Carborundum Universal Limited (CARBORUNIV) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Carborundum Universal Limited Q3 FY '20 Earnings Conference Call, hosted by IDFC Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Bhoomika Nair from IDFC Securities. Thank you, and over to you.

Thanks, Inda. Good morning, everyone. On behalf of IDFC Securities, I would like to welcome you to the Q3 FY '20 Earnings Call of Carborundum Universal. The management today on the call is Mr. N. Ananthaseshan, Managing Director; Mr. P. Padmanabha, Chief Accounts Officer; and Mr. Chandramouli, Senior GM Strategy. I'll now hand over the call to Mr. Ananthaseshan for the initial remarks, post which we'll open up the floor for Q&A. Over to you, sir.

Good morning, and thank you, Bhoomika. And I know you have a little trouble in pronouncing the name. It is Ananthaseshan, but Ananth is fine. So before I start, let me wish all of you on the call, a very, very happy new year. I know that the past quarter has not been great -- past few quarters has not been great for the economy in general. And we -- and going forward, we are also on the cusp of what I would believe is a challenging year for the country as such. Especially since that we have a budget coming up tomorrow, we were also looking forward to the government coming up with definite solutions in terms of recharging this economy. I always believe in this kind of a VUCA word. And this is something which is very, very VUCA. What we see around us and not only on the political front, on the economic trend. And suddenly, now on the health front as such. So we have this coronavirus and what it means to us as a country, as people, as economies, we will see going -- in the weeks coming forward. Now having that behind us. For CUMI, it has been a challenging quarter. What we also saw in this quarter was that the domestic slowdown has not only continued, but also turned a little sharper. For CUMI, the consolidated sales for the quarter came in at INR 642 crores, which represents a 6% de-growth over last year. Now this fall was predominantly on account of the decline in stand-alone sales, which came in at INR 409 crores, representing 11% de-growth over last year. Broadly at the stand-alone level, the de-growth has continued in Abrasives and the Electrominerals segments. This is also continued to be consequent to the auto decline over the last few quarters, though I must say that Abrasives stand-alone grew by 3% on sequential terms in this quarter. So that was some positive and possibly due to the good monsoons that we had in some parts of the country and the festive season. But overall, Abrasives had a good sequential quarter. The stand-alone Ceramics segment, which has been showing up in stand-alone growth until H1, also saw a decline, falling by about 4% on Q-o-Q terms. This has 2 parts. One is the -- what we call the thermal management materials part and the wear solutions engineered ceramics part. The lower demand has been from core industries, whether it's from steel, cement, mining, or power and also some other auto, auto-construction dependent industries. The engineered Ceramics and the wear Ceramics part, which are, as you know, highly export-oriented, saw a decline, and this is usual seasonal lulls, as you would call it, because we are export driven. And -- but due to the good performance of this segment in H1, the YTD growth is still in the double digits at 11%. So at the consolidated level, the Ceramics segment grew by about 2% in Y-o-Y terms. Overall, at the YTD level, stand-alone sales has de-grown by 3%. Three subsidiaries continued to perform well. Collectively, their growth has been offsetting some of the stand-alone decline thus far. However, the incremental growth has reduced compared to Q1 and Q2, and while they are indeed growing, the growth has slowed down this quarter. The downturn in the domestic business has been particularly steep and the subs have not been able to entirely compensate for this de-growth. So in summary, at a YTD level, consol same sales came in at INR 1,983 crores, which represents a 1% growth over last year. And when it comes to subsidiaries, some of the slowdown in growth -- in growth rates seen this quarter is also seasonal. VAW Russia, for example, has done reasonably well in terms of volumes, but due to the product mix, realization came in lower and top line grew only by about 2%. At the YTD level, growth is 5%. CUMI America and CUMI Middle East, they have performed well and they clocked 34% growth and 12% growth on a Q-o-Q basis. So this also means that CUMI America is fast turning profitable. So those are the positives on the sub side. On a segment-wise performance on Abrasives. At a consolidated level, Abrasives de-grew by 12% on Q-o-Q terms. Again, largely driven by the -- impacted by the slowdown in the auto industry. And in the both direct and indirect businesses here. As I said earlier, the segment grew about 3% in sequential terms. While the Q3 festive season has been slower than previous years in the domestic market, this has definitely come as a respite to the overall CUMI business. Among this Abrasive segments, coated products have done well. And the Precision business, which feeds largely into auto and some of the bonded product groups, which feeds into construction, continue to be impacted. In terms of exports, the segment has seen encouraging traction, especially into -- in America and in some parts of Europe as well. Electrominerals division. Within the Electrominerals segment, Russia, which is a VAW Russia, has been supporting the growth and continued to do that. It continues to perform well, but the rate of growth has come down. As I mentioned earlier, with a greater share of the products flowing into [ refractories ] and metallurgical grade silicon carbide, I'm sure you would remember that in the first 2 quarters or earlier this year, they had to do a product mix change due to the fact that the diesel particulate filter business suddenly dropped out. So this realization has had an impact on the top line. So at a consolidated level, sales in this segment de-grew by 8% in quarter-on-quarter terms and at the YTD level, growth has come in at about 3%. So the Abrasives industry performing poorly, our stand-alone Electrominerals business has been impacted sharply. While also the -- some segments of the refractories, markets have also slowed down. So contributing to the impact in the Electrominerals. So this has resulted in a Q-on-Q de-growth of about 20% and a sequential de-growth of 10%. And last year, the -- though the Q-on-Q de-growth of 20% is -- looks big. It also should be remembered that we had a good Q3 for EMD last year. At the YTD level, the stand-alone de-growth has been 9%. But as in Abrasives, on the upside, the segment is seeing a better traction in exports. Foskor Zirconia, which has been adding to the top line growth until H1, saw a sharp decline this quarter, and the sales fell by about 36% quarter-on-quarter. Availability of quality raw materials was an issue this quarter, and losses have been consequent due to the [ 4 Es]. In the case of Ceramics, at the consolidated level, Ceramics growth came in at 2% in quarter-on-quarter terms. And in stand-alone business, the demand for wear Ceramics has dropped on account of lower utilization and some stress among key end users, mining, cement, power and steel, which have impacted the decline in this segment. CAPL, or CUMI Australia business, grew by 5% on Q-on-Q terms. At the YTD level, growth is 8%. It must be noted that Australia's growth is also on a relatively higher base as Q3 of last year was very good. To sum up, the Ceramics segment is still at 12% growth at the YTD level. And a portion of the export demand, which is affected by the visible festive season in overseas markets, will return over Q4. Coming to margins, consolidated PAT for the quarter recorded INR 63 crores, which represents a 9.8% margin and 8% growth over last year. At the stand-alone level, PAT recorded INR 40 crores, grew by about 15% in Q-o-Q terms through lower tax rates and also via operational efficiencies. So Exactal made losses of INR 9.6 crores this quarter, of which our share is close to INR 5 crores. Our joint venture, Wendt and Sterling Abrasives also recorded PAT-level de-growth due to the top line impact. Both these companies have an exposure to the auto industry. Despite the consolidated level de-growth impact, we believe the margin story has been a lot more positive. In our stand-alone businesses, margins have held better despite competitors going after small pies and tough market conditions. So while the commodity input prices have largely been benign and has helped, we have also driven cost-control initiatives across the board. Many of the operational margin improvement is definitely, therefore, sustainable and can be maintained despite commodity prices and other market conditions. The focus has also been on ensuring that we have a good control on working capital. So -- and thus, we focus on a healthy balance sheet, have meant that we trained our focus on collections, quality of sales and inventories. And as you would have noticed, our cash flows are very healthy. I must, at this point, also say that one big positive that we have this year is the successful completion of the coated maker, which will come online from Q1 next year. The project has been completed and hot commissioning is in progress. What -- while we are in the last leg of the year, we will most likely close this year with a flat growth. And -- but close this year with a very good and strong balance sheet. Our outlook for the next year remains cautious, and I would say -- very cautious optimism, I would say, and this is because some of the segments in our market segments, in our various solutions, though while on a broad base looks gloomy, has definitely opportunities that we can leverage. Things like, hopefully, the government would spend more on infrastructure. And that, coupled with auto revival, if it happens, and this is anybody's guess, will contribute to this performance. But we are not going to focus on this going to happen, but on areas of non autos and increasing share in this segment is our key, especially on Abrasives. On CapEx, on a YTD level, our CapEx spend is about INR 107 crores. And stand-alone CapEx is about INR 58 crores, of which major a spend has been towards a new coated maker which has been, as I said earlier, successfully completed. R&D continues to be the focus areas across segments, and this should help support growth in the coming quarters. Now I'll request our Chief Accounts Officer, Mr. Padmanabha to take you through the financial aspects of the performance.

