Century Enka Limited (CENTENKA.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Century Enka Q1 FY '26 Earnings Conference Call hosted by Arihant Capital Markets Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Deepali Kumari. Thank you, and over to you, ma'am.

Thank you. Hello, and good afternoon to everyone. On behalf of Arihant Capital Markets Limited, I thank you all for joining the Q1 FY '26 Earnings Conference Call of Century Enka Limited. Today from the management, we have with us Mr. Suresh Sodani, Managing Director; and Mr. Yogesh Shah, Chief Financial Officer. So without any further delay, I would like to hand over the call to the management for their opening remarks. Over to you, sir.

Hello everyone, and welcome to our earnings conference call for the first quarter of financial year ending 2026. I would like to thank our host, Arihant Capital Markets Limited for hosting this call. Now let me first brief you on the operational highlights for the first quarter of FY '26. During the quarter, revenue declined compared to the corresponding period of the previous financial year. In Tire Cord fabric segment, volumes were impacted due to lower demand from the tire industry and higher imports from China. There was a slowdown in automobile industry, particularly in the 2-wheeler and the commercial vehicle segments due to subdued demand. However, we expect NTCF demand to improve in Q2 following inventory adjustments by tire manufacturers. Second half could witness better demand supported by the festive season and positive impact of favorable monsoon on farm income. Continuing geopolitical and trade tensions, along with tariff-related uncertainties remain a key risk across the value chain. For PTCF, approval process is currently underway. In the Filament Yarn segment, sales were impacted by a fire at our Bharuch plant in February 2025. The plant resumed full operations from June '25. Prices remained under pressure due to increased imports from China at lower prices. Our focus continues to be on value-added products to improve margins. On the raw material side, caprolactam prices continue to decline to record low levels, resulting in margin pressure. However, use of renewable energy at Bharuch plant helped in controlling power costs. We remain focused on improving efficiency of old equipment to stay competitive. I will now request our CFO, Mr. Yogesh Shah, to brief you on financial performance.

Thank you, and good afternoon, everyone. Let me now brief you on the financial results for the first quarter of the financial year 2026. The operating revenue stood at INR 402 crores, which declined by almost 24% year-on-year. EBITDA for the quarter stood at INR 20 crores, which declined by 52% year-on-year. EBITDA margin were reported at 4.96%. Profit after tax was around INR 15 crores, representing a decrease of almost 37% year-on-year. PAT margin stood at 3.84% for the quarter. Total volume for quarter 1 FY '26 declined by 17% year-on-year to 17,072 metric tonnes. Tire Cord Fabrics revenue for quarter 1 FY '26 decreased by around 35% year-on-year to almost INR 181 crores. Filament Yarn revenue for the same period also decreased by around 15% year-on-year to almost INR 193 crores. With this, we open the floor for questions and answers.

[Operator Instructions] We take the first question from the line of Param Vora from Trinetra Asset Managers.

And what I wanted to ask was regarding the geopolitical and trade tensions. So how are these factors affecting the company's operations? Like is it the raw material sourcing? Or is it the export market?

So our raw material sourcing is not anywhere linked to U.S. markets. However -- and we have very direct -- little direct exposure of exports to U.S. of our products. However, since our products are used by tire companies as well as finally by the garments, which gets exported to U.S. and other countries, we could have an impact if these end products are impacted due to the tariff or other kinds of levies due to particularly the differential levies between India and other countries. So we still keep a watch on what actually comes out. And that is the indirect impact that could be having of the geopolitical situation on our operations.

And my next question was that you mentioned the volumes of reinforcement Yarn was impacted by higher imports from China. So what specific actions are company taking to mitigate the competitive pressure from imports? And are you engaging with any government bodies to -- for any policy interventions?

