Gravita India Limited (GRAVITA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Q3 FY '20 conference Call of Gravita India Limited hosted by Valorem Advisors. [Operator Instructions] I now hand the conference over to Mr. Kunal Motishaw AVP at Valorem Advisors. Thank you, and over to you, Mr. Motishaw.

Thank you. Good morning, everyone, and a warm welcome to you all. My name is Kunal Motishaw from Valorem Advisors, and we represent the Investor Relations of Gravita India, Ltd. On behalf of the company, I would like to thank you all for participating in the company's earnings conference call for 9 months and Q3 FY '20. Before we begin, I would like to mention a short cautionary statement. Some of the statements made in today's earnings conference call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which should -- which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by it 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 decisions. The purpose of today's earnings conference call is to educate and bring awareness about the company's fundamental business and financial quarter under review. I would now like to introduce you to the management participating with us in today's earnings call. We have with us Mr. Yogesh Malhotra, CEO and full-time Director; Mr. Vijay Kumar Pareek, ED, non-Board member; and Mr. Sunil Kansal, CFO. Without much ado, I request Mr. Yogesh Malhotra to give his opening remarks. Thank you, and over to you, sir.

Good morning, everyone. I thank you all for participating for the company's 9-month Q3 financial year '20 earnings conference call. As you may already know, Gravita India Limited is a leading global non-ferrous secondary metal and one of India's largest secondary metal producing company. The company is engaged in recycling of used lead acid batteries, lead scrap and aluminum scrap and plastic scrap. Gravita has 13 strategically located recycling facilities in Asia, Africa and Central America with a capacity of 125,000 metric tons per annum for lead, 19,200 metric tons per annum for aluminum, and 26,400 metric tons per annum for plastic as of the financial year '20. Gravita sells recycled products such as pure lead, lead alloys, lead powder oxides, aluminum alloys, PP granules and PET flakes both domestically as well as to international customers. Further, the company has entered into back-to-back buying of scrap from battery recycling companies like Amara Raja, HBL Power Systems and selling of recycled goods to them. Gravita has a unique deep rooted scrap collection network which helps it to collect scrap globally at competitive prices which is the biggest entry barrier in this business. Also, the company now has a back-to-back hedging policy wherein upon even at the time of buying of scrap or sale of metal, the second corresponding lag of selling or buying is executed at the time of [ CM ] LME. Hence, this eliminates any price risk arising out of volatility in prices, leading to stable margins. Further from the current fiscal, the company has started hedging its core inventory as well, thus insulating it totally from price swings. Now I would like to summarize the key financials for the third quarter of financial year 2020 on consolidated basis. Our revenue from operations for the quarter stood at INR 376.51 crore, which grew by 23.4% in a year-on-year basis. Our EBITDA is in absolute terms for the quarter grew by 224% to INR 32.84 crores and EBITDA margins of 8.72% as against 3.31% in the same period last year. The net profit of the company stood at INR 12.26 crores with PAT margins of 3.26%. For 9 months of financial year 2020 on consolidated basis, our revenue from operations stood at INR 968.54 crores up by 7.3% in a year-on-year basis. Absolute EBITDA reported a year-on-year growth of 45.2% to INR 68.46 crores. And EBITDA margin stood at 7.07% as against 5.22% in the same period last year. The net profit of the company stood at INR 20.57 crores with PAT margins of 2.12%. Some of the operational highlights. I would like to mention that the overall production during the quarter increased 17% year-on-year. The increase in production was due to higher capacity utilization at all the existing facilities and stabilization of new facilities at Ghana and Tanzania. During the quarter, the company has been able to procure 39,500 metric ton of scrap, a growth of approximately 19% on a year-on-year basis. Sales realization of lead division improved due to higher sales of lead alloys and value-added products. The sale from lead alloys and value-added products registered a volume growth of 60% on a year-on-year basis. EBITDA margin improvement was due to higher sale of lead alloys and value-added products, while PAT improved due to stabilization of 100% hedging policy of the company and the economies of scale along with improving customer segmentation. Sales for Q3 financial year '20 for lead was 30,301 metric tons. For aluminum, it was 1,925 metric tons. And for plastic, it is 3,184 metric tons. Over the next few quarters, the company will majorly focus on improvement of its capacity utilization at existing facilities, increasing the production and sales of high-margin products like lead alloys and value-added products while strengthening its global scrap collection network and also by venturing into new territories. The company is also focusing on developing export market for its aluminum alloys, which will result in reduced working capital cycle coupled with higher profit margins. With this, I would like to open the call for question and answers. Thank you.

