Gravita India Limited (GRAVITA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '21 Conference Call of Gravita India Limited hosted by Valorem Advisors. [Operator Instructions] I now hand the conference over to Mr. Anuj Sonpal, CEO at Valorem Advisors. Thank you, and over to you, Mr. Sonpal.

Thank you, Dipesh. Good afternoon, everyone. Warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. We represent the Investor Relations of Gravita India Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings conference call for the first quarter of financial year 2021. 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 could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to the management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings conference call is purely 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 conference call. We have with us Mr. Yogesh Malhotra, CEO and Whole-Time Director; Mr. Vijay Kumar Pareek, Executive Director; Mr. Naveen Prakash Sharma, Executive Director; and Mr. Sunil Kansal, Chief Financial Officer. Without much delay, I request Mr. Yogesh Malhotra to give his opening remarks. Thank you, and over to you, sir.

Thank you, Mr. Anuj. Good morning, everyone. I thank you all for participating for the company's Q1 financial year '21 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, cable scrap, lead scrap, aluminum scrap and plastic scrap. Gravita has 13 strategically located recycling facilities in Asia, Africa and Central America with a capacity of 121,000 metric tonne per annum for lead, 19,000 metric tonne per annum for aluminum and around 26,000 metric tonne per annum for plastic, as of Q4 financial year '20. Gravita sells recycled products such as pure lead, lead alloys, lead powder, oxides, aluminum alloys, plastic granules, PET flakes, both domestically as well as in international markets. Further, the company has entered into back-to-back buying of scrap from battery recycling companies like Amara Raja Batteries and HBL Power Systems, and selling recycled goods to them. Gravita has a unique deep-rooted scrap collection network which helps us collect scrap globally at competitive prices, which is the biggest entry barrier in the business. Now I would like to summarize the key financials for the first quarter of financial year '21. On consolidated basis, our revenue from operations for the quarter stood at INR 258 crore, which declined by 2.3% on a year-on-year basis. Our EBITDA in absolute terms for the quarter was INR 13 crore with EBITDA margins at 4.88%. It is important to note here that the exchange gain of INR 3.34 crore is accounted in Other income due to notional accounting of the transactions, which take place in foreign currency. The difference of exchange rate applied at the time of goods movement and currency movements are accounted as Other income, which are actually a part of COGS or sales realization, and consequently, part of our operational income or EBITDA. Similarly, the gain on commodity forward contracts of INR 1.84 crore is an integral part of our hedging mechanism for the goods bought and sold to ensure and compensate the fluctuation in the metal prices. Being compensation of the operational transaction, it is also part of our operational income or EBITDA. Considering this, the effective EBITDA for the company for Q1 financial year '21 should be INR 17.84 crore, representing an EBITDA margin of 6.90%. The consolidated net profit of the company stood at INR 3.9 crore, which increased by 56% on a year-on-year basis with PAT margins of 1.51%. Our sales volume for Q1 financial year '21 in lead were 16,221 metric tonne, in aluminum 973 tonnes and in plastic 2,493 metric tonne. The overall production during the quarter increased by 2% year-on-year, with an increase in sales volume of lead products by 7% on a year-on-year basis, driven by increase in sales volume from overseas manufacturing facilities, where the company also enjoys better margins coupled with lower working capital cycle. In conclusion, the company plans to focus on optimizing its overseas manufacturing facilities, along with improving its scrap collection network in India to help improve its profitability by reducing logistic cost of importing the scrap in India and also reducing working capital cycle. Additionally, the company continues to focus on improving product and market mix to get better margins. With this, I would like to open the floor for questions. Thank you.

[Operator Instructions] We have a question from the line of [indiscernible] Agarwal from ICICI Bank Limited.

Sir, my question is, as I compare quarter 4 FY '20 and quarter 1 FY '21, I found that the finance cost more or less has remained same. What is the particular reason behind it? Your top line has almost decreased, but the finance cost has remained the same.

Yes. Because of the lower debt because we are slightly reducing the debt comparative to the revenue, so that is -- finance cost is similar, but -- your question is, sorry, can you repeat again?

My question is, the top line has almost reduced in the first quarter as compared to quarter 4 last year. Right now, when I'm seeing the finance cost, the finance cost has remained more or less on the same level. So can you just throw the light on the reason for the same finance cost in the 2 quarters?

