Carborundum Universal Limited (CARBORUNIV) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Carborundum Universal Limited 2Q FY '22 Post Results Conference Call hosted by Batlivala & Karani Securities India Pvt. Ltd. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kunal Sheth from Batlivala & Karani Securities India Pvt. Ltd. Thank you, and over to you, sir.

Thank you, Aman. I would like to welcome the management of Carborundum Universal Limited on the call, and thank you for giving us this opportunity. From the management team, we have Mr. N. Ananthaseshan, the Managing Director; Mr. P. Padmanabhan, the Chief Financial Officer; and Mr. G. Chandramouli, Investor Relations. Sir, now I will request you to give us a brief opening remarks, post which we will open the floor for a Q&A session. Over to you.

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

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

Thank you, Mouli. Thank you all for joining us on this call. I hope all are keeping well in good health. We meet once again at one of the best quarters for CUMI in terms of performance. The sustained recovery in domestic demand, government impetus to infrastructure spending, export growth and the China Plus One sourcing strategy of global players have led to strong rebound in businesses, with industrial output increasing sequentially and high-frequency data depicting return to pre-pandemic levels. Our businesses have also recovered, but facing challenges of increasing cost to maintain and improve margins. CUMI has earned the distinction of being one of the best managed companies by Deloitte India. With this achievement, indeed, proud -- we are proud in exceeding the benchmark levels, which we have set earlier. On October 6, 2021, the company acquired 71.99 percentage equity stake in PLUSS Advanced Technologies Limited. PLUSS, along with its own subsidiary -- wholly owned subsidiary, Netherlands PLUSS Advanced Technologies BV, has become subsidiaries of CUMI effective from this date. PLUSS is a specialty materials research and manufacturing company involved in the fields of Phase Change Materials for the thermal energy storage and specialty polymeric additives for enhancing mechanical and barrier properties. In the current quarter, July to September, at the consolidated level, sales recorded at INR 834 crores, quarter-on-quarter growth of 22 percentage and 18% sequentially. And at the standalone level, the company has recorded sales of INR 551 crores, which marks 30% increase over Q2 of last year. On a sequential basis, this records an 18% increase. The growth was mainly driven by -- driven in almost all the 3 segments. Most of the overseas subsidiaries have also performed well on sequential basis. When it comes to the bottom line performance, profit before tax was INR 137 crores as against INR 123 crores at the consolidated level on a quarter-on-quarter basis. And profit after tax and noncontrolling interest grew by 13% to INR 98 crores against INR 86 crores in the same period of last year. Despite increase in sales and profits in absolute numbers, the margins have not increased proportionately due to the lower base, increasing input costs and the freight costs. At the stand-alone level, PAT increased to INR 63 crores from INR 50 crores in Q2 of last year. Let's look at the segment-wise performance in some more detail. The consolidated Abrasives segment recorded a sales of INR 325 crores and operating profits of INR 45 crores, both marking a 19% sequential increase. Stand-alone operations performed well despite challenges of chips shortages, shifts from green mobility and increasing petrol and diesel prices faced by auto and auto component sector. Increasing raw material and energy cost did impact the margins, but were managed well through the price increase and better capacity utilizations. Subsidiaries Sterling Abrasives, Volzhsky Russia and CUMI America registered double-digit growth compared to the same period of last year and sequentially. Coming to the Ceramics segment, the consolidated sales recorded at INR 210 crores, marking a 21% increase in the top line sequentially. Operating profits were at INR 49 crores, 50% up sequentially. The demand scenario continues to be good, both at stand-alone and global operations, but our sales, deliveries and margins to export customers were hugely impacted due to container shortages, port congestion and higher freight expenses. Considering the future of clean energy and mitigating increasing cost of fuel, the [ key lines ] are being transitioned from liquid fuels to natural gas. Refractory segments continued to perform better on back of good orders from repair and maintenance as many core industries are beginning to invest in this area. In Minerals, the consolidated sales recorded at INR 323 crores, marking a 12% increase in the top line sequentially. Operating profit was at INR 49 crores, 19% up sequentially. The business has benefited from a combination of strong global demand and production cutbacks in China, owing to environmental concerns, leading to higher -- high realizations. The increasing input costs were offset with price increases to a decent level in most of the product segments. We also had a good run in terms of our in-house power generation at Maniyar hydel, and that has helped [ shore ] our bottom line. At our Russian operations, we have seen good volumes and higher realizations in all the business segments. We do have good order book. And at present, we expect the demand to be robust in the coming quarter for these 3 business segments. Maintaining or increasing the margins will remain a challenge considering the rising trend of the raw material prices and energy costs globally. In terms of CapEx, we have considerable progress and spent INR 71 crores in the first half year. A potential third wave is the key near-term risk, but an increase in the pace of COVID inoculation across the company, with nearly 90 percentage of our workforce having received at least 1 dose already, and around 30% both the doses, should contain the demand disruption. And I now move on to the financial performance for the quarter. At the consolidated level, the sales were increased by 22% to INR 834 crores from INR 683 crores in the corresponding period of last year. This is mainly driven by the steady performance across all the business segments. Of this, stand-alone had increased by 30 percentage to INR 551 crores from INR 424 crores of the same period in the last year. The consolidated PBT was at INR 137 crores, which is up by INR 14 crores and about 11% growth on a Q-on-Q basis. At stand-alone level, the PBT for the quarter was at INR 86 crores against INR 69 crores during Q2 of last year. On a consolidated basis, the profit after tax and noncontrolling interest for the quarter was at INR 98 crores compared to INR 86 crores in the corresponding period of last year. At stand-alone level, the PAT increased to INR 63 crores from 60 -- INR 50 crores. At consolidated level, the PAT margin dropped from 12.6% during Q2 of previous year to 11.7% in the current year, mainly on account of the lower base, increasing input costs and, of course, the higher logistics expenses. At stand-alone level, it has decreased from 11.8% to 11.4%. Moving on to the Abrasives segment. On Abrasives, the consolidated sales for the quarter increased to INR 325 crores from INR 259 crores in the corresponding period of last year. Stand-alone sales increased to INR 268 crores from INR 211 crores in the same period of last year. Domestic subsidiary Sterling Abrasives and Russian subsidiary Volzhsky Abrasives, which has had a significant growth. At the consolidated level, the PBIT was at INR 45 crores, increasing from INR 37 crores on account of better capacity utilization and price increases. Moving on to the Electro Minerals. Electro Minerals business consolidated sales for the quarter increased to INR 323 crores from INR 275 crores in the corresponding quarter of last year. And the stand-alone level sales increased to INR 142 crores from [ INR 108 crores ]. Russian subsidiary Volzhsky Abrasives registered good growth, whereas South African Foskor Zirconia recorded a marginal drop in revenue. The consolidated Electro Minerals business recorded a PBIT of INR 48 crores against INR 40 crores of Q2 last year on the back of volume growth in domestic market and aided by higher power generation at Maniyar hydel following good rainfall. Moving on to the Ceramics business. Consolidated sales of the Ceramics segment grew by 24% on Q-on-Q basis from INR 169 crores to INR 210 crores. The stand-alone sales grew by 30% on quarter-on-quarter basis to INR 172 crores. Stand-alone Ceramics business performed well despite the logistics challenges majorly for the export consignments. Subsidiaries in Russia, America and Australia also did well. Consolidated PBIT of the Ceramics segment for the quarter remained flat at INR 49 crores, mainly due to the increase in input cost and the supply chain disruptions. From the finance side, there was no debt in the stand-alone. We continue to be a debt-free company before [indiscernible]. And consolidated basis, the debt equity ratio was at 0.018 as at Q2. The total debt on a consolidated basis was at INR 42 crores as at the end of this quarter as compared to INR 45 crores at Q1 end. In terms of the ForEx cover, CUMI is typically a net importer in dollar terms and net exporter in euro terms. We cover the net exposure as appropriate, and it is in accordance with the ForEx policy. On the cash flow front, our strong balance sheet is evidenced by net cash position and low debt equity ratio. The cash and cash equivalents, including the deposits with tenure less than 3 months net of borrowings, was at INR 650 crores. And this concludes my update on finance. And now we can take up the question and answer.

