Bodal Chemicals Limited (524370) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Bodal Chemicals Q3 FY '20 Earnings Conference Call hosted by SBICAP Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Tanmay Mehta from SBICAP Securities. Thank you, and over to you, sir.

Thank you, Raymond. Good evening, everyone. We at SBICAP Securities are pleased to host the Q3 and 9-month FY '20 earnings conference call of Bodal Chemicals Limited. The management team of Bodal Chemicals is represented by Mr. Mayur Padhya, CFO; and Mr. Meet Chande, Head of Investor Relations. We'll begin the call with opening remarks from the management followed by a Q&A session. So without further delay, I would like to hand over the proceeding to mr. Mayur Padhya. Over to you, sir.

Thank you very much, Tanmay. Good evening, everyone. Thank you for joining Q3 FY '20 conference call of Bodal Chemicals Limited. On today's call, I have our IR, Mr. Meet with me as well. Mr. Ankit Patel is not on the call due to some urgent travel plan suddenly. I hope all of you got an opportunity to see our financial results and presentation filed with the stock exchanges, and are also uploaded to our website. First, I will highlight current industry scenario and our business strategy, and detailed financial performance will be taken up by Mr. Meet later. At present, as we all know, there is a lockdown in Wuhan city in Hubei province in China due to coronavirus epidemic. Due to the lockdown, for more than 15 days, the chemical companies at Hubei province have been impacted, and we believe there might be a labor issue in the near future once they reopen. Prices of our Dye Intermediate products have improved significantly after December due to these events, along with closure given to one of the domestic Dye Intermediate player. Currently, the prices of Vinyl Sulphone is around in the range of INR 280 to INR 300 per kg, which was around INR 185 in Q3 FY '20. And the prices of H-Acid is around in the range of INR 240 to INR 500 per kg, which was around INR 350 in the Q3 FY '20. Along with the prices, the demand scenario has also improved globally after the ease of trade tension between the U.S. and China and end of holiday season in December. In the domestic market also, we believe consumption level should improve gradually from the current level. On the business strategy front, as you are aware, we have opened several warehouses and marketing offices in India and overseas as well, which we will be adding further in near future as per requirement. In addition to that, we acquired 80% stake in Sener Boya, a Turkey-based company, and opened a subsidiary company in Bangladesh, mainly for marketing of our Dyestuff. We will be increasing the share of B2C in overall Dyestuff business going ahead. All these efforts will increase Dyestuff share in total revenue, further integrate our business, leading to stable margin and increasing profitability in the coming years. Our total production for Q3 FY '20 improved by 11% year-on-year to 52,084 metric ton. Our Dyestuff production grew by 11% year-on-year, mainly due to increase in capacities, while Basic Chemical production grew by 13% year-on-year, mainly due to higher utilization and additional of Thionyl Chloride. Production of Dye Intermediate was flat year-on-year. Thionyl Chloride production has picked up and reached to almost 50% utilization in Q3 FY '20, and it has further improved to almost 90% utilization in January 2020. Total production for 9-month FY '20 grew by 3% year-on-year. The Board has approved acquisition of 100% stake in Trion Chemicals. Earlier, we were facing challenges to run the plant due to partnership nature of the business. Now we are confident to start the production at Trion from April 2020, and we will expand our efforts for marketing in U.S. market. With these changes, we believe it should be turned into profitable in near terms. I'm confident about the business outlook in the near term due to favorable industry scenario and increase in the prices of our finished products. Thank you. And I would like to request Meet to take up financial performance in detail.

Thank you, Mayur bhai. Good evening to all of you. So on the quarterly financial front, our stand-alone total income declined by 7% year-on-year and increased by 19% quarter-on-quarter to INR 3,086 million. Our stand-alone EBITDA, including other income, stood at INR 315 million in Q3 FY '20, which was higher by 13% quarter-on-quarter. Stand-alone EBITDA margin stood at 10%, including the other income. And our finance costs have increased year-on-year to INR 29 million, mainly due to high utilization of working capital limits. The profit before tax declined by 57% year-on-year, and it grew by 21% quarter-on-quarter to INR 224 million. The net profit for the quarter stood at INR 190 million. Our exports stood at INR 1,306 million and its share in total revenues was at 44% in Q3 FY '20. On the subsidiaries front, SPS posted the revenues of INR 288 million with the EBITDA of INR 7 million in Q3 FY '20. And Trion posted the loss of INR 39 million in Q3 FY '20. So -- and we are committed to minimize the losses at subsidiaries going ahead. Thank you. And now I open the floor for the question-and-answer session. Over to operator.

