Century Enka Limited (CENTENKA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Century Enka Q4 and FY '25 Earnings Conference Call hosted by PhillipCapital. [Operator Instructions] Please note that this conference is being recorded. This conference may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. I now hand the conference call over to Mr. Vikram Suryavanshi. 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. The management is represented by Mr. Suresh Sodani, Managing Director; and Mr. Yogesh Shah, Chief Financial Officer. Before we start with the question-and-answer session, we'll have opening comments from the management. I will hand over the call to Mr. Suresh Sodani for now -- for opening comments. Over to you, sir.

Good afternoon, everyone, and welcome to our Q4 FY '25 earnings 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 fourth quarter FY '25. For the Tyre Cord segment, demand for NTCF was substituted during the quarter due to poor demand from truck and bus segment, while the 2- and 3-wheeler segments and the farm segment remained at similar levels of Q3. Volumes for the year were higher in FY '25 compared to FY '24, driven by strong performance in the first half. Imports increased towards the end of quarter 4 due to lower prices and uncertainty caused by tariff issues, reducing demand from domestic suppliers. Margins remained under pressure due to falling raw material prices and lower sales, particularly in Q4. NTCF demand in FY '26 is expected to depend on Indian GDP growth and geopolitical challenges related to tariff, tire exports, et cetera. Approvals of Polyester Tyre Cord Fabric are currently in progress with multiple customers. We expect commercial supplies to start from Q4 FY '26 after clearing all stages of approval. In the Filament Yarn segment, sales were affected due to a fire in our one of the plants at Bharuch in February end, leading to sales volume loss in Q4. Despite this, sales volume for FY '25 was higher compared to the previous year, supported by an increased share of value-added products. Revamping and repairs of affected plant is in full swing, and we expect the plant to be fully operational by the end of June. Falling raw material prices and dumping at low prices from China impacted margins in Q4, although this was partly offset by higher contributions from value-added products. Focus would continue on increasing share of value-added products and niche products with better margins. Caprolactam prices continued to slide to record low levels, leading to losses on stock and resultant margin pressure. We continue to focus on cost reduction initiatives to remain competitive in a challenging geopolitical environment. I now hand over to Mr. Yogesh Shah to brief you on the financial performance.

Thank you. Good afternoon, everyone. Let me now brief you on financial results for the fourth quarter of the financial year 2025. For the quarter 4 operating results, our operating revenue stood at INR 444 crores, down by around 5% year-on-year. EBITDA for the quarter stood at around INR 9 crores, a decline of 74% year-on-year. EBITDA margins were reported at 1.98%. Profit after tax was around INR 7 crores, down by around 67% year-on-year. PAT margin stood at 1.53% for the quarter. Total volume for quarter 4 grew by 1% year-on-year to 18,149 metric tons. Tyre Cord Fabric revenue for quarter 4 FY '25 decreased by around 6% year-on-year to almost INR 203 crores. And Filament Yarn revenue for the same period decreased by around 6% year-on-year to almost INR 223 crores. Now coming to results for the financial year 2025. Our operational revenue stood at INR 2,002 crores, representing a growth of 15% year-on-year. EBITDA stood at INR 115 crores, which increased by 39% year-on-year. EBITDA margin for the period was 5.73%. Net profit was around INR 66 crores, which grew by 55% year-on-year, and PAT margin stood at 3.32%. Total volume of financial year '25 grew by around 16% year-on-year to 78,425 metric tons. Tyre Cord Fabric sales for FY '25 increased by 15%, that is INR 955 crores, while Filament Yarn sales increased by 13%, that is INR 958 crores. With this, we open the floor for questions and answers.

[Operator Instructions] The first question is from the line of Vikram Suryavanshi from PhillipCapital.

Sir, last time you talked about operational efficiency gains as well as the power cost savings. So how was this in this quarter, if you can highlight an outlook on the same one going forward?

Yes. Thank you. Yes. So we continue to focus on operational efficiency, both in terms of purchase rate of the power as well as the power consumption. So this year, we would have gained a significant amount. Just to give you a number in terms of per unit, we have about a INR 4 differential between the grid rate and our hybrid power rate and that power constitutes about close to 15% to 20% depending on the total requirement of our total power demand. So to that extent, we continue to save. Similarly, where we get an opportunity to buy power on open access at a cheaper rate compared to grid power, particularly in -- for our Bharuch plant, we have continued to do that. We are also investing in power reduction consumption at our old equipment since some of them are quite old, and they are giving good returns of -- in excess of 25% on the CapEx that we are making investments on. So we'll continue to invest on reducing our power cost -- power and fuel cost, which is also reflected in the increase of only close to 3% in the total power and fuel costs, whereas the top line has grown by close to 15%. So that itself reflects that we are working on improving our efficiency on power and fuel cost.

