Century Enka Limited (CENTENKA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '25 Earnings Conference Call of Century Enka hosted by PhillipCapital India Private Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vikram Suryavanshi from PhillipCapital India Private Limited. Thank you, and over to you, sir.

Good afternoon, and a very warm welcome to everyone. Thank you for being on the call of Century Enka Limited. We are happy to have the management with us here today for question-and-answer session with the investment community. Management is represented by Mr. Suresh Sodani, Managing Director. Before we start with the question-and-answer session, we'll have opening comments from the management. I'll hand over this call to Mr. Suresh Sodani for opening comments. Over to you, sir.

Good afternoon, everyone, and welcome to our Q3 FY '25 earnings conference call. I would like to thank our host, PhillipCapital, for hosting this call. Now let me first brief you on the operational highlights for the third quarter of FY '25. In the Tyre Cord Fabric segment, NTCF demand was subdued due to poor truck and bus segment demand, but was partly offset by sustained demand from 2- and 3-wheeler segment, while demand from the farm tire segments improved towards the end of the quarter due to extended monsoon. Increased imports by tire companies following the normalization of supply chain issues reduced demand for NTCF from domestic suppliers. Our margins remained under pressure due to volatile raw material prices and imports from China. We remain cautiously optimistic about NTCF demand growth in Q4 and FY '26. Approvals for polyester tire cord fabric are in progress, and we expect commercial production to start in FY '26. In the Filament Yarn segment, demand improved due to marriage and festive season, leading to better capacity utilization, while a higher share of value-added products helped in sustaining margins. We will continue to focus on additional investments in value-added and niche products with better margins. Caprolactam prices continued to decline, resulting in stock losses and margin pressure, but we mitigated the impact through higher share of renewable energy usage and other cost reduction measures. Let me now brief you on the financial results for the third quarter and year-to-date of the financial year '25. For the Q3 operating results, our operating revenues stood at INR 493 crores, which grew by almost 9.5% year-on-year. EBITDA for the quarter stood at INR 27 crores, which grew by 48% year-on-year. EBITDA margins were reported at 5.51%. Profit after tax at around INR 14 crores represented an increase of almost 198% year-on-year. PAT margin stood at 2.84% for the quarter. Total volume for Q3 grew at 11% year-on-year to 19,368 metric tonnes. Tyre Cord Fabric's revenue for Q3 FY '25 decreased by around 5% year-on-year to about INR 214 crores, while Filament Yarn revenue for the same period increased by about 23% year-on-year to almost INR 255 crores. Now coming to year-to-date results for the financial year '25. Operational revenue stood at INR 1,558 crores, representing a growth of 22% year-on-year. EBITDA stood at INR 106 crores, which increased by 116% year-on-year. EBITDA margins for the period was 6.81%. Net profit was INR 60 crores, which grew by 165% year-on-year and PAT margin stood at 3.83%. Total volume for 9 months FY '25 grew by 21% year-on-year to 60,275 metric tonnes. Tyre Cord Fabric's sales for 9 months FY '25 increased by 22% to INR 752 crores, while Filament Yarn sales increased by 20% to INR 735 crores. With this, we can open the floor for question and answers.

[Operator Instructions] The first question comes from the line of [ Mohit Upadhyay ], an individual investor.

One question only from my side. Actually, margins have been under pressure for a while now. What is your outlook on revival for this? And what is the company doing to counter this pressure? Any cost-cutting measures that we can [Technical Difficulty]. Also, what is the update on the antidumping on NFY? Do you believe this will help improve our margin in coming quarters? Lastly, what is the outlook on the demand environment? We have added a lot of new capacity, but growth is still muted. So when we can expect better growth, sir?

