Finolex Industries Limited (FINPIPE) Earnings Call Transcript & Summary

Thanks, Rutuja. We welcome you all to Finolex Q1 FY '22 Results Conference Call. We have with us from the management, Mr. Sanjay Math, Managing Director; and Mr. Anil Whabi, Director, Finance and CFO. I'll request the management for initial remarks, post which we'll have a Q&A session. Over to you, Mr. Math.

Thank you, Ritesh, and good morning to all of you, ladies and gentlemen. I heartily welcome you on behalf of Finolex Industries Limited to this investor conference. Thank you for your continued interest in Finolex so far. We are happy to talk about the first quarter results FY '22. The company has reported a good set of financials despite the overall business environment remaining subdued due to the second wave of the pandemic. After reaching all-time highs, the PVC prices seem to be cooling off, which is a positive sign for opening up of the market in months. There has been improvement in all our financial parameters over the last year's quarter, although we should keep in mind that last year's first quarter was also affected by COVID one wave. Let me give you some performance indicators of Q1 '22. The total income from operations was INR 966 crores for Q1 '22. This is up by 71.9% against INR 562 crores in Q1 '21. The corresponding pre-COVID income Q1 '20, INR 944 crores. So this is also -- I'm giving you -- so more or less, the total income is matching with pre-COVID. Volumes in Pipes and Fittings segment grew 5.5% against the last quarter in Q1 '21. The total volume was 55,819 against 52,911 in quarter 1 '21. This is, again, lower than the pre-COVID volume unlike last year. Volume in PVC Resin segment grew by 10.6% to 50,249 tonnes against 45,435 tonnes in quarter '21. This is again lower than pre-COVID volume. EBITDA stood at INR 210 crores in quarter '22, which is up by 137% against INR 88 crores for quarter '21 and corresponding figure pre-COVID in quarter '20 was INR 124 crores. So this -- EBITDA this quarter '22 is 69% higher than pre-COVID. Profit after tax stands at INR 146 crores for quarter '22, up by 166% against last year's PAT of INR 55 crores for quarter '21. And pre-COVID PAT corresponding to quarter '20 -- quarter 1 '20 was INR 72 crores. So it is double than the pre-COVID time. These are the financial numbers. Getting to the segmental performance. EBIT in the Resin segment was INR 158 crores, up by 580% than the last year's, and EBIT in the Pipes and Fittings segment was INR 44 crores, and this is down by 15% than last year. We have a net cash surplus of INR 606 crores, standing at 30th June 2021. I think these are the numbers that I have to share with you. I will leave the floor open for questions. As you have already said, I'm accompanied here by our Director of Finance, Mr. Whabi; and Mr. Niraj Kedia, who is Deputy CFO. So I leave it to you, Ritesh. Please go ahead. Thank you, gentlemen.

Thanks, Math sir. Rutuja, we can open the queue for questions and answers, please.

[Operator Instructions] The first question is from the line of Sonali Salgaonkar from Jefferies.

Sir, my first question is regarding what is the spread this quarter, PVC to EDC? What was it last quarter? And what is the current spread right now?

I'll just give you. Spread for the quarter, 716 for PVC to EDC. And PVC to VCM -- one minute. Sorry, the average for the quarter PVC to EDC, 834, and PVC to VCM is 311.

Sir, what was it in Q1 FY '21?

Q1 FY '21? This was 547 for PVC to EDC, and PVC to VCM, 224.

Sir, what is the current spread?

Current spread, even today's numbers are very attractive as such. Today, we have seen PVC price hardening by $50, about 1,400 to 1,450 PVC, and EDC is running at 670, 680. The spread is coming up to 310, 320.

No. Sonali the present spread is 670 PVC/EDC.

That was last week. I'm just talking about ICIS today.

Yes. Yes.