Thanks, Ananth. Good morning, everyone. Wishing you all a great 2020. Let me summarize the financial performance of the business for the quarter ended 31 December. The consolidated sales for the quarter has decreased by INR 41 crores, which denotes 6% de-growth over the corresponding quarter of the last year. Out of this, the stand-alone drop was INR 49 crores, which was partly compensated by an increase in the American subsidiary, CUMI USA and Russian subsidiary, Volzhsky Abrasives, and the domestic subsidiary, Southern Energy. The consolidated segmental PBIT was down by INR 9.7 crores, which is about a 10% drop on the quarter-on-quarter basis. The major drop in the segmental PBIT was from the stand-alone and -- with around INR 7 crores. On a consolidated basis profit after tax on noncontrolling interest for the quarter was at INR 63 crores as compared to INR 58 crores in the corresponding period of last year. At the stand-alone level, the PAT increased to INR 40 crores from INR 35 crores. At consolidated level, the PAT margin was 9.8% as against 8.5% during Q3 of last year. And at stand-alone level, it has increased from 7.7% to 9.9%, which has been largely due to the change in the domestic tax rates. And now we will move on to the segment price results. On Abrasives, consolidated sales for the quarter decreased to INR 263 crores from INR 299 crores in the corresponding period of the last year. Stand-alone sales decreased to INR 217 crores from INR 247 crores in Q3 of last year. At the consolidated level, the PBIT reduced by 18% from INR 38 crores to INR 31 crores. Of this drop of INR 7 crores, a drop of INR 5 crores from -- came from the stand-alone Abrasive segment. Sterling, our subsidiary, domestic subsidiary, also experienced a slight decline in the top line as well as in the margins. CUMI America with U.S. subsidiary has performed well in sales and also as well in the profitability. Electrominerals division. Consolidated sales for the quarter decreased to INR 245 crores from INR 264 crores in the corresponding quarter of last year. At the stand-alone level, sales de-grew to INR 97 crores from INR 121 crores in Q3 of the last year. The consolidated Electromineralns business recorded a PBIT of INR 20 crores against INR 28 crores in the same quarter of previous year. This is mainly due to the increase in losses from our South African subsidiary, Foskor, and reduction of profits from the stand-alone business. CUMI's stand-alone PBIT saw a decline of INR 3 crores, significant 36% de-growth over Q3 of previous year. The net sales of our Russian subsidiary, Volzhsky, grew by 3%. And on the Ceramics part, the consolidated sales for the quarter increased to INR 152 crores from INR 149 crores in the corresponding quarter of last year. At the stand-alone level, the sales de-grew to INR 119 crores from INR 124 crores in Q3 of last year. Consolidated Ceramic segments recorded INR 2 crores increase in PBIT, representing a growth of 7% from INR 28 crores in Q3 of previous year to INR 30 crores in the current quarter. CUMI's stand-alone contributed INR 2 crores to the gain, owing to better margins from both Industrial Ceramics division and the super refractories businesses. CUMI America, our American subsidiary, has moved from the losses in the previous year's Q3 to the current year's Q3 profits. Australian subsidiary, CAPL, were also showing growth in profitability despite the condition in the domestic environment. Debt equity on a stand-alone basis. The debt-to-equity ratio was at -- it's almost a nil, 0.001% as of December 2019. There was no change in the debt-to-equity ratio as compared to September '19 position. The total debt on stand-alone was at INR 0.74 crores as of December 2019. The entire borrowings were in the nature of finance lease borrowings. On a consolidated basis, debt equity ratio was at 0.4 as of December 2019. There was no change in the debt equity ratio position, which was reported last quarter. The total debt on consolidated basis was at INR 75 crores, mainly the long-term borrowings, including the current maturities at INR 13 crores and short-term at INR 62 crores in December 2019, in comparison to the position as of last quarter, wherein it was INR 76 crores. And on the movement of loan position, we have been repaying all the loans, and nothing is -- and no significant increases seen in this. And in respect of the ForEx cover, CUMI, as you know, is typically a net importer in dollars and a net exporter in euro, and we take appropriate hedging in -- aligned with our ForEx policy. And that concludes my update on finance.