Okay. So I guess, actually, there are 3 questions. But in case I missed out in terms of replying to any one of them, you can come back later and ask that. One was on -- with respect to the margins pressure, which is right -- because the margin pressures continue, and being in a very volatile external environment, these are also quite varying. And we have been taking continuous measures on the cost side for margin improvement. One which we have already shared and which we continue to do is increasing our share of renewable power, which is cheaper from the grid power. So we are already drawing renewable power at Bharuch in the current year, and we intend to expand that by middle of next financial year. So that would help in reducing the cost. Secondly, we continue to invest on reducing our power consumptions, particularly on the old equipment and which have given good results in terms of reducing the overall power and fuel cost and we'll continue to work on that. We are also looking at improving the productivity through various in-house measures and which are also -- will take more time, but these will, over a period of time, start giving more results. As far as ADD is concerned, the association has filed an application for antidumping duty on NFY, and the process has been initiated. As we have been mentioning in every quarter that China continues to dump a lot of material, particularly at the -- on the commodity side at very low prices and that creates a lot of margin pressure on those products. And the purpose of ADD is to address imports mainly from China. As far as the capacity addition is concerned, the capacity that we added in NTCF at Bharuch was mainly for -- some part of it was to expand the capacity and part of it was to compensate for the deteriorating or the aged machines of Pune. So we continue to use the full capacity at Pune -- at Bharuch, the new capacity and only the -- in terms of the demand requirement, the balance quantities are produced from the old equipment. So we do get better quality products, which have a better sale with the customer as well as they are more cost effective. Full utilization will come when the market conditions are better and which has a lot of relations with GDP and infrastructure growth and movement -- I mean, the overall impact on the economic activity, but this will happen, and it can happen in certain months. It may not happen for the year as a whole. I guess I've answered all the 3 parts of your question. If anything is left, I would request you to please raise your question again in the process that PhillipCapital and they have advised you to do that.

[Operator Instructions] The next question comes from the line of [ Abhishek Jain ] from Investwell Agents Private Limited.

I've got a couple of questions regarding the CapEx. Sir, how much are we investing for the PTCF capacity and how the funding will be done through internal accruals and the borrowings? And what sort of capacity will be added and the projected revenue from therein? Can you please clarify on these things?

Is there any other question? Or should I -- you said you had a couple?

The CapEx in general, what sort of modernization we are looking at? Because NTCF is not a growing product. So definitely, we will be diversifying into PTCF or any other product going forward. So what sort of modernization or diversification CapEx or the maintenance CapEx that you look for in the coming year and the next year onwards, that will be good. The road map sort of things will be very good, if you can let me know?

So in PTCF, we have already completed the CapEx, and we spent about INR 103 crores on this project. The denier mix are different from the -- on the total production that comes out of this capacity, but it could range between 4,000 to 5,000 tonnes per annum, depending on the denier mix, as I said. Second, we expect to continue to spend on the upgradation of the equipments, which continue to be used for our NTCF operations mainly to reduce the power consumption on per unit per kg or per tonne basis and that will be a continuous exercise. But on an average, we have been spending between INR 20 crores to INR 30 crores, which are primarily focused on improving productivity, energy efficiency and getting more grade 1 products from our existing equipment. So these will continue year-on-year. As far as other large CapEx are concerned, we are still not ready to -- I mean, in terms of -- these are still under discussion stage. So as and when we are ready and we get a Board approval, then through a due process, it will be announced to all the regulatories as well as to the investment community.

Because the thing is that we are quite a profitable company with very less borrowing or to say we are a net cash positive company. Even after that, we are not getting into other things like -- the Board is not having some road map for the new product development and all. That is what the question was all about. Because the NTCF is -- at the end, NTCF is not a product that will be growing. It's a shrinking market, along with the capacity, the old equipment and everything that we have got and the Chinese dumping and all. So it is not going to be very profitable going forward. So that was the concern actually.

No, your concern is valid. What I would like to only state is that in last 3 to 4 years, we already invested close to INR 400 crores in capacity addition in PTCF in a new dipping line at Pune and in expansion and replacement of NTCF capacities at Bharuch. So these are investments which have already been done, and we will continue to look for growth in -- I mean, particularly in PTCF and other technical textiles. But as I said, these are still at a discussion stage and we do not have any net borrowings. In fact, we have sufficient...