Understand. Sir, my second question is regarding the EBIT for Pipes and Fittings. Sir, we have seen the absolute EBIT margin as well as EBIT per tonnes declining both year-on-year and sequentially. Sir, any particular reason why we are seeing this trend this quarter? Because consistently, we had seen the EBIT per unit go up over the past 5, 6 quarters.

Sonali, there were -- [Foreign Language] In the rising PVC prices, there were inventory gains, which were there in the earlier quarters. And obviously, when the PVC prices are moving down, there will be some inventory loss because of that. So it's a mix of so many factors.

Sir, so what was the mix this quarter, agri versus plumbing? And secondly, the quantum of inventory loss this quarter?

Inventory losses, it's difficult to quantify. And agri, non-agri mix, we -- in the last recent call, we did mention that for last year, agri mix -- agri, non-agri was 63, 37. And Q1 normally being agri dominant, so obviously, this time this quarter ratio is about 68%, 69% for agri, which is higher.

Understand. Sir, any guidance you would like to give at this point in time, either in terms of the steady state margins for pipes or PVC segment?

The Pipes and Fittings segment, normally, it ranges between INR 8 to INR 10. So that is how it should be in the future also.

Sir, the EBIT margins.

Yes, per tonne.

Okay. Got it. Got it. Sir, next, CPVC volumes and revenue this quarter versus last quarter, please?

CPVC volume, 2,431. And last year quarter was 882. So there is a threefold increase. But on the quarter 4, we had a better CPVC, 3,692 tonnes. Now this is because this quarter also, there is COVID 2.0. So that COVID effect is seen. I think the momentum, which was there in quarter 4, is not seen in quarter 1.

Got it, sir. Sir, how is the demand situation that you are witnessing right now? So we understand that this is seasonally weak for agri, but what about plumbing?

I think agri, it will depend upon the monsoon, and monsoon is very active now. I think almost all the Southern Peninsula has been covered. Even the Northern side, the monsoon is active. So agri will not take off for some time. It is the monsoon demand that will go on. I think as the pandemic is receding and we see now the cases coming down to about 40,000 from 400,000 in last quarter, so there is unlocking is going on. I think opening up is already there. We see some traction in PVC demand as well as the price demand. So July was a better month compared to quarter 1. And we see that this may continue in the remaining 2 months of this quarter.

The next question is from the line of Chirag from HDFC Asset Management.

Could you provide us with the PVC, EDC, ethylene and VCM prices for the first quarter of this year and last year?

Just a minute. This quarter, PVC average price, 1,543, PVC; EDC, 709; ethylene, 991; and VCM, 1,233.

And sir, last year's then?

Last year, Q1 '21, PVC, 740; EDC 193; ethylene, 537; and VCM 516.

And what will be the current or last week prices for the same?

I think last week's prices, PVC, 1360; EDC, 690.

6-9-0?

6-9-0. Ethylene, 1-0-0-5; and VCM, 1-0-8-0.

Great. Sir, the other question I had is, what kind of expansion do you envisage in the Pipes business this year and over the next 2 to 3 years?

Say it again, what is your question?

Sir, in terms of your distribution reach, what kind of expansion are you planning for this year and over the next couple of years?

I think expansion of the capacity is -- last time as we said...

Sir, in terms of number of dealers and distributors. I'm looking at expansion in the dealership network.

I think presently, we are fully covered across all India. Our present range is about 900 dealers and 21,000 retailers. We may add a few in -- yes.

Sure. And sir, last question, what was Fittings sales this quarter versus the previous quarter?

Fitting sales? Just a minute. Fittings total volume was 5,192, and value-wise, INR 141 crores.

And the previous year?

Previous last year first quarter was 3,054, and the value was INR 56 crores.

Sorry, value was?

INR 56 crores.

INR 66 crores (sic) [ INR 56 crores ].

There is an increase of 150% on value and 70% on volume.

The next question is from the line of [ Rahul Agarwal ] from [indiscernible] Capital.

