Balkrishna Industries Limited (502355) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Balkrishna Industries Q3 FY '22 Earnings Conference Call hosted by DAM Capital Advisors Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Chirag Jain from DAM Capital Advisors. Thank you, and over to you, Mr. Jain.

Thank you, Nirav. Good morning, everyone. On behalf of DAM Capital Advisors, I would like to welcome you all to the 3Q FY '22 Earnings Conference Call of Balkrishna Industries. To represent the management, we have with us Mr. Rajiv Poddar, Joint Managing Director; Mr. M.S. Bajaj, President, Commercial and Chief Financial Officer; and Shogun from SGA, Investor Relations adviser to the company. I will now hand over the call to the management for brief opening comments. Post start, we will begin with the Q&A session. Over to you, Mr. Rajiv.

Thank you. Good morning, everyone, and thank you for joining us today. 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 also SGA, our Investor Relations advisers. Let me begin with performance updates. Across geographies, we continue to see robust demand for our products. The macro challenges continue to be in terms of raw material costs and logistics. Specific to the quarter 3, higher power and fuel costs and increased marketing spend besides raw material cost pressures have impacted EBITDA. Having said that, we continue to maintain 28% to 30% EBITDA margin on a long-term sustainable basis. All our CapEx plans are on track, and we expect to take benefit of the strong demand via the capacity additions at Waluj and Bhuj plants. Let me recap the capacity profile. The current achievable capacity is 2 lakh, 85,000 metric tons per annum including the new Waluj plant that commenced operations in September '21. The brownfield CapEx at Bhuj announced in February '21 will add 50,000 metric tons per annum, while the old Waluj plant, which is being revamped, the CapEx for which was announced in November '21, will add 25,000 metric tons per annum. Accordingly, the entire capacity by the end of financial year '23 will be at 3 lakh, 60,000 metric tons per annum of achievable capacity. At BKT, while we remain focused on growing our business, we continue to invest in sustainability, whether it is solar power investments, co-generation power plants, tree plantation, safety and hygiene protocols for workers at plants, green products and training and education. We are now in the process of ESG review, and we'll be publishing our first integrated annual report in the 60th year of our company, thereby giving you a more detailed view on our processes and practices for sustainability. The Board of Directors have declared a third interim dividend of INR 4 per equity share in addition to the INR 8 per equity share that has been paid for the first half of this financial year. Additionally, the Board of Directors has declared a special dividend of INR 12 per share to mark the diamond jubilee year, that is 60 years of our company. With this, I now move on to the operational highlights. Our sales volume for the quarter was 70,320 metric tons, a growth of 18% year-on-year. For 9 months of the financial year, sales volume stood at 2 lakh, 11,676 metric tons, registering a growth of 33% year-on-year. Our stand-alone revenue for the quarter stood at INR 2,079 crores, which is -- which includes realized gain on foreign exchange pertaining to sales of INR 49 crore. For 9 months of the financial year '22, revenues stood at INR 5,987 crores, which includes realized gain on foreign exchange pertaining to sales of INR 94 crores. For the 9 months of this financial year, 54% of the sales came from Europe, 18% from India, 17% from Americas and the balance from rest of the world. In terms of channel distribution and channel contribution, 70% was contributed from replacement segment, while OEM contributed to 27%, with the balance coming from offtake. In terms of category, Agriculture segment contributed 66% in the 9 months of this financial year. While OTR, industrial and construction contributed 31%, and the balance came from other segments. The stand-alone EBITDA for the quarter was at INR 507 crores with a margin of 24.4%. The EBITDA for the quarter has been impacted by higher RM cost to the tune of 190 basis points. This is on Q-on-Q basis, along with higher expenses primarily on the power and fuel and marketing expenses. For 9 months, the EBITDA stood at INR 1,606 crores with a margin of 26.8%. Other income for the quarter stood at INR 31 crores while unrealized gains stood at INR 17 crores. For 9 months of the financial year '22, other income stood at INR 133 crores, while unrealized gains stood at INR 60 crores. Coming to the net ForEx items. For the quarter, we incurred a net ForEx gain of INR 80 crores, which includes realized gain of INR 64 crores and unrealized gain of roughly INR 17 crores. For 9 months '22 -- of the financial year '22, we incurred a net ForEx gain of INR 190 crores, which includes realized gain of INR 130 crores and unrealized gain of INR 60 crores. Profit after tax for the quarter was recorded at INR 329 crores with a margin of 15.8%. For 9 months of the financial year, profit after tax stood at INR 1,037 crores with a margin of 17.3%. The 9 months for the financial year '22 profit after tax was impacted by crystallization of contingent liability to the tune of INR 65.4 crores, post completion of certain tax assessments, which was charged in Q1 and Q2 of this financial year. Our gross debt stood at INR 1,881 crores at the end of 31st December '21. Our cash and cash equivalents were at INR 1,927 crores, implying a net cash position. For 9 months '22 -- of the financial year '22, we incurred a total CapEx of INR 912 crores. Of this, approximately INR 852 crores has been spent on the new CapEx program of INR 2,250 crores, which was announced earlier. For the quarter 3 of financial year '22, the euro hedge rate was 87.3% -- was INR 87.3. Forward hedge rate for -- currently stands at around INR 89.60. With this, I conclude my opening remarks and leave the floor open to question and answer.