Yes. Through our association, we have raised this issue of our imports from China and also from the free trade agreement countries where the duty protection is not available. And we have raised this issue in terms of asking one is for either initiating immediately the QCO process so that, first of all, substandard material does not come. And second, only valid and approved sources of importers -- producers in the other countries are allowed to send material to India. Second, like the government has put a minimum import price on certain finished products. So since our fabric is a finished product and goes directly in consumption for tire manufacturing, we have asked in principle, whether they can consider a minimum import price to be put on the Tire Cord Fabrics. So these two actions are underway, and we have started discussions with the government authorities through our associations.

[Operator Instructions] The next question is from the line of Gunit Singh from Counter Cyclical PMS.

Our margins, EBITDA margins have fallen from about 13% in FY '21, '22 to about 5% currently. So I would like to understand what would be the contribution of inventory losses, I mean, to these margins? And do we have any correlation with the price of crude oil on our margins? So I mean, price of crude oil have gone down and our input caprolactam prices have also fallen. So I mean, out of the 500 basis points, what would be the contribution of inventory losses? And under what conditions can we get back to 10% EBITDA margins according to you?

Okay. Thank you for your question. One is a comparison with '21, '22 is not necessarily the right comparison because '21, '22 was a post-COVID area where the demand for most of the products had shot up and worldwide as well as in India. So the more likely margins that we commit or we target normally is between 6% to 8%. Yes, our margins are lower than the target between 6% to 8% for this quarter and also for the previous quarters. As regards to the impact of falling prices, yes, this do impact our margins because the materials, the stock in hand right from raw material up to finished goods, the prices get corrected when there is a change in the underlying raw material prices. We are seeing now hopefully that the raw material prices are close to their bottom. These are record low levels with almost a fall of $400 from April '24 to June '25. And we are hopeful that these prices should stabilize or improve from these levels. There is a good correlation with the crude oil prices because the underlying raw material -- I mean, the feedstock for our raw materials are crude-based. However, it is not a very direct correlation. So sometimes it takes a few quarters or sometimes a few months before the correlation starts showing its results. But one more important point is the significant overcapacity that has been created across the value chain, right from raw materials up to the finished products, which has also impacted the margins, and it is not only in India. These margins have even squeezed in the Chinese domestic market as well.

All right, sir. Got it. So going forward, can we expect a INR 550 crores kind of a revenue run rate quarterly considering that the fire incident is behind us? Is that a fair assumption? And also the new capacity that we're coming up within Q4, what is the rationale for, I mean, increasing capacity when there's already oversupply and margins are under pressure. So do you see any uptake for that? Or I mean, what was the rationale for investing in that? And what kind of peak revenues can we expect from the new capacity that will come in, in Q4?

Okay. So we do not give any forward-looking data in terms of values of turnover or the bottom line, but volumes will definitely should go up from quarter 1 because we have restarted our plant, which was impacted by a fire at Bharuch. So those volumes, assuming that the demand does not weaken should help in overall volume -- sales volume increase. Second, the top line has a direct correlation with the raw material prices because normally, the prices of finished goods adjust to the raw material prices. And as I said, the base raw material prices are at record low levels. So what kind of top line will come -- is directly linked to what kind of raw material prices or even the crude prices would prevail in next quarters, few quarters. As far as the capacity expansion is concerned, we -- our capacity expansion and which is still not commissioned is related to polyester tire cord. And the purpose of getting into that segment is that we didn't have presence in the polyester tire cord, which is used in passenger car tires. And nylon tire cord is reaching to kind of a flat trajectory or very slow growth, whereas polyester tire cord in line with demand for passenger cars is likely to grow faster than any other reinforcement, and that is the reason that we got into that. And this hopefully should help us gain some more volumes than in segments that we are not currently present in. As far as NTCF is concerned, the expansion was mainly for -- related to the -- some of the old capacities that we thought is not able to compete with on quality terms with the latest machine. So mainly it was there, and there was some balancing capacity increase based on the demand in '22,'23.

All right, sir. So looking at the current pricing scenario, I mean, realistically, what kind of revenues can come from the new CapEx? And also, is it a fair assumption that the current EBITDA margins are -- have bottomed out and they cannot go further below what we are experiencing right now? And also, can you comment on the current demand scenario? Does it look better than FY '25? And what would be the drivers of increase in our margins for the coming, say, quarters or FY '26?

