Gravita India Limited (GRAVITA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Earnings 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. Good afternoon, everyone, and a 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 second quarter and first half year financial year ending 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 clearly 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 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.

Yes. Thanks, Anuj Ji. Good afternoon, everyone, and thank you all for participating in the company's H1 Q2 Financial Year '21 earnings conference call. As you may already know, Gravita India Limited is a leading global nonferrous secondary metal and one of India's largest secondary lead metal producing companies. The company is engaging in the recycling of used lead acid batteries, 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 26,000 metric tonne per annum for plastics as of Q4 financial year '20. Gravita sells recycled products such as pure lead, lead alloys, lead powder oxides, aluminum alloys, plastic 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 Batteries and HBL Power Systems and selling 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. Yes. Now let me summarize the key financials for the second quarter for financial year '21 on a consolidated basis. Our revenue from operations for the quarter stood at INR 339 crore, which increased by 3.6% on a year-on-year basis. And our EBITDA in absolute terms for the year has increased by 17.5% to INR 24 crores with EBITDA margins of 7.13%, which has -- which was an increase by 84 bps on a year-on-year basis. It is important to note that the exchange gain is accounted for in other income due to notional accounting of the transactions that take place in foreign currency. The difference of exchange rate applied at the time of the goods movement and the currency movements are accounted for as other income, which is actually part of COGS and sales realization and consequently, part of our operational income, EBITDA. Similarly, the gain on commodity forward contracts is an integral part of the company's hedging mechanism for the goods bought and sold to ensure and compensate for the fluctuation in the metal prices. Being compensation for the operational transaction, it is also part of our operational income or EBITDA. Considering this, the adjusted EBITDA for the company for the Q2 financial year '21 would be INR 31 crores, representing an EBITDA margin of 9.21%. The net profit for the quarter stood at INR 12.7 crore, which has increased by 71.6% on a year-on-year basis. The PAT margin stood at 3.74%, an increase of 148 basis points on a year-on-year basis. Our revenue for H1 financial year '21 was around INR 597.8 crores, which has increased by 1% on a year-on-year basis. Our EBITDA in absolute term for the quarter increased by 3.7% on a year-on-year basis to INR 36.9 crores, and EBITDA margin stood at 6.17%, which has increased by 16 bps on a year-on-year basis. After adjusting for gain on commodity forward contracts, our adjusted EBITDA for H1 financial year '21 would be INR 49 crores, representing an EBITDA margin of 8.21%. The net profit stood at INR 16.7 crores with an increase of 68.7% on a year-on-year basis. The PAT margin stood at 2.79%, which is an increase of 112 basis points on a year-on-year basis. The margin improvement was primarily due to improvement in sales mix from international facilities and value-added products. Talking specifically about the lead segment, the sales volume for the quarter were 19,700 metric tonnes which, along with the revenues were flat on a year-on-year basis. Although we saw a good margin improvement due to the scrap mix of lead change by 36% from remelted lead to battery scrap. Lead value-added products grew by 43% on a year-on-year basis, further improving margins. The sales mix from international plants which command higher margins improved to 19% in this quarter from 11% for the same period last year due to the addition of 2 new plants in Ghana and Tanzania. The international scrap prices also reduced by 6% of the average LME prices on a year-on-year basis, which we believe will not be sustainable. The aluminum business witnessed healthy volume growth of 22% on a year-on-year basis to 2074 metric tonnes on Q2 financial year '21. While the revenues increased by 50% to INR 24 crores, the sales mix from international plants improved to 47% in the quarter from 14% for the same period last year, which helped in improving margins. Aluminum average sales realization also increased by 24% from INR 93,000 per metric tonne to INR 116,000 per metric tonne, which helped the EBITDA margin expansion, although this may not be sustainable in the future. Lastly, the plastic segment saw very good growth in volumes of 46% on a year-on-year basis to 4,144 metric tonne in Q2 financial year '21. The revenues also grew by 47% to INR 20 crores. A onetime loss of impairment of INR 3 crore was incurred in Jamaica due to impairment of certain assets that were not required due to merging of 2 facilities in Nicaragua and Jamaica. This was part of the strategy to improve the overall margins for the plastic business. In conclusion, I'm happy to say that the company has consciously and diligently worked towards improving sales and most importantly, profitability and has delivered excellent results, especially considering the current market scenario due to the COVID-19 pandemic. We are hopeful that this momentum will continue in the coming quarter. With this, I would like to open the floor for questions.

[Operator Instructions] The first question is from the line of Sanjodh Gavaskar from -- who's an individual investor.