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

Congrats on a good set of numbers. My first question is with respect to the Abrasives segment. So if you please can give a broad breakup of volume and value growth whether we would have won market share during the quarter. And from that, from this sector, are we seeing demand and which sectors we are seeing not so great demand? So if we can do that.

Okay, Ravi. And in respect of the Abrasives, as you all know that there is a recovery part seen in the auto as well as the auto ancillaries. So we are also seeing the improvement in the precision sector. And there is also the fear of the chip shortages and the fuel price increases, which is also impacting on the auto industries. So it's a mix of response from our end. There is growth in the tractor, both in terms of the quarter-on-quarter basis as well as it has increased marginally to the pre-COVID levels. So there where we see demand in the Abrasives part. And one -- the one concern is that the input cost is increasing, and at the same time, the fuel costs are also increasing. So there is a strain on the bottom line. And we -- there is a time gap between the passing on the cost to the ultimate customers and that of the increasing costs. And that is why the strain is there, and we feel that the price increases will improve, and then it will be done in a phased manner, and we will take care of the increasing costs. And if we feel that the demand and the recovery path will continue in the subsequent period also, and it will have a positive impact on the Abrasives.

Okay. And which sectors are you seeing demand recovery being -- although it's a mixed batch so basically other sectors which are showing strong trends of demand?

Yes. Followed by the auto, auto components, we are feeling recovery in the construction sector, wood work, and the other infrastructure sector also -- is also booming. And we feel that this will continue. In the iron and steel sector, there is a flatness there, but we feel that it is only temporary and it will get recovered in the current quarter.

