Finolex Industries Limited (FINPIPE) Earnings Call Transcript & Summary

Gentlemen, good day. And welcome to Finolex Industries' Q2 FY '24 Earnings Conference Call, hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Arun Baid. Thank you. And over to you, sir.

Good morning, ladies and gentlemen. On behalf of ICICI Securities, I welcome you all to the Q2 FY '24 Post-results Con Call of Finolex Industries. From the management side, we have Mr. Ajit, MD; and Mr. Niraj, CFO. Now I hand over the call to Ajit for opening remarks, post which the floor will be open for Q&A. Thanks. Over to you, Ajit.

Thank you, Arun. Good morning, ladies and gentlemen. Greetings for the festival season for Navaratri and Dussehra. Welcome to the investor conference call for Q2 FY '24 earnings release. We thank you all for continued support and interest in Finolex Industries Limited. Q2 FY '24 continues to witness a volume growth on a year-on-year basis on the back of continued improvement in demand largely from the plumbing and sanitation segment. Operating performance also witnessed a substantial improvement during the quarter. Let me give you some of the performance indicators for the first (sic) [ second ] quarter, Q2 FY '24 highlights. Total income from operations was INR 883.15 crores for Q2 FY '24, down 6.16% against INR 941.13 crores in Q2 FY '23. EBITDA for the company stood at INR 102.98 crores for FY '24 Q2 against EBITDA loss of INR 142.67 crores for Q2 FY '23. EBITDA margins during this quarter increased on a year-on-year basis of -- 11.66% compared to a negative margin of 15.16% in corresponding previous quarter of Q2 FY '23. The company reported profit after tax of INR 93.78 crores in Q2 FY '24 as compared to a loss of INR 93.92 crores in Q2 FY '23. Now getting into the segmental performance: the pipes and fittings. Pipes and fittings revenue increased by 7% to INR 857.15 crores in Q2 FY '24 from INR 801.73 crores in Q2 FY '23. Volume in pipes and fittings segment reported a growth of 6% year-on-year to 62,914 metric tons in Q2 FY '24 against 59,218 metric tons in the corresponding last quarter. The EBIT in pipes and fittings segment was INR 67.60 crores in Q2 FY '24 compared to EBIT loss of INR 47.63 crores in Q2 FY '23. Moving to PVC resin segment. Revenue in the resin segment decreased 38% year-on-year to INR 297.85 crores in Q2 FY '24 to (sic) [ from ] INR 481.07 crores in Q2 FY '23. The volume in resin segment decreased 31% to 37,516 metric tons in Q2 FY '24 against 54,063 metric tons in Q2 FY '23. EBIT in resin segment was INR 20.40 crores in Q2 FY '24 compared to a loss of INR 110.68 crores in the corresponding previous year. The company continues to have a strong balance sheet, with a cash surplus of roughly INR 1,500 crores as on 30th September '23. Let me now leave the floor open to questions. Thank you.

[Operator Instructions] We have the first question from the line of Mr. Achal Lohade from JM Financial.

Can you help us understand if there was any inventory gain in 2Q? And given the current PVC prices, do you look at inventory loss in both the resin as well as piping segments? Yes...

So in Q2, overall, the prices of PVC went up by INR 4 during the quarter, starting from mid-July to August, so there was marginal inventory gain but not very material. And the prices, which fell subsequently, that price fall started 30th September, 1st October, onwards, so [ that mean ], for the quarter, there was no material inventory loss per se.

And given what has happened in the first 3 of the -- 3 weeks of the month and if we assume the current price sustains, could there be a substantial inventory loss?

Not substantial, but yes, some inventory loss will be there because, see, the prices fell very sharply. In a matter of 7, 8 days, they went down by INR 11. The positive thing is that, this morning, the prices have gone up by INR 1. So that fall, it seems, have been arrested, and -- but we'll see how it pans out.

Understood. In terms of the CPVC price, we see that the prices have come off. Is it possible for you to kind of give us some sense in terms of what is the extent of price reduction? And do you see further price reduction in terms of the raw material price for CPVC?

Yes. So yes, prices have come down for CPVC, but unlike PVC, there is no standard benchmark which kind of goes for CPVC, so we cannot give you any specific numbers [ and see ] how much, but roughly, we can say that, 5%, prices have come off very recently.

And has that caused any inventory loss?

No, not [indiscernible], not material.

Understood. And this is a -- so that anti-dumping duty on the Korean and Chinese CPVC resins, that's coming up for renewal/expiry in next year, so if theoretically it was to go away, how do you see it impacting the industry [ enough ]?

See. If it goes away, frankly, it -- I would personally see it as a positive for the pipe makers because obviously the raw material becomes cheaper. So from a pipe makers perspective, it would be a positive move in my view.

