Balkrishna Industries Limited (502355) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Balkrishna Industries Q4 FY '21 Results Call, hosted by Anand Rathi Share and Stock Brokers. 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 risk and uncertainties that are difficult to predict. [Operator Instructions] I now hand the conference over to Mr. Vijay Sarthy from Anand Rathi. Thank you, and over to you, sir.

Good morning, all of you. On behalf of Anand Rathi, I welcome you all to the Q4 FY '21 conference call of BKT. Thanking the management for giving us this opportunity. We have the senior management of the company. We will have brief update about the current quarter and then we will open for Q&A. Now I'll hand over the call to Mr. Rajiv Poddar, the Joint Managing Director. Thank you, sir, and over to you.

Thank you, Vijay. Good morning, everyone. I welcome you all to the Q4 FY '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 Advisor. Let me begin with performance updates. The demand continues to be robust in agricultural segment across geographies. In other segments also, demand has seen an improvement on the back of increased commodity prices, infrastructure creation and pickup in economic activity. This is reflective in our Q4 sales volume, which was our highest ever quarterly sales. We clocked 68,002 metric tons for Q4 FY '21. And accordingly, for the financial year '21, we ended with sales volume of 227,131 metric tons. During the financial year '21, the company faced multiple challenges. These were related to raw material prices and it's availability. Supply chain issues was also a big challenge, especially for the Suez Canal fiasco. In addition to this, like the world, BKT was already facing unprecedented times due to the ongoing pandemic. However, a resilient BKT has been able to withstand these challenges and emerge stronger by posting its highest ever annual sales volume. For the financial year '22, we are guiding sales volume between 250,000 to 265,000 metric tons. We strongly believe that this demand trend is likely to continue in FY '22 and in the years to come. However, there may be COVID-19-related softness in demand, leading us to give a wider range of annual guidance. During the last few years, we have engaged in brand-building activities in the international and domestic markets. We are happy to report that we have seen a good progress, which is reflective in the brand recall of BKT as well as our growing market share across the world. During the last year, we have done a lot of brand-building activities in India and believe we will see increased traction in business as we move ahead. In addition to various brand-building activities in India, this year, we have been associated as the official partner of various teams in the cricket 2020 league. Further, to improve our brand recognition in the rural markets, we have engaged in branding on interstate buses and hoardings across India. Further, we have used radio as a medium to reach large masses and strengthen our brand position. We are confident of the improving performance of our Indian business. Financial year '21 has been a challenging time for all of us, given the pandemic situation. At BKT, in keeping with our moto of growing together, we have engaged in a number of CSR activities in our bid to help the society at large. In line with this objective, the company has distributed cooked food and food grains in various parts of India to the people affected by lockdown due to COVID-19. The company has also distributed PPE kits to various hospitals across India. We will continue to do our bit for the society in this challenging time. Towards green initiative, we have planted over 100,000 trees at our Bhuj complex. Further, with the usage of byproduct from our carbon black plant for generation of power, the coal consumption is reduced drastically, leading to a reduction in carbon footprint at Bhuj substantially. We also have existing solar and wind power projects that are partly meeting the electricity needs of our plants. Let me now give a quick snapshot of our ongoing and new CapEx programs. Ongoing projects, ultra large giant tire plant at Bhuj. Project for 51-inch and 57-inch ultra large all-steel giant radial tire plant of 5,000 metric ton per annum has been completed as we mentioned in Q3 con call. The tires are undergoing final trial runs. Greenfield tire plants at Bhuj -- at Waluj. The greenfield tire project was progressing as per schedule. However, due to COVID-19, the work was temporarily shut from 25th March 2020 to 20th April 2020. Thereafter, the project was resumed gradually after the lockdown was lifted. Considering the current unprecedented and uncertain times, the project is expected to be completed by 30th September 2021. New CapEx over the next 18 months. CapEx of up to INR 800 crores for tire plants. CapEx spend has commenced towards debottlenecking and brownfield expansion, along with additional or balancing and ancillary units