Sir, may we open the lines for questions now?

Yes, please.

Yes.

[Operator Instructions] Our first question is from the line of [ Dhavin Makhulani ] from SBI Mutual Fund.

Just one question. Intrigued by your comments on the margins in the Abrasives segment, which have held up vis-à-vis when we look at past cycles, when it has fallen to single-digit levels. It will be interesting if you could help us, what has actually changed over the last downturn? In terms of mix of the business, we -- have we actually seen a share of a more custom-made and specialized business increase on the Abrasives side? And how do you see the margin profile of Abrasive over a 1- to 3-year time frame, as we will see new Coated Abrasives facility commissioning in the next couple of quarters?

Yes. In the Abrasives business, the broad segment, as we have, is the Precision Abrasives and the mass market Abrasives. And traditionally, the Precision Abrasives is a better margin business because most of it is custom built. And that feeds largely into the auto, steel, bearing, these industries. But over the last 3, 4 quarters, this part of the business has been impacted by the slowdown. And hence, the margins from this segment has not contributed as much as it normally would. On the other hand, the mass market products, driven by the Coated Abrasives business has always traditionally been seen as a little lower-margin business. What we have done this the last few quarters has been consciously working on operational efficiencies in the Coated Abrasives, which has significantly moved up. And also, in some part, helped by the benign raw materials, commodity raw materials prices. So I would put in 2 things. One is while we worked on operational efficiencies in Coated, looking at also reducing fixed costs in -- across units and also supported by better raw material prices. The operational efficiencies and the fixed cost production is sustainable initiatives. And going forward, that would continue. And that has been the -- largely the reason for Abrasives holding up their margins.

