Carborundum Universal Limited (CARBORUNIV) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Carborundum Universal Limited Earnings conference call hosted by Anand Rathi Share and Stock Brokers Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ashwani Sharma. Thank you, and over to you, sir.

Yes. Good morning, everybody. So on behalf of Anand Rathi Stock Brokers, I welcome you all to Q1 FY '21 Post Results Earnings Call of Carborundum Universal Limited. So from the management team, we have Mr. N. Ananthaseshan, Managing Director; Mr. P. Padmanabhan, Chief Accounts Officer; Mr. G. Chandramouli, Senior GM, Strategy; and other team members. Now may I please request the management to give opening remarks pertaining to quarter's performance, post which we can open the call for a Q&A. Over to you, sir. Thank you.

Good morning to all of you. Before we begin the call, as a practice, we will have Mr. Chandramouli to read out our disclaimer, and then I will take the call.

Yes, sir. Good morning. During this call, we may make certain statements, which reflect our outlook for the future or which could be construed as a forward-looking statement. Statements are based on management's current expectations and are associated with uncertainties and risks that are more fully detailed in our annual report, which may cause the actual results to differ. Hence, these statements must be reviewed in concert with the risks that the company faces. Thank you, sir.

Thank you, Mouli. So thank you all, again, for joining us on this call. It's a very unique quarter. I guess in all our lives, never before has any one of us experienced such a turbulence with so much of uncertainties on a global scale. It has also been a quarter where individuals and corporates have been challenged like never before, which has, among all things, required all of us to exhibit care and humaneness, stand up to be leaders and work across teams to dig deep into our results and, more importantly, build that attitude of not to quit. I must say that -- actually, we have been -- we had taken up this challenge, and we have been doing all this and more. While the lockdown or imposition of the lockdown and following the months and the weeks -- the weeks and the months after March, we had to shut all our plants in India. Possibly with the exception of the Maniyar hydel unit, all the operations have been temporarily shut down to the beginning of May, in some cases till the 10th of May. However, our operations at Volgograd, Russia and in Australia, they both continued to run through the respective lockdowns in their countries. The lockdowns there permitted them to operate in a safe manner or with necessary social distancing, while the transportation system was allowed to run, making the material movement not much of a challenge. Today, after the lockdowns had been lifted in multiple phases, all our Indian operations have since resumed, and they're running safely. So what we are looking at is roughly between 45 to 55 days of operations in Q1. So now let me walk you through the results. At a consolidated basis, sales for the first quarter was INR 444 crores, which is 33% lower than Q1 of last year. Segmental PBIT recorded INR 34 crores at the consol level. This marks an 8% margin vis-á-vis 16% margin over the same period last year. This, I would say, is largely due to a relatively resilient demand, especially in the minerals and in some segments of Ceramics. The Abrasives segment, this is the most impacted of all segments, had recorded a marginally negative margin of 2%. This was largely on account of the low demand from key end user industries. Obviously, after the lockdown, most of the auto industry, the auto ancillaries, the company's manufacturing construction sector, engineering, all of them closed down in the domestic market. So that has had a big impact. The Russian Abrasives business also saw a lower demand from their end user industries, which is largely again auto and construction. So this is -- they also had a lockdown in the auto industries. The auto industries shut operations in Russia because of the low demand. So the fixed cost coverage in this segment has not been sufficient enough, and we must be operational profitability by a very thin margin. So across the board, despite the heavy impact of volumes, our fixed cost reduction initiatives have helped show up the margins. These would be more evident, and we will also know whether they are sustainable enough so they would reflect on the past profit margin level over the coming quarters when we have, hopefully, a better and a higher degree of operations. Our input costs have been better at the consolidated level, though it has been a mixed bag, where in some cases we have seen lower input costs, and in some -- other cases, we have seen higher costs on account of the adverse ForEx impact and also some unfavorable product mix in some segments. In areas where we are net exporters, the ForEx has helped us, while in other segments, we have had product mixes -- adverse product mixes. PAT for the quarter was INR 20 crores, which is 63% lower than Q1 of last year. At the stand-alone level, sales was at INR 234 crores, which marks a 45% decline. Operating profits were at INR 6.5 crores, an 88% decline over Q1 of last year. Operating margins were at 3% compared to 13% in the previous year and at the segmental level, Abrasives recorded slightly negative margin of 2%. Ceramics