for Bhuj. The expansion will add a capacity of 50,000 metric tons per annum. This CapEx is envisaged to be completed during second half of financial year '23. The completion of the CapEx will result in our total achievable tire capacity to reach 335,000 metric tons per annum. The payback period of this CapEx is envisaged to be around 4 years. CapEx up to INR 650 crores for carbon black and captive power plants. In the second phase, we are increasing carbon black's achievable capacity from our current achievable capacity of 115,000 metric tons per annum to 200,000 metric tons per annum. This includes 30,000 metric tons per annum of high-value advanced carbon materials and power plant of 20 megawatts capacity. In addition to meeting our internal demand on enhanced tire capacity, leading to better control over supply chain and improving the quality of our tires, the plant will also allow us to generate power for the tire plant and its need. This will also lead to a reduction in the usage of coal for power generation at the Bhuj plant. This is our environment-friendly approach to reduce carbon footprints at BKT. The total CapEx spend is envisaged at INR 650 crores and will be completed by the first half of financial year '23. We expect a payback of around 5 to 6 years on this investment. CapEx up to INR 450 crores for modernization, automation and technology upgradation of equipment and material handling. This CapEx will be done at the existing facilities and Bhuj and particularly at Rajasthan, where we have 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 financial year '23. This CapEx will improve our margin profile and accordingly, we expect a payback of around 5 years on this investment. We envisage the entire new CapEx of INR 1,900 crores to be funded by internal accruals and some debt, if needed, in the financial year '22 and '23. With this, I now move on to the operational highlights. Our sales volume for the quarter was 68,002 metric tons, a growth of 17% year-on-year. For the financial year '21, the sales volume stood at 227,131 metric tons, a growth of 13% year-on-year. Our stand-alone revenue for the quarter stood at INR 1,750 crores, which excludes -- which includes realized gains on foreign exchange pertaining to sales of INR 4 crores. For financial year '21, the revenue stood at INR 5,740 crores, which includes the foreign exchange loss pertaining to sales of INR 18 crores. For financial year '21, 50% of our sales came from Europe, 23% from India, 15% from Americas and balance from the rest of the world. In terms of channel contribution, 70% was contributed from replacement in the financial year '21, while OEM contributed to 26% with the balance coming from offtake segment. In terms of category, agricultural segment contributed to 64%, OTR contributed to 32% and the balance came from other segments. This is for the financial year '21. The stand-alone EBITDA for the quarter was at INR 558 crores, with a margin of 31.9%. While for the financial year '21, the EBITDA stood at INR 1,810 crores, with a margin of 31.5%. Other income for the quarter stood at INR 20 crores, while unrealized gains stood at INR 23 crores. For financial year '21, other income stood at INR 119 crores, while unrealized gains stood at INR 18 crores. Coming to the net ForEx items. For the quarter, we incurred a net ForEx gain of INR 38 crores, which includes realized gain of INR 15 crores and unrealized gain of INR 23 crores. For financial year '21, we incurred a net ForEx gain of INR 42 crores, which includes realized gain of INR 24 crores and unrealized gain of INR 18 crores. Profit after tax for the quarter stood at INR 372 crores, with a margin of 21.3%. While for the financial year, it stood at INR 1,155 crores, with a margin of 20.1%. Our gross debt stood at INR 893 crores. Our cash and cash equivalents were at INR 1,475 crores, implying a net cash position. For the financial year '21, we incurred a total CapEx of INR 911 crores. For Q4 of this financial year '21, the euro hedge rate was at INR 87.42. While for the financial year, the hedge rate was at [ INR 84.32. ] Forward hedge rates currently stands at around INR 89. The Board of Directors has completed a final dividend -- have recommended a final dividend of INR 5 per equity share, subject to the shareholder approval at the oncoming AGM, in addition to the INR 12 per equity share is paid for the 9 months of the financial year '21. The total dividend paid will be INR 17 per equity share. That is 850% of its face value. This will result in a dividend payout of approximately 28% for the financial year '21. As mentioned, we remain optimistic for financial year '22, and accordingly, have guided for 250,000 to 265,000 metric tons of sales volume in the financial year. We are confident of improving the brand equity of BKT tires in the end market. Our long-term margin guidance remains intact between 28% to 30%. With this, I conclude my opening remarks and leave the floor open for Q&A. Thank you.