There is a significant increase in the other cost also. Is it because of the fire? Or is there a onetime expenditure we have incurred in this quarter?

Yes. So we had a fire, as we -- I mentioned in my opening comments in end of February, and we started post our survey by the insurance company to revamp and restart the -- to repair the damaged machinery. So in this quarter, we have spent about INR 8 crores, which is part of our other expenses. And we have -- since the claim has been accepted and insurance company has given go ahead to make the repairs and maintenance, we also accounted for the insurance claim receivable to about -- extent of about INR 6 crores, which is reflected in our other income. So these are the 2 income, which are coming in 2 different line items in our published accounts. Otherwise, compared to last year, we have increased our expenditure on -- particularly on the repairs because last year's financial performance was weak because of multiple factors. And whatever was nonessential or noncritical repairs were actually postponed and actually incurred in the current year. And to that extent, our other expenses, particularly on repairs of machinery is higher. But now we are on -- we don't have anything pending in terms of normal repairs and maintenance. And going forward, it will be regular repairs and maintenance from FY '26.

Understood. And can you share what was the caprolactam prices for this quarter? And how is the outlook?

So caprolactam prices have been falling consistently since September. I will give you just a quarter-on-quarter number so that just to give a feel of how fast and sharp the caprolactam prices are falling. It was $1,688 in March end, I'm talking in dollars per ton, fell to $1,683 in June '24, was $1,623 in September '24. It fell sharply to $1,483 in December '24 and again to $1,368 in March '25. In fact, it has fallen to about $1,278 in April. So it has been falling consistently almost $300 to $400, is the total gap -- almost $400 reduction between March '24 and April '25. And we hope it is close to its bottom because that is one of the factors which has impacted our financial performance, and such sharp fall is not conducive to our business model.

Okay. And would it be able to quantify the impact of this inventory loss in a quarter?

We'll not be able to give the exact amount, but I think as we have mentioned and you have the amount of inventory we carry, it will be easy to identify that or calculate that what is the kind of -- because we value the inventories, particularly the semifinished as well as the finished goods or even if it is raw material on the current prices. So that loss has already been accounted for -- so everything as of March end is equivalent to the prices prevailing either in March or in case of finished goods, expected prices in April.

Understood. So post March, are prices stabilized? Or how is the trend?

As I said, in April itself, there was a fall of $90. And due to the geopolitical challenges, particularly in China, we still see there is some fall in caprolactam prices in China. However, these are unviable levels even for Chinese producers because normally, there is a benchmark margin over benzene, which is one of the key raw materials for caprolactam, and that has fallen to a record level. It has not -- we have not seen these levels in the last 10 or 15 years that I have seen the data. And this is completely unviable for producers of caprolactam. However, there may be some players who are fully integrated up to 2 or 3 levels of downstream products. So maybe they are able to breakeven because of their integration, but still is very difficult price levels to sustain continued operations with this kind of margin.

The next question is from the line of [ Vipul Kumar Anupchand Shah ] from Sumangal Investments.

So I was disconnected from the call for a few minutes. So if my question is repeated to you, please bear with me. So why other expenses are much higher, although our turnover has fallen sequentially and other expenses are higher even year-over-year also. So what is the -- is there any one-off there? So...

Yes. So other expenses, one of the reasons for increase in other expenses is that we had a fire in end of February in our -- one of the NFY plants of Bharuch. And we started incurring the repairing cost to that extent. So about INR 8 crores was spent on repairs and revamping of the plant and equipment damaged in fire. That is included in this number. Second is last year, since the financial performance was under stress, some of the nonurgent -- noncritical repairs were deferred and they were incurred in the current year. That is a second reason. And third is we had commissioned some of the value-added products during the year, which were given on operations to the -- particularly the normal operations on contract basis. So that amount -- that contract value is not reflected in, I mean, manpower or employee cost, but comes under other expenses. So these were the 3 major reasons for increase in the -- both quarterly expenditure as well as the increase compared to the previous year.

Yes. But so your third reason, then -- employee cost, then any increase in other expenses should be compensated by equally lower employee cost, no?

