Borosil Renewables Limited (502219) Earnings Call Transcript & Summary

Thank you for joining to the call. We are -- on behalf of Edelweiss Broking, I would like to welcome management team of Borosil Glass Works Ltd., to discuss the result and the outlook for the company. We have with us Mr. Shreevar Kheruka, Managing Director and CEO; Mr. Rajesh Kumar Chaudhary, Whole-Time Director and Group CFO; Mr. Anand Sultania, CFO, Borosil Limited; Mr. Swadhin Padia, CFO, Borosil Glass Works Ltd.; and Mr. Chaitanya Deshpande, Investor Relations of the company. I would now request Mr. Kheruka for his opening remark, post which we can open the floor for Q&A. Over to you, sir.

Thanks, Praveen, and thanks, Edelweiss, for hosting this call. Wish everyone a good evening. Thank you for joining. My colleagues and I are glad to be interacting with you again. Our Board met yesterday and approved the financial results for the quarter and 9 months ended December 2019. Our results and an updated presentation have been sent to the stock exchanges and have also been uploaded on the company's websites. I can briefly run you through the highlights of our developments and our performance and then open it up to questions. Before I start, I'd also like to mention that this quarter is not exactly comparable to the same quarter last year, the reason being that Diwali was much earlier this year compared to the last year. So the Q3 performance of this year versus Q3 performance of the last year are, not strictly speaking, comparable. As most of you are aware, the Borosil Group of companies was undergoing a scheme of amalgamation and arrangement for which various statutory approvals are required. We have now got a nod from NCLT. The scheme comes into effect upon filing of the certified order with the registrar of companies. This is expected to happen by 12th, February 2020. The appointed date of the scheme shall be 1st October 2018. The company management had taken into account feedback from investors, and we are glad that we have been able to action out and invest the expectation. The implementation of this scheme will now eliminate various cross holdings amongst companies in the group, resulting in a very simple and clean structure. Shareholders will now hold shares directly in each of the consumer and scientific-ware businesses as well as the solar businesses -- as well as solar business, thus unlocking value. A shareholder with 1 share in Borosil Glass Works Ltd. will get 1 share in Borosil Renewables, which is the solar business, and 1 share in Borosil Limited, which will be the consumer and scientific-ware business. The record date 1 -- #1 for this exchange of shares is 18th, February 2020. Shareholders can thus decide to participate in either or both the companies. Earlier, a shareholder in Borosil Glass Works Ltd., willy-nilly held some portion of Gujarat Borosil Ltd., however, they were not able to unlock that value. With this scheme now, the value is getting unlocked. With the merger of Vyline Glass Works Ltd., as a part of the scheme, the related party transactions will be -- this related party transaction will be eliminated. Vyline supplies some of the scientific glassware products and glass serving-ware products that Borosil markets. Those has been done always on an arm's-length pricing basis, eliminating this related party transaction is perceived to be a cleaner and more transparent arrangement. Vyline's annual EBITDA of approximately INR 15 crores will now get added to Borosil. There is no impact on the top line as Borosil was Vyline's only customer. Upon implementation of the scheme, the consumer and scientific business, including Vyline, will get merged into Borosil -- will get demerged into Borosil Limited, which currently houses the Opalware business, which is conducted under the brand Larah. The Klasspack business, which is a subsidiary of BGWL and conduct the Pharma packaging business, will become an approximately 80% subsidiary of Borosil Limited. Borosil Technologies, which is a 100% subsidiary of Borosil Glass Works Ltd., which is -- which houses the new scientific instrumentation business of Borosil, will also get demerged into Borosil Limited and will become a 100% subsidiary of Borosil Limited. Borosil Limited is currently not listed. The next milestone for us is to get the shares of Borosil Limited listed on the NSE and BSE. We are given to understand that this could take about 8 to 10 weeks, and we expect it to be listed in -- sometime in April. Now coming to the operations of the business. During the year-to-date -- or the Q3 of this year, the company's SIP and consumer division achieved a revenue of INR 494 crores. I correct myself, this is for the 9 months of the year. This is a growth of 16.4% over the same 9 months of the previous year. Consumer products business comprised about 70% of our revenue, and products under the flagship brand Borosil recorded net sales of INR 222 crores, growing by 35% over the corresponding period in the previous year. That's an incredible performance given the market conditions that we are in, and this is kudos to the team that has delivered this good performance across our product range, both in the legacy microwavable products as well as the new ranges, which we have introduced over the last few years. While Borosil continues to be very strong in glass products for kitchenware, storage and serving-ware, the brand's equity and franchise is no longer restricted to glass. With the successful extension into other ranges, such as Hydra for storing and on-the-go liquid storage, domestic kitchen appliances and steel serve fresh serving-ware products, the share of high-quality nonglass products in the range is close to 40%, which is a successful extension of our brand. The company has been keenly listening to feedback from consumers and our trade partners and