Okay. Too many questions together. So I'll answer one by one. And in case something is left out, you can please repeat your question. One, with respect to the top line that we expect from and that's based on a normal assumption pricing of the raw materials on -- from our new capacity, it could be between -- at the full capacity between INR 100 crores to INR 120 crores. And as regards the triggers for margin improvement, it is difficult to say whether this is bottom or the best margins because we are -- the world is in a very volatile situation. And as I said in an earlier response, we do not have direct exposure to U.S. exports. But if, for example, the tire exports were to get impacted or the garment exports were to get impacted, then our businesses will also get impacted, especially on the volume term. So that is the reason to -- particularly in current scenario, at least for a quarter or 2 we have to watch how does the tariff issues and the geopolitical challenges play out for the domestic producers and its impact on domestic production going to export market. As regards -- I guess your one of the questions was on -- can you repeat? I don't know which one. As I said, there are too many questions together. Anything that is...

I mean, so I would just like to understand is the current demand scenario or the pricing scenario for our finished goods better than FY '25? Or can you just comment on the scenario and the outlook for FY '26? And also, I would like to understand there has been an inventory buildup. Our inventory levels have reached around INR 315 crores. So what is the reason for that?

Okay. So from demand side, we do expect some improvement in demand. I mean, difficult to comment for the balance 3 quarters in this scenario to say that on an overall basis, whether it will be better or worse than FY '25. But demand is expected to be better, as mentioned in our presentation on two factors. One is the festive season normally leads to more demand, particularly from farm and the 2-wheeler segments. And secondly, since the monsoon has been good and the spread has been good, the farm income has seen -- has in the past been a good driver for demand for the value chain related to automobiles. So right from basic automobiles to all tires, everything. So hopefully, this should be one reason to look for a better volumes in the coming quarters. But as I said, in a volatile scenario, if this is not supported by the export market because of the tariff, then it could lead to an overall demand reduction. As far as the second question was related to.

Inventory buildup.

Inventory, yes. So inventory buildup was temporary. So what happens is since our -- most of the raw materials are imported. And suddenly, if the tire companies take an inventory correction, we have to adjust our production. So the inventory buildup happens both at raw material and FG state. But we are seeing an inventory reduction and hopefully, by end of Q2, we should reach to closer to normal inventory levels.

The next question is from the line of [ Fahd ] Patel , an individual investor.

Sir, the first question is that the increase in the capital work in progress suggests that the ongoing capacity expansion or modernization. Can you provide details on these projects, the time lines and expected contribution to top line or operational efficiency?

Are you talking at the end of FY '25 or what period CWIP?

Yes '25.

So most of our projects, we have a very small CWIP at the end of FY '25. So we have already capitalized most of the value by March '25 already. What now remains is mostly cost reduction and balancing equipment mainly related to energy conservation and some replacement CapEx. Otherwise, the large projects were all -- most of them were completed by March '25. As I said, the combined impact is all our CapEx at the time of approval have to cross a minimum hurdle rate of at least 10% to 12% or more in return on capital employed or even better in terms of if it is not related to any current operations. So this is the kind of in a normalized scenario that should be the normal benefits that we should accrue from any capital projects taken except for replacement CapEx.

Okay, sir. And also, sir, like with a net surplus cash of over like INR 3.25 billion and improving cash generation, what is the capital allocation framework for FY '26? Should investors expect higher payout ratios or strategic investments?

The focus is on getting more strategic investments and grow this company. But anyway, the payout is more call to be taken out by the Board, and we cannot -- we can only recommend but the final -- and it has already been for the year being given out in terms of the dividend. So we can't comment on what the future would be. But yes, as the management, we continue to look for opportunities to grow this company and deliver superior returns on the capital employed.

[Operator Instructions] The next question is from the line of Khushi an individual investor.