[Operator Instructions] The first question is from the line of Kishan Shah from Isha Securities.

Sir, on the financial side, accounting side, other expenses have increased by roughly 36% on a consol basis. So what component increased -- what component has resulted in the increase?

Yes. As far as other expenses are concerned, if we compare year-on-year, there seems to have increased, but if we compare with the last quarter -- sequential quarter, then there is a slightly reduction in the expense. So what we are comparing with maybe one of the quarters, otherwise other expenses are in the range of this level only. So there is no significant increase or decrease in the other expense.

Okay. So they are at -- on a 9-month level, if I see, they are at a 20% -- as a percentage of sales, they are at 20%. And historically, it has been at roughly 14%. So the 20% as a percentage of sales, will this remain the same going forward?

No, we -- what we can see is in the absolute number, this will remain more or less similar, but when we compare with the sales, it may reduce drastically once our performance improves in, say, current quarter and next quarter.

Okay, okay. And other income, what was the reason for other income to increase? It's at INR 4.8 crores. So...

No. Other income is -- more or less will remain flat level. There is no expected increase is possible. There can be some reduction or in the similar level, it will remain.

Okay, okay. But this INR 4.8 crores, what has increased in that?

I need to check. We can take this question separately.

Okay. And sir, could you tell us the Thionyl Chloride prices for the quarter that's gone by end of the last year same quarter prices?

Thionyl Chloride last quarter, it can have average price of INR 12 per kg. It's a rough estimate.

Okay. And same period last year?

Last year, it was very high, maybe about INR 30 or something like that.

Okay. So sir, why has the prices fallen so much? I mean it was at INR 30 and if I recollect trend, in quarter 2 FY '19, it was at INR 40.

Correct.

And this last -- this 9 month year-to-date, the average prices are at, I guess, INR 16, INR 17 per kg. So why has it fallen so much?

See, some new capacity has come up in the market. Apart from Bodal, I think Kiri's plant for Thionyl Chloride has also started. And earlier level were abnormal level. So another thing, the raw material prices has also fallen down. It has 2 raw material mainly, sulfur as well as chlorine. So earlier, sulfur before 1 year was traded at about INR 15, INR 16 per kg. At present, that is hardly INR 6 per kg. And chlorine was also positive about 1 year before, INR 5 to INR 6 per kg. At present, it's about INR 0 or INR 1 per kg or something like that. So raw material prices has also fallen down as well as some new supply has come up in the market. But still at this level also, we are very much comfortable and we are making good money.

Okay, okay. So sir, what is the estimated total demand for Thionyl Chloride in India?

Thionyl Chloride, it can be 12,000 metric ton per month or something like that.

Okay, 12,000 per month.

Per month, yes.

Okay, okay. And sir, 1 last question. And this Basic Chemicals, the production levels are -- I mean the production has increased really good. So we at this management commentary, where you've said that Thionyl Chloride's improvement in utilization has contributed to this increase. So could you quantify how much is contributed by Thionyl Chloride out of this 42,532?

Whatever addition is there, that is by Thionyl Chloride only. See, if we -- corresponding last year's third quarter, there was no Thionyl Chloride. And in this Q3 FY '20 4,300 metric ton is the production of TC, and that is almost the level what is increase in the production.

Right. So 4,300 at average utilization of 50%.

Yes. Last quarter, it was at 50%, yes.

All right. So if you're saying that if it's at 90% right now, so then these levels should increase further.

Correct. Definitely.

The next question is from the line of Anubhav Sahu from MC Research.

I've a couple of questions, sir. First, starting with China situation, we also have a trading company in China. So could you quantify what is our sales and raw material exposure to China?

Sorry, can you repeat? What is the sales and...

