level of 28% to 30% and with the -- if we don't do these, then over a period of time, we will lose out in the marketplace, our product will become outdated. We will not be able to give the high-end quality or high-end technology as the world players are moving. The western world players are moving. So to be in line with them and to continue to be a leader in this field, we have to be ahead of the curve. We cannot be a follower or too far behind. We can't be lagging too far behind. So if we don't do this, you are right that we will -- this is needed to be done to maintain these levels.

Okay. Fair point. So secondly, just very quickly, on this advanced carbon back capacity, what is the end usage in terms of industry or what type of customers will you be targeting with this kind of capacity?

So basically, we are working out on that. It will be print and ink grades and certain high-quality plastic grades. So -- which categorizes my mid-level, but for us compared to the current tire grades and that, it becomes a little higher. That's why we're calling it high advanced grade.

Okay, sir. Just really one last question. On Bhuj, after this expansion of 50,000 tonnes and 200,000 tonnes of carbon black capacity that we have set up, do we have scope for more brownfield or the next phase of CapEx will be more greenfield in nature?

Yes. So as I told you earlier that we have some land. And once we have these capacities set up, we're looking at what is the next round of expansion that we need to look at. We will decide whether this current land can accommodate that or we will need to look at a possibility of exploring a greenfield project. But at this stage, it's too early to comment on whether we will go for a greenfield or another brownfield at Bhuj. It's too early to say. But yes, we have some land available with us even after these expansions.

The next question is from the line of Prateek Poddar from Nippon India Mutual Fund.

Sir, just 2 questions. First question would be, sir, how much time will it take, say, in H2 FY '23 once you get your carbon black plant ready? How much time will it take for you to ramp this up to full utilization?

So I think way we -- looking at the then demand situation, we should be ready in a quarter's time?

Sorry?

In a quarter's time, yes.

Okay. And sir, in 1 quarter, you'll be able to ramp up to full utilizations, is it?

Yes, subject to demand being the way it is today, yes, we should be able to ramp it up.

Today, are we running at full utilizations?

Yes. Actually, we are running at full achievable capacity. And even in this existing -- even in the existing phase, we were able to do it within 1 quarter. That's why we can confidently say that we'll do it in the same -- in that phase also.

Got it. Got it. And sir, second question is...

You see, our -- March, we did our Phase 2 and then unfortunately we went into lockdown. But post-lockdown, within 1 quarter, we were able to achieve our full capacity of 115,000 metric tons. That is for the annum. If you pro rata it every month, we are hitting those numbers.

Annualized basis, you have obviously...

Yes. Yes.

And second, sir, when you quantify payback period, is it pretax, post-tax?

Pretax, pretax.

Okay. Okay. And lastly, sir, just on the breakup, see, even if I take some broad numbers for the power plant, right, like INR 5 crores per megawatt, and maybe you can help us with this. And INR 550 crores for 85,000 tonnes effective versus setting up 115 -- I mean, in Phase 1 and 2, you spent INR 425 crore for 115,000 tonnes. Whatever number I take for this advanced black, it is not adding up unless there is material inflation to the CapEx costs. So maybe if you can help us in the next quarter or put an exchange release just giving the detailed breakdown of the CapEx between the basic as well as the advanced in power plant, that would be really appreciated.

Thank you for that. As we've just got the approval, we'll start our workings and all. And these are budgeted. And -- but we'll share more details as we get more information on the exact numbers.

But then, sir, that's my question, right? When you say -- I'm not trying to demean your company, but if -- I'm sure, when you say a payback of 5 to 6 years, there is a number, right, of the CapEx in your mind?

Yes.

Yes. So -- okay.

Yes. I mean it's -- I mean we have it in mind, but we're yet fine-tuning it. That's why it's too early to comment.

Okay. Okay. Yes. Maybe, sir, if you can help us in any way in the next quarter, whenever, that will be really, really helpful.

No, 100%, we will do that. We've done it in the past also, and we'll continue to do that.

Great, sir. Great, sir.