The first question I have is the aluminum and plastics divisions grew very well this quarter. What drove this growth? And is this momentum expected to continue?

The major growth has taken place because we have added additional capacity overseas in Tanzania, and that has come almost 90% capacity in utilization. That is the main reason. And in terms of higher realization, similarly says, we are directly exporting to overseas market from our overseas locations. So there is a saving on bringing the scrap over here, the paid costs. So that is a major reason for getting higher growth in aluminum in terms of volume as well as higher realization. And in terms of plastics.

The plastic growth also, we are seeing we are on the right path, and it will improve -- as such we are utilizing the production capacities in a better way now. So we believe that this will improve further in the coming quarters.

Right. So I have a follow-up question as well. Can you please tell us how the 3 EBITDA margins across 3 divisions of lead, aluminum and plastics?

So EBITDA margin, you want the per tonne EBITDA margin?

Yes.

Okay. So the per tonne margins for this quarter was around INR 15,300 for lead and INR 15,500 for aluminum and plastic, it was considering the onetime loss of impairment of certain assets in plastics. So it was INR 5,600 negative.

Right. Also lastly, just a final follow-up question is, what is your outlook for the second half of the year? And do you expect we should be able to grow some growth towards FY '21 against '20? And also, do you expect these margins to be sustainable?

So in terms of volumes, we believe that the Q2 -- sorry, the H2 for 2021 would be better than the Q2 -- sorry, H2 of -- H1 considerably as we are improving our capacity utilization. And in terms of EBITDA margins, we believe that our EBITDA margins would go down a little bit and in lead especially and would remain at around INR 12 to INR 13 per kg.

[Operator Instructions] The next question is from the line of Shubham Ronwal, an individual investor.

So congratulations on your good results and Happy Diwali to you in advance. So my question would be basically down the line. How is the situation currently in the domestic market for us? And like how we see the impact of the vehicle scrappage policy in the business? If you could give more insights regarding that.

Thank you for your wishes, and we reciprocate the same. The vehicle scrappage policy will certainly help in getting more scrap in the domestic market and more scrap will flow in the formal sector. So our dependency on the imported scrap will reduce.

Also informal.

And this more activity will take place in the formal sector, informal sector competition will reduce, the transaction will take place with GST...

By what percentage are you expecting this decline or increase?

It depends on the -- how this policy is being framed and executed. Initially, if they have a certain policy of vehicle, mainly commercial vehicle, 20 years and above. So suddenly, there will be availability of scrap will be more and then there will be a continuous flow in future to come. So that number will depend on what time line they put either 20 years and above or 15 years and above.

Okay. Okay. Okay. That's helpful. And another thing, so what is the reason that our other expenses came down? And like also the short-term debt, if you can give me an idea like it has come significantly down, like what is exactly that drove all of this, like both of these queries?

Other expenses mainly because of the efficiency on account of more volumes on the same fixed costs. So certain fixed costs are same. So as a percentage of revenue, it is slightly down. So other point was related to?

Short-term debt.

Short-term debt. Okay. So short-term debt is basically whatever profits we are earning. So that is being used for repayment of certain short-term debt so -- because whatever cash surplus we have in the last 6 months, so that we have utilized to repay the short-term debt.

Okay. Okay. That's good. And lastly, like what is the other income of INR 8 crores? What does that actually comprise of?

So as Yogesh Ji discussed, that we have certain commodity and currency gains which is operationally, which is part of the operational income for our business. Because the second consequent part is always considered in the cost of goods. So that, for the accounting purpose, it is considered as other income, but we considered it as part of EBITDA only, which is approximately INR 7 crore out of this.

So what happens is that when we hedge, we either buy the goods and sell it on LME or we sell the goods and buy it on LME. So one part is reflected in the operational income and the other part is reflected in the hedging income. So I mean, if you combine these 2, that will be the actual income, operational income. But due to accounting policies, it is mentioned separately. That's all.

Okay. That's helpful. Also, lastly, like, can you elaborate on the Jamaica impairment? Like what do we do there? Why was this impairment done, like a little insights about that?

So what we have done in Central America is that we have revisited our operations there and have combined the 2 operations of Nicaragua and Jamaica. Because of this COVID, there has been some effect on the plastic business in that area. So we have combined the 2 to increase efficiency and logistic costs and also bring in economies of scale. So out of this, some capital equipment have been deemed surplus. So for that, we have taken some provisions. But this is primarily to increase the profitability by increasing efficiency by combining these 2 operations.

Okay. So this is like a onetime thing?

Yes, this is one time.

The next question is from the line of Sreemant Dudhoria from Unifi Capital.