Yes. What is our sales and raw material exposure to China? How much -- how far out it'll be sourced from China? And what is our sales contribution from China?

Okay, okay. See, as far as sales to China is concerned, it has reached to second number as far as the list of our export countries after South Korea. But over there, some fluctuations are there. But we do have other destinations where we can make up if China is not working. There are other 45 countries where we export. And as far as raw material is concerned, there are few raw materials for which we are dependent on China. That's are like J-Acid, Tobias acid and Thionyl Chloride. These are some raw materials, which are -- we source from China. And we are happy to tell you that we already have about 3-month stock what we consume for these 3 raw materials.

Okay. And sir, among raw material, if you have -- how do we source aniline? Aniline is mostly locally sourced or it is also imported?

Both the things are possible at locally. We buy it from GNFC as well as import is also possible from Russia and some other countries. So both options are fully available with us.

Got it, sir.

And whatever you import from China, it's a very insignificant quantity as far as whatever we consume at our factory.

Got it, sir. Sir, I mean we haven't quite focused on vertical integration. I mean earlier we have been doing forward integration Thionyl Chloride for backward. And also you had some time back announcement for caustic soda, which would have benefited us on a backward integration point of view. So any thoughts on -- are you going to review that plan? Or that plan is still -- is now shelved for now? And secondly, any thoughts on other raw materials, which the possibility of backward integrating other import costs are concerned, particularly aniline or naphthalene. Not sure on the chemistry side of it, but is it possible for us to backward integrate even those chemicals?

No. If I answer your second question first, then for aniline, it's a very capital-intensive sales project. So presently, we are not considering naphthalene as well. I don't have exact idea, but it's not available majority in India. And also, it requires -- rather not feasible for Bodal. So whatever was feasible, that was caustic and chlorine that we were considering. But presently, we have put that project on hold. And considering current scenario, it is certain that down the line 6 to 8 months, we are not going to start that project. So we can say from next year, after Q2, we will reconsider when we can start this project. So for other backward integration, we are not considering at present anything.

Got it, sir. Very helpful. And, sir, coming back again to China situation, if -- for example, if the epidemic just remain contained to Hubei province, is there any way can we quantify that how much Hubei province per se contributes to Dye Intermediates business globally in terms of sales as well?

Yes. See, for Dyestuff industry, the 2 main raw materials are Vinyl Sulphone Ester and H-Acid. So for H-Acid, in China, there are some several plants. They are scattered geographically. But for Vinyl Sulphone, almost 90% of the production happens at Hubei as well as another province. It's Hainan or something like that. So in these 2 provinces only, 90% of the China's production happens for Vinyl Sulphone. And they are closed at present.

Okay, okay. And any on-the-ground feedback we have about all the factories, which are closed right now? What time period they are closed and when are they going to review start-up production?

Yes. See, it is now almost more than a month. They are closed earlier because of their vacation and they couldn't restart after the vacation. We do have our subsidiary company over there, our employees. So we try to contact them. And they say, they are at home only. There is a total kind of lockdown. And nobody is moving out at the same time. The biggest producer at the world level that is Hubei's Wuhan, that is also located in this province and they are also closed. So people are in fear very much. And according to them, it do not seem that in near future, they can restart. And we also come to know from several news that is coming up and some news clearly claim that whatever figure officially released are very much less than what actually is happening over there. So it is very clear that within a month or 2, it is not possible for them to restart even if they come up for any solution within 10, 15 days.

Okay, okay, sir. Okay, quite helpful. Sir, you mentioned about Kiri Industries plant, I mean, the new plant they have started in India. Any thoughts on that? I mean, particularly, if you could share what is the plant capacity they have, which they have started in India?

No, I don't have exact number or data.

And also, sir, you've mentioned in your presentation about the closure of 1 domestic Dye Intermediate player. Could you share further details on that? I mean how big -- how big is the plant and if you can name it also?

Yes, it's Mayur Dye Chem. They are unlisted player. And I understand their capacity for Vinyl Sulphone is almost 6,000 metric ton per annum, and for H-Acid is about 3,000 per annum metric ton.

Anubhav, these are approximate figures.