Yes. So if you look at our employee cost, it has gone up by 4.92% only so only for the operating team. I mean, the workmen category are outsourced. Other people, who have to be hired in the staff category or managerial category or supervisory category come under the employee benefits plus because of the increase in volumes of polyester -- I mean, operations of Polyester Tyre Cord at Pune, we have hired more people. So overall increase is still within -- well within our control in the employee benefit expenses.

Okay. And the expenses towards this damage due to fire, that must be recoverable through insurance claims, sir, no?

We are fully covered both for material damage and loss of profit. And we expect with -- the surveyor has already visited and we are in constant touch. Our team is constantly interacting with them. So we expect a major part of insurance claim to come in FY '26. And similarly, we'll be pushing for getting the loss of profit portion as well in FY '26. However, insurance claims are subject to, I mean, approvals at multiple levels. So we -- I mean, cannot give a guaranteed time line, but we will be pushing and making all efforts to get the maximum insurance claim within FY '26.

And sir, due to falling caprolactam prices, we'll have inventory losses in this quarter also or those are behind us? Hello?

I don't know whether you missed our...

Yes, I missed it. Yes, I was...

Between -- have you -- did you get the numbers when I was speaking about the...

No, no. I was thrown out of the call. That's right.

Okay. So I'll just repeat in short. The caprolactam price in March '24 was $1,688 per ton. It has fallen to $1,278 per ton in April. So it's almost close to $410 fall, which is a very steep fall. And particularly, the fall has been very steep between October to March from -- it had fallen to -- from September to March, so fallen to -- from $1,623 to March was $1,368. So most of the losses are already built into our financials for March quarter. However, if the prices fall further, which there has been some fall even in May in the first few days as well, there could be some inventory losses. However, the current margin -- I mean, the current economics of caprolactam even in China at these prices does not seem viable. So either it has to bottom out or the prices have to actually slightly go up because the benzene has not reduced to the same extent. So we are hopeful that the kind of fall that we saw in FY '25 should not be there. And if things do improve, actually, the prices should move up in FY '26.

And lastly, sir, when we commence the manufacturing of this Polyester Tyre Cord in the later part of this year, will that product have a higher EBITDA margin as compared to Nylon Tyre Cord?

It will have a similar margin. Only difference is that while in our Nylon Tyre Cord, we have already established a quality and we are already serving all the major tire companies in India. This will go through a process of a very detailed approval at each of the tire companies. So how we ramp up the volume is going to be a key factor, and we expect that -- since the approval process is at various stages in the tire companies that we have already given samples to, we expect that commercial production should start in Q4. And if geopolitical changes happen and it gets expedited, then we could actually have almost similar levels of margins as we are able to realize on our Nylon Tyre Cord Fabric.

And lastly, is our plant fungible? Means can we switch between Nylon Tyre Cord and Polyester Tyre Cord depending on demand of each product?

Only on the downstream side. The spinning cannot -- is not fungible. The spinning machines -- and since the properties and the raw materials are different, so the spinning would remain -- are different. And that's why we have invested in the spinning as well as the downstream. But it is fungible to the extent of the post-spinning processes up to the dipping of the fabric. And in future, it provides us opportunity to just add spinning and make it more fungible in terms of switching between the capacities of NTCF and PTCF.

[Operator Instructions] The next question is from the line of Dhaval Shah from Girik Capital.

Sir, I have one question. Are we planning to get into the manufacturing of forward integrated to making nylon 66 given the increasing demand trend, what we are seeing domestically as well as exports? And given this trade wars, India could benefit over a longer term.

Yes. So nylon 66 is similar to nylon 6, except that particularly on the conversion, which is to make the fabric and to dip it. And spinning is slightly more tricky because the raw materials are different and the properties are different. So we are looking at nylon 66, but our approach would be to not to start with the spinning, but start with the imported yarns or -- and convert it into dip fabric and supply to the customers. And at a later stage, once we establish the product on this route, we could evaluate spinning as an option to backward integrate. But to start with, it will be -- we would want to first establish the product through imports of yarn route.

Okay. So is this a guarded technology or it can be easily imported or it can be engineered -- self-engineered in terms of making -- in terms of spinning?