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

Sir, how much price increase you have taken from January?

Sir, we have not taken anything in the Q3 or in the last quarter here. We were last -- in this current quarter, we have not taken any price increase. In the quarter 3, we have taken roughly 2% to 3% of price increase.

And then when it was -- this one you've taken?

In the beginning of quarter 3, we've taken a 2% to 3% price increase.

Okay. So there is no price increase post-October, you said. And how much RM cost increase we expect in this Q4 versus Q3?

2% to 3%.

So will there be further margin pressure going ahead, like because there is a price increase we have taken so far?

No, we expect it to be similar to current levels.

Okay. And lastly, what -- obviously, because the increased trade -- ocean trade costs, we are basically passing that to the customers. In your pricing today with the realization we had for the quarter down INR 296, what would the trade cost component in that?

We don't have the current breakup with us. We can get back to you.

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

I have one question. With respect to our current run rate of production, we are already at about 70,000 plus. So do we expect any further improvement in this production level till the time new capacity comes? Or this should be -- we should be in that 70,000 to 75,000 quarterly run rate of volumes for next 3 quarters?

Yes. This should be the run rate for the next 3 quarters, same.

Okay, okay. And with respect to the end market growth. So are you seeing growth across segments, be it agri and OTR or there is some -- I mean if we go by the indicators for every side, there seem to be some softening in terms of agri indicators even in the global market. India also has been weak, but global also.

No, it is across all the segments of products. We're seeing demand.

Okay, so no softening yet in any of the categories. Okay. Great.

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

Sir, firstly, I would like to know in conjunction with the global OHT market, what would be your market share currently? And then I have a couple of data point questions.

So basically, it would be roughly about 5%.

This is your -- this is your total market share, including agri and aftermarket?

Yes. Look, globally -- so global market share across all of private segments, we are -- roughly -- market share is about -- just about around 5% approximately.

Okay. Okay. And how much is the market growth, sir, at this point in time?

Market growth is roughly about 3% to 4% year-on-year.

Okay. Okay. So I was just looking at some data and the market share -- I mean, the overall market has not grown for the past few years, whereas BKT has indicated market share gains. So just wanted to get a sense that are we -- in terms of the industry, are we at the bottom end of the cycle and probably the industry could probably show some market growth driven by mining and infrastructure in the U.S., et cetera? So do you have any views on the market growth -- overall market growth going forward?

So I think if you see an average over the period of 5 years, the average growth would continue to remain between 3% to 4%. We could have some sprouts here and there and some -- sprouts of growth here and there. But average we will be between 3% to 4%.

Right. So our inherent assumption is that our market share will continue to grow. Obviously, our volume growth is going to be higher?

Yes.

Okay. And sir, just 2 things. OpEx growth in this particular quarter of 50-odd percent Y-o-Y, could you just highlight the reason what has contributed to that? And secondly, on India volumes. So they have been sort of soft for a couple of quarters now. How should we sort of read in going forward? Should we expect an improvement? Or what is the reason for that particular softness?

So basically, on -- the OpEx impact has mainly come on 2 main accounts. I mean, apart from raw materials, there has been on 2 main accounts, it has been on power and logistic cost.

Okay, okay. And sir, India volumes, how should we -- what has led to this sharp decline in the last couple of quarters? And how should we see it going ahead?