Since we have INR 350 crores in cash, including investment and all.

We have sufficient treasury -- I mean, cash on balance sheet to make future investments, but this investment should give a minimum hurdle rate returns so that these can be approved by the Board. And in the current scenario, we have to be careful on where we are investing. So looking at all these scenarios, these plans are made. And we had made investments in mother yarn capacity in NFY, we had added value-added capacities in NFY, which have given good results. So we'll continue to look for these kind of investments. If any large new investments would come, then obviously, it has to go through a process of internal approvals and then the Board approval. And then once it is approved, will be shared in the due course.

Okay, sir. Can you tell me about the technology tie-up we have for the PTCF or in -- or it is an in-house?

These are standard technologies, and these are mostly by the equipment suppliers itself. So there is no technology per se. What we need to do is we have to get the product through our own internal technical know-how to meet the requirements of the tire companies. So it's a marriage of equipment given by standard and good international companies and then our own know-how in tire reinforcement markets to make the product as required by or as -- similar to what other imported material is coming or where the -- what the specifications of the tire companies are.

[Operator Instructions] The next question comes from the line of Priyankar Sarkar from Square 64 Capital Advisors LLP.

Sir, I'm a bit new to the company. So asking a basic question. Typically, when we do CapEx, what is the typical asset turn that we can achieve in our company?

More than the asset turn, actually, we look at an IRR hurdle rate, which has to be crossed. So asset turn is more an outcome of what investments are required and what is the -- so that, I think, is more important, is what kind of IRR we are able to generate out of this investment, and what is the strategic fit of that product or that investment in our long-term goals. So that is normally the process. The asset turn is more an outcome of once we do all the analysis and what comes out.

So just to get a sense, whatever the CapEx we have done over the last couple of years, I mean, let's say, if you put INR 100 crores into this thing at a peak utilization, I'm not saying year 1. I'm saying what is the potential -- whenever there is a demand, whenever we get to a peak potential of utilization, what is the typical we can get if we invest, let's say, INR 100 crores in a project?

I would say it is very typical to a product and what investments we are making. But if you were to take just a ballpark number, at least 1 to 1.3, 1.4 asset turns should be there -- I mean, top line should be there on an investment of a reasonable size magnitude. It could be -- INR 100 crores could even deliver a 1.5x turnover on that. But it is -- and second is the top line is also a function of the raw material pricing because the raw material pricing also fluctuates. So if the crude and all the derivatives are at, say $100, it will -- the top line would be different. If the crude and all its onwards are benchmarked through a $70 crude price, it will be different. So it can change. It cannot be a static number. But as I said, our internal process are more towards seeing that what kind of returns it generates and does it fit in strategically in our thought process.

Got it. So do you look at a payback period? I mean, what would be the typical payback period would you consider while putting up a CapEx?

So we look at IRR, a minimum hurdle rate of 12% or above.

[Operator Instructions] The next question comes from the line of [ Abhishek Jain ] from Investwell Agents Private Limited.

Sir, just one more question. Sorry for that. Can you provide me the revenue breakup between NTCF and PTCF?

Sorry, what breakup?

Revenue breakup, segmental revenue breakup, how much are we generating from NTCF and PTCF?

We have not started PTCF as yet. These are still -- as I said -- as mentioned, we have started giving them for trials. So we have not started manufacturing PTCF in the full volume and -- because it goes through a process, which is long drawn and the tire companies go through a very stringent approval process so that the product meets all the specs and there is no chances of failure of the tires because of the reinforcement. So currently, what we see as a reinforcement turnover is all NTCF turnover.

All right, sir. And when do we expect this to come from?

Trials have started, and we expect -- I mean, at various stages. So in FY '26, some processes should start in Q1 and Q2. I mean this all depends on how the tire companies go through this process. Being a new product to us, there is a slightly longer process compared to NTCF, which we have been doing for many decades. So difficult to give a straight time line. But yes, between first and second quarter, we are hopeful of getting approvals for at least some of the customers.