In our past reports also, we've shared all the details.

The next question is from the line of T.S Vijay Sarthy from Anand Rathi.

Sir, just wanted to check on the incremental capacity. How much of this will be operable in FY '23? And how much will flow to FY '24?

In the tire one?

Yes, sir.

So I think we will start -- I mean as you know, the tire will -- it will take us 6 months to ramp up. So within the 6 months, you should hit that annualized number of 50,000.

So effectively, the entire 50,000 will flow to FY '24.

Yes, effectively, yes.

Sure. And given that our core business is not carbon black, we seem to have high-value advanced carbon material for a third party, is there a cap that you set yourself internally that you wouldn't move beyond this revenue in terms of carbon black proportion? Is there at all something that's in mind? Or it's not yet -- it's still open?

No, there is no such cap or something. But as I mentioned earlier that we are doing it as a backward integration to our tire looking at the future requirement and all. And also, there is a good demand currently. So we are just enjoying that basket. We needed -- we need power also for our existing new brownfield. So you burn the fuel and generate carbon black. So that's the math which has been coming in. There is no thought as of today to become a -- divert away from our core to go from tire to carbon black or make it a big business or something. That's not the plan. But there is no such cap also at the same time that we will restrict it to here. There is no thought that we want to become -- we want to make it like 50% revenue or 40% revenue or anything. So it's just being done as a backward integration to self-cater and, at the same time, consume the -- give us the fuel for power requirement of our new expansion.

Finally, what's the CapEx that you have done until now, sir?

On what?

For this year?

For this year, roughly, about INR 600 crores.

INR 600 crores. Anything that you envisage in the fourth quarter, the current quarter?

In the coming quarter, one second, for the -- roughly, about another INR 100 crores, INR 120 crores in this quarter.

This is including the maintenance?

Yes.

The next question is from the line of Puneet from HSBC.

Can you tell us about how -- what percentage of the existing carbon black capacity are you using in-house? And what is it that you are exporting or selling? And what is the realization on it? And how -- what kind of savings are you making from it?

So on the carbon black plant, currently, our sales contribution to third party is less than 2% of our overall number. Currently, of the carbon black per se itself, roughly, about 25% is sold in the open market.

Okay. So out of 150, only 25% is sold?

Yes.

Okay. And what kind of realization do you get on it?

About this industry average, which is 15% to 16%.

Yes. No, at -- rupees per kg number, if you have.

No, I don't have it on me at the moment, but we can share with you later.

Okay. And in terms of savings, what kind of savings are you able to accrue from these existing capacities?

From the...

On your tire costs, what kind of savings -- instead of procuring from outside by using in-house carbon black, what kind of savings are you making?

So it is -- I mean there are tangible and intangible benefits. So first and foremost, I would rate the biggest advantage that we get is we get a secured supplier. We get a standard product, which we know, which relates to quality, which -- because you have full control over that and which is -- you're going to see the quality improvement. So that -- those are the advantages of getting into the quality -- carbon manufacturing for BKT itself, for the tire business.

Okay. Okay. And any tangible benefit?

Tangible benefit is, of course, there is no packaging required because it is within the plant only transferred via pipes. There is no transportation involved. So those are the tangible benefits, which we do, but it's -- those are the kind of benefits that we are seeing tangibly.

Okay. My second question is, you talked about the technology upgradation saving and somebody also pointed out almost INR 90 crores per annum. So is it largely employee savings? Because your employee cost alone is INR 300-odd crores. So it's a pretty significant savings from that perspective.

I mean there will be -- it's difficult to give you that kind of breakup, but it will not be only employee, it will be -- you will be able to develop higher-quality tires, you will be able to make better tires given in the market. So those kind of efficiency improvements will come in, your error-proofing will come in. So it's a mixed batch of everything. It is difficult to quantify the whole amount to a certain category of idea.

Okay. Okay. Great. And in terms of your dividend payout, any thoughts on the policy? You seem to be paying out quite well this year as well? What kind of rates are you likely to continue?