So I mean, the decline is in percentage terms. But if you see the numbers per se, they are not declining. It is because the export has been -- where the growth has come and export has got a higher share of those products, it is being for that. It is not that there has been a reduction in absolute numbers of tonnage being sent to India. It is -- so last year was about, say, 2 lakhs, 20,000 metric tons, we were at 22% of that. Now we are -- this year, our target guidance is about 285,000 metric tons. Out of that, we will be roughly 20% by the year-end. So if you see the actual numbers, there is a growth. The growth percentile was smaller. Absolute number, there's a growth. But if you see the percentile, you'll see some difference in there.

Okay. Anyways -- probably I'll take this offline then.

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

Sir, how much increase in the ad and promotion expenses in 9 months FY '22? And how would be the trend going forward?

Sir, as we mentioned that we spend in aggregate to the tune of INR 120 crores to INR 130 crores. And we see a huge benefit of these ads -- advertisement and sponsorships that we have been doing. And this helps us in our brand-building activities and brand recall activities. And we expect this to continue -- we expect this to continue for the next few years to the same tune.

Okay, sir. And sir, despite the muted tractor volumes by OEMs, our sales mix has improved towards the OEMs and also, margin is going down. So have you won new business from the OEM side in the last quarter?

There's a marginal increase on the OEM side, but that is just a part of our business cycle, which is there. So it is not anything to do with lower prices or anything. It's just a business cycle. It's a marginal gain.

Is it also impacting the margin?

No, no, no. That's why I said it's a marginal gain, not to impact our EBITDA margin or anything. EBITDA margins have been impacted mainly on 3 accounts, your power, fuel, logistics, raw material and some part of it has been also marketing expenses, which have got bundled up together in Q3.

The next question is from Nakshita Mehta from Credent Asset Management.

I had questions on, again, the freight situation and the cost situation, basically. How long still do you think this will persist? Can you just give us an overview of the industry?

So on the freight costs, we are also -- it's a challenging situation for everybody. It's unprecedented times. One is the -- there are 2 aspects to that. One is availability of containers to dispatch the material. And second is the cost. So we are also waiting and watching and reviewing it on a daily basis. It's very difficult to make any sort of comments on that at this stage. But we are waiting and watching and reviewing it closely. That's all what we can say at this stage.

Okay. And will then our order book or our sales volume be affected because of this? I mean how much do you think it will be impacted?

So I think we are -- our team has been able to do a good job to make sure that sales is not affected by -- due to availability. We have managed to keep that in check. And we are quite hopeful to continue to be able to manage the situation from a really basic point of view. Cost is something which is a second aspect at this stage, and we are reviewing that closely. And we'll take a call as and when we get more clarity on that.

All right. And just another question that your existing capacity is, I think, 2 lakh, 85,000 metric tons, right?

Yes.

And you -- I mean, you've given a guidance of volumes also about 2 lakh, 85,000, right?

Yes.

So I can assume 100% capacity utilization in sales?

Yes, almost.

The next question is from the line of Pramod Amthe from Incred Capital.

How has been, in the international markets, your competitor pricing action in the recent months?

So it is broadly in line with what we are doing, and it's in the similar lines.

So for them also, the last price hike was 5 months back? Or do they take usually a giant Feb hike and you haven't taken?

I mean there's nothing announced so far in this year, but we are reviewing and watching them closely, and then we will take a call from there.

Sure. And second one is considering that many of your competitors might be producing in between Europe and supplying there, how is the power scenario for the -- your OTR tires? What's the power cost for you versus how they compare? And that pressure, which is seen in Europe, should that give you a tailwind or a headroom to raise as the competition raises for you also to raise but your costs may not be going up?

So power cost is something which will be generically going up every week because internationally coal has gone up, internationally, not just for India or Asia. So the power impact should be similar for everybody across the world. But as you said, for European manufacturing there, the shipping cost would be a little bit of an advantage to them. Also, if you see, Europe is using mainly gas, so the prices of that has also gone through the roof. So that impact would be there for them as well.

Okay. Any -- as a percentage of sales, what might be the competitor's power cost and...

We don't have those details. We don't have those details.

But you don't expect them to take a forceful some pricing action because the power costs have spiked up for them?

They will have to decide for them what they want to do. And we are reviewing the situation. In case anybody does anything, we will also react.