recorded 9% margin vis-á-vis 8% -- 18% last year. And the Electro Minerals segment recorded 2% positive, which is very close to last year's level despite comparatively fewer days of operations and a drop in revenue. I will give you a flavor of the business environment that we are working with, beginning with Abrasives. So as we all know, in the stand-alone business, auto and the allied industries, direct and indirect, their disputes into the auto have taken a big hit. The other main industry, construction, has also been deeply impacted. So we can only expect things to improve slowly as the labor force returns when construction and home renovation activities resume. We also expect that the infra, real estate construction sectors to get a fillip from the Atmanirbhar Bharat scheme and other programs which have been announced by the government. In Russia, as I said earlier, the Abrasives business caters largely to domestic demand, and the auto industry in Russia, much in line with the global auto industry, is yet to see full-fledged revival. Sterling Abrasives, our joint venture in Ahmedabad has seen lower revenues by about 36%, though their PAT margins remained positive. The outlook for agriculture remains largely positive. And since Sterling Abrasives feeds into the rice-polishing or the agro-processing industry, we hope to see this business doing better in the coming quarters. CUMI America Abrasives segment declined over Q1 last year, again, due to the fact that many of the auto majors there closed shop. They have also had lockdown in multiple states, and some of the states had complete lockdown while some others had partial. So this also impacted the CUMI America sales. The associate business in India, Wendt -- super abrasives business, which is Wendt India, also faced similar domestic conditions. So overall, in the Abrasives space, when it comes to product mix, we do see some opportunities for import substitution going forward, largely driven by the weakening of the rupee. We also are undertaking channel activities through our teams in the field. In the last 45 days, our teams have started moving into the field and -- prioritizing, first and foremost, the health and safety of our employees and our partners. We also put in digital infrastructure, and we have put in place very quickly, and that has helped us to carry out remote inspection, remote ordering, and we have been able to undertake customer engagement activities as usual. The mineral segment has been more resilient than Abrasives. This contributed more to the top line and the bottom line, and we are seeing good demand from certain product groups. The demand has been relatively good from the refractory industry and the metal matrix composites. The outlook for both of them remains positive, as mining and steel will benefit globally as countries without these massive fiscal and monetary measures. Operations in Russia have seen marginal volume growth. So overall, the mineral segment has been a better story than the rest of the businesses. Margins in the Ceramics segment recorded 11%, which is lower than the 18% of Q1 last year. This is also largely coming out of a top line decline of 35%. Some areas, such as ware applications, we have seen better demand in the domestic as well as in exports markets. So some of our subsidiaries like in CUMI America's Ceramics segments have seen better performance. This is also due to the need for a repair and maintenance of these plants when they shut operations and start up again. Our Australian entity continues to see good demand from the mining sector in Australia. So the sales from India to Australia has been impacted a bit because of the shipment delays reports initially during the lockdown. And the sales of met cylinders was also lower than what we normally do due to the lockdown, and this has also impacted margins. There has, however, also been a slowdown in some segments as refractories and composites, where we cater to project orders. There have been some project deferrals, and the product mix has been adverse in this segment this year. Our overseas entities have seen relatively better performance in this segment. The refractories operations at VAW and Middle East both did very well. The Foskor Zirconia unit in South Africa also had a lockdown because the country went on a lockdown till about early May, and our portion of the losses from this business is about INR 2 crores. Overall, our performance of our JVs and associates in India, which is Morgan Thermal Ceramics, Ciria and Wendt have also seen a similar impact. CapEx addition during the quarter was about INR 34 crores at the consolidated level, and we are very cautious on our investments in CapEx, while we also explore opportunities to automate the processes in all our plants to ensure that the productivity of the plants are better, and this will also ensure that the dependence on temporary labor, ensuring social distancing is maintained. I must also say that the team has been very focused in terms of driving collections, and we have had good collections through the quarter, which has enabled the business to be -- to continue -- to continuously be strong on the cash front. And on that score, we don't have so much of a concern. So this closes my briefing for the quarter, and I now request our Chief Accounts Officer, Mr. Padmanabhan, to take you through the numbers, following which we can open up the forum for questions.