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

Yes. Sir, congrats on strong numbers, last quarter [indiscernible]. So firstly, what kind of increase you see in the RM prices during the quarter? And also, what we expect going ahead in Q1? And any price increase action that you've taken and plan to take?

Sorry, could you repeat to your question? The voice was very slow -- very low.

Okay, sorry. So what was the RM increase in the quarter versus Q3 and what we expect in Q1 going ahead?

So the RM impact will come in this quarter. It's already to the extent of around 2% to 3%. And going forward would be another 2% to 3%. But despite that, we would assume that our earnings would be intact between 28% to 30%, as we've already said.

And any price increase you have taken recently, like say, April or May?

Yes. So we have taken a price increase in January and recently in April. So that is also being passed on to the customers.

And what was the quantum sir, in April price increase?

Average the total price increase we have taken so far would be around 3% to 4%.

3% to 4%?

Total, between January and April, yes.

So was April around 2%?

Approximately, yes.

And secondly, sir, I missed on the euro rate. Can you share what was for the fourth quarter and what we expect going ahead?

So as I said, for the fourth quarter was at INR 87.42. And going ahead, currently is around INR 89.

Okay. So INR 89 we expect in the next year. And sir lastly, on the Aurangabad plant CapEx that we're doing, the greenfield plant will come up by September you said. But it's a -- if the demand surprises, can we also continue the old plant after the new plant commences or that's not possible?

So we are working on that. We are working on that. So we are trying to see what can be done, but we don't answer right now. We are working on that.

[Operator Instructions] The next question is from the line of Joseph George from IIFL.

Congratulations on good set numbers. I have 2 or 3 questions. The first one is your stated capacity, annual capacity is 285,000 tons, which translates to slightly more than 70,000 tons per quarter. And in terms of quarterly run rate this quarter, you've already hit a 68,000 number. So before the next leg of capacity expansion is commissioned, which is 50,000 tons, do you think you'll be able to do some debottlenecking or something of that sort in order to increase the quarterly run rate from the stated number of 70,000?

So as you've already said, we have started some debottlenecking. So that should also lead us to some increase in capacity. Also, the new project has already commenced. So with that, we should be able to start getting those numbers in bill earlier. But as we've said, our guidance for this year is 250,000 to 265,000 tons. So we have some gap between that and our capacity what is achievable. And by the time we hit that number, our new project should come in.

Understood, sir. And the second question is, you have been consistently reporting margins of 31%, 32%, 33%. And with -- when you look ahead with the demand being strong and with possibility of better euro realization next year compared to FY '21, there is a possibility that the margins can continue to remain strong. So why are you downplaying or being so conservative with respect to your margin guidance of 28% to 30%?

So basically 28% to 30% is something we have always maintained that, that would be our guidance for the long term. The raw material prices are going up. Other costs are also going up. So keeping that in mind, despite all these increases, we believe that in the long term, our -- the prices should remain in this -- what did you said, in this range of 28% to 30%. And that's why we are maintaining. So it's not that we have been conservative, but all the -- few costs are also increasing, as I'd mentioned.

Okay, sir. And the last question is what would be the specific CapEx guidance for FY '22?

Just one minute. Yes, about -- between INR 800 crores and INR 850 crores.

Okay. And this includes maintenance as well?

Yes.

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

Congrats for the great set of results. Sir, this INR 800 crore to INR 850 crore CapEx you talked about for FY '22 of the total CapEx of about INR 1,900 crores. So you mean to say that the bulk of the CapEx will happen only next year? And I mean in case demand surprises, then I mean, how are we planning to manage the capacity?

No. Basically, it is spread over 2 years. So you start ordering the equipment. By the time they come, they get installed, civil work and all so, it's spread over 2 years, it's not like you do half now and half later.

So bulk of this CapEx will be spent in which areas, if you can just indicate that?