And sir, going forward, how do you plan to increase your per kg realization until the new capacity comes on board? Because you're running full on the capacity. And if I have to build further on the momentum on top line. It has to come either by the price hike or your own actions on product mix. Anything on product mix improvement to be seen in next 2, 3 quarters?

No. We don't look at product mix from a perspective of short term. It is more about servicing the end user and giving him the entire basket of products that we have. So we don't see any product mix change coming up. On the price increase or price hike, that's something we are watching closely, what the market is doing, how they're doing, how market is accepting. And then if -- also the cost, how they are increasing or are they sustaining. And then we will take a call. But at this stage, there is nothing.

The next question is from Basudeb Banerjee from ICICI Securities.

Just to continue with the previously discussed point. Just wanted to understand March quarter last year where your realization per kg was some INR 257 rupees and how it is INR 296.

Sir, sorry to interrupt you but you are not audible. Hello?

We can't hear you. [Technical Difficulty]

Yes. Am I audible?

Yes, better.

I just wanted to understand, sir, your realization in March quarter last fiscal was some INR 257 a kg. And now it is INR 296. So almost INR 40 a kg increase. So how much of that is price hike? How much is mix change? And how much is the logistics inflation?

That is a combination. So I mean largely, it is -- I mean, we don't have a breakup of what is contributing to raw material, what is contributing to logistics. But it is mainly on account of both of these. And it is a part of the entire cost that we are passing to them.

Okay. And just because this time, the raw mat inflation has been so severe. So whenever in future, you see some raw material reversal, do you see a corresponding price benefit getting passed on in replacement in simply peers? Or you think that's not happened much?

Yes. So normally, that's what -- this is the nature of business. It gets passed on. There may be some time lag which you are seeing in the current quarter. But by and large, that is what will happen.

In between the spend also?

Yes.

The next question is from Siddhartha Bera from Nomura.

Sir, when we look at the commodity cost and when you have said that about 2% to 3% more increase you expect in quarter 4, does that factor in the current crude prices around $95, $96? Or you think based on these numbers, there can be further inflation, which can come subsequently in the next quarter?

So we are holding old stock also and that is what we are taking that into account. And also current levels of -- at current oil levels, also this we have factored that in as well. There is something drastically upward or downward that may have an impact. But with current levels, it is factored in.

So current -- you would say crude levels are factored in and talk about that -- it will depend on -- and second question is, sir, again, on the price hikes, when the demand is so strong and across geographies segment. So the pricing action is determined by competitors or what is probably getting to this delay in the prices? When you say you have not -- or probably in quarter 4 because of the commodity cost, do you think you may need to take more price hike?

So we are reviewing the situation. It is not just for every quarter that you can pass on. We have taken hikes in Q3, as I said earlier. We are reviewing the situation in case of things where the cost and expenses don't sort of subside, we will be forced to look at another price increase. We are working on that. We are reviewing the situation, and we will take a call at an appropriate time.

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

Sir, firstly, 2 data points. What was the production in the quarter and 9 months?

Similar to -- roughly 70,300 tonnes.

Right. And for 9 months, it would be largely in line with what you have reported?

For 9 months, it would be roughly 213,000 tonnes.

Sure, okay. And what would be the RM cost in terms of natural versus synthetic rubber for the quarter and how it has been led, yes, for the quarter, if you can share the numbers?

So synthetic rubber cost is almost same this quarter and last quarter, but natural rubber cost has gone up. Last quarter, it was INR 141 to INR 142 and currently around INR 160.

INR 1-6-0, right. So I've got a question on the commodity side. So we have seen natural rubber having a pretty long cycle. And for the last decade, it has been in a downward spiral. Do you think this is the beginning of an upcycle in commodity, especially natural rubber? Or how do you see the outlook here over the medium term?

So we think that the prices have already shot up quite a bit. We think this will sustain it here or maybe a small increase may come on this, but we don't see -- I mean we don't hope for a -- or we don't see a very big jump coming up from here.

Right, right. I mean a peak in the last decade or maybe in early 2007, 2008, it was almost at INR 240, INR 250. So do you think it can increase to those levels? I mean, how is the demand-supply situation on ground?

So there is no shortage as such. Earlier, the demand and supply is fairly even. So we -- looking at that, we don't see it to jump up drastically from here.