And as we speak, are we sourcing entirely from overseas? Or we are buying local as well, CPVC...

So we are buying locally also and importing as well.

Would it be possible to tell us the mix, sir?

Not really. And there is no fixed mix. It keeps changing. See, for CPVC, we have multiple suppliers. And depending on pricing and our requirements, orders are placed. So we don't have any quantity commitments with any of the suppliers, so that mix keeps changing, Achal.

And is there a price difference between the local and the imports? And if yes, could you quantify, sir?

There is a small difference but not material.

Okay. Understood. In terms of the spreads, if you could help us in terms of the prices and the spreads for PVC, EDC, VCM for the second quarter and the current one.

Yes. So for Q2, PVC was at $847. EDC was at $276 and VCM was average $690. The PVC-EDC delta for second quarter was $571. And the PVC-VCM delta was $157.

And as we speak currently...

And I have last week's numbers with me. I don't have today's numbers because prices have again changed, but PVC was at $770. EDC was at $320. VCM was at $675. The PVC-EDC delta today is $450, and the VCM-PVC delta is $95.

Understood. Understood. And just last question and I'll fall back in the queue again; with respect to the volume guidance for the full year, if it is possible to give us.

So 15% is something that we are very confident of. 15% to 20% growth in pipes and fittings segment should be there.

And given what has happened in the first half, you think that is a conservative number or that is...

No. That is something that we are confident could happen. It's not very conservative.

The next question is from the line of Rahul Agarwal from InCred Capital.

A few questions. Firstly, what happened to resin production? Could you just please explain? I think, obviously, the number looks pretty low, so there has to be reason for that.

So thanks for your question, Rahul. We had supply issues, especially from -- due to major breakdowns in Middle East suppliers. And as a result, the supply of EDC and VCM were constrained. And as a result, there was a drop in resin production.

Is that sorted now?

Yes. It is in the process of getting sorted, so overall for the year, we expect that overall resin production will not be to the extent of what has been produced in the past. We expect anywhere between 200,000 and 220,000 metric tons.

Got it. Similarly, for pipes, I think the company should have done better. What is your reading there and outlook? I think you've already discussed 15%, 20% pipes and fitting growth, but just in terms of 2Q, are you happy with what has happened? And how do you see October panning out?

So Rahul, to -- for the movement which we were expecting to have more contribution coming from the plumbing and sanitation segment, that, we're well on the way. You would have noticed what Niraj just mentioned. There was volatility in the resin prices, and it was a downward movement. And the price-sensitive segment which constitutes a higher percentage of our business, which is the agri segment, there was a little bit of hesitation on the part of the network and the customers pulling in or making purchases as they were anticipating a price drop. And therefore, you see a 6% to 7% growth. Otherwise, in terms of non-agri segment or plumbing and sanitation segment, we have seen a significant growth.

So first half non-agri mix would be like how much for the company? And if you could help me with the Y-o-Y trend, please, in terms of mix.

So Q2, our mix was 40:60 non-agri and agri. Last year, same period, it was 37%.

This is volume.

Volume, yes.

How about first half?

First half, it is 32%. And last year, it was 30%. See. Generally, Q2 being slow in agri, our non-agri as a ratio is better, but what we have seen this quarter has been the best of all the quarters so far. And as Ajit said, our growth in non-agri has been much, much more, as compared to agri.

Got it, sir. And last question: Any decisions taken on either CapEx or the way you're building up the channel, new product launches or dividend payout that we should know of?

See. Rahul, we will announce it, but we are actively -- we are looking for expansion, definitely, because we will be running out of our capacity in the next couple of years. So several projects in the pipeline, but we will announce it once it fructifies, yes.

The next question is from the line of Bhavin Pande from Athena Investments.

Am I audible?

Yes, you are.

Yes, sure. Just one thing. So a lot of marketing initiatives we are taking. So I mean what will be approach to just, I mean, increased market share. Or like how are we going about it? And what sort of payback period we can look at this?

So in terms [indiscernible] focus is especially on growing the non-agri segment because we are fairly strong in the agri segment. So we have targeted cities and states which we are going after for the non-agri sales. And we have segregated -- this is on an organization basis. We have segregated our teams into 2 focused areas. So that is something which has happened over the last financial year, so which is starting to bear fruit right now. And in terms of [indiscernible], we are going very, very focused on specific target segments. And our connect with the influencer community, which is extremely important for the non-agri or the plumbing and sanitation segment, has increased significantly as well, including several engagement programs which has been initiated of late.

Okay. And sorry if you have already mentioned it and I missed it, but what is -- what attributes to this Q-on-Q decline in volume?