[Operator Instructions] We have the first question from the line of [ Nitin Parekh ], an individual investor.

So first of all, congratulations on a good set of numbers. Sir, my question was regarding the hedging policy. So basically, as I understand, we have a lot of exposure to the foreign exchange fluctuations. I wanted to basically understand in detail what is the hedging policy. Where do we stand? And do we have a fixed hedging policy? Or is it variable and depending on the market conditions? So can you please elaborate on that?

Yes, so this risk of -- there are 2 risks. Basically, one is the currency risk and another is metal risk. So we have hedging policy for both. So if we talk about the metal risk, we do the hedging on back-to-back basis. Whenever we buy the scrap, equivalent metal is sold on the same day. So that is -- and we are also hedging the core inventories, which is always there in the plant. So we have taken a hedge cover for that also. So practically, our entire inventory, which is there in our plant all -- we have whatever contract we have made for purchase of the materials, and entire inventory is either sold to the customer or sold on the LME exchange. And whenever we have the contract, we buy on LME and sell to the customer. So by this way, we are fully protecting the margins on the same day whenever we are buying the scrap. So this is the hedging policy for -- we are adapting for metals that -- and another, like currency risk, we are also -- as we are exporting for India, we are importing also and exporting also. So we are 95% naturally hedged on the currency risk also, naturally, because we are buying -- importing the scrap and exporting the finished goods. So -- and the remaining 5%, we are taking the forward cover for the currency also.

Okay. So sir, basically -- but earlier, the -- our policy was not like if I had known a quarter or 2 back, we incurred heavy losses because of actions in the policy. So going forward, can we expect there will be any kind of fluctuations or we should -- will it be range-bound, say, not more than 5% to 10%? That will have any kind of exposure or losses due to this absence of the policy?

There may be fluctuations, but that fluctuations will not be due to the price risk. So basically, we have protected this risk by using this hedging policy.

Okay. So there won't be any price rise going forward? And in the coming quarters also, we can be rest assured that the margins will be sustainable.

Yes. The margins will be sustainable. But on a quarter-to-quarter basis, you may see some fluctuations because of the time gap between actual selling and actual buying.

Our next question is from the line of Gokul Maheshwari from Awriga Capital.

So I just wanted to understand the overall supply chain in the business. From overall sector level, what proportion of the end product is actually going to the battery industry?

Yes. In fact, if you see the value chain part of that, we are in the recycling business and collecting the battery scrap and cable scrap from the various source internationally and domestic market. Acid lead is a commodity, the 70% of the lead is being used for the battery segment. But as far as Gravita is concerned, we are able to place around 40% to 50% for the battery segment. And the rest of the lead we are supplying to other segments like power sector cables and value-added products for hospital industry or ammunition industry or radiation protection industry.

Okay. And the realizations are better in the non-battery segment?

Definitely, because the battery segment is a highly quality conscious -- quality conscious, as well as the margins will be in invested competition, whereas in other segments, the entry barriers are not easy, and definitely, margins are better.

Okay, got it. And in that sense, the -- while you mentioned about the fact that there is a fair amount of unorganized and organized -- and so, how is the market position in terms of the overall market size? And what proportion of the market is still unorganized in terms of lead recyclers?

If we discuss about the Indian market, around the 30% to 35% is from the informal sector. The rest of the market is around 65%, comes from the formal sector. And this formal sector also divided into the 2 segments, one is the primary producer, which is [ not recycling ] and the rest is the recycling companies. So rest of 65% is of formal sector. So Gravita is well placed as far as market share is concerned. In the formal sector, we are enjoying around market share of 9% to 10%.