Got it, sir. So I mean, yes, there was another related media report that 3 of these small players in the Dye Intermediate space may close down. And I assume it is mainly because of the few of the raw materials, which they have to source from China, it's not available. What is your assessment about the industry in general?

Yes. See, it is correct. Those who do not have raw material in-house and for that raw material, if they are dependent on China, then they have to definitely close down their factory. At the same time, for Dyestuff players also, those who are not backwardly integrated, for them also, it will be difficult for them to solve or continuously run the factory because of the addition or rather improvement in Dye Intermediate prices. If they are not able to absorb it and sale them, then that will be difficult for them to continue production for a longer period.

The next question is from the line of Ayush B from Aequitas Investment.

Sir, you mentioned that we are dependent on China for some raw materials. Those were J-Acid, Tobias acid and 1 more was which?

Thionyl Chloride.

Which chloride, sorry? I didn't get.

Thionyl Chloride.

Okay. So sir, just wanted to understand how significant are these raw materials compared to our overall cost of raw material. Because even if the situation doesn't improve after 3 months, we will have to eventually source them from somewhere else, right?

See. As far as total raw material cost of the company is concerned, this can be hardly 3%, 4% or like that. And that is required to produce some of the Dyestuff. So their share is very insignificant as far as the consumption for raw material at the company level is concerned. But yes, definitely, that much Dyestuff, we do have a quantity for about 3 months. So prices for that Dyestuff will definitely improve sooner or later, and we will definitely get benefit out of this.

Correct. So because of this China -- because of these prices of Dye Intermediates almost doubling, so what -- how does it impact a company which is fully integrated? Does our margins improve significantly? Or we'll have to absorb everything in our Dyestuff margin?

See, for some time, we will not get improvement in Dyestuff prices till the time the consumer has the stock in-house and we continuously review the situation. If they feel that prices are further going to improve, then they will start sourcing. So at intermediate level, yes, we have started orders at the improved level. But Dyestuff, we need to wait for some time, maybe 30 days to get approved in the market.

Right. So currently Dyestuff prices have not increased?

Yes. Mostly, that has not improved, but looking to the scenario, manufacturers are not even quoting, because they are also waiting for better time to come and not in hurry to sell everything.

Okay. But sir, do you feel that because of in the going ahead, even though Dyestuff prices increased, but the textile industry currently the demand situation is already bad. This might further affect the demand because of the huge increase in prices?

Yes. See, when we say Dyestuff, which are used in textile, and textile industry is not working better, see, at that time, we claim that textile industry is not doing profit, but that -- it has not drastically came down because it's related to population of the world. Till the time their quantity is there, our consumption of Dyestuff will be there. So we are not much affected by the textile's performance as far as profitability is concerned. But what we are concerned is with the volume, what they work with.

The next question is from the line of Saravanan Viswanathan from Unifi Capital.

Sir, you had mentioned you have a -- I mean from the ground level in China because you have a subsidiary there, you expect -- you don't expect any production to restart in the next 1 month. Have I heard it -- heard you right?

Correct.

You have only a marketing and trading office, right? You don't run a facility there or you have a facility there?

No, we have only marketing setup.

Okay, okay. And the second part -- I mean second question is on Trion Chemicals. So how much do you have to spend for Trion to make this 100%?

It's about INR 6.5 crores.

Okay. So stake is increasing from what percentage to what percentage?

From 59% to 100%.

59% to 100%. And so 9 months, you have said that INR 39 million loss at the PAT level represents 59% stake, right?

No, that is 100%.

Okay. So the 100% loss is INR 4 crores -- I mean almost approximately INR 4 crores for the first 9 months.

Correct, correct.

And you expect production to start from Q1 or already started? Q4, you will start?

No, we are expecting from Q1.

So what is the loss estimate for Q4? I mean how much it will go INR 4 crores will -- how much of it will go up?

I don't see further increase. See, whatever is there, mainly interest cost that is whatever Bodal has financed to there. So apart from interest, which is lockdown at the consolidated level, there is an expense of about INR 15 lakhs to INR 20 lakhs per month. That will be there. Other than that, at the consolidated level, there won't be any expense. Because whatever term loan, et cetera, was there, that also we have repaid.

