Borosil Renewables Limited (502219) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Borosil Renewables Q2 FY '22 Results Conference Call hosted by Axis Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Kevin [ Kadakia ] from Axis Capital Limited. Thank you, and over to you, sir.

Yes. Thank you, Janice. Good evening, ladies and gentlemen. I am Kevin [ Kadakia ] and I'm part of the India Industrials Power and Infrastructure sectors at Axis Capital. On behalf of Axis, I am pleased to welcome you all for the Borosil Renewables Q2 FY '22 Earnings Conference Call. We have with us the management team of Borosil Renewables, which is represented by Mr. P.K. Kheruka, Executive Chairman; Mr. Ashok Jain, Whole-Time Director; Mr. Sunil Roongta, Chief Financial Officer; and Mr. Swapnil Walung , Head of Marketing. We will begin with the opening remarks from Mr. Kheruka, followed by an interactive Q&A session. Thank you, and over to you, sir.

Thank you. Good afternoon, and welcome to the Borosil Renewables Q2 FY '22 Investor Call. It is a pleasure to be interacting with you once again. The Board of Borosil Renewables approved the company's financial results for the second quarter of the ongoing financial year today, that is to say, 21st October. Our results and an updated presentation has been sent to the stock exchanges and have also been uploaded on the company's website. During the quarter, the company recorded net sales of INR [ 160.5 ] crores, an increase of 41% over the corresponding quarter of the previous year. The average effective price of tempered solar glass during the quarter was about INR 118 per millimeter. As mentioned in the previous call, this is a lower price compared to the peak prices prevailing in the fourth quarter of the financial year 2021 and the first quarter 2021, '22. However, these prices are still higher than the prices in Q2 FY '21 by about 20%. Export sales during the second quarter '21, '22, including to customers in SEZ, were INR 55.1 crores, comprising 34.3% of the turnover. We see continued good demand for our solar glass from all our overseas markets. These markets are looking for another source besides China in order to meet the requirements for solar glass. Moreover, the power shortage and other issues being faced in China have redirected Chinese supply towards meeting their own local demand. EBITDA during the quarter was INR 58.9 crores, corresponding to an EBITDA margin of 36.7% as compared to a margin of 28.4% in the second quarter of financial year '21. The higher EBITDA margin was led primarily by better [indiscernible] realizations. Moreover, higher productivity, gross pool per day was higher by 4% over the corresponding quarter also contributed to better margins. These higher margins were obtained after absorbing higher costs on account of increases in natural gas prices, packing materials and inflation and export logistics costs owing to the increased global freight rates. Higher EBITDA led to an increase in the profit after tax. The company recorded a profit after tax of INR 34.1 crores, a growth of 143% over the same quarter last year. As the benefits of thinner solar glass are getting established, we are receiving interest in our thinner solar glass. During the quarter, second quarter of the current financial year, sales of thinner glass increased to 28.3% of sales. An observation of the global trend leads us to expect more robust demand for thinner tempered solar glass going forward. I now give you a snapshot of the solar glass demand as we see it today. Additional production capacities are being set up, keeping in mind a higher demand due to expected increase in production of solar modules to meet higher installations as well as the rapid shift towards glass, glass bifacial modules. Such modules require thinner glass in order to control the weight of the module. Meanwhile, solar cells become larger, requiring larger sizes of glass which should lead to higher efficiency in solar modules. These shifts are being noticed globally, all new capacity additions and module manufacturing have considered these larger glass sizes. Thus, we expect an increased glass consumption with every module manufacturer. There is a general upward trend in commodity prices. The prices of most of the solar components as well as modules have risen in the recent past. The solar glass selling prices globally started recovering gradually from September end and are currently about 18% to 20% higher than the average prevailing in the quarter presently under review. During our previous interactions, we have been providing a short commentary on policy and tariffs, which have a bearing on the solar glass sector in India. Imports from Vietnam, which started around April 2021, are still coming in duty free. Such import volumes are so far not significant. The antidumping duty China is valid till August 2022. The company had applied for a sunset review of the same, with the request to continue the duty for another 5 years. A hearing has been held by DGTR and the outcome can be expected in the next few months. CVD against Malaysia was levied in March 2021, and the same will be valid for 5 years. Borosil Renewables is currently undertaking a brownfield capacity expansion, a third solar glass line with a capacity of 550 metric tons. This will enhance the capacity from 450 tons per day to 1,000 tons per day. The implementation of SG-3 is expected to take place by June 2022 and commercial production to commence in the second quarter of the year '22, '23 which is expected to increase our sales volumes by over 120% on a full year basis. The estimated INR 600 crore project is being financed through our QIP of INR 200 crores completed in December 2020, bank term loans of INR 200 crores and internal accruals of INR 200 crores. In our view, the country needs to add installations of about 25 gigawatts annually to meet target of 300 gigawatts of solar installations by 2030. The total annual manufacturing capacity of solar models in India currently stands at about 14 gigawatts. Significantly high capacity additions of about 18 gigawatts are likely in the next 1 to 2 years which should take the capacity up to 30 or 32 gigawatts. Meanwhile, a large player has announced plans to set up a facility for 10 gigawatts. The recently concluded tender under PLI scheme received bids for 54.8 gigawatts, which includes 19 gigawatts with further backward integration, starting from polysilicon wafer. Thus, we expect the global supply chain and ecosystem to be created in India over the next few years. The government of India has announced imposition of basic custom duty on imports of solar cells and modules to come into effect from the first April 2022 which will immensely help growth in domestic manufacturing and create higher demand for solar glass as use of domestically produced components is promoted by way of a higher percentage of incentives. These manufacturers are already looking to secure the supply chain of solar glass. The rise in the production of solar modules will lead to a substantially higher demand for solar glass. Thus, the domestic market shall be able to absorb higher capacity of solar glass. The company has been providing an increased focus on it's costs to all markets, including Russia, middle East, Africa, North and South America, in addition to the regular markets in EU and Turkey. The [indiscernible] glass in all the major markets is expected to rise exponentially due to increased costs on domestic manufacturing of solar modules in these countries. We have started to receive orders and are servicing larger volumes from some of these new large buyers and see high growth prospects for exports. The company's Board has approved a further expansion of capacity through solar glass lines 4 and 5 in order to further raise the capacity from 1,000 tons per day to 2,100 tons per day. Work on the SG-4 project is expected to commence during the last quarter of this financial year. Given the lead times required for capacity expansion, this additional capacity can come on stream in the middle of calendar year 2023. I would now like to open the floor to questions that you may have. Thank you.