Actually -- so nylon 66 yarn is not as widely produced as nylon 6 yarn, so which obviously means that there is a technology challenge to -- and it is more technically difficult to make compared to nylon 6. But all the same, we have -- our technical team has the capability to adjust to requirements of that. And we may not need to add any significant hardware to change that. So it is more of understanding the raw material properties and the yarn properties that are required and do the right changes in both hardware as well as our operating conditions. But we will cross that bridge when we come and -- but -- I mean when we do it and discuss technically, it is -- our technical team can actually do that at a later stage.

The next question is from the line of Madhur Rathi from Counter Cyclical Investments.

Sir, I wanted to understand, sir, it seems that our value-added products in the yarn segment are improving. Sir, what percentage of our INR 950-odd crore revenue that we did in FY '25 would be from value-added segment? And where do we expect this to go over the next 2 to 3 years? And similarly, what kind of effect can it have on our margins?

Yes. So actually, we have grown our value-added portfolio compared to last year by close to 15%, and it is now close to about between 25% to 30% of the total value -- 30% value terms of our NFY top line. And the margins are also better than our base products. So we will continue to expand or make more of value-added products and reduce our portfolio of baseline products. And this will continue as -- because we also need to make investments in a gradual way -- gradual period and also develop the market in certain cases because as mentioned in our communication multiple times, we are -- within the value-added products also, we are looking at niche products so that we can maintain the competitive edge. So it is going to be between 2 to 3 years period. We will continue to expand. And ideally, we should take it to close to between 50% to 60% or even more of our total NFY portfolio.

Sir, what would be the margin delta between value-added products and our normal commodity products?

It is varying from product to product. I will not be able to share the exact margins that we realize on -- for competitive reasons. But all these projects that we implement on CapEx have a good return on investments, and they have also given us value even in this severe competition from Chinese market to be able to sustain this kind of top line and also the margins.

Got it. Sir, another question would be, sir, what would be the steady-state margin, if I consider that raw material prices stabilizing in both our divisions. Sir, what would be a steady-state margin that we would be able to achieve based on the current value-added mix in both our segments?

So we expect operating EBITDA margin of between 6% to 8% in steady-state condition. And as I mentioned, volatility is not good for our business model and our performance has been better when there is either a gradual fall or a gradual rise in prices of raw material. So that is a very key condition to get these kind of margins, especially when there is so much of geopolitical challenges. And so much of capacity is available in China, which could have a severe impact on the Indian product or producers' competitiveness. So -- I mean, in a normalized condition, we should be able to between 2% to 6% to 8%.

Okay. And sir, what would be the frequency in which we are passing on these raw material price hikes or price declines to our customers? Is it on a daily or weekly basis or it's longer than that?

So in case of reinforcement, it is on a monthly basis. However -- I mean, monthly also means that there are variations which happen in both in terms of stock in hand as well as the indices. However, in case of NFY, it is -- normally we set the price every month, looking at the market situations, both from imported material as well as the domestic market conditions. So these are also set on a monthly basis, but there is no guaranteed pass-through because these depend on the market conditions as well as the imported price that is landing in the domestic market.

Okay. Got it. And sir, just a final question from my end, sir, what would be the volume growth can we expect for FY '26?

So, we have done -- this year was the highest ever volume of 78,000 we have done. And as I said, there are so many geopolitical challenges that to really comment on volume, but yes, we expect between 5% to 10% growth in the volume for the current year. In a good case, it can be even more than 10%. In an adverse scenario where we are threatened by more imports, it can be close to these levels or about 5%. Hello? Could you get that?

Yes. Sir, what is the PTCF capacity that we are coming up with? And what kind of utilization can we expect in FY '27? And what would be the breakeven for that capacity?

So we have about -- we'll be having about 10% of the capacity -- 10% to 15% of the demand. We do not give breakup of our volumes for the various products that we make. And since there's an approval process, we are currently marketing our yarns in the market in various segments. We are also planning to look at export markets because of the current geopolitical challenges and opportunities. So the breakeven is again a function of how the prices behave both in domestic market for the polyester industrial yarn as well as the international market. However, on a normalized basis, we should breakeven at about 60% of our capacity utilization -- easily breakeven at 60%.

Got it. And sir, what is the current demand for domestic for this product as well as export that we can -- the market that we can cater to in a short period of time, what would be the demand for both of these segments?