constantly introducing new products to meet changing and emerging consumer needs. From the shift away from plastics to designs to optimize cabinet storage space, to carrying hot and cold beverages, to the convenience of chopping and grilling, our teams have kept the new product pipeline busy. In Larah, our growth was more muted at about 5%. However, to note is we had one single order last year, which was not repeated in this year. And if we take this order out, the growth was approximately 25%. We have continued to invest in advertising and sales promotion for our brands to strengthen long term equity. During the 9 months ended December, advertising and sales promotion to sales for consumer business was about 6.5%. The growth in sales continues to be broad-based. All regions have shown strong growth. Similarly, all channels, that is general trade, large-format stores, B2B, CSD and e-commerce are all performing well. Coming to scientific products. Our SIP division during the 9 months ended December was about INR 146 crores, which is a growth of 4.5% over the same period last year. The Labware division clocked sales of INR 113 crores out of the INR 146 crores, which is a growth of 5%. Subdued funding to government laboratories and tighter monitoring of budgets at pharmaceutical companies has resulted in low growth in the lab glassware business in India. As we have shared in earlier interactions, the company has begun seeding export markets so as to create an additional growth vector for Lab glassware. We understand that this takes time to nurture. However, now we see the fruits of this action, and we are seeing exports now in double digits as far as the lab glassware revenue is concerned. Similarly, LabQuest instrumentation, designed by Borosil, which is largely to substitute imported products, is being built as an additional pillar of growth in this business. And this also is now a double-digit contributor in terms of percentage to our Labware business. Klasspack's range of ampules and vials for primary pharma packaging is our third pillar of growth. This vertical has been facing a few challenges over the past few quarters. We have decided to strategically focus on meeting the specification requirements of high-quality long-term customers. And I'm glad to say that in this year, we've added almost 4, what we would call pharma A plus customers. Quality assurance and inspection equipment has been installed and production runs to meet these unique specifications have been taken. It's -- consequently, it's been necessary to lose some business as we have been saying in the short run, both in terms of lower selects for the higher quality requirements as well as substituting, let's call it, to lower grade customers with these higher pharma A plus customers. And I'm happy to say that we have been able to improve our EBITDA margins in this year. While we are not quite where we wish to be in terms of margins, we anticipate a substantial improvement in the quarter 4 as well as going forward in the coming year, both in terms of revenue growth -- both in terms of revenue growth as well as in terms of EBITDA improvement. We feel confident that our strategy to derisk growth in the scientific-ware business, which used to only comprise lab glassware in India in the past is playing out well, with the introduction of these 3 new pillars of growth, namely exports in lab glassware, instrumentation through a LabQuest brand and primary packaging through Klasspack. Coming to EBITDA margins. EBITDA from operations was at about approximately INR 80 crores -- INR 80.1 crores. This was -- this grew by 25% over the same period last year. Overall, EBITDA to sales improved from 15% -- 15.1% to 16.2%. The EBITDA earned by Vyline, which is not included above, is an additional INR 11.2 crores. The margin improvement was driven by Larah, where we are working towards an objective of improved margins through cost optimization as well as through benefits of scale. Larah has now improved its EBITDA margin to 25.6%. The EBITDA margin in Klasspack, as already mentioned, was low at 7.2%. Work is in progress for stabilizing the production lines and reducing wastage. And we expect the quarter 4 to further improve the margin, and we hope to be in double digits shortly. Coming to PAT. We registered a PAT of approximately INR 57.2 crores, which is a growth of 37% over the same period last year. Overall, we see -- we continue to see a multi-year growth story ahead of us. Over the last 3 to 4 years, we have focused on and successfully reduced our overdependence on lab glassware in the scientific division and microwavable glassware in the consumer division. The new avenues of growth which we have developed have helped to strengthen the foundation of our company, on which we have built -- we can build a more robust growth pipeline in the years to come. Even as we expanded our retail reach for our consumer products, our go-to-market strategy has created multiple meaningful channels that we can leverage as modern trade and e-commerce growing significance in India, Borosil has built relationships and capabilities in-house to service these channels effectively. We will continue to invest in our brand, Borosil and Larah, in order to sustain customer pool, which will give us a long-term competitive advantage. We will continue to target a medium-term growth rate of 15% to 20% in our consumer business as well as 8% to 10% in our scientific business. And we expect EBITDA growth to continue improving and take it to an overall high teens area. Scale and improved EBITDA, along with the merger playing out, will definitely improve ROCE as well. So overall, that's my view of the third quarter. Like I said, the third quarter is not exactly comparable. So prefer to discuss the 9 months ended numbers, and I'd be now happy to take questions that you may have.