So like we've seen in the past cycle, where the margins actually dropped to 4% or 5% in 2014, '15. Would you believe that if in case the downturn accentuates, we could see the same level? Or what I was actually looking at, has something changed more fundamentally, structurally that...

Yes.

You think the current level of margins are sustainable?

Yes. I mean I think you -- that's a very good question because compared to the previous downturn, to this downturn, over the last 6, 7 years, as a company, we have been pursuing the PPM methodology in terms of driving operational efficiencies. So what you're looking at is a fundamental change in the way we do things. And that has supported us very well in consistently and sustainably increasing or improving our yields, throughputs and hence the cost structures. So what we're looking at is, as I would call it, some structural fundamental change and hence, we are very confident that we would not go back to those very low single digit margins, what you mentioned.

The second question is, we've seen the drop-off in the margins on the stand-alone Electrominerals division, while the subs-level has held up reasonably well. If you could take us actually through what actually changed where we saw certain drop? Is it like this sudden spot in -- sudden drop in the SiC prices? Is there is a reason why we saw margins going down?

Yes. The Electrominerals business is, again, broadly 2 parts. One is what we call the commodity part or the regulars businesses, which is the fused alumina, silicon carbide, et cetera. And the specialty part. Specialty part driven by the fine powders and also the -- what we call the Alumina-Zirconia and the ceramic grains part of the business. Now as I mentioned earlier, beginning of this year, we saw this -- one of the better profitable part of the businesses, which is the diesel particulate fine powders, kind of dropping out. So with the diesel cars or the diesel particulate filters not being favored, we saw a significant drop in that market, and hence, no market for our fine powder. So that has one way impacted profitability. On the other side, we also have on the mass market or the regulars, what we call it, the aluminas and the silicon carbide, impacted by the lower or the drop in the Abrasives and refractory market. So on both sides, we have had this impact. And hence, this margins. We do see, even in the regulars now going forward, the demand for some of those product groups. And so -- hence, we would hopefully see an improvement in the margins in the coming quarter.

We'll take our next question from the line of Ravi Swaminathan from Spark Capital.

I just wanted to know -- I mean, we have seen a very sharp decline of 12%...

Mr. Swaminathan, sorry to interrupt. Could you speak a bit louder? Sir, we are not able to hear you clearly.

Am I audible now?

Yes.

That's audible.

Sir, we had seen roughly around 12% revenue decline in the Abrasive segment. Was it that the end market alone had seen a decline? Or was it because of down-trading and some market share loss also that we might have seen? So How was it?

Yes. Ravi, in the stand-alone, the impact has been largely because of the higher realization, higher margins, Precision Abrasives business. As you know, the Precision side is not only better margins, but also better in terms of realization per unit turnover. So that has definitely contributed. What's also happened is not only the direct -- the supplies in the direct auto industries, but as a kind of a domino effect, we're also seeing that some of the peripheral industries or adjacent industries to the auto or what we call the non-direct auto industries, like your fettling, snagging, foundry. So they also have been impacted. So that has been the reason for this sharp fall. But having said that, the Coated Abrasives has kind of compensated for this slowdown in the bonded abrasives. And hence, we have these numbers.

Got it, sir. And in terms of the Ceramics and refractories business, we had seen 2% growth. I understand that where Ceramic had been impacted because of impact from core business, but you had mentioned that the export ones, like Metallized Cylinders, et cetera, have also been impacted due to a seasonal weakness. I mean can you explain a bit because last year, also same quarter would have been holiday season, et cetera? Is it like the Metallized Cylinders business is seeing slowdown in terms of growth?

I mean, Metallized Cylinder business has continued to do well. It is nothing -- we believe that the -- this particular year has been lull in exports because of this December festive season. But otherwise, our order books are pretty healthy on this segment. So in the Metallized Cylinder domestic market, we do have some individual challenges with a couple of -- one customer specifically not picking up volumes this year.

Got it, sir. And what capacity utilization will be running at within the Metallized Cylinder business? And is there any CapEx likely to happen in the near term?

We are in the high 80s in terms of capacity utilization. We do have this expansion going on, which is your -- another 0.5 million cylinders which should come up by Q1 of next quarter -- next year.

Q1 of FY '21?

Yes.

And that will take it to 2.3 million?

2 million cylinders. Currently, we have 1.7 million, plus 0.5 million, we'll increase.

Okay. And in the Electrominerals in Russia, we are running at full capacity? How is it?