9% to 10%. But when you include this, do you include the capacities of players like Exide who do recycling on their own?

Yes, every capacities include a part of this. Because Exide, as a different entity. It's a part of Exide, but it's a separate entity for recycling. So we always consider as a part of the market size.

Okay, got it. And is the market moving towards the organized players? I mean, what is -- if so, what is driving that movement?

In fact, the awareness among the market, because it's the aggregate product and the recycling of this stuff creates a lot of environment issues. So government of India is very concerned about this informal sector. So migration is towards formal sector. If we discuss about around 2 to 3 years back, it was close to 40% to 45%. It has come down to 35%. And the way government of India is imposing lots of restriction and the way we are increasing the awareness into the market, because at the end of the day, customers or the users of batteries, they have to take a call that to where this -- the scrap has to go. So we are trying to educate them that this has to be recycled in formal way. So we have both efforts from recycling industry as well as the government of India. That's this formal sector. But again, it will take next 3 to 4 years' time where this informal sector will be in the single digit.

All right. And lastly, your arrangement with Amara Raja, if you could just give an update? I understand that they are collecting back the batteries and giving it to you for processing. So there is a quantum jump over there in terms of what you would process for them. So could you just give an update on that?

In fact, not in Amara Raja, but all the OEMs are supposed to collect their batteries back as per the norms. Exide has their own smelting units, but Amara Raja and other battery companies, they don't have any -- their backward dispensing units. So we -- initially, we discussed with the Amara Raja and we could conclude the contract where we are collecting batteries on their behalf and recycling it, supplying back to them. Similarly, discussions are going on with other OEMs also. So definitely a quantum jump is there, because it takes a lot of time, a lot of effort to collect the batteries. And at the end of the day, Amara Raja is also putting their efforts and Gravita is also putting the efforts. And at the end of the day, we are able to work good.

And also because of our pan-India presence, we are well-placed to take advantage of all these tie-ups, better placed than any other competitor of ours.

So if there are 10 batteries, which of any of these OEs actually sell, are they able to collect back 10 of these? Or there -- some of the leakage happens to the unorganized market?

In fact, if you see in that way, out of 10 batteries, they are able to collect 9 batteries, but they -- after collection of these 9 batteries, only less than 50% is coming to the formal sector. And again, the formal sector also divided into the 2 segments, formal sector is formal sector and formal sector by working -- they are working as an informal sector. So practically, very small segment of batteries are coming to the real formal sector from all segments.

Okay. And you're saying that there is more effort from the OEs to actually bring back their old batteries?

Yes.

Are you seeing that on the ground?

Yes, absolutely, yes. All the OEMs and all the recycling companies, both are increasing the awareness into the market. Because if you see the marketing network of the batteries, it's very deep rooted into the rural areas and also in different parts of that. So the awareness campaign, we are doing in jointly with the OEs as well as independently.

We will take our next question from the line of [ Harsh Shah ], an individual investor.

Just wanted to know the organic market share of organized [indiscernible] currently? And in that, what is Gravita's market share?

Yes. In Indian context, so formal market, the formal segment is around 65% out of the total market, and Gravita is enjoying out of this formal sector 9% to 10%.

Out of -- 9% to 10% of the 65%?

Out of the 65%.

Okay. And in terms of total market share... [indiscernible]

Mr. [ Harsh Shah ], sorry to interrupt. Your voice is kind of breaking. If you're in a hands-free mode, can you switch it to handset?

Yes. Is it fine now?

It's better, yes.

Yes. And sir, on a global [indiscernible] market [indiscernible] so the data is available by any chance?

Yes, [ roughly ] data are available at the global map. Like out of the total global market of lead, 45% is [indiscernible] by the China itself. India's market share is close to 10% of the global market.

Okay. [indiscernible] in China, the 35%.

Come again?

And the remaining 35% is with China, you mean?

No, 45% is China, 10% is India and rest of the 35%, goes to the Europe and U.S. market.

Okay, okay. Sure. And the second question which I had was, sir, what is the update on Mundra project?

