Finolex Industries Limited (FINPIPE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Finolex Industries Limited Q4 FY '23 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] I now hand the conference over to Mr. Sohil Kaura from ICICI Securities. Thank you, and over to you, sir.

Thank you. Good morning, ladies and gentlemen. On behalf of ICICI Securities, I would like to welcome you all to the Q4 FY '23 Post Results Conference Call for Finolex Industries Limited. From the management side, we have Mr. Anil Whabi, Managing Director; Mr. Ajit Venkataraman, CEO; and Mr. Niraj Kedia, CFO. Now I hand over the call to Mr. Anil Whabi sir for his opening remarks, post which we will open the floor for Q&A. Over to you, sir.

Thank you, Sohil. Good morning, ladies and gentlemen. Welcome to the investor conference call for Q4 FY '23 earnings. We thank you all for continued support and interest in Finolex Industries Limited. After witnessing the robust demand since last couple of quarters, Q4 also reported a healthy volume growth. Overall stability in prices and company's enhanced focus into non-agri side of the business has improved the profitability during Q4. On a full year basis, FY '23 reported a new milestone achievement of record volume growth of more than 3 lakh tonnes in the pipes and fittings segment. As another mark of achievement, during the quarter, the company added a new state-of-the-art manufacturing facility of PVC fittings at Talegaon, Pune. For this per annum capacity of 12,000 metric tons, the company incurred a CapEx of about INR 100 crores, which has been funded entirely through internal accruals. The operations are ramping up as per the plan, and we expect to reach full capacity production in 3 to 6 months. Let me give you some of the performance indicators for Q4 Total income from operations dropped 28% to INR 1,141 crore against INR 1,594 crores in Q4 FY '22. While the EBITDA for the quarter decreased 18% on a Y-o-Y basis to INR 217 crores in Q4 FY '23 compared to INR 265 crores in Q4 FY '22, as compared to Q3 FY '23, this was an increase of 137% from INR 92 crores to INR 217 crores. EBITDA margin also increased to 19.06% this quarter compared to 16.6% in corresponding previous quarter over Q4 FY '22. The company reported profit after tax of INR 158.35 crores in Q4 as compared to INR 493.8 crores in Q4 FY '22 and INR 72.07 crores in [ Q3 FY '23 ]. Now getting into segment performance, Pipes And Fittings. Revenue decreased by 14% to INR 1,102 crores in Q4 FY '23 from INR 1,277 crores in Q4 FY '22. Volume in Pipes and Fittings segment reported a growth of about 4% Y-o-Y to 81,452 metric tons in Q4 FY '23 against 7,629 metric tons in [Technical Difficulty]. The EBIT in Pipes and Fittings segment was INR 90.32 crores in Q4 FY '23, down 4% on a Y-o-Y basis compared to INR 94.2 crores in Q4 FY '22. However, on a sequential basis, EBIT improved 31% compared to INR 68.9 crores in Q3 FY '23. Moving to PVC Resin segment. Revenue in the Resin segment decreased 52% from INR 1,044 crores in FY '22 to INR 501 crores in Q4 FY '23. Volume in the resin segment decreased 27% to 58,132 metric tons in Q4 FY '23 against 79,182 metric tons in Q4 FY '22. EBIT in the Resin segment was INR 117.25 crores in Q4 FY '23 compared to INR 156.46 crore in the corresponding previous year's quarter. On a Q-o-Q basis, this is a significant improvement compared to INR 12.43 crores in Q3 FY '23. The company continues to have a strong balance sheet with a net cash surplus of roughly about [ INR 1,500 crores ] as on 31st March '23. Let me now leave the floor open for questions. I have my colleagues, Ajit and Niraj to answer these. Thank you.

[Operator Instructions] We have the first question from the line of Sandesh Barmecha from Haitong Securities.

Sir, a couple of questions from my side. Sir, our annual PVC resin production is down around 10% compared to pre-COVID levels in FY '23. And that is despite the increase in pipe sales volume. So are we facing any challenges in raw material availability front to optimize -- optimally utilize the PVC resin plant? And so what would be your guidance for PVC Resin segment for FY '24?

Hi, good morning. So the answer to your question is both yes and no. See, this is, in general, no shortage or no issue that we have in sourcing materials. But what did happen actually was, for a couple of shipments, there were issues with those particular shipments. In some of the suppliers in the third quarter and fourth quarter, one of them had a force majeure, and they had some plant issues. So we could not source VCM completely as we had envisaged. But generally, there is no sourcing challenges that we face.