[Operator Instructions] The first question is from the line of Mohan Kumar from [indiscernible] Financial.

So I had -- congrats on a great set of numbers. I had a question regarding the input costs. So you've seen the price of commodities to really shoot up. Can you walk us through what the impact could be over the next 6 months on not only the current production, but also on the further expansion plans that you have in focus?

Ashok, will you answer that?

Yes. So more the input costs are rising for, in the case of, say, particularly natural gas, which is RLNG imported and supplied by GAIL to us. And also in the case of soda ash, and some of the other inputs, like sodium Antimonate. So these are the basically products which are linked to our import or foreign currency or for that matter the costs are volatile. So these costs, in the case of natural gas, are changing every month. So the current costs are being booked in every month whenever the costs are rising. As far as the total quantum and total basket of natural gas is concerned, we have different type of contracts where the prices are aligned to different baskets. And we try to minimize our risk. Though the costs are rising in each of the segments, there are different contracts whereby we can optimize the cost structure. But nevertheless, the prices are going up. In the case of soda ash, also the prices have risen significantly. Until December, we have fixed price contracts. So we are not being impacted so much as of now. But going forward, we believe that the prices are going to be higher. They are currently being quoted at about 50% higher. So this would lead to certain cost inflation in the coming year. This could well be about 6% to 8% in terms of the overall selling price both these items put together. But we have to also understand that these are the products which are being imported and consumed by virtually all the solar glass manufacturers. So the impact of these cost increases will be applicable to all the producers. It's not unique to us. And in terms of the pricing, everybody has to take into account the cost of inputs. On the other hand, as Mr. Kheruka mentioned, the current prices are already higher by 18% to 20%. So we -- though we cannot basically control the cost of inputs, but selling prices are taking care of it.

Got it. And just a follow-up on that. So we've seen -- we've been hearing that a lot of the manufacturing capacity in China has been either the government has forced to reduce the manufacturing or stop manufacturing because of the power-related issues or because of the manufacturing standards. Have you seen the output from China reduced? And do we expect this to help move solar prices further?

Well, as far as the glass production is concerned, we have not heard that many of the glass production units have gone out of production. But at the same time, as Mr. Kheruka already said in the remarks, the local production requirement has gone up in China because of the power shortage and all, which is why the supplies for all the components like glass or other components are being rerouted to their own consumption. So in that sense, the availability of materials could be lower in the international market. But prices are generally a factor of various complex situations. So this could be one reason why the prices might have gone up.