Okay. Okay. And finally, I missed the euro hedge rate, which you mentioned in your opening remarks. So what it is for the quarter and what is the forward hedge?

Euro hedge rate for the quarter is at 87.3. And for the year is 89.6.

So 89.6 for the forward quarter, you're saying, right -- for the forward 12 months?

Yes.

The next question is from the line of Mumuksh from Emkay.

Sir, OEM segment has grown strongly over the last few years, so what is the outlook for the -- in the OEM category for both Agri and Construction Equipment segment for CY '22? And what kind of outperformance can we expect, sir?

So on the OE, we expect to sustain the levels that we've reached. And with all the brand-building activities we are doing, the brand recognition that is coming through, it may be a couple of percentile, it may go up.

Right, sir. And sir, on the -- what was the carbon black sales in Q3 and 9 months, sir?

So to the third party?

Yes. To our revenue also and third party as well?

So third party was about -- roughly about 17% of our capacity. And in terms of revenue, it is overall less than 3% of our overall sales revenue.

And sir, what is the outlook for FY '23 for carbon black sales, sir?

So I think we are reviewing it, and we'll come back to you by the -- in the next quarter about the outlook for next year. For the full year, we'll give you the outlook in the next quarter.

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

My first question is on the tonnage per se, volume growth. So you indicated Q4 tonnage to be similar at the 70,000 tonnes. Usually, our Q4 has been typically quite strong per se. But you seem to indicate similar volumes for Q4 and Q1 and Q2 of the next fiscal also. So the -- are there any headwinds in specific geographies or segments that you're seeing that keeps us slightly cautious when it comes to the near-term outlook per se?

So basically, you're absolutely right that our Q4 has always usually been the strongest. But here, our bottleneck would be capacity. We are already running at about 100% capacity, close to 100% of our capacity. And this would be our run rate for the next 3 quarters till the new announced projects start kicking in.

Okay, okay. So the new capacity will come in hopefully -- sorry, at Q3, beginning of next fiscal year?

Yes.

Okay, understood. But the other thing is Europe as a geography has done exceedingly well. If you look at Q2 and Q3, I'm leaving Q1 aside because the base is very different there. Just in Q2 and Q3, the volume growth as well as absolute volumes has been quite strong there. This is all largely agri-led in Europe? Or what is happening? Give us some flavor.

So agri is also strong, which was our strong quarter, but also we are seeing a good uptake in the industrial construction in OTR for which we are going through a lot of trials. And now that the product has been accepted for that as well. So it's both -- the response has been good in both sectors.

Okay. Understood. Understood. Got it. Sir, the other point is on the -- from a cost perspective, you indicated around INR 130 crores per quarter kind of marketing ad and promotion spend. So that would imply something close to INR 520 crores for this fiscal year compared to close to INR 340 crores for F '21. I understand we have to do these spends to improve our brand presence...

Sorry to interrupt you here. The number that I told, INR 120 crores to INR 130 crores is for the whole fiscal year, not for 1 quarter.

Okay. Okay, okay. What was the comparable number for last year as per...

It was similar, but if you recall last quarter, I said that we are going to increase marginally. So I think it was about INR 100 crores, INR 110 crores, which is now going to INR 120 crores, INR 130 crores. And that's for the whole year and not for per quarter.

Understood, sir. So sir, my question is, we are in a commodity inflation scenario, logistics costs are going up. We also have to keep up our marketing spend per se. To remain competitive, therefore, in this scenario, and not lose market share or anything of that sort, would it be more prudent to cut our margin band so that we can remain more competitive in the marketplace while maintaining our investments on the brand as well as the other inflationary headwinds we are facing on different fronts?

No, no, we don't look at short term. I mean, we will always look at it long term. So our guidance has always been that we will have an -- we would like to see -- in the long term. If you recollect my comments and all from last quarter also last year quarters, where we were at 32%, 33% also, we have clearly indicated that these numbers are -- we expect BKT -- BIL to sustain between 28% and 30% and which we are continuing. Quarterly hiccups can come both upward as well as downward. But if you look at it, our -- as a management, our endeavor is to continue to be in the bracket of 28% to 30% long-term sustainable EBITDA margin. And that's what we are working towards.

