Gravita India Limited (GRAVITA) Earnings Call Transcript & Summary

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 third quarter and 9 months of -- ended -- 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. 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 of 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 Pareekh, 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, Anuj ji. I thank you all for participating in the company's Q3 financial year '21 earnings conference call. Gravita India Limited is a leading global nonferrous secondary metal and one of India's largest secondary lead metal producing companies. The company is engaged in the recycling of used lead acid batteries, cable scrap and other lead scrap, aluminum scrap and plastic scrap. Gravita has 11 strategically located recycling facilities in Asia, Africa and Central America with a capacity of 121,800 tonnes for lead, 19,200 tonnes for aluminum and 16,800 tonnes per plastic as of Q3 financial year '21. Gravita sells recycled products, such as pure lead, lead alloys, lead powder oxides, aluminum alloys, PP granules, 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, HBL Power Systems and selling recycled goods to them. Also, it has entered into INR 305 crore worth of contracts with Sorin Corporation, which is a subsidiary of Korea Zinc and Luminous Power Technologies. 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. Now I would like to summarize the key financials for the third quarter of financial year '21 on a consolidated basis. Our revenue from operations for the quarter stood at INR 373.6 crores. Our EBITDA in absolute terms for the quarter were INR 32.1 crore, and EBITDA margin stood at 8.6%. The net profit of the company stood at INR 15.7 crores, which increased by 27% on a year-on-year basis, and PAT margins stood at 4.2%. For 9 months of financial year '21, our revenues were around INR 971.4 crore, which were flattish on a year-on-year basis. Our EBITDA in absolute terms increased by around 19% on a year-on-year basis and INR 81.2 crores, and EBITDA margin stood at 8.36%. The net profit stood at INR 31.2 crores, which was an increase of 51.5% on a year-on-year basis. The PAT margin stood at 3.21%. On Q3 financial year '21, our operational revival was driven by a change in raw material mix of lead, which changed by 11% year-on-year in Q3 financial year '21 from remelted lead other scraps to battery scrap. The domestic battery scrap collection increased by approximately 82% year-on-year in Q3, resulting in logistic cost savings, with also reduced working capital cycle. During the quarter, the lead value-added and customized product witnessed a growth of 38% on a year-on-year basis. There were overall better operational efficiencies with improved recoveries and low processing costs and the overseas production increased by 45% on a year-on-year basis, which commands higher margins. Aluminum sales saw a volume jump of 6% year-on-year from 925 metric ton to 2,050 metric ton in Q3 financial year '21 and in Q3 financial year '21. The sales mix in international market as compared to the Indian market also increased by 34% in Q3. And the aluminum's average sales price per tonne increased by about 13% year-on-year basis. The overall plastic production also increased by 33% in Q3 financial year '21 on a year-on-year basis, and sales quantity increased by 37%, along with an increase in sales realization by 5% in Q3 financial year '21 on a year-on-year basis. Going ahead, the company plans to focus on optimizing its overseas manufacturing facilities, along with improving its scrap collection in India to help improve its profitability by reducing logistics costs of importing the scrap in India and also reducing the working capital cycle. Additionally, the company continues to focus on more value-added product and customized product in the product mix to get better margins. With this, I would like to now open the floor to the questions. Thank you.

[Operator Instructions] The first question is from the line of [ Raj Vaswani, ] an individual investor.

Yes. So I would like to know the company has won 2 major orders in the last few weeks. So could you please explain the scope for work for these orders? And also, what kind of revenues will these add to our company? And what kind of margins also will these orders command?

So recently, company entered in agreement with one of the international trading companies that is Sorin Corporation, which is part of Korea Zinc and other one was Luminous. So as far as margins are concerned, they are in the range of what we have projected or what we have produced in last quarter. But if you see that 80% of our complete business is flowing from 70% of the customers.

So the margins would be in line with what we are getting right now. We mentioned that the EBITDA margins would be around 12% to 14% going forward. Sorry, INR 12 to INR 14 per kg. Hello?

Okay. Okay. That makes sense. And also, what would be the revenue guidance for FY '22, if any?

So we are on line with around 20% to 25% growth going forward in the next 2 years.

The next question is from the line of Anurag Patil from Roha AMC.