Yes. Thank you, Anant. Good morning, everyone. Let me summarize the financial performance for the quarter ended June 30, 2020. The consolidated sales for the quarter has decreased by INR 220 crores, which denotes 33% decline over the corresponding quarter of last year. Of this, the major stand-alone, which has dropped by INR 190 crores. This is mainly due to the impact by the prevailing lockdowns in the country. The consolidated segmental PBIT was at INR 34 crores, which is down by INR 51 crores and about 60% degrowth on a quarter-on-quarter basis. At the stand-alone level, the segmental PBIT for the quarter was at INR 7 crores against INR 56 crores during Q1 of the previous year. On a consolidated basis, the profit after tax and noncontrolling interest for the quarter was at INR 20 crores as compared to INR 53 crores in the corresponding period of last year. At the stand-alone level, the PAT decreased to INR 11 crores from INR 45 crores. At consolidated level, the PAT margin fell from 8% during Q1 of previous year to 4.4% in the current year. Out of this, at the stand-alone level, it has decreased from 9.9% last year to 4.3% during the current quarter. And on the segments, the Abrasives, the consolidated sales of Abrasives for the quarter decreased to INR 131 crores from INR 259 crores in the corresponding period of the last year. Stand-alone sales decreased to INR 113 crores from INR 214 crores of last year. At the consolidated level, the PBIT was a marginal INR 3 crore negative from INR 28 crores of profit last year, and out of which, INR 2 crores of losses was from stand-alone. Our subsidiaries in U.A.E. and America showed positive growth on a quarter-on-quarter basis in terms of profitability. Moving on to Electro Minerals. Electro Minerals division consolidated sales for the quarter decreased to INR 210 crores from INR 264 crores in the corresponding quarter of the last year. At the stand-alone level, sales dropped to INR 65 crores from INR 105 crores in Q1. The consolidated Electro Minerals division business recorded a PBIT of INR 23 crores as against INR 24 crores in the same quarter of the previous year. Russian subsidiary continued to show strong performance, both in terms of sales and profitability. The South African subsidiary also showed reduced losses on Q-o-Q terms. On the Ceramics segment, the consolidated sales of the Ceramics segment degrew by 35 percentage on a quarter-on-quarter basis from INR 165 crores to INR 108 crores. The stand-alone sales degrew by 43 percentage on Q-on-Q basis to INR 79 crores. The net sales of our Russian subsidiary, Volzhsky, grew by 49 percentage on a quarter-on-quarter basis. Consolidated PBIT of the Ceramics segment for the quarter was at INR 12 crores, lower by INR 18 crores from the same quarter last year. The entire decline was due to the reduction in the stand-alone. The entire INR 18 crores was from stand-alone only. From the finance side, there was no debt on a stand-alone basis, and we continue to be a debt-free company at the end of this quarter. On a consolidated basis, the debt/equity ratio was marginal, 0.03 at Q1 end. The total debt on a consolidated basis was at INR 63.81 crores in June in comparison to the March, wherein it was INR 61.63. The increase of margin at INR 1.5 crores is due to the exchange fluctuation. So the borrowings remain the same. And on the ForEx cover, CUMI is typically a net importer in dollar terms and a net exporter in euro terms. We -- as per the policy, we cover the net exposures as appropriate and in accordance with the ForEx policy approved by the Board. And on the cash flow side, we have strong balance sheet as evidenced by the net cash position. Net of debt, which has increased during the current quarter to INR 393 crores, which was around INR 294 crores in March and also a low debt equity ratio. This concludes my update from finance side.

Thank you, Paddu. So now we are open to questions, please.

[Operator Instructions] The first question is from the line of Ravi Swaminathan from Spark Capital.

My first question is with respect to July demand, how it is shaping up, say, compared to, say, June? Is it flattish? Or has it seen improvement? If you can give some color on that across segments, it would be really great.

Okay. Yes, I think the -- what we saw in Q1 and, I guess, as the lockdown started lifting in various cities, the June demand was more robust than demand in April and May, which is understandable. So we are continuing to see a better demand in July, largely coming from both the mineral segment and the Ceramics segment. The business segments, which is, again, as I said, is driven also by auto, I'm assuming, is yet to see such traction, though it is definitely better than the early May -- April and May. I hope that once we -- the auto industry starts and people start coming back to work, this should improve in possibly August, September.