Yes. Yes. Russia is -- in terms of capacity utilization, is pretty well. It is 95% plus. The -- again, capacities are determined by the product mix, right? So the -- how they -- whether it is -- this year, it has been largely the metallurgical, the silicon grade, which -- and which goes into the refractory segment. So they are doing very well, they're going strong, we're running flat out there.

Got it. But from a growth perspective, next 1, 2 years, what will drive growth then? So debottlenecking?

In -- yes. There is an amount of CapEx, which has been planned and being executed this year for improving the silicon carbide volumes by about 10%, 10% to 15% there. And also what will happen in the SR's -- the SR-based refractories is one segment, which we are looking at investing and growing.

Okay. We manufacture it there as well?

Yes. We do manufacture now, the Nitride Bonded refractories. So that segment will definitely improve.

Got it. And my last question is with respect to Foskor losses during this quarter. How much was it for the third quarter and for 9 months? If you can...

It's around -- our share will be around INR 4 crores. And we expect that this will be closed in the current quarter.

It will -- in this quarter?

In this quarter.

Okay. From fourth quarter onwards, it won't be there?

Yes. From Q1 of next year.

Q1 of next year. Okay. And for the 9 months, how much was it? Roughly?

Roughly...

Our share is around...

INR 9 crores.

INR 9 crores.

[Operator Instructions] Next question is from the line of Harshit Patel from Equirus Securities.

I had just one question. So we have posted a 2% Y-o-Y growth in the Ceramics segment this year. So could you bifurcate this growth between Super Refractories and Industrial Ceramics part?

It's -- we normally don't give out those numbers because as you would appreciate, it is business sensitive. But I can tell you that the engineered Ceramics and part of the business is done very well. The thermal part of the Ceramics business consequent to its exposure to the steel, cement and some auto has not done as well as expected in Q3.

Sure. So sir, what would be our capacity utilization in the thermal part? And do we have any plans to increase the capacity over there?

See the thermal business is a very specialized kind of a business in terms of addressing design-specific requirements of customers. So what we call the fired ceramics part. And currently, we're running at about 70% capacities. As I said earlier, the investments in this area would be in the silicon carbide or Nitride Bonded silicon-carbide-based refractories in Russia and some in India.

Our next question is from the line of Ujwal Shah from Quest Investments Advisers.

On the Abrasives side, sir, considering a lot of inputs from China was also impacting the business. Now considering this virus issues are on and the trade would be impacted, are we going to see benefit out of it, considering imports from China might go down? And on the Abrasive side, sir, how confident are we on maintaining our margins going forward?

Yes. I would answer your second one first because I did give a detailed explanation on why we believe that our margins will hold. And it's again a combination of strong operational efficiencies in the plant, [depleted ] by our TPM practices and also supported by, in some measure by the soft input prices we saw last year. On the imports, I must say, first, yes, it is a situation none of us want in terms of being a health scare and people reportedly dying. That is something which none of us want. But is there going to be an impact on the supply chain and both for raw materials and finished goods? There could be. On the raw material side, while we do import some raw materials for our Abrasives, we should also remember we are pretty strong in terms of our own production of Abrasives of grains in India. So that will give us definitely a stronger edge. So we are prepared for that. On the imports of the Abrasives from China, it will be largely the mass market imports, which would be the Coated Abrasives and thin wheels. Now we do not know for sure how long this virus outbreak will last. But we definitely know for at least in the short term, there would be some supply disruptions. And yes, that would give us some advantage in terms of leveraging our volumes, especially in Coated.

Sure, sir. Coming to Ceramics business, sir, we saw a very strong growth over the last few quarters. Are we seeing sales now peaking out considering of those strong numbers that we have posted based on base effect coming in? Or you are confident on engineered Ceramics still driving the growth ahead, and we can see a double-digit growth in coming quarters?

Definitely, the engineered Ceramics and the mix ceramics, so we should continue with the growth momentum that we have. And that is the indication that we have had from our customers as well. So both these products are pretty strong. The demand requirement -- the demand drivers for these requirements are strong. So we would -- you would see a good performance in this segment. On the wear products, we have prepared products both for the domestic market and what we see as -- from the exports as engineered lined equipment. And in both these cases, definitely in the export markets with our presence in Australia, we would definitely see a demand going up there. And in the domestic market, if the infra picks up and we have the cement, steel, power coming back into play, we would definitely be there. So -- because if you look at wear, wear products is something which is required by every industry, which is experiencing -- which is into processing and experiencing damage due to wear. So this is something which is a global business and can be a good growth driver for the company.

Sure, sir. And also on their margins, we have been maintaining very healthy margins on the Ceramics side. So as you indicated on the Abrasives, can you share some light on the Ceramic margins? How sustainable are these margins going forward as well?