Sir, are you planning any major...

Sorry to interrupt, Mr. Patil, your voice is breaking up.

Just a second. Hello? Is it clear now?

Yes.

Much better.

Yes. So sir, are you planning any major CapEx in the coming year? If you can elaborate on that side, please?

Yes. So we have mentioned this earlier also that we are not planning any greenfield projects in the coming years, but there would definitely be some strategic CapExes that we do in terms of expansion of certain facilities that we have. So total CapEx would be in line of around INR 25 crores for the next year. No greenfield project is there. Sorry?

Okay. Okay. Understood. And sir, you just mentioned in your opening comments that your focus will be more towards the value-added products. If you can just elaborate on that side, what exactly you are planning to do?

So current -- around 40% of our business comes from -- I'm talking about the lead segment. 40% of the business comes from value-added or customized product. And our plan is to take it to around 60% in the coming 1.5 years, which include customized alloys, lead sheets, lead powder and other products that gives us higher value or higher margins.

Okay. Okay. And sir, I have a basic question. So what other recycling facilities do you have? Are those fungible in nature, means can these lead acid or recycle lead related plants can be used for other kind of recycle? Or are they very customized in nature?

No, these plant and machinery are specifically used for a particular product, like for aluminum, we have different plant and machinery. For lead, it is different. And if we plan to do some other recycling, it would be different. So these are not plant and machinery that can be utilized for other products. In lead, definitely, you can use it for different alloys. But that is for only lead alloys. You can't use it for any other metal.

Okay. Okay. And one last question, sir. Our government is planning around this vehicle scrapping policy. So how can it benefit us? If you can elaborate on that, sir?

Yes, new yearly policy will be effective from April 2022. So then government will remove those commercial vehicles more than 15 years. So the scrap generated from that will be more of [indiscernible] scrap in nature. Batteries will be certainly coming in a structured way so that availability of this scrap will become better because it will come from an institution or some big collection center rather than it is growing via retail.

We'll move on to the next question that is from the line of Gokul Maheshwari from Awriga Capital.

I have 2 questions. One, how are you seeing the aftermarket in the battery segment currently? And the second question was, do we see business moving to the bigger players like you or Exide? And the unorganized players, how are they doing currently in the market in the aftermarket of COVID?

In fact, if you see in the last 9 months, the battery segment has shown a phenomenal growth of double-digit figures. And this growth largely came from the aftermarket sales only. Although auto sector has shown the positive trend in last one quarter. So this is a trend we foresee as a ' continued trend, although there may be some hurdles as far as the lithium-ion battery is concerned, for a market-specific or a category-specific. But overall, these companies are going to project double-digit growth in times to come. And if you see the market trend in Indian scenario, the way these battery companies are becoming more serious about collection of their battery scrap back and ensuring the recycling in legitimate manner or the formal recycling, we foresee the availability of this scrap will be in better position. Companies like Gravita, we are already working with Amara Raja, and we are very closely coordinating with companies like Exide and Luminous also for collection of their scrap. So as far as availability is concerned, it will be better. As far as informal sector versus formal sector, we foresee that within next 1 year, there will be a drop in formal recycling. And the sentiments are showing positive trend.

The next question is from the line of Dhiral Shah from PhillipCapital.

Hello?

Hello.

Sir, you talked about the value-added product, which is now contributing 40%, right? And within 1 to 1.5 years, you are targeting it to 60%. So what is the EBITDA margin difference between value-added products and the commodity products?

So the EBITDA margins would be around 3% to 5% more in case of value-added products, depending on what market we cater to and what products we make.

Okay.

So this current EBITDA margin of 12% is in combination of these 2 value-added products and normal products. So if we increase the product mix to value-added products, these EBITDA margins will grow. So basically, we enjoy approximately INR 12 to INR 14 a kg for our blended business. But if we specifically talk about the value-added products or customized products, it is in the range of INR 15 to INR 16 -- approximately INR 16 a kg.

Okay. So, is it -- with this contribution going up, can we expect double-digit kind of margin for the overall business?

Even -- in terms of percentage you're talking about?

Yes, sir, yes.