I had 3 quick questions. Firstly, on the volumes, could you help me understand how much is the volume lost because of COVID lockdown? On a normal circumstance, the company would have done 80,000 to 90,000 tonnes is what my understanding is on overall pipe volumes. But any analysis in terms of how the actuals have panned out versus your own expectations? Obviously, adjusting for COVID, what's the volume lost here for agri pipes.

Rahul, it is difficult to state that there will be -- because of this reason, there could be reason of high PVC prices. Also, there's multiple factors. So it is difficult to [ assign ] for which reason the volumes have come into this being.

Okay. But -- okay. So let's say, in terms of your sense of non-agri demand, could you help me understand over, let's say, short term, let's talk about until December 2021, which segment within the non-agri you're seeing demand coming in? Let's say, July, what's your experience, July, August?

I think we will be looking at CPVC, one; Fittings, second; and the sewerage, SWR. These are the main areas of trust. Agri maybe as the normal average of monsoon. But as Mr. Whabi said, there are multiple reasons. One is COVID, and the other one is pricing. And the third one is, if you say pre-COVID 2019, the monsoon was delayed. Although overall monsoon was good, but it was delayed up to middle of July. And that is why that volume was good. You were talking about -- so Q1 '20 was 90,000 plus. But that was not a normal average of Q1, could be somewhere about 80,000 to 85,000. So the loss could be somewhere around 25,000.

Got it, sir. Got it.. And so -- got it. Got it. And last question on other expenses. This number has actually stayed flat Q-o-Q at INR 130 crores. Any one-offs or anything you want to highlight there? Or is it a normal number?

Normal number. There's nothing unusual there.

Okay. Okay. And if I can just squeeze in one short question on the East market. Any thoughts, any future plans in terms of addressing demand there?

I think East market is still -- at present, East has got maximum COVID cases. East is in lockdown. I think there is a real -- all the 7 states in East, they have the highest number of cases. There is a lockdown. I think this particular quarter, we can't really predict how East will perform.

Sir, I was more asking from a servicing perspective as in terms of -- since we don't have a plan there, I was more asking from that perspective, long-term structural, how do you address East markets? Because I think West, North and South are all very well catered by the company, right?

No, we are servicing it through our various plants here, in West and North. So there is a transportation cost, but we are bearing it.

The next question is from the line of [ Vipul Shah ] from Sumangal Investment.

Congratulations for a good set of numbers. My question is, with the fall in PVC prices, are you seeing any improvement in demand, sir, for agri sector?

Agri sector is -- at present in monsoon, we can't really see that it will take off like what we see normally in winter and summer.

Okay. But what is your assessment? The fall in PVC prices should encourage more demand? Or...

Look, the seasonal demand is coming up only in spring and summer. So it must take off sometime around December, January, when the monsoon is over. And then the winter and the spring sets in, the demand starts picking up and summer is a peak. So this particular quarter 2 may not be the real pickup on agri demand.

And sir, I missed your CPVC quarterly numbers and last year's CPVC? Would you repeat it, please, in tonnage and value, if possible?

CPVC is 2,431.

This quarter, June quarter?

This quarter, about INR 88 crores.

And what was the same figure last year?

882 tonnes and INR 29 crores.

[Operator Instructions] The next question is from the line of Achal from JM Financial.

My first question is, if you look at the company, 70%, 75% of our resins are captively consumed. So just wanted to understand, is it to do with the capacity locations, which is why we are not able to consume or we have to buy resins from outside? And what is the difference in terms of the cost due to the logistics side?

I think we have surplus capacity on resin at present compared to what we can consume internally. Secondly, we are buying resin from outside only for CPVC and the fitting grade. So the other products are made by the in-house resin consumption?

Right. Okay. Okay. And the transfer pricing is the same as the external sales pricing. Is that right, sir?

Yes. So whatever is a surplus, we sell it on the market.

Right. Understood. My another question, you mentioned that SWR pipes will be a driving factor for next few months.

