Century Enka Limited (CENTENKA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Century Enka Limited Q1 and FY '27 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Ms. Purvangi Jain from Valorem Advisors. Thank you, and over to you, ma'am.

Thank you. Good afternoon, everyone, and a very warm welcome to you all. My name is Purvangi Jain from Valorem Advisors. We represent the Investor Relations of Century Enka Limited. On behalf of the company, I would like to thank you all for participating in today's earnings call for the first quarter of the financial year 2027. Before we begin, let me mention a quick cautionary statement. Some of the statements made in today's earnings call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to the management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decision. The purpose of today's earnings call is purely to educate and bring awareness about the company's fundamental business and financial period under review. Now let me introduce you to the management participating with us in today's earnings call and hand it over to them for their opening remarks. We have with us Mr. Suresh Sodani, Managing Director; and Mr. Yogesh Shah, Chief Financial Officer. Without any further delay, I request Mr. Suresh Sodani to start with his opening remarks. Thank you, and over to you, sir.

Thank you, Purvangi. Good afternoon, everyone, and welcome to our earnings conference call for first quarter of financial year 2027. I would like to thank our host, Valorem Advisors, for hosting this call. Now let me first brief you on the operational highlights of the quarter under review. We are pleased to report an exceptional quarter with the company delivering record revenue growth, profitability growth and margin performance. The strong performance was driven by healthy volume growth across all business verticals, supported by productivity improvements and higher operating rates, which contributed to a meaningful expansion in operating margin. We were also able to effectively pass on increase in raw material costs through calibrated pricing actions. In addition, profitability during the quarter benefited from one-time inventory gains arising from low-cost opening stock, while higher availability of renewable power helped partially offset increase in petrol-based energy cost. While we expect margins to normalize as higher cost inventory gets consumed, the underlying operational performance and demand environment remains encouraging. In our Tyre Cord business, demand remained robust during the quarter following GST cuts on tyres and automobiles with healthy growth across all automotive segments driving strong demand for tyres from OEMs. While demand fundamentals remain healthy, evolving geopolitical developments, volatile crude oil prices and persistent inflation continue to remain areas to monitor and could impact demand growth in the coming quarters. Meanwhile, the PTCF approval process is moving in the desired direction with commercial sales expected to commence in H2 FY '27. Turning to our Filament Yarn business. We continue to witness healthy demand during the quarter with robust sales volumes and improving product mix led by higher share of value-added and better margin products. Our new Mother Yarn and other value-added products continue to support margin expansion and strengthen the overall profitability of the segment. At the same time, import of commodity filament yarn from China continued at very low prices, while the Finance Ministry did not notify the antidumping duty despite favorable findings by DGTR. Looking ahead, we remain focused on enhancing our value-added product portfolio with new VAP investments planned during the year to offer more customer-specific products and further improve margins. I 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 financial year 2027. For the quarter under review, operating revenue stood at INR 554 crores, registering a strong growth of 38% year-on-year and 15% quarter-on-quarter. EBITDA for the quarter came in at INR 86 crores, delivering an exceptional growth of 331% year-on-year and robust increase of 55% sequentially. Consequently, EBITDA margin improved significantly to 15.46%, representing an expansion of 1,050 basis points year-on-year and 400 basis points over the previous quarter. Profit after tax for the quarter stood at around INR 62 crores, reflecting a substantial growth of 301% year-on-year and 57% quarter-on-quarter. PAT margin strengthened to 11.13%, translating into an expansion of 729 basis points year-on-year and 298 basis points sequentially. Total volume for the quarter grew strongly by 12% year-on-year to 19,199 metric tonnes. Within this, Tyre Cord Fabric sales increased significantly by 59% to INR 306 crores, while filament yarn sales reported a growth of 20% to INR 230 crores. With this, we open the floor for questions and answers.

[Operator Instructions] Our first question comes from the line of Vipulkumar Anopchand Shah with Sumangal Investment.

Congratulations for very good set of numbers. So can you quantify the inventory gain in this quarter?

Quantify means you are asking in terms of volumes?

No, no. Means how much it added to the bottom line?

I think it's already mentioned in the results which have been published, which has inventory impact is INR 46.24 crores, which is already mentioned in our quarterly results submission to the stock exchanges.

INR 46.2 crores. Okay. That's EBITDA level, right, sir?

No, no. It has to be given in terms of the way it is reported in the financial statements to the stock exchange. So that's the only information we can share. We cannot give anything further on that.

Okay. So is it safe to assume that due to increased caprolactam prices performance may be impacted in coming quarters or?