So for Polyester Tyre Cord the -- I mean, as per our information, the demand is close to 35 kt. It could be lower by plus/minus -- 3 kt plus or minus depending on the demand side. Exports is -- I mean, polyester industry -- Polyester Tyre Cord Fabric has good export opportunities as well, which we will explore only post our approvals and regular sales to the domestic market. However, unlike NTCF, which is not consumed by the Western company, Polyester Tyre Cord Fabric is a regular consumable item because of the passenger car production -- passenger car tires production at -- in both -- all the advanced economies. So that is an opportunity we will explore post our domestic sales getting stabilized. And that also offers us opportunity to do expansion in future.

The next question is from the line of Amit Kumar from [ Determined Investment ].

Just one point on this PTCF. So our understanding is the plant is sort of operational, but you think commercial orders will take a little bit of time? Would it be possible for you to quantify roughly how much of drag in terms of your EBITDA this would be at the present time?

We'll not be able to give you an exact value, but...

No, roughly. I'm not sort of looking for an exact value also, but...

Let me complete. So as I said, we are not keeping the plant idle. We are producing and marketing polyester industrial yarn in the interim so that we stabilize the spinning and the approval process is going on parallelly. So as I said, these are very volatile times. So in a normal, I would say, steady-state condition, it should almost be a breakeven product -- breakeven case even to make polyester industrial yarn. And we are in the progress -- we are in the process of getting approvals. And as mentioned in the opening remarks, we expect that we should start commercial supplies from quarter 4 of FY '26. So that would definitely help it to make EBITDA positive for the year as a whole.

For FY '26, you are basically saying?

Yes, yes.

So I was basically -- in the current quarter, what would be the drag, if any, from this basically?

Current is you're talking of which quarter?

Fourth quarter and...

Fourth quarter? No, fourth quarter, as I said, we had a breakeven -- we didn't have a drag on our operating cost.

Fourth quarter itself, you had a drag and you were saying that -- sorry, you had breakeven and that breakeven will sort of continue.

Yes. Yes.

Second point was why is it taking such a long time to get approvals for this product? Because -- so our sense was that you're supposed to sort of start getting commercial orders from 1Q and now we are talking about 4Q. This is I think just at the end of last year. I don't think the plant was operational. So maybe there might have been some delays out there also, but why does this process sort of take so long? If you can just help us understand.

So one is, the Polyester Tyre Cord Fabric is slightly new to our team. So there is also a learning part. But more importantly, this is the first time we are getting an approval from the tire companies. And you know that this is mainly used in the passenger car tires. So it goes through a very stringent process of approval. And since we are supplying for the first time, it goes through multiple approvals, including making of tires and running it for thousands of kilometers and then giving us. So there is almost a 4-stage approval that we have to go through, and it applies to all producers of tire cords. So it's not unique...

Ladies and gentlemen, we lost the connection with the management. We'll connect.

Hello?

We have the management on the line, so you may proceed.

Yes. Sorry, our line got disconnected. So I was just explaining -- the question was why it is taking so much time for starting commercial supplies of PTCF. So as I said, one, it's a new product for us. So our team is also getting used to understanding the nuances related to this product compared to the nylon. Second is this is a stringent process because it is going to passenger car tires and tire companies follow a very detailed approval process -- stage-wise process with tires made from this fabric and then tested in multiple terrains for a very large number of -- I mean, thousands of kilometers and then only it becomes a commercial supply. So our understanding compared to -- we had -- because we were into NTCF for a long time, we had estimated that it would take shorter time, but I think this is a learning that any new product, particularly new category goes through a different process. And we are hopeful that now we are on the right track to -- we would not have to go beyond Q4 -- for starting of Q4 for our commercial supplies, at least to some of the customers.

Okay. Is there any chance that the approvals can come in quicker? I mean I think earlier than 4Q is highly unlikely?

It could be. I mean, since I said, it's an approval process and how satisfied and how -- because they are -- as I mentioned in some of the earlier calls, almost 80% of the Polyester Tyre Cord is currently imported. So the expectation obviously is to match the import quality in all parameters. So if we are right on bang in terms of our quality parameters in comparison to imports, I think -- I mean, I'm hopeful that there could be some expeditious approvals as well, but they still will have to go through the process. They do not, in any case, shut down -- cut down on the process that is required for approval of a critical product like a reinforcement for passenger car tires.

Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to the management for closing comments. Thank you, and over to the management.

I'm Yogesh Shah. So thank you, everyone, for joining our earnings call. I hope we were able to give the answer to your queries, and I hope those 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 Manager at Valorem Advisors. Thank you.

On behalf of PhillipCapital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.