Okay. And the volume value growth and market share gains, any market share gains we would have seen from unorganized players or organized competitors?

In the mass market items, the disruption from the Chinese imports is having a play on the market, and we feel that we have also increased our share to a greater extent. And it's like the unorganized sector. Though unorganized sector is there, the demand for the product overall market size is increasing, depending on the industrial growth and the recoveries seen. The government impetus is also there across all the industries. The PLI benefit is there, therefore, we are seeing a recovery on the Abrasives front.

Got it, sir. And volume value growth Y-o-Y or over a 2-year period for this quarter? Any...

Yes, if you could see on the sales front, the Abrasives, we have sequentially grown by 19%, and quarter-on-quarter it is 20 percentage. And on Y-on-Y, it is 142% mainly on the lower base. So that is why the growth rate we've seen is 142% at the consolidated level on the top line.

So -- sorry, sir, I didn't get it. So basically, on a consolidated level, we have seen year-on-year 25% growth. So if you could bake that into, say, volume growth and price increase. So...

Yes, we feel that we -- this is mainly due to the -- it's a mix up of both volume as well as the volume growth and the price increase. In the precision sector, we feel that we -- due to the recovery in the auto, auto components, we feel that there is a volume growth. And in other sectors, mainly construction, volume growth is there and the price increase is also there.

Next question is from the line of Jason Soans from Ashika Group.

Sir, just my question is on the Ceramics sector. So in the Ceramics segment, you did mention that you're facing -- you faced some container shortage issues. So just wanted to know, I mean, till what -- what was the extent of the impact? And how long do you expect the situation to normalize? Because Ceramics from around 50% to 60% comes from exports from this segment. So I just wanted to know your view on that.

Yes. In respect of the Ceramics segment, the power industry mainly catering to the power sector. The power sector is growing. However, the container shortages have impacted the sales in respect of the met cylinders mainly catering to the power sector. And in respect of the wear resistant components, the container availability as well as the logistics issue because most of the exports are to the Australian continent. It has been impacted. We feel one is the container availability, second is the increase in the freight. So both areas it is getting affected. Despite the challenges, at the stand-alone level we have grown at 22% sequentially and 30 percentage on a quarter-on-quarter basis. And on a year-on-year basis, it is 48 percentage. And the consolidated level, the growth on year-on-year is 38%.

Yes, sure, sir. So I mean any time line which you want to ascribe on how long do you expect this situation to normalize? Are you seeing any signs on the ground level as in -- for the freight increases as well as the container shortage, do you find that normalizing as of now?

Yes. As of now, the freight cost is only on the uptick trend, and we don't feel that this will get reduced in the near period. It will save for some time, and the container shortage is also continuing. We are managing the consigns with negotiating with the available C&F agents and the logistics agencies. And it has improved well. We are -- in fact, it's a mixture thing. The container, et cetera, is getting delayed.

Okay. Okay. I understand.

We'll get the clarity only during the third quarter end. As of now, it is going on as in the last quarter, but it will take some time, maybe around Q3, and we'll get -- or some clarity you can get.

We will wait and watch.

Sure. Sure. And also, my next question is, I mean -- just want to know, sir, Ceramics segment, yes, you have a customized business and you work closely with your customers generally for solutions. In that respect, I just wanted to ask you, who are your key competitors in the Ceramics segment? That's my first question. Yes -- and the Customized Solutions business, just wanted to know who are your key competitors in this segment. And -- yes, so that's my question.

Yes. See, in respect of the Metallized Cylinders business, we are the second largest producer of metallized cylinders in the world. And the first being from the Korean region, and they are the competitors in this field.

Okay. Okay. So Korean. Okay. And just my final question, just wanted to know you did allude to -- a lot of significant margin pressures with input costs and trade costs as well. And in FY '21, we saw on a consolidated level EBITDA margin of around 17.7%, which is the highest margin in the last few years. Just wanted to know, would you want to probably -- what are the sustainable margins going ahead? What do you see? Any guidance on some pro forma margins going at Carborundum Limited on a consolidated basis?

If we are taking this COVID challenge as an opportunity, and we are focusing on the cost reduction as well as cost-saving initiatives across all the businesses in the organization, and in almost all the entities, that is why the -- despite the challenge and the pressure from the cost push side, we are able to have a decent margins. And we have cut off the cost to a greater extent. One is by a tough negotiation with the supplier. Second is that we are also concentrating on increasing the efficiency by productive measures. This has helped us. We feel that the sustainable margin will be around 100 to 150 basis points.

Next question is from the line of Bhavin Vithlani from SBI Mutual Fund.

Congratulations for a good set of numbers. My first question is on the ceramics side and especially focused on the SOFC side of the business. One of the supplier to the SOFC company, in the call in the morning today, guided for quadrupling of revenues to Bloom Energy given the growth that they are seeing. So if you could highlight what are we actually hearing from our client side. And for actually such level of volume growth, are you also expanding our Ceramics business?