So it's everything. So equipment -- bulk will be, of course, equipment and then some part of it would also remain civil.

No, sir, I mean, which project, if you can say that?

The tire project.

I mean, carbon black also, there's a INR 500 crores plan. You have a radial plant expansion also, take upgradation also. So amongst these which one will have the majority part?

Yes. Out of this whole project, the CapEx would -- major CapEx would be done on the tire plant and on the upgrading and automation of the existing tire plant. CapEx for the carbon plant and the power plant would come a little later. But some part of it would come this year, but the bulk of that would come in the next year.

The next question is from the line of Jinesh Gandhi from Motilal Oswal.

First question from my side is with respect to the U.S. market, considering that is one of our expected growth drivers. How do you see the size of the opportunity and split between agri and OTR? And how are we positioned currently? And what is our aspiration for that market?

So as we've always mentioned that Americas overall is a growth driver for us. And you can see that we are steadily making some progress in the numbers there, in our sales. The opportunity is huge. So we have been constantly looking at growing in those markets.

Okay. But any number which you can address -- attach to the U.S. market in terms of size and anything which you can share on that, sir?

I mean, I can share with you that Americas put together contributes to about 15% of our sales. So what used to be about 12% of the lower number is now about 15% of the higher number. So you can see that's the growth that we are getting into.

Okay. Okay. Understood. And secondly, with respect to the Bhuj plant expansion, so post this 50,000 ton expansion, which we are doing, is there scope to further expand capacity from there?

Yes. There is some capacity available. Land is available for us.

Okay. That can -- what we can add another 100,000 tons there?

We'll have to do the working. We don't have the -- I mean, once we sit on the drawing board first month after the expansion, we can give you the exact numbers. But yes, we have land available and we will announce once we are able to plan the whole thing.

Understood. Understood. And lastly, on the OTR segment, again, that is another area for growth for us. So what's the road map there? I mean, will we need to substantially expand our product portfolio and distribution network to attaining the growth which you are looking for in OTR segment?

So OTR segment, as you can see, we have constantly been firstly, completing the product line. And if you can see, we have just completed the setup of the 51- to 57-inch ultra large giant tires. The tires for these are under final runs at our plants, and then we will send it out. So once we do this, we'll have the entire product basket. In the meantime, we have already set up our distribution channel. We have strengthened that. So once the entire basket [indiscernible], we are quite confident in making good progress in this also. If you can see in the numbers also, roughly about 32% has come from OTR. So where we used to be and where we reach an OTR is quite a substantial jump.

Right. And we do expect probably 50-50 split in, say, next 3 to 5 years between OTR and agri?

It's somewhere close to that, somewhere close to that.

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

Sir, quarterly run rate from other expenses have gone up to the INR 400 crore range. Will it be on a continuous basis? Or is there any one-offs in this quarter?

The main impact on other expenses has been basically on the logistics cost.

Okay. So will it come down in the coming quarter or it will...

It should be similar. We don't expect a drop in the immediate next quarter, the way logistic costs and all are going up. But we see it easing towards the maybe second half.

Okay, sir. Sir, demand of off-highway tire has gone up very strongly from some metal and mining tradition countries like Australia, Brazil and South Africa. So how do you see potential and opportunity of these markets for the company?

So these are markets where we have strong presence, and we are making good -- they are making good headway in those markets as well in the OTR and mining sector, and that's reflecting in the contribution of the OTR sector to the overall product portfolio of...

So what is your growth outlook of OTR that you are expanding your business in these countries? So we are expecting that growth would be at higher side in FY '23, so can you provide some guidance?

So what we are suggesting that in the next 4 to 5 years, our OTR contribution should be around 45% to 50% of the product basket.

Okay. Is there any margin differences in OTR and agriculture tires?

It's similar, similar.

Okay, sir. Sir, my last question is from the -- your key market, like in last couple of quarters, demand from the Germany, U.S.A., France and Italy was quite strong, which contributed more than 40% of your [ spot. ] So how do you see growth in FY '22 on a high rate in this country?