Yes, Mundra project, actually, we plan to relocate our existing unit of Gandhidham, which is already operational. So the idea was to have a better logistic [ path ], and also to save on some rental cost, so we are waiting for permit to start the operations. Everything is ready, but we are expecting it by March. So after which we will be shifting this Gandhidham unit to relocate it to Mundra, then it is continuing. We are continuing with the Gandhidham unit.

Okay, okay. Till then, you will be continuing with Gandhidham only?

Yes, correct.

[Operator Instructions] The next question is from the line of [ Suresh Seth ] an individual investor.

So I actually just wanted to understand as to your view in terms of the plans of our company in terms of, let's say, if lithium-ion batteries are completely replacing the lead-acid batteries. So let's say, our customers like Amara Raja batteries are also moving towards lithium-ion batteries. So just wanted to understand your view and the scenarios, if you could just throw some light on that.

Yes. So there are 2, 3 things here. First of all, a lithium-ion battery cannot completely replace lead-acid batteries in the sense that even in electrical vehicles, there is -- the initial -- the primary batteries are of lead acid only. And that reason that we will not be replacing the lead-acid batteries. They will still be there. Apart from that, we are definitely looking at technical tie-ups, because lithium-ion battery recycling is a different ball game altogether where the technology is much more advanced than lead-acid battery recycling. So we are in discussions with some of European and American companies for a tie up for recycling, and they are very much interested. Right now, it's at a very initial stage, so we can't divulge the entire details with you. But we are definitely looking at recycling of lithium-ion batteries as well.

Our next question is from the line of Mr. [ Kumar ], a shareholder.

[indiscernible]

Mr. [ Kumar ], your line is unmuted. [Operator Instructions]

Hello?

Yes, hello.

The employee's cost is going up quarter wise. If you see the last financial year, it is only 22 crore, now for the 9-month period itself it crossed almost 21.34 crore. And for this quarter, 7.42 crore are [ implant ] and 19.28 crore for this thing, employee cost. Finance cost is 7.42.

Yes. So there are 2 things. One is, definitely, we are improving some management bandwidth for the coming year also. And that is the one reason of having some more employees or rather management team members also, which is the reason for improving -- increasing the employee cost. Another reason is that we have also made some provisions for some incentives, employee-based incentives, we have implemented. We have also taken some provision for the same in this quarter.

What is your export share against the total sales? Is there?

Import share for the Indian business, whatever we are doing, so close to 70%, 75%. We are using the imported material for Indian business.

Okay. No. I'm asking what is the -- your export turnover against normal turnover.

Export turnover?

Yes.

It is approximately 50-50. So 50% of the Indian goods we are exporting, and 50% is -- we are selling in Indian market. It has -- I mean, it has gone down from the last year, now we have more share in the Indian market as well.

Okay. Now metal prices are coming down because of this China coronavirus. Whether that affect your operation in the current quarter?

No, we don't have a big presence in China. We are rather buying only small amount of -- borrowing a limit from China. Otherwise, as far as sales point of view, we don't have any presence in China.

Metal prices are drastically coming down because of the China issue. Will that affect your operation in the current quarter?

So basically, as we are fully hedged on the metal side, so whatever impact is there due to lower metal prices, it is very small in quantum. But the overall metal price risk, we have fully hedged by using our hedging policy.

Our next question is from the line of [ Nimesh Shah ], an individual investor.

I have some questions with respect to changes in inventory which shows a negative 36 crores. Could you just throw some light on that?

Yes, it is just part of the material cost, because whenever we reduce the inventory from our existing WIP and finished goods, so that is representing that number only. So overall, material cost is approximately 80 to -- 81% to 82%.

So 1 more question that I have is, are we planning to expand our network to other countries for a scrap collection mechanism?

Yes, we are already continuously doing that. We are also exploring now Southeast Asia for getting scraps from that country also. We are already expanding in various countries in Africa like we have initiated this with Ghana plant. And we are also expanding the countries near Ghana to have more slots for Ghana, which was earlier -- earlier coming to India. So we are continuously -- that is a continuous process for us to explore new countries and get more scrap from different markets.