I think all non-agri, I will say, plumbing, products and SWR.

Right, right, right. Understood. Sir, can you elaborate a little bit on the SWR pipes as to what kind of contribution we have, how many SKUs we have and what is the plan...

I don't have that number now.

Okay. Okay. But what kind of SKU or the mix you would like to see over the next 2, 3, 5 years?

Whabiji, do you have any number on this?

Total number of SKUs is 2,100 plus, and this will keep on rising, and the number going up will be more in the non-agri space.

This 2,100 is aggregate, right? Of that, how much would be agri and how much would be...

Aggregate. No, no, it is aggregate of all, aggregate of all. Yes.

Right. And how much would be agri out of that, sir?

That I do not have. That split I do not have.

And my another question was, with respect to resins, we do hear that it has been a bit of a challenge for the smaller players, unorganized players to source resins. So just sort of taking your perspective on the same as to how the resin availability is in India? And are you seeing a disruption? And what is the outlook on raising price? Or rather, let me ask, what is the outlook on the global production side? Have things come back to normal? And what is driving the price increase globally?

I think the present prices are again hardening. They came down to 1,350. Now, today, I think they are coming back to 1,400. We see that the next 6 months, that means, this year end up to December, the price range will be somewhere about 1,300, 1,400. Maybe lowest will be 1,250 and highest could be 1,450. So in this range, in this band, it will move. There are certain issues on this that the availability for inter-region trades is less, particularly all the regions, particularly North America, Europe or Asia Pacific. They are -- internally, they are self-sufficient, but they don't have the surplus for trading outside. And that is how India, being short on PVC, has got certain nonavailability of import materials. Last month, the imports were less than a lakh of tonnes. Normally about 130 to 150 KT is an import. So this shortage has definitely created something. Presently, people are also building up their inventory internally because they have depleted that, and demand has slightly picked up. So there are offers coming up at a higher price at present. So Indian demand will depend upon the availability, particularly from outside sources. Domestically, all are running their plants fully. And I think they don't have any surplus material available. So presently, if the demand picks up, it is only the supply constraint.

Right. And just a follow-up on that, sir. For FY '21, what would that import number be in terms of PVC Resin imports in terms of volume? And how much of that, in your view, would be going for the plastic pipings?

I think these numbers are published regularly by the import/export departments. Every month, these numbers are available. And normally, the total demand could be around 30 lakh tonnes of PVC. Out of that, the internal domestic production is about 13 to 14 lakhs and the remaining is imports. So about 16 lakhs, 17 lakhs comes from the outside. Now if any time there is a drop in the supply from outside, the prices can fluctuate. At the same time, demand also is not steady. It is seasonal. So all these factors together, seasonal demand of PVC and pipes and the supply side constraints or demand side constraints will change the entire pricing pattern. But it will remain in one band, maybe $100, plus/minus.

Right. Right. Just of the total imports, how much would be going for plastic pipes? Is it like 40%, 50% or is it 70%, 80% kind of a range?

I think PVC has multiple applications, but PVC, mainly in India, I think 70% goes to the Pipes segment only. There are multiple other sectors where PVC can go, maybe in [ photo ] files and films and lamination and various other things, okay? But they are all 4%, 5% each now. Wire and cables is one of the things. PVC cables is again 6% to 7%. Now all these put together remain at 30%. But main usage is 70% on pipes.

The next question is from the line of Ritesh Shah from Investec India.

Sir, a couple of questions. One is, from a capital allocation standpoint, are we looking to enhance our resin-making capacity or add more EDC, ethylene to cover up on the VCM side? Any thoughts?

I think we told you about this last time also. We are not able to close out on feedstocks, which are very limited available. And that is why we're not really able to take up any view on expansion at present.

Sir, should one assume that what you are referring to is more on the VCM side or it applies even for EDC and ethylene?