[Operator Instructions] The first question is from the line of Prakash Kapadia from Anived PMS.

Couple of questions. If I look at the 9-month performance of the Opalware, we've seen around a 5% growth in sales. What could be the reason of this low growth apart from the seasonal impact, which was felt in Q3? So I'm looking at a year-to-date 9-month to 9-month comparison.

I already mentioned this in the call in my opening remarks. We had a onetime order last year, which was a substantial onetime order of more than -- almost INR 20 crores -- slightly more than INR 20 crores, which was not repeated. If we take this out of the equation, our sales growth is more or less more -- around 24%, 25%. So frankly speaking, I think we have had a pretty good performance in Larah. And that onetime order, it's not that it's -- we are looking at other orders as well. So I don't see any major challenge to Larah vis-à-vis the Borosil-branded product range. And I expect that we'll be closer to achieving our sales targets for -- by the end of the year.

So what would be the institutional sales as on date of the 9-month figure for Larah if you can share?

Sorry, I don't share that data.

Okay. Any sense you could give us on liquidity issues across wholesalers and retailers. We still keep on hearing there are liquidity issues. So anything specifically, what you have observed? Anything what we are doing to help them if...

Quite frankly, we have not seen any increase in our outstanding base at all. So we have not yet experienced anything material as far as liquidity issues are concerned. If anything, our collections are running ahead of our projections. So we don't see that play out yet.

Okay. And lastly, any specific import duty change in the Opalware segment? I think recent budget talked about kitchenware import duty increasing.

In fact, import duty across the board has gone up from 10%. BCD has gone up from 10% to 20%. So effectively, the import duty is now from 11% to 22% and this includes Opalware; this includes kitchenware, which is made from borosilicate glass as well as soda lime glass. And it includes some steel products, porcelain, bone China even some appliances. So across the board, there has been an impact. And we are still working out the cost impact to us because we also import some products. But frankly speaking, I think for us, it's more of an opportunity than the cost because we have -- we -- our scale is large enough for us to be able to either pass some on to the customers or get discounts from our suppliers. And in our case, about 2/3 of our sales are on production. So to that extent, we have benefited actually by the import duty.

Exactly. So that should be seen more of an opportunity because, one, pricing becomes more competitive. Secondly, from import side, there could be supply side distribution. So that could be a lever for higher growth in the coming quarters or?

Yes. That's how we are looking at it. But obviously, it's still to play out, that's exactly how we're looking at it.

I will come back if I have more questions.

[Operator Instructions] The next question is from the line of Rishav Sisodia from Concept Investment.

Sir, I had one question. If I go and check on Amazon and Flipkart about our Larah product. I think there's a significant difference in the amount of discounts provided on both of the platforms. So if you could just help us how the -- how are we taking on the e-commerce platform?