Yes, in respect of the alternate source of energy, we are already in search of the solid oxide fuel cells, and we are supplying the ceramic components to them -- to various suppliers, including the one -- the supplier which you had mentioned. And we feel that now that the focus is on the alternative fuel energy, including the SOFC and the hydrogen fuel cells are also coming in the market, the focus will be on the demand for the ceramic plate, ceramic components, et cetera. In addition to that, even with the existing suppliers, what we are doing this, we are exploring the opportunity of replacing the ceramic plates, wherever the metal plates are used across all the SOFCs as well as the hydrogen fuel sales. So this trend will -- it is a promising growth potential is there. We need to wait and watch about the velocity of this increase.

Sure. But is the growth outlook that we could have like -- could be exponential in the similar quantum that some in -- one of the other supplier is also speaking about?

Yes, correct. It depends on the how this sector behaves. The risk of third wave is also there. We cannot rule out anything at this point of time. So we need to wait and watch. And going by the growth potential, we agree that there is a growth potential. But when it is going to pick up, et cetera, it is going to take time.

Sure. The second question is on the Electro Minerals...

On a conservative manner, we may not -- we are not expecting an exponential growth. We are expecting an arithmetical growth.

Okay. So the doubling of revenues for the Ceramics segment guided over a 3-year basis, we maintain that outlook?

Yes. The concern is only in the near term. We need to wait and watch about how the COVID challenge is being managed across India as well as across the globe, then we need to wait and watch.

Sure. That's helpful. On the Electro Minerals segment, if you could just help us because in the previous earnings call we have mentioned that we are working towards a high purity SiC, which is 99.999%, and we had reached a level of 99.99%. And after that, we will be able to cater to the semiconductor segment. Any update on that will be helpful.

At present, we are concentrating on the core [ or cast ] minerals of the white fused alumina and brown fused alumina. In respect of the specialty products, it depends on the sector applications across various industries. So it will take some time. We are working on to improve to the 99.999 percentage level. As you rightly said that we have already achieved the first 2 decimals. The third decimal, we are aiming at, and we are working on it.

Sure. And any outlook on the Electro Minerals as a segment because China is a very large producer, and they are seeing power outages and a lot of bottlenecks. So are we seeing improvement in our price realization? And do we see a positive outlook on the margins because of global demand-supply imbalances?

Yes, China Plus One strategy is helping to an extent, but we cannot rule out the supplies from China because China being the major suppliers to the world. So we -- it's a mix. At this point of time, yes, there is a demand. And then -- and of course, if the demand is there on one side, and the other side, we see the increasing input materials as well as the increase in both energy and fuel as well as in the freight.

Our next question is from the line of Charanjit Singh from DSP Mutual Fund.

First of all, congratulations on great set of numbers. So first of all, if I look at 2-year CAGR, so we have delivered more than 2% growth on a 2-year CAGR basis across the category. And this is despite -- there have been a lot of issues in terms of supply chain bottlenecks and all that. Certainly -- and the underlying end markets still not operating to the level of what they should be. So as things normalize, what's the kind of then sustainable growth you expect, and it can be much higher than this, if you can touch upon that aspect first.

See, the demand for the products across all the businesses is growing. And it's a good sign for us and almost all the sectors we are in are improving, and there is a growth, but -- which is hollowed by the challenge of COVID, then the logistic issue is becoming a big issue. Because of that, one is the container shortage; second is the freight costs are increasing. And the import costs as well as the energy costs are also increasing. So the challenge of one side, the market is growing, the demand is growing. On the other hand, the input cost and the cost of production is increasing. So the challenge is what is the potential to pass it on to the customer? The timing is the real issue. Therefore, we are seeing muted growth. We are taking it on a cautious trend.

Okay. And sir, from the price hike perspective, if you can just quantify what's the kind of quantum of price hike which you would have taken across product categories? And do you expect any further price hikes going forward?

Yes, considering the present market conditions, the price passing on will be there. Price increases will be done because the input cost has grown significantly. It does not attain the arithmetical progression, it is going in the geometrical progression. Therefore, we are speaking to the customers and then explaining to them the cost push on the input side. And we are, in the consultation phase, increasing the prices. And we will be doing it in a phased manner.

So sir, what is the quantum of price hike which you have taken year-to-date, sir? Sir, year-to-date?

It depends on the businesses as well as the sectors which we are supplying. It ranges from a minimum of 2 percentage and then it goes to the double-digit figures.

Okay, sir. And sir, lastly, if you look at -- there has been also a discussion about import getting banned, and that is a category where we have also been trying to introduce more cost-effective products. One, in the overall size of the market, what was the proportion of imports? And now what percentage of the revenue we have been able to cater to or substitute in terms of the imports and grow our revenue, especially in the Abrasives segment, if you can touch on that?