Sure, sir. Sure. That is very helpful. Sorry, just before I conclude, one last point, sir. So given the capacity challenges we are facing and from Q3 onwards, our new capacity is coming through, but that capacity will also take some time to ramp up. So just directionally, will a double-digit volume growth for next year be more challenging given the capacity challenges we are facing at this point? This direction -- sir, I'm not putting you in a thought for a specific number, next fiscal year.

For next year, our guidance, we will give you at the end of Q4 in our next quarterly results. It's too early to give any guidance, let us complete this year. Let us complete our guidance what we have given for this quarter and this year. Let that get completed, and then we'll come back to you at the right time for next year's guidance. It's too early to comment on that. We've not even started the year. So give us time, and we will come back to you on that.

The next question is from the line of Devanshu Sampat from Yes Securities.

Two questions from my side. So if I look at the past 2 years, it seems that the contribution from the OEM segment has been increasing. So how are you balancing commitments to OEMs as well as maintaining the replacement demand at the time when you have capacity constraints? And is this possibly the reason for margin pressure apart from the input cost aspects that are there? This with the assumption that you get better pricing in the replacement market. If you can comment a little bit on this for both agri and OTR.

Yes. So I'll comment it on -- as a company as a whole. As I mentioned in my opening remarks, the EBITDA margins were affected on higher power and fuel costs during the quarter because of some shutdowns when we had to run our coal boilers. So unfortunately, at that time, the coal prices started to go up. So that impact has come in. And there was some increase in raw material costs and logistics costs. Along with that, there was a bunching of some marketing spend, which came in Q3, which was -- which was actually supposed to be for the whole year. So that is what has led to this. So we don't see it as an increase of OEM or a replacement market or any of that to have an impact on our raw material or our EBITDA margin. So that has nothing to do with it. And we don't expect that to also drag down our EBITDA margin. So that is not what has impacted that.

So would it be safe to assume that margins are pretty much similar for both segments?

Yes, yes.

Okay. And what's the breakup between OEM replacement and OTR, if you don't mind sharing that?

No, we don't have that segment-wise breakup on OTR and -- we can give you as a company as a whole. We were 70% from replacement and 27% from OEM and balance 3% was offtake.

Okay. Okay. And last question, once you're -- post all your capacity expansion, including the carbon black 200,000 tonnes, what will be your -- how much would be the requirement on a 360-tonne tire capacity?

Roughly about 25% to 27% of our finished products. So if you are talking about 360, so roughly between 90,000 to 100,000 tonnes.

90,000 to 100,000 tonnes.

I think consumption would be.

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

So my -- it's not more of a question, it's more of a thought. Sir, the way in which we backward integrate into Carbon Black has really favored us in such a situation when the crude prices are going up. So that's really commendable. Sir, on similar lines, as a company who spend a lot of money on automation and modernization, so our power cost is one major factor. So anything that we intend to do for putting up some kind of a solar plant or reduce our dependency or increase our captive power generation? So anything on that will add up to sustainable margins or increase our margins as well? So is anything, back of the mind, could you please share?

Yes. So thank you for your thought. And it sort of validates what we have been doing at BKT. Because if you see our program for expansion, we have expanded to set up a new captive power plant already at Bhuj which is ongoing in the CapEx spend that we are talking about. So that is already there. We have -- even if you see my opening remarks where we said about solar power investment. So we have done some of that, and we are reviewing the situation, and we will take it forward as and when our other projects are done. So that is that the coal prices -- power prices went up because in the last quarter, there were some marginal -- for a few days, there was a shutdown in our cogen power plant, for which -- by which we have to run our older boilers, which run on coal, and that had impacted the power cost.

Fine. Sir, just one sense, how much of our power requirement is currently made from our capital sources as of now and then when we go to the additional capacity, how would that be?

So at Bhuj, we are practically currently at about 80%. Once the new production expansion and new power plants coming up, we should be close to about 95%. And in the other plants, it is about -- roughly about 40% through solar, through windmills, et cetera, which have been generated.

The next question is from the line of Ankit from Smart Sync Services.

Sir can you just highlight, what is the price differential we have right now with our European and American counterparts, specifically the likes of Michelin numbers?

Sorry, your voice was not audible, it was very muffled. Can you repeat that?

I was asking about the price differential. I mean, what discount we sell our products currently compared to our European and American counterparts and the price differential?