Got it. And my second question is, we are seeing a lot of investment in India into manufacture of solar panels. Do we see that a lot of the players are coming into manufacturing solar glass, too? And do we think about going ahead for some kind of backward integration into creating a solar panel or working towards creating [ future ] panels? Or we plan to stick with our expertise of photovoltaic cells.

So if I were to answer your first part of the question, the solar glass portion in India, there is a scope to raise the production because the glass demand is going to rise substantially. So there are possibilities of other players setting up the glass plant, solar glass plant, particularly the [indiscernible] who are trying to do it for their captive consumption in order to secure their supply chain. Should there be any other addition of substantial volume or not in the market for the general purposes, we do not have any idea. But the small plants might come up, over a period of time, which would be additionally catering to the domestic demand. As you know, we are only at about 35%, 40% of the domestic market so far. And even with increased capacity, we will not be more than 50%, 55%. So there is enough room for the glass consumption and glass capacities to take place in India. So there may be an increased production of solar glass in the country. But right now, the imports are filling the gap which might reduce over the period. In the case of your second question, on the panels backward integration or forward integration buyers in the similar value chain, we have been evaluating this. But our niche is in the solar glass manufacturing, and we have to first become a decent size solar glass company where we exploit the scale benefits first. And thereafter, we can think of diversifying or looking at any backward, forward integration. So as of now, our hands are tied with the solar glass manufacturing expansion plans.

Got it. And just one follow-up on that. On the -- so you mentioned that a lot of the new capacities, new players are coming in and you're expecting a lot more production of the solar panels. Do we have long-term agreements in place? Or has any of the new manufacturers kind of approached to set up the longer-term contracts for supply of solar glass?

Well, the business is transacted on a monthly basis as of now, but we're fairly know that everybody or every piece of our customer is buying certain volume from us. And since we have limited volume available, generally, it is fairly known that each company will buy how much quantity. In the sense of new customers, there are new capacities which are coming up from the existing players as well as a couple of new manufacturers are entering the manufacturing module, solar cell and module. So each one of them has been touched with us for a long-term tie-up for large volumes. So we will eventually conclude with them for certain volumes which we can supply going forward once we have the expanded capacity available from, say, July, September quarter 2022.

The next question is from the line of [ Prateek Padicha ], an individual investor.

Set of numbers. My question is around the patented technology of Antimony free glass. I just wanted to understand if this Antimony free glass is across every single glass that Borosil Renewables manufacturers? Or is it a value additional product?

Sunil, would you like to respond?

We have successfully made Antimony free glass. However, the market currently requires a glass produced Antimony. And this is what is going to be used until there is a general consensus around the world that Antimony free glass needs to be used. So at the moment, the glass we make does have very highly reduced quantity of Antimony, they're still there.

Perfect. And a follow-up question was about bifacial glasses. Can you share some split up of demand in terms of how many of your customers are ordering bifacial glasses versus monofacial glasses?

Sunil, will you answer that?

Yes. Yes. So in terms of the use of the glasses, glass are not bifacial, the models are bifacial because the cells are charged on both sides. So generally, in the conventional modules, the solar cells are charged from the front side and the back side is not charged for converting into electricity. In the case of large glass modules or bifacial modules, there are glasses on both sides of the module. And this is done by eliminating the use of backsheet at the rear end of the module. So you replace that by a glass. Now what happens is that in the case of bifacial model if the cell is charged from the other side also. It received light transmission from the backside also and for which the glass is used. So bifacial modules are becoming increasingly popular across the globe, more so in -- particularly in China and other markets where they are already at about 30%, 40% of the overall installations. But the market slightly slowed, but is catching up now. We are receiving inquiries from European as well as now Indian customers for the use of glass -- for use of double glass model in the bifacial modules. And as we go for bifacial glass modules, the glass thickness is also going to go down. In the conventional models, you are using 3.2 millimeter or 2.8 millimeter. But in the bifacial models, generally the trend would be to use 2 millimeters glass. And we see this to be getting a lot of traction in the next couple of years. There are certain studies are available which give an indication that over the next 3, 4 years, this might become about 40% of the entire consumption in the -- or entire model manufacturing in the entire globe. So it's going to be a very high-growth business in that respect.

Right. And my last question, I'm trying to tie back to the Antimony [indiscernible] patent. So if there is a different manufacturer who wants to set up Antimony free glasses, would they have to pay some royalty to use this patent? Is this a technology that is exclusively owned by Borosil Renewables?