Okay. So what will be your guidance for the full year, sir, FY '24 for the PVC Resin segment?

It should be back to normal.

We should be back to around 260,000 to 280,000, sir?

No, not 280,000. Our weighted capacity is 270,000. So between 250,000, 260,000 tonnes should be a number.

Okay, sir. Sir, if I'm not wrong, we have done INR 100 crores CapEx for the 12,000 capacity right now in Talegaon, sir. So if I just do a rough math, that comes to around 140 or something -- around INR 1 lakh per metric ton. So isn't that a bit on the higher side, sir?

See that includes the cost for molds. So if you look at the machine and all, that cost is not very material. But what happens is, the number of SKUs that you're going to manufacture there, will require mold. So the large part of this investment is towards the molds.

Okay. So we're expecting to increase our SKUs basically going forward, sir?

Yes. Gradually, they will also increase. And some of the -- so this plant will make a large number of SKUs.

Okay. Sir, what would be our growth -- volume growth and EBITDA margin guidance for Pipe division for FY '24, sir?

See, generally, guidance, we don't give. But to give you a basic trendline, if you see in this year, when we see last 2 years, '21-'22 were abnormal, even for pipe segment, because this year, in Q2, we -- obviously we suffered a loss because of the prices going down, which continued in the month of October and November. But if you look at the trendline, after November, prices have increased or have been stable, and that is reflected in the numbers that we have for Q3 and Q4. So slight improvement on these numbers going forward, assuming that PVC remains at these levels or remains constant, should be the numbers.

Okay. Sir, a couple of just data points, sir. Sir, what will be our CapEx plan for FY '24 amount or plan, sir?

Roughly INR 150 crores to INR 200 crores.

Okay. Sir and non-agri pipe volume for FY Q4 and full year '23, sir?

So the non-agri Pipe segments, we have a total contribution of approximately 35% over the overall volumes. And that is the segment of the industry, which is growing robustly. So we expect a 15% to 20% growth in that segment.

15% to 20%. And sir, same for CPVC pipe volumes and revenue, sir, for this quarter, Q4, basically?

See that -- the growth in CPVC is going to be faster than the overall [ moment ].

Right. Okay. And sir, fittings volumes of our Q4, sir, volume and revenue for Q4 FY '23?

So we normally don't split up Pipes and Fittings volumes.

We normally do, but we -- when we internally discuss we realize that it is not so relevant. It is better to look at the company as a whole than the full segment as a whole.

Thank you. The next question is from the line of Achal Lohade from JM Financial.

So my question is on the agri business. Can you help us understand what has been the growth in the fourth quarter and for the full year? And what has been our market share, if you can give a broader [Technical Difficulty]?

Sorry, we couldn't hear you very well. If you can repeat the first part of your question again, please?

Mr. Lohade, your volume is very low. So could you please increase the...

Yes. Is it better now? Yes. Sorry about that, sir. Sir, my question was on the Agri business in terms of what has been the growth in the fourth quarter and for the full year FY '23 in terms of volumes?

So see, this again is something -- while we gave this agri non-agri split, to be very honest, the end use of these pipes and fittings, it differs from region to region. For example, there are some states and some regions where agri-based pipes are used for non-agri application. So hence, we realize that it is not a right number to give probably -- to give the exact split. What we would request you is to look at the business as a whole.

Yes, that's fine, sir. I mean, what I wanted is the growth, not the specific mix or anything. It appears to us that the agri is probably flattish, marginally higher for the quarter, given the non-agri probably is growing faster, like you mentioned in one of the answers. So just wanted to understand that for the fourth quarter and full year, how has been the agri -- from our -- production perspective, may not be from an application perspective, but from a production perspective, have you seen that it's kind of flattish? And if yes, what could be the reasons, given now PVC prices are pretty much that we bottom or stable?

Yes. So see, if you compare with Q3, obviously, the volumes of Q4 were lower. But if you compare with last year's same quarter, the volumes are slightly higher, okay? On a demand per se, you are right that prices have gone down. But if you look at it, the volumes of roughly 80,000 -- 82,000 tonnes, 81,000 tonnes that we have done, it is more or less at the pre-COVID levels. And what has also happened is that, because of the huge demand surge in Q3, our view is that some of the demand, which would have otherwise come in Q4, may have been pulled back into that quarter. But right now, as we speak, we are seeing strong demand in both agri and non-agri.