So this is, say, Q1 and Q4, generally the peak seasons. That is when the agri demand is at the highest. So if you're talking sequentially, Q2 has always traditionally been poor because volumes drop because of monsoons. Pipes cannot be laid. Even the construction activity kind of slows down, so you'll typically generally find Q2 being slower than Q1.

Okay. Okay, but in terms of then top line, if you look at on Y-o-Y basis, I mean, there's some decline, so -- and that's why I'm just wondering. Was it that this Q2 was worse than last Q2, something like that?

No. So see. On a value term, if you're comparing with last year, our volumes are up in the pipes and fittings segment, but PVC prices have corrected since then. So if you remember, Q2 last year was actually not a very good quarter for us. We lost a lot of money because PVC prices fell very sharply. And they've kind of reached the normal levels, so when you look at the top line number, there is an impact of the reduction in PVC prices.

Okay. Okay. Wonderful. And just one last thing, what was our agri and non-agri mix for this quarter?

60:40, 60 agri, 40 non-agri.

Okay. And how has it moved Y-o-Y as well as Q-o-Q?

So last year, same period, it was 63, 37.

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

A couple of questions. So first is, how should we read into volume growth? 6% looks pretty low. The context in which I would seek the answer over here is does the management look at volume growth with respect to peers or from a market share standpoint. I do understand we do not take direct government orders, but if we look at from a [ presumed operative ] basis, this looks a tad lower. How should we read into this, sir?

So thanks for your question, Ritesh. See the volume growth which we have seen for the pipes and fittings segment of almost 6% year-on-year. What I would also suggest is that, see, if you are looking at product mix, a significant portion of our -- as Niraj mentioned, 60% of our volumes come from agri segment. And agri segment is a much more price-sensitive segment. And in anticipation of the PVC price drop, many of the purchases were postponed, and as a result, it has impacted overall volumes. And that is one of the significant impact that you see, that [ it has added ] 6%. Once the price stabilizes and given the moderate rainfall this year, we expect that the volumes in the agri segment is likely to grow from here on, yes, based on the assumption that the PVC prices will stabilize.

Okay. And sir, if I put it the other way: So we also see inventory built up in the system. Had it not been for this inventory buildup, which I presume it's probably on back of destock in the channel, what sort of volume growth we could have probably seen...

You are referring to in terms of, if the price movement was not there, what would have been the volume movement.

Sir, I'm referring to -- so there is inventory which has [ moved up ] for us. So I presume that is with respect to the prices going down, demand being a bit slow. Had that decline not been there or inventory stocking not been there, what sort of volume growth we would have probably seen...

We could have -- we would have seen at least 20% to 23% growth in this quarter.

Okay. And sir, you indicate this is something which is specific to us. Or this would be industry-wide phenomena wherein the inventories have actually [ moved up ] because of the price declines. [Technical Difficulty]

Ladies and gentlemen, I'm really sorry for the inconvenience, but we have now joined the management line. So sir, Mr. Shah, if you can [ please repeat your question ].

Yes, yes. Sir, I had a few other questions -- am I audible, sir?

Yes, Ritesh, you are [indiscernible], yes...

Yes, yes. Sir, any incremental color on the credit days, which I think have marginally increased? That is one. That's the second question. I have a third question for Ajit sir as well.

No, so -- there is -- see working capital. I mean there is slight increase in this quarter, but fundamentally, nothing has changed, so this should normalize as we head in over -- head into the year. There's no strategic or tactical shift which has happened in credit terms.

Okay. So sir, just to understand on PVC agri pipes. It still continues to remain cash and carry for us, right?

Yes, yes.

And on CPVC, what sort of credit do we give in the marketplace...

See there is no separate credit for CPVC versus other non-agri. So see -- and even -- maybe even when you're giving us credit, [ it's to the participant dealers ], then it becomes slightly difficult to segregate [ key scope for CPVC so much ] for this. So generally it is 30 to 60 days [ and ] which is given for all [indiscernible].

Okay. That is helpful. And sir, last question is on competitive intensity in the marketplace. One of the larger South Indian players, I think they are facing a lot of challenges internally into the company. They are pretty strong in column pipes. Finolex also has had always presence in column pipes since quite some time, so are we reaping any benefits? Or do we see any gradual benefits to accrue to us over the time line, be it on the loyalty of the dealers changing towards us? Anything on that sort, sir?

So Ritesh, our focus have been in column and casing pipes. And we have been strengthening that going forward, and as a result, we do expect an uptick for us.

Sure. And sir, lastly, on capital allocation, we have a huge cash balance. I think, since Mr. Whabi days, we have been hearing that, next quarter or so next year, we'll hear something on capital allocation, either CapEx or payout. Sir, any firm time line over here by when we can expect the use of funds?