That would have to actually wait until the time comes and manufacturer enters into dialogue with us. What we will take, we cannot decide that right now.

The next question is from the line of [ Sridhar ] individual investor. Mr. Sridhar, you may please go ahead with your question. As there is no response from the current participant, we take the next question from the line of [ Shitesh Sara ] from Task Investment.

Congratulations on numbers. I had one very basic question on the change in inventories. So we have a rise in revenue. And the inventories decreased last quarter, this quarter did increase. So at a high level, could you please help us understand how it moved, what the reason is? Because this impacts the bottom line. So is it safe to assume that this inventory would be sold in, let's say, the coming quarters and thus there would be the benefit of this?

Yes. So there was a lot of background noise, but whatever I could hear that you are saying that the inventory during this quarter has increased, but it is actually reversed. During the quarter, the inventory has gone down. If you're really looking at the numbers, in this quarter, we have decreased inventory by INR 8.26 crores. So we are fairly comfortable in selling the entire production, and we don't keep much inventory at the warehouse. So there is no changes . Whatever the changes you are seeing are actually a result of Ind-AS accounting. Last quarter, the June quarter, we had a certain sale of about INR 17 crores which we could not account in sales because of the Ind-AS accounting requirements. But this quarter, that has reduced also. So we have actually reduced the inventory.

The next question is from the line of Krishna Agarwal, individual investor.

How domestic module manufacturing industry is doing? [indiscernible] will be applicable from April 22 and currently we are allowed to import without duty. This is affecting volume of domestic module manufacturers? How they are doing?

Would you like to take this?

Well, actually, the thing is that, as you probably are aware, there are a number of government schemes which are in place which mandate the use of domestically manufactured modules. So if company gets an order that applied to those schemes, then he must obtain the modules domestically. And so therefore, those modules have to be made in India. Having said that, there are orders placed by government for installations in which modules are still being imported by various players. Having said that, at the moment, there is -- many of the large Chinese module makers have put up notices in which they have said that they will work force majeure, saying that they cannot deploy modules for an indefinite period of time. So as far as we are concerned, we are a little bit confused on that subject because there is definitely several cases that we have heard where contracted supplies by Chinese suppliers have been stopped by the Chinese suppliers on grounds of force majeure. So how this is going to pan out is something I'm not sure. But as a member of the industry, I definitely strongly support the call for the imposition of basic custom duty on reports of cells and modules. For the time being, as far as we are concerned, our sales of solar glass have not been impacted at all. Thank you.

Okay. And sir, second question, what is the [indiscernible] of CapEx of [indiscernible] China crisis is affecting or they are on track? What is promise of the CapEx plans?

We have limited the information which is available to the -- I mean, everyone in the marketplace. They have installed certain capacities already which are coming into operation. But they have said in a couple of calls that they are going to be monitoring the demand situation and accordingly adjusting their production plants or start of the new capacities. So they are fairly aware of the situation. And based on the demand-supply situation, they will be able to fast track or delay their projects.

Okay. And sir, last question. Do we have a plan to start manufacturing other component like [indiscernible] or we will be focused on our large industries?

Yes. We -- I mean, I had answered that question some time back that right now we are focused on the glass production to become a large player or to a decent player in the glass production first. And then we would like to also try our hands on other things in the renewable space. But we keep evaluating the options or the opportunities. And whenever the time is opportune to get into anything different, we will definitely come back to the shareholders and do it.

So like [indiscernible] like prices have increased in recent. And so can we plan, with glass we can plan line of options.

Your suggestion is very well taken. The production of other components along with glass will definitely be a good situation. But based on any price point or certain price points, we cannot decide on the project because we have to look at the what are the other challenges, other competition or the other technological or other variants or competencies required for the particular business and is there any sort of value addition by our being there in that business? So based on that, we'll take a call.

Is there any...

Mr. Agarwal, sorry to interrupt, may I please request you to rejoin the queue for your follow-up as there are people waiting for their turn. Thank you. The next question is from the line of Jimesh Sanghvi from Principal India. Looks like no response from the current participant. We will take the next question from the line of Vaibhav Dinani, individual investor.

Is there an operational metric that you use to measure the efficiency of the glass manufacturing process? And have we maxed out on that front? If not, what is the targeted upside on that?

I didn't get it properly. Can you repeat the question, please?