So firstly, on the aluminum division, you mentioned about the capacity expansion in Tanzania. Could you please quantify it? How much was the expansion?

No. We added the capacity last year.

Yes, yes. Okay. It's that same capacity?

That capacity is same. The utilization has improved now.

Okay. So the entire -- the volume growth that has happened in the aluminum division, it's totally driven by the Tanzania plant utilization, not anything in the domestic markets?

Yes.

Okay. And secondly, on the plastics division, you mentioned you have merged 2 facilities. So I was trying to understand why we have to take a write-down when we are just merging the facilities, it's just a movement of your plants and machinery from 1 unit to another. Did we have to book any kind of receivable loss or anything of that sort in that business?

It is basically merging by way of operationally merging of the 2 facilities, like we have converted the Jamaica facility into scrap collection yard for -- which is working for the Nicaragua facility. So basically, we were struggling for scrap collection for Nicaragua, and that will be utilizing the scrap collected by the Jamaica facility. So basically, we have -- we are stopping the production facility in Jamaica and utilizing that scrap, which is collected in Jamaica for the Nicaragua facility. So that way we are merging that. So whatever certain assets we have surplus in Jamaica, so that we are disposing it off. And the difference of the amount is recoverable for sale of those assets, so that we have taken as a provision for impairment.

So do you think that with the merger of these -- the operations, would the losses in the plastic division kind of be a thing of past? And should we see a bit positive numbers?

Yes. Because there are certain fixed costs and the cost of -- administrative cost of these operating in 2 facilities, so that will be significantly reduced after stopping the production. So we are using the premises of one of our suppliers of scrap for collection of scrap and shipping it to our Nicaragua facility. So that way we are significantly removing all kind of administrative expenses in Jamaica to overall improve the profitability of both the facilities as in taken together.

Okay. So what is the utilization level now in Nicaragua after the operations have merged?

So after merging, it should be close to 85% to 90%.

Okay. And with this fixed cost reduction, we should see kind of an EBIT positive number in the plastic division going forward?

That's absolutely correct.

Yes, correct. It is already positive, excluding this onetime loss.

The EBIT number this quarter came in at about INR 4 crores of loss in the plastic.

Yes, it is now positive. So you can say that in the current month, it is positive after this.

What is the breakeven top line number for the plastic division?

For the plastic division, you want the volume breakeven?

Yes. The -- okay, volume, yes, the volume or the...

So for Nicaragua plant, we do the breakeven operation wise, plant wise. So for the Nicaragua plant, the breakeven numbers would be around 70% of the total capacity utilization or around 7,000 tonnes per month or per year.

Okay. Okay. And the increase in the volume that has come in, in the plastic division, both sequentially as well as on a year-on-year basis, that was related to the Nicaragua plant only or the other plants also have ramped up the utilization in plastic?

Other plants also like the Jaipur plant and Chittoor plant, they are also ramping up because as soon as we have more scraps from the -- our in-house facilities like lead division. So that is also contributing the volume increase in plastic division because that plastic part of the battery scrap is also used in plastic division. So that's also supporting. Other than that, we are also sourcing the scrap -- plastic scrap in Indian plants in Jaipur and Chittoor, other than that volume growth in Nicaragua plant.

What is the outlook in the plastic in terms of the volume additions since there has been a sharp improvement in this 1 quarter. Is there a further upside to the volume sequentially?

Yes. Volume will further grow by approximately 20% in next 2 quarters sequentially. So -- but this 20% growth -- after this 20% growth, we may be needing some more capacity addition for further growth in plastic division.

Okay. Okay. So one thing you mentioned in the lead division was the international scrap prices have come down, and that has actually helped in better margins in that division. So have the scrap prices now normalized to the historical levels as a percentage to the LME prices? Or they are still at a discount?

Yes. Now it's almost stabilized in the current month or last 2 months, it is more stabilized now.

What really triggered this fall in scrap, specifically in quarter 2. So quarter 1, there were a lot of disruptions, quarter 2, I think things were stabilizing, but what led to this fall?

So I mean it was -- I mean, the continuity of disruptions in various countries, various economies, whether it is India. So they were -- I mean, there was a difference between demand and supply. So the demand side was a little down, and therefore, there was this opportunity for us to buy this scrap at a lower prices.

Okay. Okay. Did the availability also of scrap increase during that point in time?

Not much, not much, but because the demand side was not there, so we could capitalize on this opportunity at that point. But yes, there is a simple increase in scratch which is naturally happening, it is there, but it's not too a large extent.

And we've been operating in various geographies where exports were not happening at certain places. So that volume transferred to us, you can say that.