Got it, sir. Abrasives would be 70%, 80% of normal in the month of July?

Yes, around that, I guess. 70% would be better.

70%. Okay. Okay. Got it. And international operations are running fine, Russia, et cetera. I mean...

Russia is doing well. So they have also had a good quarter last quarter and reasonably good start in this quarter as well. So we don't see a major hiccup there.

Got it. Got it. And any update with respect to the exit of Foskor this quarter or next quarter?

Zirconia? Yes. So as I said during the last call, we have been progressing with due diligence with one of the potential buyers, and this has been progressing, but it was kind of a derail because of the lockdown. And subsequent to that, we have made some progress. So hopefully, we would try and close this transaction definitely in the next couple of quarters max.

Got it, sir. And with respect to cost, both from employee cost and CapEx, vis-á-vis our earlier estimates, are we cutting anything? If at all, how much it would be?

So we had -- on the employee cost, there was -- though April and May was no production, we did -- as a company and as a group, we had committed to pay salaries to everyone, including contractors. So this is a part of our special commitment. We said we will not deny them or we'll not -- we'll definitely support them during these tough times, and we did. So the employee cost, I would say, was higher than normal for the sales what we did. While we did that, we also ensured that going forward, to be more productive and recognizing that you may not have the luxury of people coming in and working on a temporary basis, so we have -- we are looking at making investments in modernizing and mechanizing the plants, especially on the material handling, automation of operations, et cetera, though it will take a couple of quarters for it to get installed. So the CapEx has been -- we have been focusing only on absolutely vital, which is vital to the growth and which would drive revenues and which will also reduce our variable cost of pre-productivity. The desirables have been kind of deferred for now. So there would be some drop in the CapEx. Hopefully, it is not significant.

[Operator Instructions] The next question is from the line of Renjith Sivaram from ICICI Securities.

Sir, given the challenging scenario, good to see profit happening [indiscernible]. Sir, if you look at the other income, that has seen an impact [indiscernible].

Sir, there is a lot of disturbance coming from your line.

Hello? Hello?

It seems you are on speaker phone right now. If you could come off speaker, or even if you're using the phones, if you could just be on the handset mode?

Yes, yes. Okay. I'm now in handset mode. Am I audible?

Yes, please.

Yes. Your other income was high. So is there any impact of ForEx gain in that or why it was high this quarter?

Paddu, do you want to take that?

Other income.

The other income is mainly on account of the dividends received in the stand-alone, that is why it is high. And in respect of the consolidated fee, it is from the interest from the bank deposits.

ForEx-related impact on that?

ForEx related, this time it was a loss and, therefore, it is in the miscellaneous expenditure, and the other income has not been affected because of that.

How much was that ForEx impact in the expenditure?

ForEx impact was around INR 7.5 crores at the consolidated level. Out of that, INR 5.5 crores coming from our Russian subsidiary, VAW, and INR 1.5 crores from our Australian subsidiary, which is mainly due to the translation losses.

Okay. And what are your current utilization of the facilities?

As I said, it depends on each division. So I guess [indiscernible] is 50% to 60%. The Russian facility is running flat out.

[Operator Instructions] The next question is from the line of Harshit Patel from Equirus.

Sir, in the last quarter, you had mentioned that some of our sales were stranded with respect to imports as well as domestic sales because of the restrictions on the travel. So I believe our previous quarter revenues would have benefited from that. So sir, if you could elaborate a little more on what was our run rate in terms of both the month of May as well as June versus the same period last year, then that would be very useful.

Sorry, I didn't catch your first part of the question.

Sir, I think that in the fourth quarter of financial year '20, we had lost some sales in the last 10 to 15 days. So I believe those sales would have now come into the first quarter results. So if you could quantify that. And in terms of both production as well as sales, what was our run rate in the month of May and June versus the same period last year?

It's very difficult to answer because many of the -- because the sale in March or the lost sale in March, which typically would be, let's say, the sales to the channel partners, which happens in the business was -- though we had started shipping out some of the orders in May, we also had to realize that many of the orders, which was shipped just before the lockdown, also, we had not delivered till the beginning of May. Many of the transporters were stuck and the trucks did not move, so the materials were in the godown, so did not get delivered to the dealers. Some of the dealers were in containment zones like in Maharashtra, Mumbai and Gurugram. So it is not easy to make a comparison to a normal time. It is just a shutdown for 10 days. So there's been a lot more repercussions that has happened. Having said that, I think May would have been about 60% of our normal sale, 60%, 70%, and June was a little bit better.