We have already mentioned in our highlights that it may get normalized with changes in the raw material prices. One of the changes that had happened post the Iran war was a very significant and substantial rise in a very short period in the -- particularly in the caprolactam and the chips prices. And they are a bit tapered down in this quarter and are volatile because of the geopolitical situation. So it will have some impact, but we do not give any forward-looking statements on what the impact would be. So it is expected to normalize based on how the pricing situation prevails during the forthcoming quarters.

And you have mentioned that profitability has also increased due to higher share of renewable power. So what was the share of renewable power in our overall power consumption? And what was its impact at the EBITDA level or PAT level, sir?

Overall, our renewable power is over 40% for the quarter. We will not be able to give any value terms of the impact. And we expect that since we have already announced that our expansion of renewable power at Bharuch is expected to be commissioned in H2 or most likely in Q3 of FY '27, that percentage should also go up and the value addition in terms of bottom line should also help.

So it will move from 40% to what, sir?

Around 50% expected by once the plant is commissioned and starts generating at normal levels.

So that improvement will be structural, sustainable, yes.

Yes. So once it's commissioned, I mean, it is definitely weather dependent. It's not constant as we know. But on a yearly basis, we have seen that it normally operates in a range which is forecasted at the time of the project is implemented. So it should definitely add to the overall reduction in power rates.

Our next question comes from the line of [ Rohan Shah ] from [indiscernible] Capital.

So just wanted to ask you about the -- so you've noted the GST cuts on tyres and autos. So this has driven a robust NTCF demand this quarter. So how much of this 38% year-on-year revenue growth is led via the GST cut-led price buying versus the genuine underlying demand growth as such? And do you see any risk of demand pocketing in the Q2 or Q3 or when this GST effect fades?

I don't think we'll be able to quantify the increase in volumes of auto sales or tyres per se due to the GST cut because that has happened in around September last year, and that has been a continuing phenomenon. I think the numbers of auto sales across various segments, whether it is 2-wheelers, 3-wheelers, tractors, personal vehicles, heavy commercial vehicles, all have been going quarter-on-quarter at a good pace. So how much is to be attributed to the GST cuts is a guess of anybody. But it definitely had an impact on demand and the buying of -- I mean, more importantly, that it made the automobiles affordable to the customers. And how much would it continue is, again, guesswork because it depends on so many situations, financing, general economic environment. But it did definitely have an impact because we could see a stark improvement from Q3 onwards both in terms of performances of auto companies, of the tyre companies and all value chain partners related to the tyre companies.

Sure, sir. That is actually really helpful. And I understand that the quantification might be difficult. And one more thing, I think you flagged the evolving geopolitical developments, if I'm not wrong, and the volatile crude prices and inflation as a risk to demand in the coming quarters. So could you elaborate on which specific end markets you're most watching for a slowdown? So just to tell you 2-wheelers or the vehicles, what exports, what are you looking that the demand will slow down, yes?

Actually, it's a combination of multiple factors. Most important is the price increases in raw material due to the underlying crude variability and most likely the increase. So that could lead to either deferment of purchases or other kinds of economic challenges, which could relate to either reduction in demand for the new vehicles, new automobiles or also the demand cuts in terms of various value chain partners related to the automobile. And then there is also an import threat, which because of multiple countries having different geopolitical situations in the domestic markets, which could lead to a surge in imports to the domestic market. So when we -- our markets are primarily domestic markets, our export exposure is very little. So our -- these comments are more in relation to the impact in the demand in the domestic market and impact on supplies to that demand, which could also get impacted by very cheap imports in certain segments that we operate in.

Our next question comes from the line of Madhur Rathi with Counter Cyclical Investments.

So if I look at our gross margins, they have been similar for the past 3 quarters. So is it fair to assume that whenever there is a raw material increase, we capture the upside in terms of what -- because the gross margin bill is similar, but whatever the realization improvement that should flow and that is the reason for the margin increase this quarter.

It does impact the gross margin because we always have inventories in hand, which are both in terms of in transit as well as inventories that we have to purchase since a lot of our materials are also imported. So that does impact because the consumption against the current prices get -- in terms of profit and loss are charged at a different rate, and it works the other way also. But I think the more important part is that it happens only when there is a very sharp increase either way because volatility is a normal phenomenon in this business, which is linked to crude price variability and other value chain related volatility. So any small or more gradual volatility, whether going upwards or downward does not have a significant impact on margins. But a sharp increase or a sharp decrease in a very short period of a month or 2 months, that definitely has an impact on the gross margin.

Right. Sir, but the gross margins were 58%, 59% range for the past 3 quarters. So I'm not able to understand if there was a sharp price increase post the war. Was it that due to some time lag -- because of the time lag between the price increase and we passing on the pricing to our consumer because of that, it might look like there is no meaningful improvement in our gross margins?