See the Ceramic business, unlike other parts of CUMI, is largely dependent on raw materials, which are imported because these are high, pure -- high favored raw materials. But what creates a value is in terms of our -- the strength in design and offering solutions to customers. So on the industrial Ceramics side or what we call this wears and engineered Ceramics tiles -- engineered Ceramics parts, the fact that it is mostly custom-built gives us the confidence that our margins will hold. On the refractory side, again, in terms of the product mix, the more and more into the designed products, the product mix will definitely support us.

Sure, sir. And lastly, on the Electromineral division, sir, not one of the great years that we have seen for this division, be it in terms of sales or in margins. So any outlook, sir? How we are seeing business shaping up, especially for FY '21, considering this year is almost gone by? Where do we see our growth coming in from -- for EMD, considering that DPS would be totally off for 1 year now considering by next year? And which products will basically drive? And when do we see those double-digit margins coming for EMD again?

Yes. The EMD business -- as I again mentioned, as I said, 2 parts. One is the mass market regular parts, which is cost and efficiency driven. And in this space, we are positioned well, both in Russia and in parts in India because, for example, the white fused alumina business is a large-volume business and supported by good pricing -- or good sourcing strategies that we have put in place now in supply chain. We believe that we can be very cost effective. On the work we have to do on the specials in terms of building volumes and gaining applications to compensate for the drop in DPF. So that is some work which we are doing. We -- so in EMD, it's a case of a product mix, while on the regulars, we drive efficiencies and build volumes. On the specials, we will build these businesses back. And there are opportunities emerging, not only in the current, what we call, the conventional specials but also in emerging specials like in the battery segment, in the EV segment. So it is not going to happen next quarter or 2 quarters, but that is going to be the focus for building back these double-digit margins.

Okay, sir. And in terms of Russia, sir, what was the volume...

I'm sorry. On -- we also should remember that the EMD margins have been impacted by the first Foskor losses. So if that is off, then we would see better margins coming up.

Okay. Sir, we were planning to move out of Foskor. So where is that placed as of now?

We are in discussion with potential buyer. So that would -- we hope that we would close it out by end of this year.

Okay, sir. And lastly, sir, in terms of VAW, what is the capacity currently? And by next year, what would be the capacity ramp-up? And what was the volume growth we saw in 3Q?

In VAW, the -- on the silicon carbide segment, we are running flat out. We are at about 95% capacity utilization. This has been the case for the last couple of years. The team there has been working on operational efficiencies and on debottlenecking, which would improve our volumes by about another 6-odd percent, plus we have our investment in CapEx to improve volumes by about 10%.

Okay, sir. And in 3Q, what was the volume growth that we saw in VAW?

Volume growth was almost -- I mean, I would say flat because they were running -- year-on-year, it's full capacity. So flat out.

Our next question is from the line of Kirthi Jain from Sundaram Mutual Fund.

Coming to earlier question. Like, you had highlighted, sir, the Foskor will be closed by Q4 and we will not see any losses, sir. Am I clear, sir?

That is what we are working towards.

Okay. Sir, any settlement cost or anything would be there likely?

No. No impact.

Okay. Sir, coming to -- sir, next year, like what sort of growth we should expect, sir, broadly?

Yes. So we are in the process of finalizing and discussing our business plans for the next year. So we would be sharing with you, most possibly more details in -- when we have the call in April. We're also looking at how some of this growth will be consequent to what's going to happen possibly in the budget. And also, how do things pan over the next few quarters to come. So -- but all of us know that the consumption story has to restart. Because these are industrial consumables. So that has a big impact. But we are positive, in the sense there are opportunities as a company and being present in various segments is what gives us the resilience. So -- and the capability to absorb shocks across.

Okay. Sir, in the graphene side, any progress sir, we have made in terms of the business, whether we are getting -- how is the response for our product and in new customers, are they asking more supplies from us?

It's roughly in a -- it's a pilot plant, right? So we have commissioned the plant. We are currently -- the focus is on working on developing applications for this material. So it is still not commercialized in that sense. So we have to first get the applications where we can establish and scale-up. We are working with a few customers, specific customers and that is what our first priority is, to get the applications going.

[Operator Instructions] We'll take the next question from the line of Manish Goyal from Enam Asset Management.

Yes. Sorry, I'm Manish Goyal from Enam Holdings. Sir, a few questions. First, on the VAW Russian, -- what is Russia -- what is the current capacity? Did we take some expansion? Or are we looking to further expand? If you can clarify the number, please?

See the Russian business is largely in the 3 parts, which is silicon carbide, Abrasives and the refractories part. On the silicon carbide, our current capacity is at about 85,000 tonnes, and we are running at about 90% plus capacity utilization there. So as I said earlier, there is definitely debottlenecking investments and some capacity increase, which will come up this year. So -- to the tune of about 10% additional. For the capacities, what we have put out, increase is in the refractory space. And there, we would see further investments because this is definitely a growing part of that business.

Okay. So what kind of capacity increase we'll look at refractories?