Typically, e-commerce, we are not giving anything different than we give in trade. So you'd get similar discounts in trade. We are not following a strategy to discount our products on e-commerce to push sales there. Rather, we are trying to market our products on e-commerce. And the convenience of the platform, market the convenience to attract customers to buy from their own home. So while you're right, there may be some discounts in some products in both Amazon and Flipkart, I don't think you'll see a situation where the discounts are dramatically different than what they are in trade. Sometimes e-com also has some special products, which are not available at all in trade, which are dedicated e-com products, in which case, the discounting may be slightly aggressive. But we are not looking to switch any trade sales to e-com at all.

Okay. That is all from my side.

The next question is from the line of Naveen Bothra an individual investor.

Congratulations for good set of numbers, once again. My first question is regarding the China coronavirus issue. Will it have any impact on Borosil Glass, positive or negative on supply chain disruption from there?

Yes, I think for sure, it will have an impact. Positive or negative, I don't know yet. But in the sense that we have our inventory planning and all is quite good. So we have sufficient inventory to cover short-term disruptions, whereas others may not. So to the -- in the short term, it may be quite positive. In the long term, it really depends on how bad this virus evolves. And if it starts impacting people in India and people don't go to markets to buy, then, of course, it'll have a negative impact. So I mean, anything -- any virus is a bad thing, so we wanted it to go away as quickly as possible, obviously. But I don't foresee -- it's too early to really say whether there's -- what kind of impact it will have, but it will have an impact, and we are following it very closely, virtually on a day-to-day basis.

You are also importing from China?

Yes, we are.

Okay. And the second question is regarding the listing clarity, which I have already discussed in the Gujarat Borosil con call. But once again, what I can understand is that on 14th February, Gujarat Borosil will go out and there will be no trade. It will merge a new Borosil Glass Works Ltd.

On 12th February.

Yes.

Okay. So on 12th February is the effective date, at 14th February the share stop trading, as I understand.

Yes. So the only listed company will be more Borosil Glass Works Ltd. in its current format.

Yes, which name will change to Borosil Renewables Limited.

Okay. But the listing, as far as -- after the recorded one, the listing will be of Borosil Glass Works Ltd. as is consumer and [ SIC ] division, I think?

Yes. So the name will change to Borosil Renewables Limited. It will remain listed. But on the same date on 12th February, the consumer and scientific business will demerge into a 100% subsidiary, which is Borosil Limited and we will apply very shortly thereafter for listing of Borosil Limited. So that will get listed probably sometime -- it'll take 8 weeks, sometime in April, hopefully, we expect it to at least.

No, that is okay, 8 to 10 weeks is okay. But more clarity will be good for the investors also. But I think from 17th February onwards, that is Monday, Borosil Glass Works, as it is today, will remain listed and trading will continue, I think?

Yes, you're absolutely. But the name will change. The name will have changed even in the Borosil's to Borosil Limited. Sorry, to Borosil -- my mistake to Borosil Renewables Limited.

And record date 2 will see the demerger of this Borosil Glass Works Ltd., that I can -- as far as I understand.

Demerger will happen on 12th of February only. The record date 2 will be the issuing of the share of Borosil Limited to the shareholder of Borosil Glass Works Ltd. So that record date will be in the month of March -- by in the middle of March, somewhere.

Till then, it will be -- will be housing the business of Borosil Glass Works Ltd.. That is okay?

Yes, you're right.

Yes.

Okay. And the next question is regarding the ESOP adjustment, there is an announcement. So if you can clarify on that one?

So we had an ESOP policy in Borosil Glass Works Ltd. for certain employees. So as a result of this scheme, the ESOP policy also has to be slightly amended to incorporate the same -- so the same benefits, which shareholders get, the ESOP holders also get. So the scheme is amended only to that extent. So there's nothing new except that the ESOP holders by law have to get the same benefits as the shareholders are getting.

The exercise price will reduce?

There will be an amendment in the exercise price, but I don't have an exact number for you, what is that new exercise price. But I have to check that. But it's a -- in my opinion, it's a very small amount in terms of the overall share of capital. And this -- we are just following the provisions of the law.