So can you talk about full year, sir, in that case? What has been the growth for agri?

So again, full year, if you see our company from 236,000 tonnes to 303,000 tonnes, which is a growth of almost 30%.

So for the agri business, sir?

Similar levels.

So it's kind of flattish. You're saying -- while we are seeing the other companies are growing much faster, and I presume agri is also contributing, does that mean that we have kind of lost market share? And if yes, why? Could you give some clarity on that?

So if you look at it from a company perspective, our full year growth was almost 30% year-on-year. So I don't know how you are saying that we have lost share or market share?

So sir, if I talk about the market leader, grown at 37% Y-o-Y in this year. If I look at from a 4-year CAGR perspective also, like pre-COVID to FY '23, the CAGR for Supreme is 8%, while for us, it is 4%. So I'm coming from that background, sir.

So this, you'll have to look at it in context with the total market and not just of the organized players.

So you think the total market is flattish, Sorry, I'm kind of engaging that to and fro, sir. You are saying the agri market has been flattish from a pre-COVID perspective. I mean, is that understanding right?

No, that is not right. Pre-COVID the highest that we did was roughly 256,000 tons, 250,000, 260,000 tonnes. This year, we have -- on a company level, we have crossed 300,000 tonnes. See why that is flattish.

Thank you. The next question is from the line of Karan Bhatelia from Asian Market Securities.

So what kind of SKU additions we've seen in this year or last 2 years [indiscernible]?

So can you just continue with the question? I'll get the numbers, and I'll tell you.

Yes. And also on the Nal Se Jal Scheme, so how has that scheme shaped for the [ organized pack ]?

So typically, we don't deal directly with the government or participate in the government tenders. These are done by our dealers. And definitely, it has given a boost to the overall industry as such, but we don't track numbers directly with the government.

Right. And on the SKU addition...

I will let you know.

And sir, just the bookkeeping breakup, so prices for PVC in this quarter, PVC and EDC compared to last year, that's [Technical Difficulty].

Sure. So if you look at Q4 FY '23, the PVC prices were averaged $920, EDC was $288, and VCM was $766. For the full year, PVC was $1058, EDC was $410, VCM was $844. These are all average [ axis ] numbers. So the delta PVC-EDC delta for the quarter average was $632 and the PVC-VCM delta was $473. For a full year basis, the PVC-EDC delta was $648 and PVC-VCM was $294. Right now, as we speak, latest, PVC prices are around $800, $810. EDC is hovering around $330, $340, VCM is around $690 or $700. The PVC-EDC spread is around $470, $480. And the PVC VCM delta is around $120, $130.

Thank you for the answer. And sir, any thought process on the PVC pricing for the rest of the year or for 6 months [ Q3 sir ]?

See, they are holding stable as of now, but we'll only get to know how they move, when the year is over 6 months [indiscernible].

The next question is from the line of [ Dhvaneet Savla ] from DN Trading. Please go ahead.

I have [ a few] questions, sir. First is a little hygiene kind of a thing. So I wanted to know what would have been our comparable PAT number without the exceptional item in the last year? And on the basis of that, how much growth or degrowth have we posted? And second question is a little longer, where do we see our profitability or our top line heading after the completion of this CapEx? And where do we see the PVC prices settling in the long term, because it's been quite volatile in the last couple of years? Thank you.

Sure. So see, our PBT before exceptional item last year was INR 1,000 crores, which for this year without exceptional items, is almost INR 300 crores -- INR 297 crores to be precise. And this, what you see on a segment basis or a full year basis, in the Resin segment, it was INR 722 crores whereas it is INR 92 crores -- almost INR 92 crores this year. On the Pipes and Fittings it was INR 250 crores last year, and it is INR 154 crores this year.

Okay. So a significant decline has been seen in the resin -- correct?

Yes. Correct.

Thank you. And on my second question.

Can you repeat that, please? Can you repeat the second question please?

Yes. So we were, on a long-term basis, I know that you don't give much guidance on it, but after our entire capacity addition is completed, what kind of revenues are we looking at the consolidated level, both resins and pipes? And where do we see the PVC prices settling, since it's been quite volatile in the last couple of years. So is the current pricing is where it will settle or a do you see any trend coming out -- in the coming quarters?