The refractories would -- we would be adding another 1,000 to 1,500 tonnes of refractories.

Okay. And the Abrasive business seems to be incurring losses in Russia. So any -- can you probably quantify in terms of what kind of revenue and losses we see in Abrasives in Russia?

The Russian -- the Abrasives in Russia is largely limited to the Russian market. And yes, it's a small part of the business. So there we are looking at maintaining the current volumes.

Okay. But do you expect that we should be able to kind of grow volumes and probably turn around the business?

That would kind of grow along with the growth in the Russian market because the products -- what we produce in Russia is -- it's for the local market, and it is not export-driven. So it would grow in line with the local market there.

Sir, what are the volumes you are selling sir, currently in Abrasives in, say, on an annual run rate basis?

It's a mix of both Coated and bonded. So I will not be able to give you tonnage numbers.

Okay. But we are not seeing volume growth?

Our focus there in Russia is on leveraging the silicon carbide and the refractory space.

Okay. And sir, on silicon carbide, capacity expansion will be operational by when, sir, in Russia?

During the course of the year.

In the current calendar year?

Yes. In the current calendar year.

Okay. Sir, on the met cylinder, so I believe we were looking to enhance product range, like probably start selling metallized devices as well. So any progress on that, sir?

We have some progress in terms of devices, in getting approvals from some customers, both in the electronics and space industries, but these are long-decision projects. So we have been over the last year and building up capabilities in this area. So we hope to see further growth and speed in the next couple of years.

Okay. And on met cylinders with increasing capacity, are we having a fair bit of visibility in terms of utilization, say, probably over a period of next 6 to 12 months, sir?

In met cylinders, definitely, yes. There is a -- met cylinders is something which is -- we have been won in terms of the capacity ramp-up that we are progressing with. And also in terms of the customer base. Yes, we do have reasonable visibility there.

So is it that we are probably gaining market share? Or is it that the market itself is growing, and it's a function of both market share gains and...

I would think it's a function of both, the nature of the product and its application is such. So we would see increasing requirement for these kind of cylinders across both, I would -- the power transmission, power generation and power distribution sectors.

Okay. And sir, last thing on the overall margins. Sir, basically, if we see the 9 month numbers, what we probably see is that material cost has somewhat declined as well as power and fuel costs has also been a bit lower. While on the other side, we have our fixed cost, like employee costs going up and other expenses as well going up. So if you can probably give us a sense going forward that probably on overall margin front, how do you see that? Because in 9 months, still, our EBITDA margins have declined by 130 bps. So -- and largely driven by the increase in -- or maybe loss of operating leverage. If you can give us a sense going forward?

See when we plan for the year, we plan the sales numbers, we plan the cost, including both the variable cost and the fixed cost, right? So when -- while we progress, and when we see that the sales numbers are not in line with our plans -- and because of the -- what we call the market conditions today, we have been working extremely hard in terms of improving efficiencies. Yes, the raw material prices has definitely helped. The power and fuel prices have stayed kind of flat. But the significant improvement in internal efficiencies, as I said, across divisions, has definitely helped in maintaining or improving the margins. The -- you should also -- I mean, we appreciate that the fixed cost, while we have taken steps to reduce fixed costs, those fixed costs cannot be flexed so quickly to the drop in sales. And that is the reason for the EBITDA not improving as much as we would like to.

Yes. So exactly, sir, I was probably looking forward in terms of that entering into FY '21, probably, we may see a flattish scenario on the fixed cost based? And then probably with growth in top line, we should probably see the operating leverage benefit.

Absolutely. So because if you -- across all our plants, we are looking at fixed cost growth coming down. The growth rates have been coming down. So that's our focus area. So while we look at opportunities to increase sales even in this market, ensuring that the fixed costs are controlled and in a sustainable way is going to be the focus.

And if I may squeeze in a couple more questions. On the -- we were looking at some opportunities from the BS-VI norms coming in for two-wheelers. So there was some product we were planning to launch, if you can give us outlook on that?

The product which you would be mentioning is the opposite sensors for the two-wheelers, yes. But again, this is on -- it is qualification with a few customers. So that's kind of progressing. So as the volumes and the BS-VI goes up, hopefully, this part of the business also will grow.

Okay. So by when do you think we should be able to -- we'll be through with these approvals and...

I mean, it's an ongoing thing because it depends on customer to customer, how they would want to use those products and to what extent they're looking at. So...

But how big is the market sir, in terms of opportunities, like once we enter into, like...

Honestly, I can't tell you right now.

Sure. Okay. And last question, sir, in Abrasives, how has the mix changed in terms of revenues for coated and bonded?

Traditionally it's about 60-40. 60% for Bonded Abrasives and 40% for Coated Abrasives. And I believe that over the period, going forward, the Coated Abrasives will kind of catch-up with the bonded.