Sure, sir. That was very helpful. Sir, on my second question, could you give us a little bit of flavor on the recent trends in terms of realization in both fused alumina as well as silicon carbide? Also, has there been any negatives or positives on the raw material procurement for us in terms of any supply side issues or the raw material availability issues, et cetera?

See, brown fused aluminas are largely supplied to the abrasives and the refractories industries. So while the demand for fused aluminas in the refractory segment was higher due to the local customers choosing to source from domestic supplier rather than from China for various reasons, including possible disruption of supplies from China, the realizations are typically lower compared to abrasives products because abrasives products are much more of higher performance and much more quality, standards are higher. So Abrasives sales have been impacted because of the drop in overall abrasives industry as well. So the demand for those products have been lower. So what we are seeing overall is, on a weighted average basis, a lower realization of fused aluminas. And in silicon carbide, again, since the [indiscernible] silicon carbide to abrasives has been lower and more to the metallurgical and refractory market, the prices have not gone up. So the prices have been stable, but in the case of aluminum oxide, because of the product mix change, the realizations are dropping and are lower. In terms of availability of raw materials for these, we do have secured raw material sources for both alumina and the raw materials for silicon carbide.

Sure, sir. That was very helpful. And sir, on the last bit on a bookkeeping question. So sir, I have noticed that we have incurred a CapEx of almost INR 300 crores in the last 3 years. I'm talking about from FY '18 to FY '20. Still, our depreciation has not increased at all. It is still hovering around INR 105 crores kind of a level in each of the last 3 years. Even in the last quarter, we have noticed a downward trend in the overall depreciation. So sir, could you give us a little bit more flavor on that?

Yes. Paddu?

The depreciation, one is, if you take for the current quarter, the April was down and May was picking up, and June was normal. Therefore, the depreciation is based on the shifts of operation. So when you are not working, then it will be a single shift of operation. And in the subsequent months, these shifts will increase. And if you compare with the previous years, it's a mix. One is that because of the shifts and second is that the accelerated depreciation, the useful life has been closed and, therefore, there is a reduction of depreciation as compared to the previous years.

The next question is from the line of Kaustav Bubna from Rare Enterprises.

So if I had to break up your segments into Abrasives, Ceramics, Refractories and then Electro Minerals, could you share with me the blended capacity utilization as of today or like end of quarter 1 for each of these segments and then if there has been any meaningful CapEx in these segments, which has recently come on or will come on in the next 1, 2 years?

If I look at Abrasives, it is largely a domestic business. So there, the current capacity utilization stands at about 50-odd percent.

Sorry, I didn't hear you.

About 50%. And the major CapEx here has been the coated maker, which was recently commissioned. That was in the last half of March. So that was the major CapEx which is coming out. So in the case of Ceramics, we would be running at about 60%, 65%. Again, I'm talking about blended. So it is different product groups are running at different capacities. The [ CapEx ] what we had considered for our Metallized Cylinders, which is the second line or line 2.5 as we call it, those equipments have just been received. It was a delay because the shipments got stuck during these times. And we have received them, and we will be commissioning them in the second half of this year. In the Electro Minerals segment, the capacities, again, have been in the range of about 65%, I would say. In the case of -- that is in the domestic side. And in the case of Russia, it is almost running at about 90% -- 90%, 95%.

Okay. And for all this capacity addition which you are doing, what is the total cost of that? And what is the total revenue that can generate if that runs at 100% or close to 100%, whatever the math it can run at?

See we -- I would believe that the capacities what we have in place, we should be able to hit revenue of between INR 3,200 crores to INR 3,400 crores on a consolidated basis.

And that's for the full company?

Yes, for the full company.

The next question is from the line of Renjith Sivaram from ICICI Securities.

Yes. Am I audible?

Very much.

Yes. Sir, just coming back to, I think, the previous participant's question, if you look at your normal utilization of the factories near Hosur, the abrasive factory, ceramic factory, and the current utilization, how much is the difference? And when do you see this normalizing? Or is it close to normalization in terms of our productivity?