I'm trying to understand what operational metric you use to measure the efficiency of glass manufacturing process? And have we maxed out on that front? And if not, what is the targeted upside on that?

Well, the operational efficiencies are on 2 extractions actually. One is the glass production. So you produce the glass from the furnace. So furnace is a certain capacity of in case of 2 furnaces combined, we have a capacity of 4-5-0, 450 tons per day. So what is the full we take out from the furnace, that is one measurement. And after that, the second measurement would be that how much glass we finally receive as a tempered glass? Because at the end of the day, the module manufacture is supply tempered glass, which is the finished product going out from the factory. So at that level, from the gross production to that net production, what is the [indiscernible] ratio which is what we are more concerned, because that efficiency or the wastage or lose in the process have a lot of cost. Because if you produced the glass and if you have wasted it in the process until you reach the final production, then that becomes a product to be recycled, but then all the overheads are incurred. So we measure it on both accounts. But in terms of what is left out, to answer that question, in the case of gross pool, hardly anything is left out, maybe 2%, 3%, 4%. And in the case of efficiencies also, there are 4, 5 percentage points we can go up in terms of the efficiency also.

The next question is from the line of Ganeshram [indiscernible].

I'll just start with a broad question. So the outlook is that we're expecting about 25 gigawatts in demand going forward. And based on the numbers you provided, they're expecting about 42 gigawatts in contract that we'll be able to cater to. So would it be -- so could you just help me understand that going forward, sometimes it's going to be a little bit more than the demand as we could see for the glass in the domestic market.

Hello?

Yes, can you hear us?

Yes. Yes. Can you shortly repeat the question again, please?

Yes, no problem. so from the domestic demand side of things, we were expecting about 25 gigawatts in module manufacturing and you're expecting capacity to come in that would be indicated to about 42 gigawatts going forward. Is that correct?

Yes. So actually, the capacity right now is about 14 gigawatts. And another 18 gigawatt of capacity have been announced by various players. We have to see how many of this -- how much of this actually comes online and when. But over the next 2 years, we expect most of it to come in stream. Beyond that, another 10 gigawatt has been announced by a large player and this should total up the capacity to roughly 40, 42 gigawatts. In terms of the capacity utilization, this is based on actually 3 shift working of the plants. In the case of module manufacturing industry, what we have typically seen is that, on an average, the capacity utilization is about 2/3. So even there, when you have a 40-gigawatt capacity or 42 gigawatt capacity, your utilization is going to be say about 28, 29 gigawatts at the most. So in terms of the manufacturing actually taking place, our projections are at about 20 gigawatts in the course of next 2, 3 years. It should reach 20 gigawatts or thereabouts. And the capitalization might be about 50%, 55%, 60%, depending on each module manufacturer's ability.

Okay. So that means it's a bit clear. So going forward, so currently I believe about 20% of our revenue comes from the exports, right? So do we have any projections as to how that might look going forward on this capacity prediction?

Yes. So we are projecting the exports to go up further because of the larger opportunities sitting in Europe, Turkey and American markets. And we believe that we can raise exports to about 25% on our expanded capacity. So we have a huge opportunity in terms of raising the exports, and it also helps us to derisk the market from any angle and also diversify our geographical approach, reachable market.

That's very clear to answer that. And I believe in one of our previous conference calls you had mentioned that there were some production losses, an incremental level of production losses. So we actually had about 73% output after accounting for it. How are those issues like sort of resolve themselves? How is that looking now?

So we are -- I mean, glass [ pool ] is almost 97%, 98%, as I said. But in terms of the efficiencies, we have still some work to do. And there is room to increase our efficiencies.

Right. All right. If I'm not taking too much time, just 2 more quick follow-up questions. So for SG-3, are the capital structure sort of highlighted for the project [indiscernible] approvals of 200. So for SG-4 and 5, so it's gone from 500 TPD to 550 for both on the utility revenue. So do you have any guidance on what the financing might look like for those projects in general.

Yes. So broadly, the CapEx on SG-4 is going to be about INR 650 crores. And similar CapEx may be expected on SG-5 whenever it is taken up. But at current point, it is estimated to be the same. So that is the kind of money we will require in order to complete these 2 projects. And in terms of the financing, the Board has approved the mechanism to use all the 3 sources like debt, equity and internal accruals. How much exactly will be for each of the projects, that we will have to figure out as we go along. But the board and the shareholders, they also approved raising of INR 500 crores by way of equity. So to the extent we require money from the -- for the remaining part of it, we will have to see what are the internal accruals available and accordingly decide on the debt front.