As we maintained that we see fairly strong demand in the financial year, which I mentioned in my speech also, and with that, we are looking at a guidance of 250,000 to 265,000 metric tons per annum for this financial year.

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

Congratulations for good numbers in such a challenging environment. I just had a couple of questions. One is on the India market. So you said that we are looking to increase investments in brand building and overall activity. So if you look at FY '21 as a whole, what kind of growth do you have seen in India business? And how does that, that compare to the industry? And further that, any color you can give into the market share in OE and replacement?

So India for this last financial has been a strong sector for us. If you can see that India, which was in single digits a couple of years back, is today contributing to 23%. So it becomes our strongest -- second strongest market after Europe. And we have gone to 23%. It has been -- and it has grown 29% year-on-year -- the Indian sales has grown roughly about 29% year-on-year in the last financial year. That's the kind of growth we are in. In terms of market share, in India, we would be close to about 4% to 5% for the market, overall, and this is bit replacement and OE put together is roughly about 4% to 5%.

So is it largely skewed in replacement or there's still -- I mean there is some headways made in OE now also? I mean, is there any gap in terms of market presence or in terms of product range we have or we kind of fully covered in terms of range and in terms of distribution as well?

No, we are fully covered. So we're fully covered in the terms of range. And both OE and replacement, we are making good headwind. And we are there with present with most of the major OEs already in India. So all these brand-building activities are helping the brand recall, so that's helping push in the OE. So overall basket is growing for us in India.

Just last one, whom are we gaining market share from? Any color you can share in terms of industry dynamics, whom are we gaining share from? And given that we are more backward integrated now, are we -- would you be open to using price as a means to kind of accelerate the market share gains, especially in the replacement market?

So we have been overall gaining market share from all the competitors. It's difficult to point and say one over the other. But overall, we are gaining market share.

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

Congratulations on very, very strong set of numbers. Sir, my question is slightly more medium term on the America markets.

Sorry to interrupt, Mr. Jalan. Sir, this is the conference operator. There is a disturbance coming from your line, sir.

Is it better now?

Yes, sir. You may go ahead.

Sir, my question was on Americas. Obviously, you have done good growth in this quarter. But if I look at this year as a whole or maybe last few years, that is a market, I think where we still have a lot of potential. So if you can give us some color as to what is the market size in America versus Europe? Because for us, America is only 30% of euro volumes. How is the market size over there? And what have we done in terms of distribution reach, if you can give some numbers in terms of number of distributors or number of people on the ground to kind of increase your product accessibility to mining companies and all. Some color on the American markets, in particular, because I think that is the one market which will drive your growth in the next 3 to 5 years, right?

Yes. So if you look at, firstly, over the last few years, what we've been doing in Americas is we've developed some special products, mainly for the European -- for the American market. It has now come into play. We started our brand-building activity from Americas, which is now reflecting in a good recent recall. And we've covered our distribution network for both agri as well as the OTR business. And those should all start kicking in. As far as distribution is concerned, we had covered the entire America, North America. In terms of market size, it would be as big as Europe put together America [indiscernible]. So that's why we see that we have a good potential to grow there.

Sir, it's -- distribution expansion in America, is it a more recent phenomena? Because if you have already expanded your distribution, if you have already launched more country-specific products, then why is it not reflecting in volume growth? Because if I look at this year also, America is the only market where volumes are flat on a Y-o-Y basis. And last year, also volume declined over there. So just wanted to see what will -- what needs to change or what will be the key catalyst that will start driving the volume performance in America markets?

So I mean -- so as you know, we added distribution in the online channel. So that is now coming into play. The product is now what was launched has been tried and tested. So that is now working. And with that put together it's growing. The thing is that results will start coming now for that. And also [indiscernible] see in Americas overall, they had a very rough year with drought and other things. Also, so even COVID had a big impact over there in the first few months. So that all had an effect on our business there. But now we see some strong movements coming from America.

Sure. Sure, sir. Sir, just 1 follow-up. I forgot -- I kind of missed you when you mentioned the impact of cost increase in this quarter and what we should be expecting in the coming quarters. If you can just repeat those numbers, please?