See, Ritesh, to be very honest: We do need expansion of our capacities in the next couple of years because we expect our volumes to -- our capacities to max out. And once we have figured that one out, we will be moving the rest of the remaining cash to the shareholders, but we will have to fix our CapEx first.

[Operator Instructions] The next question is from the line of [ Mr. Vipul Kumar Shah from Sumangal Investment ].

Sir, this 60:40 agri/non-agri mix, is it -- volume-wise, right, sir?

Yes, volume-wise.

So any color on value-wise mix?

No. Generally, we don't share because they are not separate subsegments, so volume is something that we feel is a good indicator.

Okay. And can you share CPVC volume? And what was the same last year, corresponding quarter?

We don't give CPVC and other subsegment-wise numbers.

Previously, you have shared...

Yes. So 2 quarters ago, we stopped doing that because, see, these are not separate segments for us. So polymer-wise, it is -- we felt, is not right to share.

So at least directionally you can say what is the year-over-year growth in CPVC segment.

It is better than overall non-agri. I can say that.

Better than overall non-agri, right?

Because CPVC has been growing faster than -- this has been [ a faster-growing segment ].

The next question is from the line of Mr. Udit Gajiwala from Yes Securities.

Sir, the -- firstly, on the resins front, where do you see the stability in the resin prices coming? So you are still sorting out the issues of the supplier, so a steady quarter, hopefully, should be from Q4. Is that understanding correct?

Yes. Even I also concur with your view. By Q4 is, again, my personal view, that we should see some sort of normalization in the profitability in the resin segment.

Sir -- so full year, what kind of EBIT per kg are you expecting for the resins front?

We should -- around INR 7 to INR 8 for the full year average.

Got it. And sir, secondly, on the pipes, your previous comments suggest that in the H2 -- so the plumbing mix will be much higher than agri, so in that pipe business, do we see any improvement in EBIT per kg? And similarly, what will be your full year guidance for that segment?

See. For the full year, the pipes segment, we should be between the INR 10 to INR 12 mark.

Okay. And sir, just directionally in next 2, 3 years, when we are expecting to grow our non-agri portfolio at a faster pace. So how do you see these numbers for EBIT per kg moving in pipes segment specifically? Because we will also have a CapEx cost that will be coming up if you are planning accordingly.

Yes. See. Gradually with our improvement in the non-agri mix, this EBIT in the pipes segment should move towards INR 14.

The next question is from the line of Rahul Agarwal from InCred Capital.

On the new fitting plant, the 12,000 tonnes which you put, what was the utilization in 2Q and first half?

So the plant capacity is approximately 900 to 1,000 metric tons at this point of time. And our utilization has been upwards of 60%.

Got it. And Niraj, just one thing on the resin. I think the spreads are down Q-o-Q, right? I mean the delta you mentioned currently versus last month. I understand that the quarter is yet to go through, but the guidance which you're giving, INR 7 to INR 8 a kg, I think [ half ] average is about INR 3. But isn't that too optimistic, to achieve that INR 8 a kg for resin?

See. my view is as follows, Rahul. Again you're right because we don't control how commodity prices move, but see my view is, VCM, I feel that it should correct more before the next one starts. So that should kind of help us improve. A lot of this also is impacted by when are we buying the stock. So if you see, this month, we have probably just taken just 1 vessel. We'll probably take 2 vessels. And if you look at the volume terms, for the first half in resin, we have done roughly -- see. Of the 220,000 tonnes that we have to do in resin, a larger volume will happen in the second half, so that should kind of help us.

Got it, sir. And one question was on the supplier issue. So essentially, the guy couldn't supply, and obviously, it's a profitable quarter for us. I don't know how the contracts are signed with them, but is there any compensation which you're [ liable ] for? Or would you claim for that, or is it something that we have to let go?

See this is generally force majeure clauses are there. He did not -- he could not -- it's not that he did not supply. He could not supply.

Yes. They had a change in technology and they did not anticipate it taking this long for the restart-up of plant. And that was one of the reasons why we had to -- we did not get some of the shipments.

So I don't know about a long history here, but essentially -- so it doesn't mean that we are [ liable ] to any compensation from them, right?

No.

No.

Not in this particular instance.

Got it. And lastly, CPVC volumes and fittings. I know that you don't share it, but could you give some positive flavor in terms of growth for 2Q and first half for CPVC and fittings, please?

Fittings also has -- the overall growth of fittings has been higher than overall non-agri growth, okay? As a ratio also, fittings have improved substantially. I would say 3 to -- 3 basis points, as compared to last year.