Yes. In respect of the imports, it is mainly happening in the mass market items of Abrasives. And now that there is a challenge in the supplies from China, so there are -- the demand for the mass product items internally is increasing. And the customers who were there using the Chinese products are -- prefer to have the local players, and this is helping us. And we feel that this trend will continue in the near period. And we need to wait and watch how the biggest supplier of China is behaving in the years to come.

The next question is from the line of Sujit Jain from ASK Investment Managers.

Sir, I just wanted to check what was the opportunity size in SOFC, solid oxide fuel cell, applications? And as well as you had mentioned in the last call of applications in the EV, where lightweighting for lightweighting purposes, there won't be applications. So for that segment as well, what could be the potential opportunity size?

Yes. In respect of the alternate fuel energy, mainly the SOFCs, we are presently supplying the panels for SOFCs. And there are growth potential in the sense the -- more of the other components, mainly the plates can be replaced by the ceramic plates. So there is a market growth potential is there. So we feel that this will help us in increasing the supply to the SOFC side. And the focus of the government is also helping us. It is on the hydrogen fuel cell site. And as we have already catered and supplying to the SOFCs, we have the technology and then we can cater to the needs of the hydrogen fuel cells also. And there is a growth potential. We need to wait and see how that demand increases in the market. Depending on that, our supplies -- we are geared to supply to the increasing market. To that extent, we are gearing ourselves.

Any number that you can put to the opportunity size, both EV and SOFC applications?

Yes, as far as the numbers is concerned, the focus is in the initial stages. Government -- even if you could take earlier incentives like PLI, Atmanirbhar, et cetera, it took 2 to 3 quarters to get stabilized. And then the benefits can be seen only later quarters. That is why, at this point of time, we have to wait and then see how the demand is increasing. And then we -- from our side, we are gearing ourselves to cater to the needs of all the components to the extent possible. And -- that's why we are -- with the existing suppliers, we are giving and are getting ourselves quality clearances for -- by supplying the other parts of SOFCs. So this will help us in catering directly to the hydrogen cell market also. At this point of time, we may not be in a position to work out the numbers and then come out how it will behave.

Sure. If I do the math of consolidated minus stand-alone for the Abrasives business, the EBIT margins are much lesser, 6.9% in the quarter. Annual trend also is anywhere between 6% to 7% to 8% kind of margins. What will be the reasons of lesser margins in Abrasives segment in consolidated minus stand-alone?

See, in respect of the consolidated minus stand-alone, the Abrasives segment, as you know, that we got INR 56 -- INR 57 crores is the turnover part, which is 17% growth on quarter-on-quarter basis, and almost 16 percentage on the sequential. And on year-on-year, it is 34 percentage, mainly because of the low base effect. And out of that, the stand-alone has really performed well in line with the growth in the auto, auto components. That's why you could see the growth in the stand-alone level Abrasives. There are growth in the other entities, like Sterling is also growing because they are also catering to the industries, mainly the precision as well as the polishing industries, we are -- they are growing. As far as the America is concerned, they are supplying the material for hard floor polishing. Therefore, the market is there. There also it is growing. And we are seeing growth in the Russian market also.

Right. And one last quick question is on your energy costs. Note 10% and 14% for the full year last year for stand-alone and consolidated. Now that you have this Maniyar plant hydel power plant, captive plant, giving you energy, and you are also planning a captive power plant in Russia, with both of these coming in, what would be the savings in energy cost at consolidated level?

Yes. At the console level, the energy cost is around 13%, which is hovering between 13 to 13.5 percentage. And it is mainly because of -- one is the hydel power in India as well as the cheaper power availability in Russian front, where the power consumption is very high for -- mainly for the fusion purposes. In respect of these 2 places, the hydel is dependent on the rainfall. As you see that now that the rainfall is good, the generation from our Maniyar hydel power plant is high, therefore, it is reducing the cost. One end, the power cost is increasing. To some extent, it is offset by the better generation at our hydel plant. And that is why you could see despite increased the fuel prices, we are maintaining at same level of 13 percentage.

The next question is from the line of Ashwani Sharma from Anand Rathi.

Yes. Congratulations for a great set of numbers. So I have 2 questions. First is, what was the capacity utilization levels across the segments during the quarter? And what is the number that you are projecting for full year FY '22?

On the first, and relating to the capacity utilization, it is hovering around 65 to 80 percentage. In the Abrasives segment, it will be around 65%. In Ceramics, it will be around 80 percentage. EMD, it is almost 90 percentage. And so we are utilizing the capacity. And in respect of VAW, it is almost flat out. And can you repeat the second question, please?

Sir, the targeted number for full year -- the current full year.

Yes, we feel that going by the current demand trend, we can't repeat H1 subject to the -- how the COVID challenge behaves in the H2. We're expecting -- if everything goes well, we are expecting the same figures can pan around in the second half also with reasonable growth.