Yes, definitely. So basically, there are 2, 3 things. One is our overseas business, which commands higher margins. So we are also increasing the volumes from the overseas business. So that is taking us to from 8% to 9% to 10% to 11% of EBITDA margin. And also this contribution, higher-margin from the value-added and customized products. So taking both the things together, yes, we will be double-digit in next 2 to -- 2 years.

Okay. And sir, off-net, we all have seen that commodity prices have moved up primary like aluminum and all that. So do we see the [indiscernible] product as being a recycled -- the demand then goes up because of the higher primary prices?

In fact, the acceptability of recycling products like lead, it is increasing day-by-day. So we cannot say that the recycled price will be higher than primary one. But as far as uses are concerned, where people awareness is concerned, that acceptability is growing very fast for the selling products.

Okay.

So -- but in case of plastic, definitely, there is a chance that the prices would be higher than the primary plastics, which is the case in some of the developed countries.

And sir, what is the difference between recycle prices and maybe the primary one?

So actually, these 2 work totally independent of each other. So in some cases, demand and supply is very important. So in some areas, primary prices are higher, in some cases, secondary prices are higher. So in developed countries, these are running independent totally. Whereas in India, the secondary plastic prices would be around 75% to 85% of the primary prices currently.

Okay. And sir, lastly, as we don't have much CapEx for next 2 years. So what kind of debt reduction we are thinking of with the incremental cash flow?

Okay. So basically, current debt is approximately INR 250 crore. And so 2 things we are doing. One is the CapEx will be lower in the next 2 years. And also, we are reducing the working capital cycle as we are increasing the domestic procurement for the Indian plants. So both the things taken together, we will be reducing the debt, but -- so growing the volumes. So EBITDA will improve, but that absolute debt will slightly come down, but significant come down. But definitely, with the additional bonus, we wouldn't be requiring the significant debt. So debt to EBITDA -- basically, debt to equity ratio, which is currently 1:1. So this will -- in next 2 years, it will come down to 0.7 to 0.75.

Okay. And sir out of the overall INR 240 crores, INR 250 crores debt, how much is the working capital debt and how much is the long-term?

So approximately INR 40 crores is the long-term debt and 200 -- approximately INR 210 crores is the short-term debt.

Okay. And sir, in our business, typically, what is the fixed asset turnover ratio?

Fixed asset turnover ratio is approximately 8 to 9x. So whatever CapEx we do, approximately 8 to 9x is the revenue generation from the CapEx.

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

I have 2 questions. So in regards to lead, largely, the lead production.

I'm sorry to interrupt, Avnish. Sir, we're not able to hear you clearly.

Is it better now?

Slightly better, sir.

Yes. So my first question is like what is the competitive advantage in terms of maintaining this market leadership because lead is largely recycling-driven business. And the second question is like what kind of impact are we going to see because of the migration of batteries towards electric vehicles?

So to answer your first question, there are various layers to the market competitiveness that we have. First of all, our procurement network is one of the biggest competitiveness that we have. We have scrapyards across nations, which help us in procuring the raw material at a cheaper price. The second is our operations, which are spread over 3 continents, which enable us to -- and in India, we are present in -- on pan-India basis in west, east, south and north. So this enables us to strategically collect the raw material and service the customer very efficiently. Currently, we are the only company which has more than one lead plant in India. And the third and also equally important is the ability to produce customized and value-added products in lead segment, so which gives us better margins than the competition.

Sir, my second question was regards to the electric vehicles and batteries, like what would be the impact we are going to see?

So even in lithium-ion, I mean, first of all, the -- whenever the lithium-ion will come, it will come to recycling after 8 to 10 years because the life of lithium-ion batteries is longer. The second thing is that even in lithium-ion batteries, you need lead acid battery for starting, lighting and ignition purposes. So even when the lithium-ion cars will come into India, even the current cars that are coming into India or used anywhere, you need lead acid battery. So it will not reduce the current recycling of lead acid batteries, but it will give us another opportunity to get into recycling of lithium-ion batteries also. So from a company's perspective, it's a good sign. But as I mentioned, that it will take some time for the lithium-ion batteries to come to a stage where recycling starts taking place. So it is still some time there. But we are already talking to some technology partners from outside India to get into recycling of lithium-ion batteries as well.