Yes. Excellent. And as far as Larah capacity is concerned, I think this will be more or less full by the end of the year 95% capacity. So what's your view about the further expansion or the third-party manufacturing about the Larah?

So we are at the moment, going to be repairing the furnace in the next few days, I guess, and we'll be expanding it by about 10%, our capacity in that. So I think -- and then we have some other options, as I've already mentioned, to reduce the lower value products and increase higher-value products. So I think another year, we should be okay. We should be able to grow with the current capacity. We'll probably take a call somewhere towards the end of this financial year to -- I mean, I've talk about now the 2021 year in order to decide what to do with Larah in terms of expansion.

The next question is from the line of Kamlesh Kotak from Asian Market Securities.

So my question pertains to Larah, in terms of how the competitive intensity and how the pricing environment work between -- across the 3 players. Are we at par or at a discount to the other 2 players in the market?

I think we are more or less at par with our bigger competitor, which is LaOpala. Ello maybe slightly lower than us. But I think I mentioned this many times in the past that if you look at general -- if you go to any single shop, you may find the variance even within products. And really, the play is the product combinations can be infinite. And what looks like a 21-piece dinner set maybe you can play with it depending on the combinations, which are inside the 21-piece dinner set. So it's hard to talk at SKU level. But as a broader or at a higher level, I would say we are almost similar to LaOpala. And Cello maybe slightly behind us in terms of pricing. That's my perception. But I don't have any data to kind of back up my statement. That's my understanding in the market.

And in terms of SKUs, are we having enough of range in terms of the total -- what the competition has? Or how -- if you have any number in terms of how many SKUs we have across product categories for Larah?

We have -- okay, we have more than 100 -- 100 different shapes, let's call it, more than 100 different shapes. SKUs are almost infinite because you can combine those shapes and the designs to make any number of SKUs. So we do have, I would say, enough of a range of SKUs. We don't need to have anything new.

And how much is the utilization currently for Larah?

I think this year, we'll end up at around 85% to 90% capacity utilization.

85% to 90%. And this with 10% CapEx expansion, we will -- it will take care of our 2 years of requirement, right?

I think another 1 year. Another 1 year, we should take care.

Then we have to again plan for some more CapEx?

We'll have to see. We have to see what are the different options.

Is outsourcing also an option or that's not an option there?

Well, I don't know, we are -- we are still evaluating that.

Okay. Right. Secondly, if you can just get some sense about the total equity. I understand Borosil, it will be 114 million, right, post the demerger?

Yes, INR 11.4 crores, yes. Roughly.

And how much it will be for Gujarat Borosil?

Both will be exactly the same.

Okay. And how much will be the cash and debt level across 2 entities, if you can just share some broad numbers?

Cash will be around INR 100 crores and debt will be a similar number, both the entity.

How much?

The debt will be INR 100 crores.

Okay. These are about Borosil or Renewable, you are talking?

Maybe I'm talking about the Borosil Renewable Limited debt.

And for Borosil consumer division?

Borosil net cash will be approximately INR 80 crores.

Net cash would be INR 80 crore for Borosil consumption, right?

Borosil Limited.

Borosil Limited.

Right. Right. And for this company, you said how much for...

Borosil Renewables will be debt of about INR 100 crores.

Net debt of INR 100 crore.

Yes.

Okay. And how has been the raw material enterprise. I mean, the cost environment now going forward, you see that the margin delta will come because of the cost being benign? Or how do you see the energy and our consumption cost may be low in terms of the current context?

You're talking about what now for which product category?

Larah, particularly.

See Larah, frankly, the cost of raw material is low as a percentage of the selling price. And the main raw material, which is what -- has a very -- I would say, last 10 years, hardly, there's any inflation or deflation in the cost price, okay? The main raw material is electricity, which has also been quite stable now. The other main raw materials is electricity, which has also been quite stable for some time. So I don't see any major impact on costing in terms of input costing for the consumer range of products.

All across -- that is on Larah or consumption and other glass products also you see...

Yes, except for the increase in customs duty, which is going to increase our costing, I don't see any major other impact.

Okay. And lastly, if you can help us understand our kitchen appliances strategy, how we are going to penetrate it? Which products category we are aiming and how has been the...