Sir, would it be 50-50 today, sir? Because bonded is declining and coated is growing so...

If you're looking at it as a -- with a very narrow window? Yes, possibly. Very close, 45%, 55%, and that's because of the fact of the drop in the auto industry.

Okay. But with now doubling of capacity at coated, ideally it should be then probably hovering in this range, right?

It will come -- yes, it will be closer, but again, if you'd realize that though the capacities have gone up on the ground by almost double. The capacity utilization will take about -- to come to the current levels of capacity utilization, it could be anywhere between 4 to 5 years.

Our next question is from the line of Jasdeep Walia from Infina Finance.

Sir, what has been the growth in North America in the 9 months of this year? And how do you see that going forward?

North America, our business in North America is largely driven by the Abrasives segment. And what we see here is that the requirement for Precision Abrasives have significantly improved because we have been in North America for the last 10 years plus. And we have established a good base for Precision Abrasives and the acceptance now is better. So we are seeing a better business in the Abrasives segment. And it has moved over the last year by about INR 4.5 crores.

In the 9 months?

Q-on-Q. On a YTD basis, yes, about INR 5 crores.

So it hasn't grown much in this year?

We have grown. Over INR 5 crores, we have grown.

What's that in percentage terms, this INR 5 crores number?

22%.

Got it. And sir, how do you see this growth going forward?

So as I said, we are quite positive about this because the -- one, the product range and the fact that we are competitive in the American market. So we have some good customer acceptance there. So we hope that this level of growth should maintain.

And what all countries will you include in North America, sir? I thought...

Largely the U.S. and Mexico.

And Canada, also right? You...

No. Canada is very small.

Okay. Got it. Got it. And sir, what was this turnover last year in terms of million dollars?

Broadly is about $8 million, I would guess.

$8 million? $8 million?

For full year. Full year.

Our next question is from the line of Aditya Mongia from Kotak Securities.

Sir, my question was also on the North America business. So the question essentially was that this business, while we've been there and we have grown this business over time to $8 million, $9 million, it's still a loss-making business for us at this point of time. What would be your thought process on contribution actually coming from the Americas business over time?

First of all, yes, it's been a -- we have been there for a long time, but I must correct you that it's no longer loss-making. The last 3 quarters has been a positive. And on Y-o-Y terms, we are looking at about a INR 1.5 crores profits from this business.

Sir, can these profits grow non linearly as your revenue line grows by 25%, 30% into a meaningful sum? Or would there be a more patient wait over here?

So the nature of the business is that it is a customer business where you need to establish your product to customers, gain their confidence. And the fact that we are at a distance, also kind of hampers the kind of speed at which we can do things or get a customer confidence. And that is the -- largely the reason why we have taken some time in establishing our presence. Hopefully, with this -- the speed or the rate at which we have -- acceptance levels have gone up over the last 2 years, we should be able to grow faster here. And that will also impact our -- positively our profitability.

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

My question is regarding your CapEx in Russia. One is, what would by the CapEx we're looking at for the incremental capacity as you are increasing by 10% and cost will become double?

We would be finalizing it over the next couple of months. We will then be able to share with you.

Okay. And the second on the CapEx in refractory spaces. If I'm not mistaken, in the past, this business has not been too huge. And we are going for a capacity addition there as well. So you're seeing demand coming in from Russia and -- or from Europe?

The demand is largely for the Nitride Bonded, silicon carbide Abrasives or what we'd call the businesses which are like in the aluminum industry, et cetera, which is not only in Russia, but also global in nature. So while we have established our products in Russia and some parts of the world. So this gives us a good opportunity to grow. And this is one of our focus areas going forward.

So this CapEx should be in Abrasives and not refractories?

This is in refractories.

Our next question is from Riya Mehta from Anand Rathi.

[indiscernible]

Can you speak a little louder, please?

Can you hear me?

Yes, much better now.

Yes. I just wondered CapEx numbers for FY '20 and '21, if you could just give a guidance?

It will be around at the same level of INR 110 crores.

For FY '21?

Yes.

And for FY '20 as a whole?

FY '20 is at the INR 110 crore levels, and we expect that it will be in the planning stage, a marginal increase will be there.

Ladies and gentlemen, that was the last question. I would now like to hand the floor back to Ms. Bhoomika Nair for closing comments. Over to you, ma'am.

On behalf of IDFC Securities, I would like to thank everyone for being on the call and particularly the management for giving us an opportunity to host the call and answering all our queries. Thank you very much, sir.

Thank you so much again. And I'm definitely sincerely hoping and wishing that all of us do well in the year to come. And definitely, from our side, we are -- though we had a tough couple of quarters, we are looking at many positives. And that's what we are banking on. Thank you, again.

Thank you, members of the management. Ladies and gentlemen, on behalf of IDFC Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.