See, everything is finally connected with ethylene. Because if you take EDC, EDC is also made from ethylene and ethylene chlorination. So ethylene is the main supplier. And then you have EDC. EDC cracking one way can go, but the other route is that you can buy VCM and make PVC. So EDC route is a longer chain, VCM route is a shorter chain, but all depend upon finally from ethylene only. So that is how it will finally go.

Okay. So nothing on this side, on the CapEx side. That's encouraging. Sir, secondly, one of the larger players or groups in India, they have announced nearly 2 million tonnes of PVC capacity in Gujarat. And this is via carbide route, and the group has captive coal, port, other things. So they will be lower on the cost curve. So just trying to understand, I think you indicated that the PVC manufacturing capacity in India is around 1.5 million tonnes, and the demand is around 3.3. So the gap is, say, around less than 2 million tonnes. So if hypothetically this capacity comes in, wherein the cost curve for the company is lower than EDC/ethylene/VCM route, what would it mean to our business model? And secondly, on the local premiums for PVC Resin, is it something which could be detrimental? Because they could actually potentially close in the gap of imports into the country.

I think I will not talk about the new project that is coming up. They must have definitely done their economics right, and that is why they are going ahead with this project. But in general, I would say that carbide route is not the new route. It is the old route, which is known. In India also, I think they were -- initially, when we started PVC, it was on carbide route. And that was one company in Bombay that was Calico, which started earlier on carbide route. And secondly, VCM is still operating a carbide route. And secondly, VCM is still operating a carbide route. Now between carbide growth and the ethylene route, the advantages of carbide route is, the capital cost is a little lower but the operating cost is higher. Now operating cost depends upon how it works. I'll just tell you. Calcium is coming from the limestone. So you have a limestone, you have a coal, and you burn that together, and you make calcium carbide. And this is a very high energy-consuming process. Per tonne of calcium carbide requires about 3,000 to 3,500 kilowatt of energy. It requires 0.6 tonnes of coke and 0.9 tonnes of limestone. Now having made calcium carbide and then you crush it and treat with water, you make acid clean. And acid clean is treated with HCl. HCl is again made from chlor alkali plants, that means, caustic chlorine plants. And you burn hydrogen and chlorine that you generate as side products of caustic. And then you make HCl and you react with calcium carbide to make calcium carbide-based acetylene and make VCM. The objection for this process came from the environmental issues, as this process is using mercury chloride-based catalyst, and Mercury is a heavy metal and which is banned for any human consumption. Now that is how that particular process became environmentally unacceptable earlier. Now there are developments which are happening, that they are moving away from mercury chloride and maybe barium chloride is another catalyst that is developing. And this process is new, coming up very soon. Possibly, there will be an opening on this particular process, which may be environmentally acceptable. At the same time, the cost of calcium carbide-based route will depend upon energy cost. So those who have got very cheap energy, they only can compete, not everyone. So if you have captive mine of coal and you make your calcium carbide on captive mine and you also have cheap source for energy based on coal or any other source, then only this becomes economically competitive. I think that is how possibly we'll grow. But at the same time, it has got a very high carbon footprint because you are going to use coal-based power plant, and you are also going to use coal-based calcium carbide, which also is highly energy consuming, and it will be having carbon footprint. So how the environmental clearances will come on this and how it is taken up. I think when China started because they don't have the feedstocks, so China gave this type of permissions to handle the calcium carbide route. And particularly on the Eastern provinces of China, there is a lot of coal available. So they gave mines with calcium carbide permission. And most of the PVC in China, more than 50% of PVC was made from carbide route at one point of time. And then later on, they put up the regulation. And environmentally, I think they stopped that. So there is a blend between ethylene-based PVC and calcium carbide-based PVC. But except China, I think none of the other countries are in carbide route. Possibly, India may look at this if environmentally it is acceptable to the country.

Sure, sir. Sir, just a few follow-ups. Sir, which is the other catalyst that you indicated besides mercury?