And just the last question is, you just growing about the position in the market and it just on a market perspective. So what are the percentage of our solar glass demand is actually imported and how much do you expect it to compress going forward?

You're questioning on the demand front.

That's correct. So of the total demand that we have, what percentage are we sort of importing at the moment? And how much do we expect it to compress going forward?

So currently, we are at about 35 -- we have a market share of about 35% in the overall demand for solar glass in the country. As we go along, there will be certain capacities coming up from our side and the demand will also be growing. And in case there are more capacities coming up from the other players who may set up for captive consumption or for sale in the market, this will be a complex situation where the decision or the this will be arrived at, how much will be the import or how much will be the domestic production. But we foresee our -- or we rather plan to be enjoying a market share of at least about 50% even going forward.

The next question is from the line of Nikhil Chowdhary from Kriis Portfolio.

Am I audible?

Yes, yes.

Yes. Sir, congrats on a great set of numbers. I have two questions. Considering what all we have discussed regarding the 2-mm glass and the glass modules, the demand of which we are seeing - demand for which seems to be bright. I wanted to understand, considering we are the leading supplier, won't we have an edge over the other guys who probably don't have this technology of manufacturing the 2-mm? Because considering the glass modules will be requiring thinner glass and we have that technology, won't be having -- won't we have the pricing power in terms of these glasses?

Yes. So very, very good question. Actually, the 2-millimeter glass is becoming popular for the glass glass modules across the world. And we have fully tempered. We have been the pioneer in producing fully tempered 2 millimeter solar glass in the country or in the world. And now because the other people have not been able to deliver fully tempered 2-millimeter glass, they have gone ahead to gig supply heat-strengthened glass. It is less than the fully tempered glass. So since the process and the process so stringent and the losses are higher, the people have -- the other manufacturers are going ahead to supply 2-millimeter heat-strengthened glass. And that has been accepted by various model manufacturers. So the niche or whatever we have in terms of fully tempered glass is appreciated by certain manufacturers in Europe. But in China, particularly, it is heat-strengthened glass which is being used as a 2-millimeter glass. But for the fully tempered glass which we are able to supply, deliver to our customers in Europe, we certainly have an edge on the pricing and also on the preference over the other HS glass, which is available from other parts of the world. But largely, the market is consuming HS glass, the heat-strengthened glass as of now.

Got it. Got it. Sir, are we looking to patent this? Like is it patentable thing that we have?

Actually, it is difficult to do a patent of this kind of process because the equipment and the capability can be achieved by others also, and this is not very different in that sense. So it's some unique -- something unique. We have been able to do it, that's another better.

Got it. Got it. Okay. And sir, secondly, on the new players that are looking to set up capacity for the solar glass, wanting to understand what would be the [ sinking ] cost for our own customers like moving to them or like the -- or the market is so used that everyone will be proven. I wanted to understand your perspective on that.

So the -- being the existing player in the solar glass production, we have certain advantages which include that whatever glass we are supplying to our customers have been already used by them. They already made the models. They already got the glass certified with the model. So the -- our glass has been certified for use in their models by themselves and also the international agency [ CEA ]. So anybody who is coming new with a solar glass supply has to go through the process of first getting the glass certified and being -- once they receive the favorable comment on that or certificate on that, then it supplies it to the model manufactures who prepares list of materials BOM, and then he makes modules. And then he submits to the central electricity agency. So now with these things, it takes a lot of time and a lot of costs are involved in the whole exercise. So we have an advantage and edge over the new players. But the new players eventually will be able to do this. But the time required and then the amount of cost and losses which they may be subjected to may be substantial.

The next question is from the line of Kevin Kadakia from Axis Capital. .

Sir, any thoughts on services revenue via O&M? And also in the longer term, any potential via recycling of solar glass?

Well, O&M is a business which we have not been examining. But recycling is what we have been evaluating in terms of initial thoughts. And in India, so far, the industry is not very old. It's only about 4, 5 years. A lot of installations have started to come up and the model life is 25 years. So a lot of models might go out of circulation after, say, next another, say, 20 years or 15 years. So after that, the recycling may become a major business. But we have been closely watching this space, and this could be an interesting feature going forward. So the recycling will only take place by way of collecting the modules and removing the various components and removing the glass from it and then recycling it. As of now, I would say that there is no real technology available to separate the glass efficiently from the other components of the module. So this is still something a little bit in the future.

The next question is from the line of Sridhar, individual investor.