Cost increase due to raw materials?

Yes, RM cost increases.

Yes. So RM cost, I believe, should be around 5% to 6%.

5% to 6% more increase you will see in the next quarter, is it?

Yes.

The next question is from the line of Nishant Vass from ICICI Securities.

Congratulations on good numbers. Sir, my first question is on your OEM mix in terms of revenue, as we're close to the end of the year, we've seen OEM pick up traction. So what is your sense in terms of the demand from an OEM side? Is that looking up or customer orders for next year looking stronger? What's your view on that?

Yes, so I think the demand overall, both OE as well as replacement, is looking strong and both has been at a good order position now.

Is the OEM pickup universal? Is agri and OTR both customers are giving you stronger guidance?

Yes. Yes. Yes.

Okay. Okay. And my second question is after retail follow back is on the large OTR plant that has started. So how -- obviously, as you're close to commissioning. So what are your target customers? Like how -- can you give some sense about what is your observation from the market? And how are you looking at from a future expansion of that space? What's your strategy around that?

So basically, the tires are now under trial. Once they're get done, they will be sent to the market. So they have -- on the OE side, of course, there is some of the major players who need these tires for the equipment. So we have already been in touch with them, and we are working closely with them to get the tire sector therein. On the replacement side, you have players across the world who need these kind of tires, a big mining guy who contract it out. So we are in touch with those contracting agencies who run these mines on behalf of the mine owner. So we are in touch with them for using and testing our tire. So the work has already started with that.

So if I had to ask you from a lead time basis, obviously, because this is a new category of tires and which is generally in short supply globally. So what is the lead time of experience and feedback? So I'm just coming from a fact that, obviously, the capacity is not really large. So suppose customers want you to manufacture more, so what is your strategy plan for expansion on these size tires?

Yes. So I think the lead time from shipment to going -- getting the feedback could be between 6 to 9 months.

We will have in the next thought in terms of expansion...

Sorry, your voice is very mumbled. The last question could not be heard.

Yes. I was saying, so basically in the 12 months, I say you will have the feedback. And in case you succeed, you will then potentially look at expansion. That is my understanding, is it correct?

Yes. Yes.

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

Two questions from my side, sir. First of all, can you please shed some more light on the raw material costs and the pricing environment? Where do you see -- I mean you've said about the first quarter, but going ahead, how do you see raw material panning out, both in terms of national rubber and food-related raw materials? And commensurately, how is the pricing environment?

Yes. Bajaj Ji,, do you want to take the question on the raw materials?

So raw material prices currently, we see that 4% to 5% increase will be there in the next quarter. The current price of the natural rubber and then synthetic rubber is around INR 130 per kg, which will be in the next quarter around INR 145 per kg. And as far as availability is there, availability has no issue, but logistics is an issue for many of them. Anything else you want to know, sir?

Yes. Yes, sir. How is the pricing environment? I mean if you have 4% to 5% raw material, are you able to fully pass it on to the customers, both in India and of course, across Europe and U.S.?

So some of it we will be passing on to the customers. As you can see, we've already done 1 round of increase in January, 1 round of increase in April, and we are working closely with our customers to see how we can -- what we can do in the near future to take care of these costs.

Sir, second question would be, I don't know if you can share, but you've been sharing the volume numbers. Is it possible to share the revenue breakup as well between the geographies?

No, I don't have that with me.

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

My question was on the demand side. So the demand growth that you have seen in volume in this quarter and also your guidance for the next financial year. Just a clarification, this is -- you are seeing this demand coming from the existing distribution network or this is based on the new distributors that are added to our network or getting added to our network going forward?

So it's a mix of both. So some of them -- I mean, the old ones are also showing strong demand. And the new ones will always add in, so it's a mix of both.

So any approximate number in terms of weightages if you could weight...

The new ones -- the older ones will always have a higher share because they are bulk of it. New ones would be a very small percentage of...

No, so the incremental growth that you are expecting from -- so how much would be -- how much weightage would you give to the older ones? And how much to the -- I'm talking the incremental, let's say, from 200 to 260. So 60 incremental, how much you are seeing -- expecting from the newer guys and from the older distributors?