Okay. Okay. So in terms of our further expansion plans, so what is next in the pipeline in the next, say, in FY '21 and '22? And in that context, where could we see the debt levels going?

So we are not doing any greenfield projects in this coming year, but we may increase some capacities in our existing plants like Tanzania and Ghana. So overall -- and Mundra also, we are planning. But all these would be brownfield projects where we are increasing the capacities only. So the CapEx involved would be around INR 20 crores to INR 25 crores in all these brownfield projects.

And what would be the expansion -- what would be the increase in the capacity on an absolute basis because of these brownfield expansions?

10,000.

It's around 10,000 tonnes to 12,000 tonnes per year.

In the lead division?

In the lead division.

Anything on the aluminum side?

Aluminum side also, there is a capacity increase in Mozambique.

In Mozambique.

Approximately 3,000 tonnes of capacity increase in Mozambique for aluminum also, which is covered in these INR 25 crores CapEx plan.

Okay. Okay. And on debt numbers, how do we see the debt numbers?

Debt basically, we have reduced it approximately INR 20 crores, INR 25 crores we have reduced already. And whatever surplus after considering this fresh CapEx next 1 year. So whatever remaining number will be utilized for further reducing the debt. So that will -- considering the increase in business. So we can say that INR 10 crores to INR 15 crores further will be reduced in next 6 months.

INR 10 crores to INR 15 crores? Okay. But your cash flow generation would be much higher on that side, is it?

No. Cash flow generation will be used for additional volumes. We are -- because there will be additional volumes in the next 6 months. So -- as compared to what we did in Q2 or Q1. So that will be slightly used for that additional working capital requirement. Because we are also using this additional working capital for bringing certain goods to India from our Senegal, Mozambique, Tanzania, certain locations. And that is more slightly -- at this moment, slightly more working capital cycle is used. So considering those requirements in working capital, we can be reducing it by INR 10 crores to INR 15 crores in short-term debt.

[Operator Instructions] The next question is from the line of Deepak Shah, an individual investor.

So my first question is basically, are we witnessing a revival demand specifically for lead batteries in the replacement segment as the economy is opening up? And is there any update on tie ups with any other OEM?

Yes. In fact, if you see the lead acid battery segment, the vehicle demand of 2 wheelers and 4 wheelers are increasing. And subsequently, the results of Amara Raja, Exide and other battery companies are also showing the positive trend into the market post-COVID. So vis-à-vis, we are also expecting a good demand from these customers because we are having back-to-back tie up from these customers.

Okay. Sure. And a follow-up question, sir, what is the update on the Mundra plant? Are we continuing our CapEx? Do we, as a company, want to continue to do more CapEx or we will consolidate for some time until utilizations are brought up?

So as I mentioned, at Mundra facility, we are also considering it as a brownfield project where we are shifting the existing Gandhidham plant to Mundra primarily and probably increasing some smelting facilities there. So the overall capacity will not increase. Some backward integration would be done so that we can process battery scrap also at that facility.

Okay. Sure. And sir, can you please explain a bit more on the opportunity of the aluminum and plastic recycling business? How big is this industry of recycling? Who are the major competitors? How do we hedge for these products, if at all? And also, lastly, what is management's strategy to ramp up these divisions? Can any of these 2 verticals be as big as lead division? And if so, in how many years are we expecting that to happen?

Okay. So this aluminium recycling is not as similar to lead because aluminum recycling mostly takes place where you have the car manufacturing. Otherwise -- or there is a ban on scrap in that country. So we will find out more locations where we feel that there is a ban on scrap. So you convert them into alloys for die casting applications because we are into die casting area only that we are only making cast alloy. We are not into rolling or extruded product. So that is only 15% of the total aluminum consumed. So in that case, we will certainly explore more countries, where you cannot export out the scrap and can add more capacity and can grow in volumes and numbers. And in terms of plastics?

And plastics recycling is definitely even bigger than the lead in terms of opportunity available. But as of now, it is very fragmented and mostly in unorganized sector that it's happening. So as there is new policy coming up in India as well as outside India, where the focus will be on sustainability. We believe that it can definitely grow bigger than lead or aluminum or any other recycling industry. But it will all depend on how the government will implement those in India.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Malhotra from Gravita India Limited for closing remarks. Over to you, sir.

Yes. Thanks, Anuj Ji, for holding the earnings call. Thank you, everyone, for attending this earnings con call. We hope we have answered all your queries. In case you have any further -- you need any further information, you are welcome to contact through Valorem, and we would be happy to answer your queries. We thank you once again for taking your time out to attend the con call. Thanks. Thank you, everyone. Thanks a lot.

Thank you very much, sir. 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.