Can you hear me?

Yes, please.

Congratulations on a great set of numbers. And I see EBIT margins have improved from year-on-year. But compared to quarter-on-quarter, they have reduced significantly. I just wanted to know the reasons behind this.

Yes. So actually, the -- as was mentioned during the opening remarks, the prices started to decline. The selling prices are actually governed by what is happening in China, Malaysia and all. Because almost 90% or 95% of the solar glass process is in the hands of Chinese. And the prices are accordingly decided by them based on the demand-supply situation. So in the quarter 4 of last year, the pricing was running quite high. They started to decline in the first quarter of this financial year. And we had also -- we were also required to match the landed cost of imports. But there is a certain time lag available for imports versus local supply. So our price reduction started around middle of May. So in the first quarter of this financial year, we suffered a certain dip, which was not exactly the same reduction which happened in the prices. But as we went along, the prices had to be aligned to the imported landed cost, which is why the prices are down in the second quarter of this financial year. So basically, there is a 16% decline in the average realization in this quarter, that is July to September. But as we speak, the prices started to recover from September itself, September end itself. And the prices are currently about 18% to 20% higher compared to the quarter that is July, September quarter. So prices have actually come back to the earlier levels more or less. And this is a phenomena which is governed by, as I mentioned, by the Chinese manufacturing or demand-supply situation. So this is -- the decline is basically because of the prices, not for any other reason.

Okay, sir. And my second question is on -- you said you have a technology for tempering this 2-mm glass. But where are the competitors doesn't have, so they are going with HS glass. So what is the cost of HS process versus our heat-tempered process? Will there be any cost advantage they have versus what we have? Or are they going to cost the same?

They don't have a cost advantage. So they are not able to achieve the full tempering, but they have to spend the same amount of money, nearly the same amount of money in heat strengthening the glass. So there is no saving in terms of cost, I would say.

Okay. So it's -- but quality-wise, I think customers can...

Yes, the quality is different. Heat-strengthened, it is less strong. And fully tempered, it is stronger.

So what you're saying is like for the same price, our product is higher quality compared to the competitors.

Yes, you can say that. Yes. But we, of course, seek a higher price because of the product being superior. Another feature would be the cost of the line itself, that the tempering facility which we have is much more costly than generally the facility Chinese or other producers have who are using their equipment for heat-strengthened glass. So it may not be the same facility there. Their costs may be a little lower in terms of the equipment.

The next question is from the line of Mudit Kabra from Hem Securities.

Congratulation for the management. And I have some basic questions like sorry, but what was the capacity utilization for the quarter?

So capacity utilization on the production of glass was roughly 97%. And in terms of the final product, it was at about 68%.

Okay. Okay. And sir, can we talk about this number, like the average realization per square meter of the glass?

So it was mentioned in the remarks that the average realization during July to September was up roughly about INR 118 per millimeter of glass. And the current realization, current prices are higher.

Okay. Okay. And sir, like how much square meters of glass do we derive like on an average from 1 ton of production?

1 ton of production, 200.

200 square meters of glasses?

200 square meters of 2-millimeter glass.

2-millimeter glass. And what about 3.2 millimeter of glass?

It could be 8 kilograms per square meter. So about that much, about 125 or something.

The next question is from the line of Jimesh Sanghvi from Principal India.

Sir, can you share the CapEx number which has been incurred in relation to the third quarters which has been there?

Yes. So as of now, we have been paying the advantage and opening the LCs that is the status. We have spent close to INR 120 crores or so as of now on the project. And a lot of LCs have been opened for the equipment, and they'll be coming gradually over a period. So the balance payment will be made towards the supply. So commitments have been made, but the actual payments have been about INR 1,820 crores.

Okay. And so we have seen an increase in the export percentage for -- on a realization basis -- on a revenue basis. So can you share that number in terms of volumes as well? And if you can also throw some light on whether the exports are more profitable vis-a-vis the domestic sales?

So in terms of the volume also, the exports have gone up substantially in the -- this quarter. The exports were about 11 [ lakh ] square meter, which was about 18% or so of the sales, overall sales. In terms of the export realization or their profitability vis-a-vis the domestic, for the last 2, 3 quarters, the export's profitability have been slightly lower than the domestic profitability, because the domestic prices have a certain advantage in terms of being capable of capturing the CVD, which has been introduced on the Malaysian exports to India from March 2021 and also because the international freight for our customers who are wanting to receive goods from Malaysia, Vietnam or China has been very high. And since that becomes a part of the landed cost, we are able to price our product higher in that proportion. So the domestic realizations have been superior in that sense. And export realizations have to be aligned to the domestic competition in every geography. So depending on that, we have to price our product. So we do not get a similar advantage as of now, though in many countries where the local production is not there, we align the prices to the competition and accordingly price of our product. So as of now, export profitability is slightly lower.