It's very difficult to put a number now. I mean what I'm giving you is a consolidated number that this is -- I mean, between 250 and 265 is where we will end up. So it's difficult to put a number that the new ones will get this much today because the tires need to go test. The old guys approved and they're working and they're also going. So just to give that sort of breakup right now.

Right. So your confidence is emanating from the expansion in the distribution network?

Our -- this is -- yes, of course, that will add value. But also the demand is strong, so the existing guys are also -- existing team is also doing the thing as there's a lot of momentum in the overall marketplace at the moment.

Right. Right. Right. So mainly it's coming from the existing good...

Yes. Good is coming from the existing ones. The new guys are just to fill the market gap so that the distribution channel is complete. It's not that they [indiscernible] through the same value -- same region or something.

The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

This is Shyam from Sundaram Mutual Fund. Hope you and your team are doing well at this point of time. Sir, my question is on the balance sheet side. If I see the inventory levels on the balance sheet has substantially increased to INR 900 crores plus. Is this more -- is it that we are keeping a lot of raw material inventory to shield against sharp inflation that we are seeing? Or is it anything got to do with the end of the year and being unable to ship out the products on time. So that is my first question. And secondly, on the payable side also, we have seen a substantial increase there. Any change in the terms of trade there on the payables front?

So basically, the -- both major things coming on the enhanced raw material procurement and capacities are also -- numbers are also going up. So it is on those basis. And that's why the number is coming up in the balance sheet.

Okay, sir. On the payables are higher...

Sorry to interrupt, Mr. Sriram. Sir, this is the conference operator, I would request you to mute your line after your question so that the management can answer your question, sir.

Sure. On the payables front, also, this is the same reason, sir, for the raw material?

Yes.

Okay. Okay. Okay. So of the INR 900 crores, how much would be RM, sir? End of the year, what's the inventory that we hold now?

I don't have the exact breakup now.

Approximately 38 to 40 days.

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

I can clearly understand that the demand outlook is extremely positive from what you've been indicated. Sir, what is on the supply side, are our competitors and peers also in expansion spree? How is the supply side shaping up? If you could you give us some more understanding on that as well?

So as we said, supply side has -- on the raw material side, some -- it's a challenge for us also, but we are making sure we are covering that. With -- already with carbon black, we are self-sufficient.

So sorry to interrupt, sir, very sorry to interrupt. I'm not talking on the raw material supply, I'm talking about the industry supply. So overall tire and our peers, are they also expanding and are willing to supply more tires in the industry? So competitive supply, that's what I'm trying to understand.

So we can't really mention about what the competitors are doing, but we are doing what is needed and we are taking care of the enhanced momentum which is there.

Sir, okay. Again, 1 more point was we're looking at eventually to reach about 10% of global market share over a period of time. Sir, where are we on that journey right now?

So we are close to about -- just over 5%.

Okay. So we are at 6%, we are almost there only. So if the industry is growing, it's actually not technically that more market share gains are happening for us?

Yes.

The next question is from the line of Arjun Khanna from Kotak.

So my first question is for FY '21, how much would we have spent in advertising and promotion?

So as we've been saying that normally, we spend close to INR 100 crores for the same, but with the enhanced -- enhancement in sales. We are looking -- this may go up to about 100 to -- INR 120 crores to INR 125 crores in the years coming.

Sure. And secondly, obviously, how do we try and understand the benefits of this? So are there any metrics qualitative or quantitative that the management looks at to understand the benefits of this spending?

Yes. So basically, we continuously do market research and keep on checking with what are our -- what is the people that -- whether this brand recall has been creative, and we've been getting those reports from professional agencies as one of the indicators to give us -- when they do market research before and after, so we see that. And also, if you see like -- if you see in India per se, in the last 1 year, we have had a 29% growth year-on-year. And this is an impact of -- could be a direct impact of the branding because people are now coming up and asking for our tires. So we have data that pulled it. We're not -- they're more aware of the name BKT than they were a couple of years back.