So roughly 12% to 15%.

12% to 15%, okay. And do we maintain that going forward also? Or do you see that individual?

Yes. In the short term, we look to maintain that.

Okay. And sir, how do we see the situation whereas as we are already -- we have 100% capacity and our CapEx plan is more towards -- is going to come up by the end of FY '23. So can there be a situation in the first half of next year, where we'll not be able to cater to the demand as we have already guided for a very good demand environment?

Because that's what we said is that in the next 3 quarters will be -- we are at full run rate. And then once the new production capacity comes on board, you will see the jump coming in.

The next question is from the line of Naresh Suthar from SBI Life Insurance.

Yes, my question has been answered.

The next question is from an Lokesh Manik from Vallum Capital.

Rajiv, my question was on the OE customers. So what is the nature of contracts do we have with them? I'm assuming it would be a little different than what we have with our distributors.

Yes. So I think it's -- I mean basically, it's -- yes, I mean, it's a little bit more formal in the sense there's agreements and all, so where we have to give commitments of capacities and all which we are giving, and we are adhering to that. There is also a long-term understanding between both parties as to they will continue to make sure that they are buying. So then -- it's a little bit more formal kind of an agreement, which both parties need to adhere to.

Okay. And the pricing, is it index-based or would it be spot?

It's very difficult to give a generic answer. In some cases, it's index based, some basis is on the spot and similar to how we are selling in replacement. So it's a mix of both.

Okay. Any rough guidance on the proportion in this quarter guidance?

By and large, the overall replacement and OE margins are similar -- at similar levels.

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

Yes, sir, sorry if I am repeating the question. If you can just help us understand that -- about the margin, which you have given that you will be bouncing back to 20%, 30% in the long term. So what really will make you to go back to this kind of margin level? Will it be simply a decline in cost structure, or -- the cost structure or that will be something more?

So I repeat my statement once again. So what we have always maintained, sir, is that the EBITDA margins -- that our endeavor is to continue to maintain an EBITDA margin of 28% to 30%. During last year in my earlier commentary also, you heard when we were at 32%, 33%. We have said that these are not regular. Our sustainable long term would be 28% to 30%. Even now when it is down to about 24%, we are maintaining the same that our endeavor is to go to 28% to 30%. We are looking at how do we get there. It would be by price increases. We are going to review the cost structure. If the shipping cost, raw material prices continue to be strong, we will be forced to pass on that to -- that aspect to our end users, our distributors, who will then pass it on.

And last thing, if I can just understand from you is that your end customer base is inherently cyclical in terms of demand. And of course, you have a far lower market share, but you were adding capacity. So considering the inherent cyclicality of your end user segment, how confident are you about the demand, let's say, beyond next 5, 6 months?

So even with the new capacity coming onboard, our market share will go to between 7% to 8%. So it's not going to be where we will be a very big chunk that 30%, 20%, 25%. And also the capacity will be added in a phased manner. So by the time the demand -- by the time the capacity comes, it's not going to come on day 1. It will take us a few months to ramp up and reach that level.

So does this mean that irrespective of the end market cyclicality, you will be able to sustain about something like 10%, 12% kind of volume growth each year?

Yes, that is our endeavor.

The next question is from the line of Sonal Gupta from L&T Mutual Fund.

Sir, just could you quantify the impact of the higher power costs this quarter and higher freight cost? I mean, like where is freight cost now as a percentage of sales?

No, that -- I don't have those details readily available. We can't quantify it.

Okay. And -- but I mean, like what we are hearing is that freight costs have started coming down. And the other thing was, I think you were passing on some of the freight cost as a surcharge, right? So to that extent, incrementally that versus Q2, it would not have been a negative, right?

No. There's some -- cost has gone up beyond -- so we started passing on in the beginning of Q3. The cost went up beyond what we were passing on. So we are reviewing it. But as you rightly said, the prices have started softening. And hence, we are not reviewing a price increase in this quarter as what I mentioned to you earlier because it's difficult to pass on and then go back and on. So we are reviewing the situation for -- this is for the freight I'm talking about.

Got it. No. So the freight surcharge you're saying is that there's no incremental increase in that because these prices are now -- the freight costs are now coming down?

Yes.

But this quarter, it has been higher than what you actually passed on to the customers?

Yes.