See, when you say the word normal, I mean, I think your guess is as good as mine. So the normalization will happen only when -- I think when we have an effective vaccine to this virus globally. So that is going to take some time to come in. And in terms of utilization of these capacities, what we have learned over the last 3 months is that every day will bring you surprises. We were -- for example, in the last month, in the last couple of months in minerals division in Kochi, almost running flat out. And we thought Kerala was the safest place to be in. And the last 2 weeks have told us Kerala's cases have been increasing, and there has been a series of lockdowns in that state as well. So we are taking it day by day, week by week. So in terms of capacity utilizations, depending on whether we will have another wave or we will not, the capacities will have to be ramped up accordingly. And so we have to wait and watch and not worry about -- yes, while we have to worry about the safety and the health of people, we are focused on improving our productivities in the plant. But if there is a government order to shut down or restrict operations in one area, then it will happen.

Okay. And sir, in our annual report, you had given a photo of equipment, which we -- plant, which we [indiscernible]. So is that a big opportunity that [indiscernible]?

There's a lot of disturbance on your line, please.

Sorry to interrupt, there's a lot of disturbance coming from your line. We would request you to please come back in the question queue. The next question is from the line of Kashyap Pujara from Axis Capital.

Sir, the gross margins at the consol level might have shown some improvement, but actually, at a stand-alone level, we have seen deterioration both on a Y-o-Y and Q-o-Q. So while the fixed costs have kind of been under check in line with the top line deceleration, but gross margin at a stand-alone level has come off. So could you just explain what has driven this? Has there been adverse mix? Or is it foreign exchange due to import of grains? Where exactly we can quantify this movement?

See, the gross margin has largely been impacted in both Abrasives and in Ceramics. In the case of Abrasives, it's been a combination of product mix. And though we had had a better handle on the fixed costs, the product mix has probably been impacted by the absence of -- near absence of the Precision business because that is one which is a better margin business than the channel business and that is related to the auto industry. So that has seen a significant decline. So that is still not picked up. So obviously, there has been an impact because of that. Second, in the -- in terms of even the operations itself, because of the nature of our operations where we had to start -- when we had to run the -- we had to stop the kilns and then run them back again after a stop. So we have had to take on additional costs. So -- in terms of restart costs. So that also had impacted, and this is the case for both Ceramics and Abrasives where they are high-temperature processes because the kilns have to -- we have to put additional fuel to bring it back from a cold start to the temperatures. Third is, what we also have discovered over this period is that there are costs which we did not even plan for in our scenarios. For example, the costs which we are now incurring on setting up quarantine facilities, right? So it is now that -- we have had instances of COVID-positive people in the plant as well. So to -- if we have to give them the confidence that they would be taken care of, and especially there are people who don't stay with their families and we can't just allow them to be at their rooms or in hospitals, so we have to spend money on quarantine facilities now, medical and sanitization. These costs just were not factored in. So these are also impacting our margins. So overall, the gross margins have been impacted due to these as well. In the case of Ceramics, the product mix definitely has impacted. The ware ceramics part of the business, which has shown better traction, especially both in the domestic and in the export market, has helped in the top line. But in the bottom line, they are less profitable than the engineered ceramics. Now the engineered ceramics are the ones which we supply as met cylinders and to other alternative energy companies in the U.S. and other parts of the world. And they have been impacted by our inability to ship out volumes during the first 45 days of the lockdown. So that has also impacted.

Sure. Sir, just another question was about the difference between consol and stand-alone. Could you kind of give us a breakdown of what has -- what constitutes that difference? Say for instance, how much is the contribution of, say, Volzhsky in the current quarter, both on top line and profit? Likewise on CUMI Australia, CUMI international, if you can just give some color, it would be helpful.

See, CUMI -- I mean Russia has been, as I said, running flat out. So they have been having normal sales levels. So their ratio, which is typically about 25% of the -- 22% of the company's sales of normal times would definitely be higher in this quarter. This drop in the sales of about INR 220-odd crores has come largely from the domestic. So INR 180-odd crores is a drop from domestic. So to that extent, the ratios will change. But Russia has done normal numbers, so is the case of Australia. So Australia also has done the normal numbers in terms of the top line, marginal decline, but overall, in the same levels.