Sure. No, this is obviously very positive. Just want to understand from your end, sir, in terms of pricing, so at what point in time -- so if you look at the European and U.S. market, historically, we have been at a discount in terms of MRP level -- I'm not talking at the dealer level, but at the MRP level, say, with the global #1, #2 player. Over a period of time, that discount obviously has narrowed. How do you see the prognosis over the next 2 to 3 years? And is this promotion and branding activity possible to reduce it further?

Yes. So this is -- I mean, it's a continuous thing so where we were to where we have reached, that the gap has continued to narrow down. And with certain brand-building activities, enhancement in the next few years, this will continue to narrow. But at a point, we will come and we will plateau. We won't be able to meet their level. We will yet maintain a gap of 12% to 15% to them. And that is -- we are now trying to reach to that level, and then we will take it from there. But we see up to that level, with the brand-building activities, we should go, and then we will [indiscernible].

Perfect. And where are we currently? So you mentioned 12% to 15% is the end goal, where are we in that journey?

Around [ 20% -- 20% to 22%. ]

Sure. Sure. Secondly, the next question is in terms of the pricing because of the currency depreciation, has there been any pressure from the OEMs to pass that on to them in the export market?

No, not yet.

Sure. And in terms of coverage, till what period are we have taken forward coverage for the next year?

There is a -- you're talking about the ForEx, right?

Right.

Yes. So that is a continuous basis. So we are doing on a daily basis. So it's difficult to give what level we covered until there, but we are doing it on a regular basis. And the average rate -- the mix was around 89. And broadly, if you look at it between 5 to 6 months, it's covered.

Sure. No, the reason I'm asking this is because we are looking at an increase in production. So from our sales from INR 220 crores to maybe in the range of INR 250 crores to INR 265 crores. So in a sense, do we see that being front-ended or possibly back-ended for the year?

Sorry, could you repeat your question?

So the reason I'm asking this is because when we say 5, 6 months, that's based on our -- the higher guidance of INR 250 crores to INR 265 crores.

Yes, sir, we are taking on the basis of the guidance, the future cover.

Sure. And obviously, this high seasonality to this. So do we see a higher run rate possibly in the second half of the year versus the first half? Or possibly we could see a more even distribution during the year in terms of sales?

At this stage, we are saying that we will maintain the similar run rate to what we have, and that's why we are giving a wider guidance because there is yet some uncertainty in the marketplace regarding COVID, what -- where it plays and where it doesn't. So we are giving a similar number. That's why the range, you can see, has been wider than what we have normally done.

Sure. Sir, just a final question. In terms of logistic costs, you did bring about that we are at a heightened level right now. If one had to look at it in terms of absolute cost compared to, say, what we were before a COVID situation or before people did see issues with freight, how much higher would that be on an average?

To what?

If we -- the freight costs compared, say, to Europe or U.S. compared to business as usual versus currently where we are seeing an heightened freight cost to container availability issue. How much is the difference if one needed to quantify this, sir?

It's 3% to 4%, it would be higher by about 3% to 4%.

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

Just 1 clarification on the other expenses. So we are associated with IPL. So I just wanted to know whether our advertising and promotion spends have any lumpiness in it on a quarter-to-quarter basis. So is it -- is our operating expense higher than this quarter also because of that?

So the payment term that we have in our agreement is fair across the year. So we don't see that.

Okay. And sir, you mentioned that -- the other thing is on the raw material side, you mentioned the inflation is 5% to 6%, and we've already taken a 2% price hike in April. So broadly, it should cover for -- the gross margins should not take a major hit. Is that the right understanding?

No. I mean, as we mentioned that the logistic costs are also going up for the time being. So we'll have to see where that goes up to. So that's why we are saying that averagely our range that we're looking at is between 28% and 30% EBITDA margin on a long-term sustainable rate.

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Rajiv Poddar for closing comments.

So we thank everybody for their time and thank you once again. We hope everybody continues to remain safe during these unprecedented second wave. Please take care. Thank you.

Thank you. On behalf of Anand Rathi Share and Stock Brokers, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

Thank you.

Thank you.