Sir, then are we seeing a slowdown in the overall domestic demand because we have been exporting more? Is there something in the domestic market which should -- could be a bit of a concern for us going ahead? Because on one side, we are talking about imports of around 50% to 60%. And on the other side, we are exporting almost 11 -- 18% of our overall volumes.

So basically, the company has been exporting around 15% of it's production. And we use export as a part of our strategy in terms of improving our quality and service on each -- on our factory level and also as a part of diversification of the geographical risk of any nature. Moreover, the export customers were wanting material from us earlier also, but we had limited capacity. So until 2019, '20, we had only 1 furnace. So we were not able to give larger volume. As we have more supply available now, we are increasing. And as we are adding capacity, we have to be ready to be able to supply larger volume to the customers. The particular customers are requiring certain volume -- minimum volume from you. Unless we are able to satisfy that, they would not be interested in placing orders because they cannot keep on changing the production line every now and then. So certain minimum volumes will have to be supplied to certain large customers. That's why we have been able to increase our exports in the recent times. And it's a part of a strategy, as I mentioned, that we want to increase our focus on the exports. And these geographies offer good opportunities like Europe, Turkey and U.S., as I mentioned, for growth in exports.

But there is no slack in terms of the domestic demand. Is that the right assumption?

Absolutely no slack. In fact, we are -- as I mentioned, we only have 35% market share. That should give you an indication that 65% of market we are not able to service. So there is no [ bulk ] of orders from the domestic market, and customers are actually wanting more each time they place order. And we have to, in many cases, cut down on the requirement because we have certain availability of glass which we need to allocate to various buyers.

Okay. And sir, lastly, when we look at the new furnaces which would come up now, these furnaces are larger in size compared to the ones which we have right now. So will it be more efficient on a comparative basis? Will our profitability be better on these furnaces? If you can share some numbers out there if it's possible.

We cannot say that for sure because we haven't operated those furnaces yet. We need to operate them to come to a year assessment. As we speak right now, there should be a similar cost of production for us.

Okay. Okay. And lastly, sir, you said that we are seeing an increase in the commodity prices of raw materials. Correspondingly, we are seeing a 20% increase in realization for Q3. Does it largely cover the entire cost increase? Or probably the realization increase is higher than the cost increase? How should one look at that?

Ashok, you answer that.

So as of now, the -- as I mentioned, is that the raw material or input costs have an impact of about 8% of the price. But the current prices are 18% to 20% higher compared to what they were in the last quarter. So I'm not giving you an indication that 18%, 25% price will be higher in the -- for the quarter, but the current prices are like that. So the prices are more than offsetting the cost increase, as you can see.

We take the next question from the line of Harshil Shethia from AUM Fund Advisors.

Sir, you said that we have efficiency of 500 bps which we can cater to. So with the whole thing and considering that our new furnace will come in CY '22 or next year June, what kind of top line do we see in the next 2 years?

So until the new production comes, the top line will be roughly the same, except for the whatever efficiency increase we can bring in, in terms of the volume. But in terms of the prices, it could be volatile as we have seen in the past and also in the last 2 quarters. So you have to take an average in certain rate at which the production can be valued. So I would advise you to take the current 6 months as a basis for the next 6 months to be safer. And in terms of the volumes after the new production come in, we are currently at 450 tons and we are going to increase by 550 tons. So in that proportion, the volume and sales could be expected to rise.

Okay. And can we say that 35% will be a sustainable EBITDA margin for us?

Yes, You can probably analyze from the performance and the prices and all. And we believe that on a ongoing basis, between 30% to 35% should be a decent assumption on account of EBITDA margin on a sustained basis.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for closing comments.

Yes, sir. So thank you so much all the participants for providing this opportunity to us to interact with you. And it has been very insightful from questions from all the participants. We are very happy to interact with you again next time when we meet. Thank you. We are very bullish or very positive on the sector, and we believe that we have significant upside in future to grow our business And grow our domestic as well as the export business. Thank you very much.

Thank you very much. On behalf of Axis Capital Limited, we conclude this conference. Thank you all for joining. You may now disconnect your lines.