So you're right. If you look at the last 10 years horizon for PVC prices, you will see that we have been fairly steady. The pre-COVID level prices were fairly steady for the past -- prior 5 years. Now the PVC prices have almost come to those levels. And since December, they have been fairly steady. The expectation is that, unless there is any major shock, these levels are likely to continue. And difficult to predict, but at this point of time, that is the assumption we are going with. In terms of growth, it's difficult to give a number to this. But in terms of industry, we are expecting that the agri segment is likely to grow 8% to 10%, and your non-agri segment is likely to grow anywhere between 15% and 20%.

Okay. Can you please repeat that? Agri segment to grow at?

8% to 10%, and your own agri segment is likely to grow anywhere between 15% and 20%.

So on an average, we are likely to see a double-digit growth going forward?

Expectation is that.

Yes. All right. Thank you very much and all the best for the coming quarters.

Thank you. The next question is from the line of Pranav from Equirus Securities.

And sir, I just wanted to understand if you can throw some light on this recent imposition of quota restriction on 4 countries on PVC Resin imports. So how does that impact the industry? And let's say, if the quota is overshooting, then what kind of [ implications ] can we see?

Hi, Pranav. Good morning. So these quota restrictions have -- so the guideline which has come on this quota restriction, this is applicable for import of PVC, which have higher than 2 PPM of content. See, while it has come, even in the industry, we are also not very clear how this is going to be implemented; because -- and we don't know what is the tracking mechanism of the government going to be, on how to track when the quota is getting completed. For example, if I am a buyer and I buy something, I don't know whether -- where I am lying in the quota bucket. And similarly, we also do not know what will be the implication if this quota is breached, whether it will be on the buyer or the seller or the industry, we don't know as of now. So hopefully, these clarities will come during the course of time. We also do not know since when is this applicable. There's no start date as such. The whole reason for this was, that very cheap PVC was being dumped into the country, which was not as per the grade that is right for the humans. So the step is in the right direction. Hopefully, some clarity we will receive from authorities. But as of now, I don't have the answer to your question.

Okay, sir. But sir, should this lead to stability coming in the PVC projects since imports were actually creating a lot of problems for the domestic manufacturers, and India being kind of a growth engine, a lot of other countries are also exporting to India. So will there be a stability in PVC credit because of this?

Hopefully, it is a positive move, as I said, because a lot of cheap PVC was being dumped in the country. So let's see how it pans out.

We have the next question from the line of Abhishek Ghosh from DSP.

Sir, I joined in late, so I don't know if you have discussed this issue earlier. But in terms of capacity now, what is the peak capacity that you have currently in the system, sir?

So we have the pipe capacity is about 370,000 and fitting capacity of about 48,000 metric tons.

48,000 tonnes. Okay. So sir, is it fair to assume that in a good quarter, can you go to a peak volume of almost about more than 1 lakh tonne now, given the augmentation of capacity that you have done?

Yes, we can.

Okay. Okay. And sir, in terms of going forward now, how should one look at the overall capital allocation, given the large amount of cash that is there in the books? How are you thinking about it? Because what we overall see. that pipe demand continues to be very strong across the country, led by now a recovery in agri, infra and other things and plus housing is also doing well. So how should one look at the capital allocation, if you can just help us with that, sir?

Sure. So if you see, we added this capacity in Pune, on the fitting plant last quarter -- this quarter, sorry, in March. So similarly, wherever we feel that we are probably kind of in the ballpark of reaching the existing capacity, we will add capacities. But nothing concrete as of now today.

Sir, any thoughts on the greenfield, because your presence in some of the regions is still -- you're kind of under indexed in those regions and a greenfield capacity can reaccelerate your rate of growth. So any thoughts on that, given the amount of cash on our balance sheet is quite high?

Abhishek, at this point of time, we have sufficient capacity, both in pipes and fittings. Essentially, there are 2 philosophies, having local plants versus transportation cost. At this point of time, with the necessary capacity that we have, it's a toss-up between paying for the transportation costs versus setting up new plants across the country. So we have chosen the first one.

Okay. And you think this pipe volume of about 314,000 tonnes that you've done for the -- sorry, you've done about 303,000 tonnes in FY '23. You can grow that by 10% to 15% for next 2 to 3 years given your current capacity and whatever little opportunity of brownfield that you have. Is that a fair assumption to make Ajit?