So I think that the Board will take a call looking at the performance every quarter. So it's difficult to give you a number what will be there or what is there. But of late, from the last 2 or 3 years, we've been -- the Board has been approving the dividend payout quarterly. And based on each year's performance, each quarter's performance, they take a call. But it's difficult for me to answer what will the Board do and what is the target that the Board is setting.

Yes. Okay. But in terms of -- since a large part of free cash flow will now be diverted to CapEx, is it likely to hurt the dividend? Or you think the same run rate can at least continue?

No, I think -- I mean same run rate should be able to continue based on current market scenarios and current earnings.

The next question is from the line of Ashwani Agarwalla from Baroda AMC.

I've got a couple of questions. So with this CapEx, are we expecting roundabout INR 550 crores to INR 600 crores of operating profit every year from FY '24 onwards, apart from the normal run rate?

Mr. Ashwani, sorry, your question got lost. Can you just repeat yourself, please?

Surely. With this CapEx of overall [ INR 1,950 crores ], do we see operating profit of roughly INR 550 crores from FY '24 onwards additional -- I mean to say, operating profit apart from the normal...

So it's very difficult to give those numbers like this. We cannot share those numbers on this, but we will work on it. And -- I mean we are working on it, and we'll get back to you on this.

No, no, I'm just trying to derive from whatever you said that normal payback period at PBT level should be roughly 5 years, right?

Yes.

So at the PAT level, you should take roundabout 6.5 years or slightly more than that to break even. You'll make a profit of INR 300 crores, approximately, on this.

Yes. Yes. So yes, I mean, when you look at it on those bases and the calculations we have done, it looks achievable, and we should be able to hit that. But your -- these numbers are broadly right in terms of when you put the maths together. Whether -- but we can't commit to it today, but this is the direction that we are looking at. You're right in that sense.

Yes, that's true. But you would have taken an assumption that INR 300 crores over the next 5, 6 years or whatever, that would have basically -- so -- but in the initial 2, 3 years, this will be highly ROE dilutive because currently, you're looking at ROE of 20%, 21%, right?

Yes.

And on this, for the initial 2, 3 years here, ROE will be less than 15%, maybe 12%, 13% to start with.

See, whenever you take up any cycle of CapEx, that question will come and then come back. So I think if you look at historically also or any project that's been undertaken, at that time, there is some rip in the ROE and then goes up. But if you try and see, the CapEx for us will be spread across the years equally, starting slower and then picking up and then going. So with that cycle, you should have overall the same numbers.

Okay. And on a discounted cash flow basis, this payback period should be more like 9, 9.5 years, right?

Yes.

Okay. Sir, what is the scenario about the demand and your raw material position currently?

So for the raw material position, Bajaj-ji, can you answer on that?

Yes, sir. So raw material availability, currently, we have got 2 months' inventory, 1 month in factory and 1 month in transit. And currently, we are not facing any issue, but going forward, yes, some raw materials are in short supply, like, nylon and rubber chemicals. But otherwise, we are well covered with our raw materials.

Sir, raw materials [Foreign Language] short supply [Foreign Language]?

There is overall -- not for us, but overall, there is a short supply in the market, but we are covered for the moment, and we look to manage our situation.

Okay. And what is the effect on the cost as compared to Q2, Q3.

Approximately 4% to 5%, prices have gone up in the last 2 quarters.

Okay. And are we able to pass on these prices to our clients?

Yes. As I told you in the start of this quarter, we were able to pass on 2% to 3%, and we look to continue to pass on in the coming quarters.

Okay. And how is your demand situation for the next 1 year, how do you foresee it 2 years?

At this -- I mean 2 years are a long time to say, but at this stage, we see it good. And we are forecasting it to continue to be good, and that's why we're looking at these kind of CapExs to be done.

Thank you. Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. Joseph George for closing comments.

Thank you, Margaret. I would like to thank the management of Balkrishna Industries for taking out time for this call. Have a good day.

Thank you.

Thank you. On behalf of IIFL Capital Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.