Okay. Sir, my second question is, what is the CapEx for the current year? And which are the areas where this CapEx will be done?

As of now, we have done a CapEx of around INR 71 crores, and we expect that, for the full year, it will be around INR 120 crores to INR 130 crores.

And the areas where you think that this will be spent?

It's a mix. It may be -- it is mainly on the Ceramics segment as well as the Abrasives segment. It's a mix up of the maintenance CapEx as well as the -- some additions of the ancillary equipments for the lines which we have already put in.

The next question is from the line of Harshit Patel from Equirus Securities.

Sir, my first question would be on ceramics trends. Sir, you have previously mentioned that we were doing a pilot of our new product in the same tide as silicon carbide-based ceramics. So sir, could you give us an update on the same? And also, what would be the end user industry for these kind of products? And also the margin profile, would it be similar to what we do in the aluminum-based ceramics? Or would it be materially different from it?

Yes, it is in the very initial stages, and it will take time for us to come out with the margin for that. We feel that we -- the market for that will grow because of the increasing concern on the green Earth point of view. So sustainability -- from the sustainability point of view, this will help us because it is a high purity product.

Right. So what would be the cyclical end user industries where we are planning to supply? Is it aerospace, defense, I mean, those kind of high-end industries or the end user industry profile remains pretty much similar to what we are doing right now?

Majorly, it will be the high-end industries.

Okay. Okay. Sure. And sir, my second question would be on super abrasives. We have seen a very good performance by Wendt India, which is an associate company in the last 2 to 3 quarters. So could you highlight which end user industries or the product groups are doing very well? So that globally, the electronics has been the end user industry, but that is absent in India. We have, in India, the automobile would be the major end user industry for super abrasives. But the automobile industry was not having a really great time in the last quarter. Despite that, we have been really well in Wendt. So what actually is driving this kind of performance? Also, is there any plan to introduce these products in a stand-alone entity as well?

Yes. In respect of our associate Wendt India, they are supplying the super abrasives to -- mainly to the auto, auto components and auto ancillary industries. And now that the recovery path is seen in the auto sector, the demand for the precision product has grown, and that is why you are seeing growth in the results of the Wendt too. And we feel that the one advantage is that the chip shortages has not greatly impacted the Indian auto sector. So we need to wait how it is behaving. And at this point of time, we feel that the auto sector has recovered, though it has not gone to the COVID levels. But as we -- if you compare to the last year, the demand has increased, and we see growth -- a growing trend.

Yes, sir. Please go ahead.

So we feel that the demand for the super abrasives will continue in the coming quarters, and we can see good results from the Wendt too.

Sir, is there any plan to introduce super abrasives in stand-alone entity as well? Or we will cater to that market through the Wendt India only?

See, both are -- it is catering to the different applications. Though it is serving to the same auto sector, the applications are entirely different and then both will go on parallel.

The next question is from the line of Bhoomika from DAM Capital.

Yes. Congratulations on good set of number. Sir, on ceramics, just wanted to understand 2 things. One is, how is the metallized cylinder capacity ramped up? What would be the utilization now? And secondly, if you can comment about how the Australia operations, which were disrupted earlier because of the China trade war, how is that behaving in terms of normalization?

Okay. In respect of the ceramics, there are 2 components. One is on the metz component, met component. The -- we have the -- we have, as you know that last year, we have increased the capacities, mainly to cater to the increasing demand. And we have an [ inherent ] capacity of around -- nearing to 2 million as far as the capacity is concerned. And in respect of the [ var ] ceramics, the -- it is mainly supplied to the Australian market, the mining operations, coal washer use, et cetera. There are -- the relationship between China and Australia, there is a strain. And then, however, it is -- we feel that, at this point of time, there is -- there are certain solutions that are coming, and therefore, we feel that, because there will be -- the demand has increased as far as the Australian market is concerned.

Sir, is it possible to get what the utilization levels are for the metz plant?

Utilization level is around 75% to 80% area as far as the metz plant is concerned.

For the new metallized plant that you have commissioned.

On a combined manner.

Bhoomika, the year-on-year capacity for metz cylinder was 1.7 million. After that, last year, we added another 50,000 -- 0.5 million we have added. Totally, 2.2 million is the current capacity. And out of which, we have nearly 70% to 80% of the capacity, right, actually we are running.

Okay. Okay. Okay. Got it. The -- sir, in terms of upgrades, we've definitely seen some good market share gains from Chinese import substitution, et cetera. Now is this -- with the kind of price hikes that we are seeing and you're doing, I mean is the demand kind of sustaining? And do you think that these price hikes are getting absorbed? Number one. And number two, do we need to take further price hikes to pass on any kind of raw material pressures that we are seeing?