Yes, we should be able to meet the demand.

Okay, okay. And just a couple of other questions in terms of competitive intensity in the segment. How are you seeing, because PVC prices went up so sharply. There were supply issues and they dropped fairly sharply, a lot of people had inventory losses. So given this backdrop, are you seeing some change in the competitive landscape, particularly from the semi organized and unorganized segments? Any color there will be helpful, sir?

So given the price volatility, it is difficult for smaller players to survive. So the consolidation among the organized players is likely to increase at this point of time. But at this point of time, we have approximately 55% to 60% of the industry organized, as it is. So that is likely to intensify further.

Okay. And just one last question, and this is particularly to Ajit, that you've been in the system for some time now. If you can just talk about some of the broader changes that you've brought in, and anything in terms of results that you're able to see? Any thoughts or color on that will be helpful Ajit.

So currently, it is work in progress. What the organization is doing, is to continue focusing on what we do well, which is in pipes and fittings. And focus -- stay focused in that segment. There is enough headroom to grow. The other areas which we are working on is digitization of our supply chain and improving efficiencies of our manufacturing. So those are the 2 areas which we are currently focusing on [Technical Difficulty] operations more efficient.

Okay. So just one last thing, in terms of capital dilution, just coming back to the cash on book. So one should expect the higher dividend payout now, given that your capital commitment at least over the next 12 to 18 months doesn't seem to entail a large one? So should one assume a higher payout from that perspective? Any thoughts on that?

See the Board has recommended a dividend of INR 1.5 or 75%. So that is for this quarter. Next year, we pay -- obviously, the Board will guide us for what is to be done.

[Operator Instructions] The next question is from the line of Udit Gajiwala from YES Securities.

Just one small follow-up from the previous participant. So sir, after the 12,000 that we are doing into fittings, your total capacity will be close to 430,000 for pipes. Is that right? Pipes and Fittings [Technical Difficulty]?

Approximately 420,000.

420,000. And sir, on an annualized basis in this business, what could be the peak utilization that could go? Is it -- 75% could be the peak by which you would go for...

In some of the peak months, we do hit about 80%, 85%.

Okay. Okay. And sir, on the resins front, you mentioned that the Q4 EBIT per kg is maintainable, is my understanding correct about it, or we are still looking at that INR 14 to INR 15 a kg band?

So long term, 14%, 15% should be the number which we should all strive for and that should be an acceptable number.

Got it, sir. Got it. And sir, this INR 150 crores to INR 200 crores CapEx for '24 will be largely for -- how much will be for this 15,000 and the rest will be for what?

Sorry? The CapEx that you have guided for INR 150 crores to... A large part of that CapEx is replacement and maintenance CapEx.

The next question is from the line of Yash Goenka from Awriga Capital Advisors LLP.

So I wanted to ask, what is the market value, product launches initiatives which we are taking in non-agri segment to increase our market share, it would be in terms of agri, geographic [Technical Difficulty] can you talk about it?

Yes, we have -- our product range is fairly full, and we have the complete range. Most of the marketing spend and -- has been going towards the non-agri segment and the construction pipes and -- plumbing and sanitation segment, and also increasing the reach, and in terms of expanding, in terms of visibility to our target segment. Most of the marketing spends have gone towards that.

Okay. And we have [indiscernible] geographic reach as well?

One, it is definitely consolidating where we are strong, and also increasing our reach in the new segments in North and East.

The next question is from the line of Achal Lohade from JM Financial.

Wanted to check about the margins. If you look at for the industry and also for us compared to, say, FY '17, '18, the margins have meaningfully improved. If you could guide us as to what has driven this? Is this product mix alone? Is it market consolidation? Any -- bit more clarity on that would be great, sir?

So this enhancement has come from 2, 3 things. See, 2, 3 years ago, our reach in the CPVC segment and overall non-agri, as we call it, was much lower. So in the last 3 years, 4 years, there have been substantial inroads in the CPVC and also other non-agri, as we call it, those -- that subsegment. Plus, our fittings have grown faster as compared to pipes. So these 2 factors taken together have resulted in improved profitability, and we foresee that this upward trend should continue.

And the INR 15 per kg margin, you talked about the resin I presume? Is that right, sir?