And sir, how much are we expecting revenue and the margin sort of?

Revenue at peak capacity should be -- I mean, as I said, it's a function also of the raw material. But at a standard, what we assume as a price should be about -- between INR 110 crores to INR 120 crores and margins at least in excess of 10% -- EBITDA margins.

[Operator Instructions] The next question comes from the line of Vikram Suryavanshi from PhillipCapital India.

So what was the average caprolactam price for this quarter?

So the caprolactam price at the end of Q2 was $1,623 CIF and end of Q3 is about $1,483. It has been varying. So instead of giving an average, I've given you the end quarter numbers because in certain months, the fall was more steep. So between Q2 end to Q3 end, the fall is about $140 per tonne.

Understood. So that fall has impacted our raw material because that inventory loss would be accounted into raw material cost?

Yes, yes. So -- I mean, our model, as long as the prices are varying at a decent pace -- I mean the volatility is less, that is more suitable to us. Because otherwise, it can have an impact on our effective margins that we are able to report.

Understood. Understood. And see, other textile companies, particularly in polyester also has some advantage because when we import from China, BIS certification and all that what government has made it compulsory. So is there a way we can have some kind of relief from that kind of BIS certification in our business or it's not much impacting?

We have already initiated the BIS process through the association, and the gazette has already come out and the stakeholder meetings are on. And we are hopeful that -- and government is positive -- I mean the authorities are positive that this has to come as a part of getting the right products and there is no misdeclaration of products or malpractices in the -- during the imports of any inferior product. So we are hopeful that certain -- in the next year, maybe in quarter 1 itself, the BIS could get notified and then implemented in due course.

Understood. And this PTCF 4,000 tonnes to [ 5,000 tonnes ] of annual production capacity, once we get customer approval, how fast we can ramp up to this capacity? Or can we give some in terms of utilization possibility for full year once it is operational?

So normally, what we have seen in the past in NTCF is that once we get an approval and the product becomes standardized and are accepted by the customers, then we can ramp up very fast. So -- because then that -- and what we are dealing with is the same customers that are buying NTCF from us. So the customers are not different. The people that we are dealing with are not different. It's only that it is going for a different application, and it has to go through a process of approval, which is new -- I mean, more stringent and more detailed compared to a product which we were already making. So once we start and we get a commercial scale approval, I think the ramp-up will be quite fast.

Understood. Okay. And just on the current capacity, which almost, I think, [indiscernible] tonnes per annum. So this year, probably we'll go to almost like around 80,000 plus tonnes in terms of capacity production, which is quite a good utilization. So is there any headroom for further production now from the same rated capacity or how we basically -- to what extent peak utilization can go up the rated capacity for the PTCF -- sorry, NTCF and nylon basically?

Yes. So one is -- I mean the demand conditions will drive whether we can utilize the full capacity because it's a volatile situation. But what will add to the capacity utilization is a commercial approval for our PTCF, which will definitely help in getting more capacity on an overall basis as a percentage of the installed capacity.

But for NTCF and nylon, basically, we can go around 80,000 tonnes to 82,000 tonnes this year on a full year basis?

So I mean, we -- as we said, we have been reporting only on synthetic yarns in single. So what we are giving is an overall capacity, and we expect a good and healthy capacity utilization to continue. Market conditions determine that we can -- whether we can touch 90,000-plus tonnes in certain quarters or even higher, but it all depends on how -- I mean, the PTCF approval comes and how the market conditions are.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management for the closing comments.

Thank you, everyone, for joining our earnings call. I hope we were able to give you answers to your queries and hope these were to your satisfaction. If you have any further questions or would like to know more about the company, please reach out to our Investor Relations managers at Valorem Advisors. Thank you.

Thank you, sir. Ladies and gentlemen, on behalf of PhillipCapital India Private Limited, that concludes this conference. You may now disconnect your lines.