Because the volume is lower in this quarter 1. So the finance cost is not directly related to the revenue, it is related to the working capital being used in the business. So working capital remaining same, so finance cost is also same. So that is same at the same level. But due to the COVID reasons, the volume of the growth is reduced. So that is why the finance cost is same, but revenue is lower. So in the coming quarters, when the -- it is not directly linked to the -- when the volume is higher, so it is -- finance cost remaining same, the volume number could be higher and the revenue could be higher, similarly.

[Operator Instructions] Next question comes from the line of Amit. He's an individual investor.

Sir, I have a question. In your opening statement, sir, you mentioned that Other income should be included in the EBITDA. So can you please explain this in more detail? So if the company had made a loss due to ForEx or hedging, that too should have come in the Other income gain or loss, right? So why should this be included in EBITDA? Sir, I wanted a little bit of a clarification on that front.

Sure. Sure. So basically, what happens when -- finance cost is a different part, but whenever we buy the imported raw material, there is a -- when you make the payment of the import, say, INR 70 is the mix, we are making the payment. When the goods is arriving at say INR 75, so that INR 5 is the exchange gain instead of that consequently, second part is going to the cost of goods. So whenever we have this exchange gain or loss, it is coming Other -- either it is Other expense or Other income for the accounting purpose. But when we see as a business operational cost or operational gain, so it is always considered as the operational gain or loss. But due to the calculation of the Other income is excluded from the EBITDA, so that's why we are just saying that it is part of the operational gain and part -- should be part of the EBITDA or operational income. So when it is a loss, it is shown as other expense and it is always considered as a part of the operational loss. So this time, it is gain. So it is showing under the Other income. So it is considered as a part of operational income only.

Sure, sure, sir. Got it. Got it, sir. Sir, one more question is, what would be the share of value-added products out of the total sales of net? And how does the same grown on year-on-year period? If you could just provide some light on that?

In fact, the present share out of our total revenue from value-add production customers' average is around 35%. And we are targeting to take this share up to 50% by end of this year.

Okay. And sir, one more follow-up question on that would be -- so just wanted to know what are the utilization levels we are operating at each of the business segments across the plants, both in India and overseas on average? So it's a comparison between domestic and international.

So you want to ask you about the capacity utilization?

Yes, sir. So utilization, capital utilization, yes.

Okay. So basically, capacity utilization has been grown from -- historically, it used to be around 60% in case of lead. But over a period of time, it has increased up to 75%. But this quarter is slightly lower. It is approximately 55% for the lead. Aluminum is around 23% because aluminum is more impacted in case of COVID situation because of the new vehicles are lower. So demand was lower in India. So gradually, we are shifting to international market for aluminum also. And plastic was significantly lower, approximately 10%. So overall, the capacity utilization in Q1 was 45% as against Q4 it was 63%.

[Operator Instructions] [Technical Difficulty] Next question comes from [ Mr. Sreemant line from Unifi Capital ].

Yes. A few questions. Firstly, what's been our debt level as on June end? And what's the status on the Mundra project and other CapEx going forward? Hello? Can you hear me?

[ Sreemant ], Just give a minute, I think we've lost the management now. I'm very sorry. [Technical Difficulty] Operator, please connect the management urgently.

Sure, sir.

[ Sreemant ], please ask your question again.

Yes. So a couple of questions. One is what is our debt level as on June end? And what is the plan -- what is the target level for this year ending FY '21? Where are we on the Mundra CapEx? And is there any other CapEx in the near term?