We are in small domestic appliances. And so these are things like toasters, mixer grinders, induction cookers. So we call them small domestic appliances. We have started only 3 years ago. And I think we have got very good traction in many parts of India. So our focus is really quality, and our focus is after-sales service to improve that. We are not very aggressive in terms of pricing. We would like to retain a premium position in the market. So we continue with that. That strategy has worked well for us so far, and there's no reason to change it at the moment. So yes, that's going to be our focus areas.

This is going to be outsourced products?

Yes. At the moment, they're all outsourced.

And how far the...

They're contract [indiscernible].

Okay. And how far the distribution reach has been. Is it fairly covered the market? Or is it still more...

Long way to go.

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

Sorry to be a bit repetitive. I'm just trying to look at our presentation, but was unable to. You guys gave out the splits and all. So -- and I was just trying to figure out from your commentary as well. So for the 9 month, the consumerware business, which obviously includes your Borosil brand and the Opalware business. If you could give us separately, what was the growth rate in both of them? And the EBITDA margin that these businesses did?

Borosil brand for consumer division grew 35%. Larah grew 5%. So blended is 22%. I already mentioned Larah was impacted by a onetime sale last year, which was not repeated in this year. So that impacted the growth. Without that, it's closer to 25% growth. As far as EBITDA is concerned, we have a total blended EBITDA, which includes scientific, Larah and Klasspack of about INR 80 crores, which is about 16.2% of our revenues. This does not include Vyline, which is another INR 11 crores, okay, which will, as a part of the merger, this also gets merged.

So the consumerware EBITDA would be what?

We don't share consumerware EBITDA separately. Larah EBITDA is shown separately, which is about 25%, 26%, if I'm not mistaken.

Sorry, 25% is?

Larah is between 25% and 26% EBITDA.

Okay. And the growth there was 5%?

Growth -- turnover growth was 5%, you're right.

And what explains the 35% growth in Borosil consumerware?

Well, I don't know. I mean, market's grown. We've grown. We've introduced good products, which are well accepted by customer. All our channels have grown, all the regions have grown. So it's really broad-based, I would say, the growth. So we are quite satisfied with that, frankly.

The next question is from the line of Binoy Jariwala from Sunidhi Securities.

Shreevar, this is Rishav. Just a few questions. One is, in your opening remarks, you mentioned there was some seasonality in this quarter. So should we be looking at Q2 and Q3 and compare that to last year as a steady-state growth rate? That's my first question. My second question is on both the technologies. In your earlier call, you had shared some interesting updates on that. Just wanted to see how the progress is there. And lastly, I just wanted to check if the Jaipur warehouse is commissioned and whether our margins in Larah can expand further because of this?

Yes, all good questions. So the first point, Q2 plus Q3, absolutely. You can compare Q2 plus Q3 of last year with Q2 plus Q3 of this year, okay? And that should be okay because that takes out the seasonality and the difference. Again, for example, next year, Diwali is again late in November like I think 14th November. So again, it will be the same issue. So Q2 plus Q3 is a good way to look at it. On LabQuest, I think we've got -- like I said, now we are double digits as a percentage of our total scientific product sale, which is good news, and things are moving quite well. We've introduced, I think, almost 22 to 23 SKUs, which have done well. Another 10, I think, are around the corner. So we -- it's slow growth, but I would say it's really meaningful growth because this is highly repeatable business and it's very sticky business. So once it comes, it just stays. And the initial investments in people mainly are high. Once they start generating revenues, the ROCE becomes very attractive in this business. So I mean, we are very bullish, I would say, from the scientific products perspective of the 3 growth levers, this has a potential to give the maximum juice in the future. The third question on the warehouse. Yes, it is commissioned. It got commissioned, I think, on Jan 14 of this year, but it's partially commissioned. So the second part, meaning 50% is started. The second part will get commissioned in March, I think around mid-March of this year. So that should improve, in my opinion, 1% of our -- 1% to 1.5%, maybe stretching to 2% of our EBITDA in the -- but I would say this would happen from Q1 or Q2 of the coming year.

Okay, great.