Yes. The cost force has not subsided. We feel that in 3 areas, the strain is there. One is the input raw material cost is increasing. And second is on the energy and fuel prices are increasing. And thirdly, the largest issue. There also, we are having increases in the price charters. And of course, the availability of the containers is also a challenge. And we are passing it on to the ultimate customer, but there is a timing issue, see what is the price increase that is the cost push. At what rate the cost push is there and at what rate the selling price has to be increased. The timing is very important. So we may not be in a position to exactly quantify what would be the pass on at this point of time. If the cost push is continuing in the next -- in the subsequent quarters also, we will be consigned to increase our prices.

Okay, sir. Okay. Sir, the other thing is in terms of EMD, in terms of VAW, we were looking at some debottlenecking of capacity out there. If you then talk about the stages of the [ fee ] and also about the status of the South African venture scale down.

Okay. In respect of VAW, it is almost at flat out, and we are running it fully. We have -- we are working on the scrubbers to get the -- to emission norms, which we have already done, and we have got a lot from the Russian government and in the region where we are working on. And that is the main aim, to reduce and to conform to the norms that have been achieved. The second is on improving the capacities, which we have to cautiously do based on the environmental controls. That's why we are not taking up in an aggressive manner.

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

Yes. Just one small clarification. Since we have products across abrasives and ceramics dealing to a diversified set of end user industries. So the growth that we are seeing, is it more broad based in nature? Or this is attributed to a few specific industries in the domestic market -- growth in the domestic market?

The advantage of the CUMI business is that there is no single concentration to any user industries. It is very much diversified, as you rightly said. And the growth in the -- all the sector. Even if there is no growth in a particular sector, we are continuing to have the growth at par with the existing levels. That is the advantage which CUMI has. And the growth in -- we feel that the growth is almost -- the recovery is seen in all the sectors. It is mainly because of the government impetus and then the China One Plus source strategy. These things are really helping us. And we feel that if this continues, and the third wave if it is under control, the percent demand will continue.

So this would be broad-based in nature. This is not attributed to...

It is broad-based and not any sector, certainly.

Understood. understood. That's it from my side, sir.

We feel the demand will be across all the sectors.

The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.

So the question is on the supplies that we had some about in the previous quarters for solid-state batteries to the likes of Murata and Toyota. And any update on that? And when can we see that mass production for these solid-state battery commence?

Yes. As we mentioned in our earlier calls, the quality and the acceptance by the suppliers are the intermediaries of the factory. It's a big process. And we are in the process of qualifying that the qualifications have come to some of the customers have agreed and then the process will take time. One by one stage we need to finish. One will be on the technical quality side. One will be on the endurance side. Another will be on the -- how the energy can be retained, et cetera. So it is a process.

Sure. Any, I mean, update? Where are we in that process? And will it be like in 2 years, we could see some amount of revenue coming out from solid-state batteries?

Yes. We are positive on this side. And then the demand for the battery is increasing, mainly due to the EV also. If you could see the EV growth, almost more than 1 percentage growth is seen against the conventional vehicles across all the segments, Mainly, it covers the 2-wheelers as well as there are 3-wheelers. The demand for EV has grown. Out of this 1%, more than 50 percentage growth is seen in the 2-wheelers, and the rest is on the -- from the 3-wheelers. On the 4-wheelers, it will take some time. And the demand, the supplies from us will cater to the battery of all the sectors, 2-wheelers, 3-wheelers as well as the 4-wheelers. So we feel that, that demand will be manifold, but it depends on the -- how it is getting accepted in India as well as in the group.

Sure. My last question is on the exports for abrasives. And in the previous calls, you had mentioned about exporting jumbos and doing final assembly closer to the client side. And there was some success that we had seen from our Russian subsidiary as well. So any update? And when can we see a ramp-up in the exports for the abrasives?

Yes. As far as the market -- the abrasive market is concerned, as I explained earlier, the growth is there in the American market, mainly we had hot load polishing. And in the Russian market also, it is improving and it is a double-digit growth on a quarter-on-quarter basis as well as on a yearly basis. So -- it will be improved, and we are looking into the various avenues that -- by which we can reduce the time involved in exporting to each of the jurisdictions.

Sure. Sure. Any percentage of sales for abrasives which is exports? And how should one expect this over a 3-year basis?

Yes. At this point of time, the exports of abrasive is around 10 to 12 percentage. And because we -- see, it is -- we are catering to the American markets at this point of time and the Russian markets to some extent. It depends on the growth in these areas. If the growth -- but we have -- the study shows that the demand for the abrasive in -- across the globe will increase. Even if it goes to the EV segment, the demand for abrasives will continue.

The next question is from the line of Rajesh Ranganathan from Doric Capital.

You had spent a lot of time talking about the need to take a price increase because of cost push. But if you look at our margins for this quarter, yes, they may be a little bit lower than what you reported most recently. But compared to history, our margins are quite high. So in this context, either due to competitive pressure or pushback from [ plan ], why are we confident that we'll be able to pass on the cost push, [ correct ]?