Barium chloride.

Sir, I didn't get you, sir, sorry.

Barium. Barium chloride.

Barium chloride. Okay. That's one. Sir, secondly, if...

There are technologies which are coming up now, and there may be different types of catalysts, which are not based on heavy metals and very acceptable catalysts. At present, mercury chloride catalyst is contaminating all the products that are made out of this particular VCM.

Sure. Sure. Sir, my second and third questions over here. Sir, would there be any sense on basically how much will be the conversion cost if it is on captive coal versus the conversion cost that we incur via EDC/ethylene route and...

I think these are very difficult things to answer, what price coal you are getting. Today, if you see, coal is going up $60, $80, $90, depending on the calorific value, which is ridiculously high. It is the highest ever, basically. And you can't say what is the market price of coal whereas what is the mining cost of coal, you understand? So that is where the whole thing will be. So somebody's cost of coal may be different than the other person's cost of coal.

Right. Sir, is there any threshold above which the coal prices go, the carbide route becomes unviable? Anything of that sort based on your...

I think we don't have that kind of economics at present.

Okay. And sir, are we familiar with any capacities in China being taken down because they're high polluting and by carbide route, which can incrementally give better pricing on PVC in a more structural way going forward? Is there any theme of that sort or anything that you're hearing of?

We can't say how China will respond to their demand of PVC. At present, they are more than 15 million tonnes. So -- and most of it, half of it is coming from carbide route. But that is consumed internally. I think it is not coming out. So how they -- if there is more demand, whether they will go ethylene route or not, I think it is up to them how they will be looking at the whole thing, particularly in terms of carbon footprint and how the pressures will mount on that.

Right. Perfect, sir. This is very helpful. And sir, last question, sir, you indicated that agri percentage on volume terms was 68% to 69% for Q1. Sir, can you give the same numbers for Q4 FY '21 and Q1 FY '21, please?

Q1 FY '21?

Yes, sir. Sir, prior quarter and corresponding period last year.

Ritesh, this agri/non-agri mix keeps on changing seasonality -- because of seasonality. So last -- during the last call, we said for the year, in '18, '19, what was 70-30 has moved to 63-37 for the full year in terms of value.

Correct. Sir, just wanted to know in volumetric terms even if you view for Q4 FY '21, that should be fine. I'm just trying to understand the realization movement on a sequential basis.

In volume terms, it will be different. So in value terms -- we have tracked on value terms in case of both, the earlier year and 2021.

Sure, sir. I'll follow up on this with you separately.

[Operator Instructions] The next question is from the line of Karan from AMSEC.

Congratulations for a good set of numbers. Sir, 2 things from my end. Sir, currently, are we facing any logistical challenges on the input of PVC resins?

We don't import PVC resins.

In general, there are trade restrictions. Container availability is also very low, and the cost of containers transport has also gone up. The freight rates are also gone up. So there is a limitation coming on that front, but that is in general for every solid cargo.

And this is where we have seen some firmness in prices after our recent fall?

No, I don't think that is what is the reason. Maybe there is some demand tailwind.

Okay. Okay. Okay. And also sir, how is our channel inventory filling up now given the fact that PVC prices are again started to firm up now. So how is the reaction over there?

Whabiji, can you tell this...

Normally, dealers don't keep large inventory. It is only because of this reason, because of the volatility in the prices. So they don't keep more than 8 days inventory anyway. So it doesn't make a difference.

Okay. Okay. Okay. And one last thing. Sir, our presentation mentions about some capacity increase in the Pipes and Fittings. So can you throw some light on that?

Last time we told about pipes capacity, 370,000 tonnes, and it is still sufficient for next 1 or 2 years. Once we see that there is a gap coming up for building additional capacity, it will be incrementally going up.

Right. Right. Right. Got it. And sir, just last thing you mentioned, the CPVC volumes of 3,400 tonnes or 2,400?