Actually, there is another factor which has been instrumental in the last 3 quarters is also a volume growth. And as I said, the GST cuts had a positive impact on the volume growth on the demand side, which has translated into better volumes in the last 3 quarters. And if you see the volumes compared to Q1 and Q2, it's from Q3 onwards, the volumes have gone up. So that also has an impact on gross margin. As I said, it's the combination of multiple factors, but the volume part also plays a very important part in the overall gross margin.

Got it. Sir, going forward, do we expect to maintain these levels of margins going forward? Or do we -- because we are -- the prices of our raw materials have reduced. So how should we look at it going forward?

We do not give any forward-looking statement, but I think we already mentioned in our presentation that we do expect margins to normalize over the next few quarters and not -- because these kind of sharp increases are not a regular phenomenon. I mean this was more a market reaction on the entire commodities on the Iran war. So any kind of that kind of event could have impacts on either way. But as mentioned, we do expect normalized margins going forward.

And sir, normalized would be 10% to 12% EBITDA margin. Is that a fair assumption?

We have been mentioning that because of the volatility, we -- operating margins of between 7% to 10% is more normalized. Anything above that is more a factor which could be not necessarily a permanent feature as of now. I mean it doesn't mean that margins would not change in going forward because a lot of initiatives on cost reduction and on enhancing our value-added products and improving our basic model to improve the margins would be there. But as of now, we do maintain our last conversation on margins, which is that it would be between 7% to 10% on a normalized basis.

Got it. And sir, just a final question from my side, sir. How is the PTCF plant scaling up? If you could give a color on that?

So as mentioned, the approval process has moved forward, and it is going on well with a few customers. We do expect commercial sales to start in second half. So we'll make some more progress in this quarter. And hopefully, some commercial sales would start from Q3 or Q4. But H2, we definitely expect commercial sales to start.

Got it. And sir for the volume, considering all these factors, what kind of volume improvement can we expect for FY '27?

As mentioned, we cannot give a final number.

No, sir, I'm just asking -- I'm not asking you the magnitude, but do we expect the margins because in the last 4 years, based on our investor presentation, volumes have been kind of -- they've been on a flattish trend. So can we expect it to improve going forward? That's what I'm asking.

We are -- our focus has been more on improving the margins on the products that we are selling. So there we are not adding any significant volumes in the current financial year in terms of capacity addition. So volume will be a function of definitely market conditions and the overall competition intensity, including imports. But as mentioned, the focus is more on the value addition and improving margins on the volumes that we are -- we sell in the market.

Our next question comes from the line of [ Amrita Sahney ], an individual investor.

Congratulations on the performance of this quarter. So I would just like to, if you would help me understand the overall capacity of the company. So they have an overall capacity of 92,000 MTPA, right? So if you could give us some color on what is the kind of data for reinforcement fabric and filament yarn and with the new capacity coming up, PTCF capacity, so what are the utilization levels at present?

So since we report our results in single segment, we'll not be able to give the breakup of various products as part of the capacity. And as also the volume has been mentioned in our presentation, so the expected our operating capacity utilization normally varies between 85% to 90%. And it is across -- there is some variation across various products, which depends on market conditions. And as I said, since the PTCF part is under approval, we continue to sell some yarns, but that has an impact on our capacity. But overall, that's the range that we normally operate on. So that would be a good ballpark number to communicate that this is the range. And depending on, again, as I said, various factors, it could change between the product segments. But in an overall basis, we expect that this should be the range that we'll be able to operate in.

One more question, despite about the healthy cash balance which is there on the balance sheet. So my question is regarding if you could talk about the CapEx plans for the company, if anything big CapEx is coming up for the company? Or as you said the utilization level is around 85%, 90%, around that level. So what are the future plans for the next 3 years, what is the kind of CapEx addition or the company is looking at?

So we will be adding some capacities with regard to the overall capacity in our mother yarn. But that would get commissioned in FY '28. That would be -- and then there are some value-added products that would be added to our [ NSY ] which will go in CapEx, but will not add to the capacity, but add to the margins. As already stated and as a consistent process that we have been doing is that we are enriching our offerings in the filament yarn segment basically to counter the commodity imports that are coming at very cheap prices of that and also make differentiated products for the customer. So these would be the major ones. Others are related to our investments and CapEx on -- one is reducing the power rate by our investments in group captive schemes for renewable power. And then a lot of it will also be going on in reducing the power consumptions because particularly where the equipment have become old and inefficient. So we have been continuously improving our productivity through investments which enhance our overall efficiencies and also some amount should be spent on improving our safety post our detailed assessments at the Bharuch incident in Feb '25. So we have significantly enhanced to ensure that we do not have any major incidents or other incidents at all on the safety side, particularly on the fire risks.

Any ballpark number that you're looking at for the kind of CapEx that we are planning?