Yes. It is -- you need to look from the angle of the manufacturers across the industry. The input cost is not only for CUMI. The input cost price is felt across the industry and all the manufacturers of the abrasives are facing this. The energy cost is also increasing. Therefore, we feel that it is not the problem of CUMI alone. Across the industry, it is a problem. And then the cost push has to be passed on to the ultimate customer. That is why we are confident that the increase has to be done. And of course, there will be a challenge of the competition. But when the entire world is facing the cost push, I don't think that it is one man's problem.

So what I meant was, at least on the reported basis, our margins are quite high. So in that sense, we actually don't have a problem because compared to history, our margins are still high. So if competition is also in a similar situation, they may choose to either accept it or use the opportunity to gain market share. Clients could push back saying, "Hey, you're making good money, why do you want to make more prices?" Or is there something about these margins which look high? But actually, because of historical inventory costs, our margins are higher. But on current prices, margins are a bit lower, if you could explain that.

See, we have taken the COVID challenge as an opportunity to look into the cost. And we have taken initiative to reduce the cost, both at the variable cost level as well as the fixed cost level. These initiatives have taken across company, across the businesses and across the locations. And the second thing is that we are exploring all possible areas where we can increase the productivity levels through efficient methods. So these 2 things are helping us to face the challenge of cost increase. This is helping to a greater extent. That is why you could not see -- even under these circumstances, we are able to stick on to the around the same profit level.

Sir, to be clear, if, let's say, prices -- input prices, freight costs, energy prices, et cetera, remain at the current levels, our margins would also be similar. You only need to take a pricing fee if current prices of input increase further. Is that correct?

Yes. The price increases is to match the cost input increases.

You answered a lot of questions already on solid-state batteries and so forth, and you mentioned another answer as well, you supply the whole variety of industries. And as you know, India is going through potentially manufacture [ its own batteries ]. Several new industries are getting a push from the government to localize. Along these, have you already looked at saying all of these potential customers, any one of these look more exciting than others?

It is not only at the Indian level, it is across the globe, the demand for the ceramic components for -- towards manufacture of the alternate fuel cells is here. And the demand, we are working on with the relevant manufacturers. And we feel that -- in fact, as I mentioned earlier, we have passed some of the qualities [ needed ], and we are positive on this.

I'm sorry, maybe I didn't clarify my question. What I meant was just -- even without solid-state batteries, anything like that. We have so many other teams that have come up in India for chemicals, for solar, for selling conductors, mobile phones, whatever. So I guess all of these customers for you, any one of them look more exciting than the others for you?

Yes. See, it is not customer-specific. It is more of the sector-specific and the application-based. So as long as we are catering to a particular application, naturally, the customers who were existing at this point of time are the new incumbents. We will be in a position to supply to everyone as long as our product caters to the specific application. For example, if you take EV, if our -- if we have geared ourselves to cater to the EV manufacturers, whether it is the [ X or Y ], we will be in a position to supply to them.

Yes. Sir, last question for me, specifically on EV batteries and on electronics industry, what applications are exciting as at this point in time?

In respect of the ceramics, it caters to the high end of the power generation, both conventional as the alternate fuel energy and the highly advanced, the Arrow Dynamics aerospace. And then defense, it is -- is also there. [indiscernible] can also use ceramics. And advanced medical equipment can also use ceramics. As far as the vehicles are concerned, the advantage is that if they use the ceramic plates, the weight of the vehicle will come down. So the -- instead of the -- using the metal, they will use the ceramic plates as an alternative, which will reduce the fuel consumption and increase the speed also. So the growth potential is very high across all the applications.

And you're also trying to export to the source countries such as in Taiwan because, ultimately, even though electronics market is very small in India, it's a huge market globally. Have you had any success with targeting export applications in this sense?

It is not any sector -- it is not any customer-specific or geography-specific. Wherever the demand is there, if we are geared to supply to specific application, yes, we are in and we can do that.

The next question is a follow-up question from the line of Jason Soans from Ashika Group. It seems there is no response from the line of Jason. Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Kunal Sheth for closing comments. Thank you, and over to you, sir.

Sure. Thanks, Aman. And I would like to thank all the participants for taking time out for this call. And I would like to wish the management and all the participants a very, very happy Diwali and prosperous New Year. Sir, any closing comments from your side?

Yes, sure. Thank you all again for logging into this call. Of course, the global challenges like chip shortages, energy crisis, increasing input costs and supply chain receptions will continue to remain for the upcoming months and maybe some quarters. We are confident to gear ourselves and be prepared to mitigate these through higher realizations and efficiency improvements across all the businesses and operations, and better cost management. And we are also staying focused on building our capabilities to face the future. And I also wish each and every one of you and your families a very happy, prosperous and safe Diwali.

Thank you very much. Ladies and gentlemen, on behalf of Batlivala & Karani Securities India Pvt. Ltd., that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.