Okay. Okay. So in the Dyestuff segment, have you seen any volume growth in this first 9 months? What is the volume growth you would have seen in the Dyestuff segment?

For this quarter, there was 11% increase in volume year-on-year. So there is not a significant improvement. Significant improvement is yet to come for Dyestuff of the increased capacity.

Okay. No, for the 9 months, also a similar number, 9 months?

One second, let me have the 9 months. For Dyestuff 9-month data, it's 13,885. So it hardly 1% improvement as far as 9-month total concern year-on-year.

Okay, okay. Do you feel like situation has -- I mean outlook looks better than what it was? You're referring to volume growth, plus the -- anyway, the Dye Intermediates pricing will be beneficial, but you're also expecting more -- I mean additional volumes, right?

Yes. Volume as well as margin growth, both should happen in the Dyestuff.

Okay. And similarly, in Dye Intermediates, whatever decline you have seen, is it only price decline or has there been any volume issue there also?

No, at the 9-month level, there was almost flat at the volume level. But yes, pricing were down compared to last year.

Okay. Okay, understood. A couple of bookkeeping questions. How should we understand the tax part, reported tax of the year? What would be the...

So we have estimated tax as per the new regime of 22% plus the surcharge, so total it comes to 25.17%. And we have certain additional depreciation when we compare to book depreciation. So effectively, it can be 20%, 22% tax regime, not more than that. It can be even lesser than that.

Okay. But from a 9 months basis, the reported tax looks quite low. That's why I wanted to know.

Yes. So see, for earlier year, it was about 35%. And even if we include the effect of additional depreciation, then that might have about 32% or something like that. So there is a drastic reduction of almost 10%, 12% when we compare with the last year's tax provision. That's why -- at the same time, total profit has -- before tax has also come down. So both these things, lower profit as well as lower tax rate, that has contributed to lower tax provision.

And you have moved to the new regime, right, 22% plus?

Yes. Considering the things, we -- it seems that we will go for this only.

The next question is from the line of Pritesh Chheda from Lucky Investment.

Yes. Sir, just wanted to know in your quarter gone by, what would have been the realization for your intermediate products, that is, H-Acid and Sulphone? Would it be at least INR 300 and -- sorry, INR 180 for Sulphone and INR 350 for H-Acid or a different number?

For Q3 FY '20, H-Acid average was INR 355 and Vinyl Sulphone average realization was INR 187.

Okay. So it's a similar number only. Second, what would have been your capacity utilization of intermediate? And what is your sales mix for intermediate? So in your total revenue, what would be intermediate sales?

In the total revenue for the quarter you want to know?

Quarter or 9 months, whichever you are comfortable. I'm okay for the 9 months also.

Yes. For the 9 months, intermediate has contributed 38% as far as revenue is concerned.

Okay. And what is your capacity utilization?

Capacity utilization is almost 70%.

Okay. And from your comments about China, so is it fair to conclude that these capacities might take some time to come on system, considering the labor shortage, et cetera? So if you have to hazard a guess that it is going to be a couple of quarters affair for the whole capacity to come online? Or it can be shorter than that?

So, as I mentioned, it will take time. And the news what we have been getting from the news channel and whatever we get from our personal sources, everything is closed as far as Hubei province is concerned and nearby provinces are concerned. And as I mentioned earlier, almost 90% of the Vinyl Sulphone capacity is situated over there. And Vinyl Sulphone is the main raw material for production of Dyestuff as well as main products for Bodal Chemicals. So it will take time. Even if the solution comes within, say, 10, 15 days, then it will take at least 2 months for them to be on stream and it can further take some time for their material to come to India and can affect the India's price structure.

And what is capacity expansion lined up in India, industry capacity expansion, if any, in the next 6 months? Any capacity is coming?

No, we do not have any capacity expansion, almost nil, whomsoever have -- has expanded and already expanded in the last couple of years.

Okay. And what would be the industry capacity utilization? Thus, if it is 70% for you, what would be...

It can be a similar number for industry.

The next question is from the line of Parth Adhiya from B&K Securities.