So your margins are -- just so your margins -- EBITDA margins on the higher end the same. So going ahead, should we expect these margins to sustain?

One part of margin definitely is sustainable, because we did some operational efficiencies. We changed some of our customer segmentation. We improved our product segment, also value-added products we are adding up. So some of the margins are definitely on a sustainable basis. But there are certain additional margin also, which we -- onetime we got in this quarter due to some market arbitrage as the domestic prices were lower, and we were able to procure it at a lower price than the international market. So that is -- some part of margin is sustainable. So we can say there are 2 things, 2 parts of this.

So lead [indiscernible] on the...

Mr. [ Nimesh Shah ], your voice is breaking up in between.

Okay. [indiscernible]

Yes, we can hear you.

Yes. So please. Please continue.

Mr. [ Nimesh Shah ], I think we cannot hear you right now. May we request you...

Hello?

Yes, sir. Please.

I think you're in an area where there's no proper network, so maybe, can you disconnect and call back while we move to the next question? His line has dropped out from the queue. We will take our next question from the line of [ Nathan Pawar ], an individual investor.

Hello?

Yes, sir.

My question is basically regarding the realization levels. [indiscernible] how has the realization levels been for the aluminum for this particular quarter?

So aluminum realizations are the -- as compared to the previous quarter, it is improving, but the overall aluminum market, the price is getting reduced. It is reduced almost by 10% in last few quarters. So -- but we -- as we are doing aluminum business in international market also, now we are getting better prices in international markets like China, Vietnam, Thailand. And so these countries, they are focusing upon instead of earlier, we were focused -- only focused in India. So we -- it is helping us to improve the realization levels in the aluminum business.

So going ahead, we can see the realization levels to improve also going ahead, right?

So it will be stable in future. We expect it to be stable, but the margins all should be better as compared to what it is in the -- in quarter 3.

Great. Sir, 1 more thing. The next question, it is the plastic division. So if we see -- I've been looking on a quarterly basis, the second consecutive quarter where we reported a loss. So what is your take on that?

So I mean, similar to aluminum division, the plastic also have seen a price decrease on a continuous basis for the past 9 months. So that is impacting the overall profit of the business. But if we look at it now, I think that prices have stabilized. But as we have inventories at hand, so maybe the next quarter probably we'll break even. But from Q1 next year, you can see profits from plastics as well.

And sir, how do I look at it for 12 to 15 months' point of view, if I want to see in this particular division and analyze the growth rate where you're coming in?

We are expecting a growth rate of around 20% to 25% in terms of revenue from plastic on a continuous basis for the next 3 to 4 years.

So 1 more thing. One question, if you allow me. It's really the turnkey project division. Even I see there's a loss over there also, despite revenue has been growing. So what will be your outlook on this kind of thing?

Turnkey projects generally are always in profit. At this time, we have made a provision of around 1.5 crores for our -- for a project for which we are not expecting it to be completed this year itself. So that project was on hold from the customer side, and we were -- we have some debtors for that customer. And considering that -- their business condition, we have taken a provision for that. So that is a onetime situation for negative project business.

So if you look right now, given the economic slowdown, so can there be any further projects under our bucket right now, which could -- where we could see some kind of more provision coming in or the rest or others are at good stages?

No. So we are not looking at any growth in the turnkey project. But I mean, we can see similar numbers in the coming years also -- in the coming year also. In next quarter also, we're expecting similar numbers. And in the coming year also, we'll be probably doing around 15 to 20 crores only. But there will not be further provisioning on this account in future.

[Operator Instructions] The next question is from the line of Mr. [ Kumar ], a shareholder. Please go ahead. It looks like Mr. [ Kumar's ] line has dropped out. [Operator Instructions] As there are no further questions from the participants, I now hand the floor back to Mr. Yogesh Malhotra from Gravita India Limited for closing comments.

I would like to, once again, thank you all for participating in the earnings call. I hope we have answered all your queries. In case you have any further queries, you can route it through Valorem Advisors. Thank you very much. Thanks a lot.

Thank you, members of the management. Ladies and gentlemen, on behalf of Gravita India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.