Yes, sure, [ Sreemant ]. So your first question is regarding the current level of debt. So it is approximately INR 240 crores is the total debt, including working capital debt of around INR 175 crores and remaining is -- approximately INR 50 crore is the term debt. So we are trying to reduce this debt -- working capital debt, which is the major part of this. So basically, we are taking 2, 3 things. One is, of course, increasing the capacity utilization in the overseas plant. So the scrap is basically moving from overseas to India. So we are trying to reduce the import of scrap in India and getting more scraps from Indian markets. So we are increasing the share of the domestic scrap in India. We are increasing the volumes. We are tying some companies like we have done with some OEMs -- contracts with the OEMs, increasing the volumes from them. And so gradually, the scrap, which is moving from overseas to India, should be reduced. And by this we are reducing the working capital cycle, and overall consequently, we are reducing the debt of working capital. So we're targeting approximately -- further reduction approximately 10% to 15% in next 1 year by way of this mechanism. So the second question is related to the CapEx. We are not doing any significant CapEx in this year other than the maintenance CapEx of approximately INR 15 crore to INR 20 crore for this year. But we may do some small CapEx where we get the immediate returns of, say, 8 to 10 months up to INR 5 crores to INR 10 crores depending upon the opportunity. Regarding Mundra, we are currently on hold because of waiting some license, which is to be issued by the Ministry of Mines and Forest. So we will be shifting that Gandhidham location to Mundra location after getting this license, but till then we are fully operational in Gandhidham location. So it was just having some advantage of some logistic advantage and saving of the rental cost, which we are incurring in the Gandhidham plant. So -- but otherwise, we were having some bigger plans from Mundra, where we can have the smelting facility also. So that plan, we are currently on hold till approximately 9 months to 12 months for the next year. So we may plan for another CapEx in next year, not this year in Mundra for having the smelting facility in Mundra.

Next question comes from Mr. Rahul Jain from Systematix.

So how should we look at your business because, if you see, over the years, we have seen a recent top line growth, but somehow your free cash generation has been lagging. And here also, the working capital has been increasing in line with your increasing debt levels. So when do we see that you have some kind of more free cash generation?

Sorry, couldn't hear you properly. Can you come again, please? So your voice is not clear.

Yes. I want to check like, how should we see your business because over the years you've done -- had a very good volume growth and even top line growth, but your free cash generation hasn't been really exciting. So how should we look at it going forward?

So basically, we are targeting a volume growth of approximately 15% to 20% every year. That was -- majorly the growth should be coming from aluminum and plastic part. But this year, considering COVID, and we have already lost approximately part of our Q1, so considering that, we should be -- in this year, we should be flat to 5% to 10% growth in the volumes in this year. Otherwise, we are targeting approximately 20% growth in volumes every year.

Yes. But what I'm saying is that your growth is coming with a lot of additional debt and it's taking time to deleverage. So you have deleveraging also on your mind or you're looking more on volume side?

Yes, definitely, because if you see the last 1 year, we have not increased any debt level in spite of the volume growth. So similarly, in the next coming years also, we are not going to increase the debt level. And rather, we are focusing on reducing the working capital cycle, as we discussed in the last question. And with the decrease in the working capital cycle, we are going to reduce the working capital debt, which is a major part of the total debt. So considering the same level also, we are increasing the volumes without increasing the debt.

Right. And sir, there is a new scrappage policy going to be announced. So do you expect any benefit coming out of that?

Among new policies, there are 3 to 4 policies are in pipeline. One of is the end-of-life vehicle policy, which will certainly impact this business in India, availability of domestic scrap. Then second is battery waste rules, which are under draft stage, where in the control of entire domestic battery scrap generation will be governed by that. Third is EPR for plastic waste. So this policy. And fourth is, there's a lot of work going on GST on scrap. So this is also expected to be revised in the time to come that it should be charged under RCM, Reverse Charge Mechanism. So that earlier, there was no tax on scrap generated from individual in excise regime. But after GST, there's 18% tax on post-consumer scrap. So this has been requested through GST Council to have under RCM. So these 3, 4 policy intervention and taxation changes opens huge opportunity for this sector in organized recycling. And we foresee that a double-digit growth in domestic recycling in the next 3 to 5 years. And our presence -- pan-India presence will offer to exploit these opportunities.

Next question comes from Mr. Vikram from individual investors.

Hello? Am I audible?

Yes, yes, please.

So sir, I just wanted to understand on the procurement side of it, have you faced any challenges as such from scrap procurement?

You're talking specifically for the effect of COVID on scrap procurement or...

Exactly. Because of the COVID, there was a lockdown which was there up till the last full Q1, if we can say in a way, till end of May, early June. Just wanted to understand how -- did we face any kind of an issue with procurement of scrap during those times?

Yes, definitely, there was an issue, especially in India because most of the cities were closed due to COVID. But as we have some stock of material already in the pipeline in the factories as well as that is coming from overseas, so our production was not hampered to that extent. So that buffer stock helped us go through the COVID situation in our factories because our factories were running during the COVID period also. So we did not face any -- I mean, although the procurement was an issue, but we did not face any availability of scrap. We did not face any issue in availability of scrap.