And just another thing was on -- I mean, could you give us a sense of what sort of market share would you have in like European agri tires?

It will be difficult to give that breakup, but roughly about 10% to 12% overall in the agricultural European market.

10% to 12% in agri European market?

Yes.

The next question is from the line of [ Disha Seth ] from Annual Wealth Management.

Sir, I just wanted to ask that when you said the natural numbers was 16 per kg and you mentioned that the margin for Q4 will remain at a similar level as Q3. So I was checking in spite of the increase in the raw materials ask, how will we manage to keep the margins at the same level? Is the operating leverage kicking in because of full capacity?

Yes, yes.

Okay, that is the reason. Okay. And sir, on a long-term basis, what is the volume we look at as a volume growth guidance of 1x 4 to 5 years, you plan to increase by 10% to 12%?

Yes, that is our endeavor.

The next question is from the line of Ashutosh Tiwari from Equirus Securities.

You had mentioned last quarter that the realized rate was INR 87.75, and you're looking at power rate INR 89.7. But this quarter also, the rate is only INR 87.3. So when do you expect to realize this INR 87, INR 89.6 rate, will it come through in fourth quarter or it will be next year only?

So because we don't do 100% coverage, there's about 50%, 60% of the forward is hedged. So there will be some delay but -- time lag, but we should see it in the next few quarters to come through.

So even the -- now the mix is almost 50% is spot and 50% is forward?

Yes. By and large, by and large.

Then because current spot rate is INR 85.5, so then the rate would not increase much in the coming quarters, right?

It should be -- so I mean, this is the average rate. So we should see it coming in towards the mid of the -- end of this quarter and then full reflection would be in the next quarter.

Okay. And secondly, while we are passing on that freight cost element to the customers, is it that in case of OEM because they also source locally in their contract, we are not able to fully pass on this freight cost impact versus replacement market, or we are able to pass it to OEMs as well because they will be buying from local suppliers as well? And for them, the cost has not increased so much?

So most of our OEM contracts are -- I mean, it's a mix of it, but some of them also on an FOB basis. So that aspect gets cleared. So we are working closely with them to see how much for the other half, whom we are doing with logistic cost. We are working with them to see what can be managed.

And lastly, you said that this quarter, marketing cost was higher. So generally you guided a INR 120 crores, INR 130 crores for the full year. What was the number for this quarter per se?

So roughly, if you -- earlier, it would be about between INR 100 crores to INR 110 crores. So this has gone up to INR 120 crores to INR 130 crores. So that differential amount has come in this quarter, which will roughly -- that has come in this quarter, and that will be bundled out.

So that entire INR 10 crores extra has come in this quarter, you mean to say?

Yes, about that much. Yes.

The next question is from the line of Nakshita from Credent Asset Management.

So I just wanted to understand how much power cost and how much carbon black cost as from what percentage of your cost does it form? And how much do you plan -- do you see it reducing by this -- the capacity addition and this new CapEx? Hello?

We'll come back to you on the breakup, offline.

The next question is from the line of Devanshu Sampat from Yes Securities.

Sir, a few questions about your carbon black views on the marketing stuff. Can you talk about the outlook on the prices and volumes and there's also news of India's largest carbon black player expanding capacity by about 150,000 tonnes by the end of the year. So how do you see this playing out?

So on the carbon black, our current levels are about INR 95, I mean, approximately. And for the -- current prices are at roughly about INR 100 per kilo. And anyway, for us, our main business will always be tire and not carbon black. So that is not there. This is mainly for our self-consumption. And third party will be -- with third party coming in also, it will be roughly 3% to 4% of our overall sales volume. So it's not new business aspects that we are looking at, it is just to complement our own tire consumption.

How exactly are you sending this to third parties?

Sorry?

How -- I mean how is the distribution for -- when you -- when it comes to third parties? Are you doing it locally or is it exported?

It's a mix of both. There is a small amount which is exported, but mainly it is local.

Mainly local, okay. And this 30,000 advanced carbon black, is it all used in tires or it has other applications?

No, it's not advanced carbon black. It would be specialized carbon black. It will be in other industries.

Thank you. I now hand the conference over to the management for closing comments.

So we thank everybody for taking the time out to be a part of our call. And we hope, and we wish everyone along with their near and dear ones continue to remain safe in these challenging times. Thank you.

Thank you very much. On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.