And sir, just one more small thing on this. So are we looking to expand to any new geographies for scrap collection?

Yes, definitely. That we are doing every -- I mean, that is a continuous process. Every year, every month, we are setting up new yards in different countries to procure scrap.

Okay. And sir, one more thing. Since the last con call, if you remember, you had mentioned that you have reduced the aluminum production in India and vice versa, you had actually increased it in Tanzania and Mozambique because of which the EBIT margins are now better off. So I just wanted to understand how has the Q1 performance be on this, I mean, with the utilization levels and so?

So the EBITDA margins have gone up because the Indian operations has a limited EBITDA margins while the overseas have higher EBITDA margins. If you see in this Q1, that has improved because the impact from lower volumes from domestic, particularly Indian operations in aluminum recycling.

So just on a follow-up on this, sir, how has been the performance in the plastic division for us during this quarter?

So plastic division in this quarter was almost at a breakeven level because of -- first of all, volume was lower in case of plastic and also still we are struggling with the prices -- lower prices of plastics and -- because the primary -- excuse me, hello?

Right.

Yes, the primary plastic prices have come down drastically and also because most of our plastic goes into the U.S. So there were some demand issues in this quarter. So plastic has suffered to some extent for this COVID -- because of this COVID problem.

Sir, how do you look at now once lockdown has slowly started opening up? So how do we look at this plastic division coming ahead -- going ahead? And can we expect that the plastic division also start contributing materially to the bottom line?

In the short term, definitely, there are going to be some impacts because of the slowdown as such because it has also affected the consumption of plastic worldwide. So that will definitely be some issue. But the good news is that recycled plastic prices are getting disassociated with the primary polymer because of the demand of recycled material has gone up in the U.S. and in the European countries. So what the manufacturers are asking for is a higher percentage of recycled material for their products. So in the longer run, maybe in the coming 2, 3 quarters, we would see that taking effect. And the recycled plastics will -- the prices of recycled plastics will disassociate itself from the primary plastic prices. So that will definitely have some good impact on us.

So what are the end users -- when we look at this recycled plastics right coming in, who are the end users to whom it would be useful to?

So these are all these companies like Coca-Cola, Pepsi that use PET. Any company that is using plastic will be using recycled plastic. And they have increased their percentage of recycled plastics. I mean, currently, in U.S., it is mandated in certain states to use 25% recycled plastics. Certain companies like Nestlé have some brands that use 100% recycled plastic also. So as the awareness among consumer is growing up, that is putting the pressure on these brand owners. Similarly, the governments are also becoming a little more concerned about plastics. So that again is putting some pressure on these brand owners. Most of these brand owners use plastic -- recycled plastics for packaging.

So I think, there's a huge market making a lot of potential for the company. So just to end up, sir, are we looking at any new products in this segment to launch in the coming future -- in the near future down?

You can see, right now, what we are doing is we are basically doing scrap collection and selling it to people who are then -- I mean, there is very little value addition currently because we have in PET we're selling flakes only, although those flakes are food grade flakes, but it is still flakes. So when we get some volumes going, then we will go in for value-added products like we are doing in lead right now.

[Operator Instructions] There are no further questions, sir.

Okay. Can we ask the management for their closing comments, please. Yogesh Ji, over to you.

Yes. Thank you very much. Thank you all for participating in the earnings conference call. It has been a pleasure interacting with all of you. As closing comments, during the quarter, the company has been able to achieve a better-than-expected performance in spite of adverse market conditions globally due to the COVID-19 pandemic. We expect better operational performance coupled with volume growth in the coming quarters. As I mentioned earlier, the company is focused on optimizing its overseas manufacturing facilities, along with improving its scrap collection network in India to help improve its profitability by reducing logistic costs of importing the scrap material in India and also reducing working capital cycle. Additionally, the company continues to focus on improving product and market mix to get better margins. We value your continued interest and support to Gravita. If you have any further questions, can we reach out to our Investor Relations managers at Valorem Advisors. Thank you, once again.

On behalf of Gravita India Limited, that does complete this conference for today. Thank you for joining us. You may disconnect your lines now. Thank you all.