The next question is from the line of [ Suman Bhatia ] from Prabhudas Liladher.

So -- yes, sir, so you had mentioned in your opening speech and in your earnings presentation that there has been a very healthy growth in volume and also realization. And also value-added products have improved a lot, which all should have improved your margin so far, right?

Yes.

So why is it that it has resulted in sales on a Y-o-Y basis and still not -- there is no growth or margin improvement whatsoever. So any reason for that?

Yes. Basically, last -- 3 years back, we established a plant in Chittoor, Andhra Pradesh, where we were getting certain -- because when we established the plant, definitely, 1 or 2 years is a stabilized period. And if we get some incentives based on the reimbursement of some taxes from the state government. So that comes as a stabilized compensation for the initial period, initial hiccup period whatever we get. So during that period, we were getting -- till last year, we were getting that, that incentive from the state government, which was in this quarter of -- quarter 3 of '19-'20 was approximately INR 4.5 crores. So that incentive is not there in this current year. And even after -- we are not getting that incentive and we are operationally better. So we are still at the stabilized margin of INR 12 to INR 14, what is the -- which is a stable margin for us for this year. So that incentive is compensated from the operational efficiencies, which we have mentioned.

Yes. So if we take that into account, so what would be the normalized EBITDA margin going ahead and your target EBITDA margin?

Yes. Normal EBITDA margin is taking the current country mix because we enjoy the better margin in case of overseas business and we enjoy better margins in case of value-added and customized products. So taking the current things in picture and lead prices also, so we are targeting approximately INR 12 to INR 14 a kg is a stable margin for us.

Yes. And sir, one last question. So what is the current utilization levels for all the plants?

So the current quarter 3, if we talk, so 82% is capacity utilization from -- of the lead business. And if we talk about the total capacity utilization for the all 3 segments, it is 71% for quarter 3.

And what has been the peak utilization level?

So peak utilization can be 80%. We can take -- optimize 80% to 85% we can take.

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

Sir, one last question. In regards to the mix change between domestic and international and also the value-added versus commodity, like where do you see these ratios being in a couple of years' time?

Can you repeat the question, sir? Your voice is...

My question is. Sorry. Yes. My question is in 2, 3 years' time, where do we expect our domestic versus export mix? And the second is, like where do we expect our value-added versus commodity mix?

Sir, if you're talking about lead, I think we mentioned already that the value-added products would be around 60%. Current levels are around 40%. So we are planning to increase the value-added products from current 40% to 60% of the total. And in terms of domestic versus international, currently, it's a 50-50 ratio. And we believe that there will be an increase in domestic demand going forward. And -- but there will be no major shift. So around 55% would be domestic and 45% would be international. But that could very well change, sir.

The next question is from the line of [indiscernible], an investor.

The aluminum segment and the plastics segment has done quite well in quarter 3. The revenues have also increased and the [indiscernible] have improved significantly. So what has caused the same?

In the aluminum business, we have started more volumes from our overseas locations. So we are manufacturing over there and exporting directly from those locations. So as compared to Indian locations, those have better margins. So that ratio has increased in favor of overseas activity in case of aluminum alloy manufacturing. And in case of plastics...

In case of plastic, the plastic market was not conducive for the past 2 quarters because of the COVID. So it has now starting turning up again. So we expect better margins going forward.

Okay. So also the contribution from these segments is still very small. So what are the company's plans to increase this? And what kind of contribution can come from the audience in the next 3 to 5 years?

So basically, currently, we are doing around 88% to 90% business from lead and the balance 10% comes from other segments, going forward for the next 2 years, we expect it to go to around 20% for other businesses and 80% for lead.

Great. So just a follow-up question. So what kind of volumes are we looking at this year from Amara Raja, Luminous and Sorin separately?

In fact, in my first comment, I mentioned that we are getting around 70% business from the 15 customers. So these 3 customers will give us, say, close to 30% to 40% business of Gravita.

Right. Okay. So finally, I would like to ask a final question saying that also, will the scrap from these clients be sourced from India only? And will their goods be manufactured and exported from India or from overseas facility?

In fact in Amara Raja, we are working on 2 business models. One is that Amara Raja itself is providing scrap to us and we are making finished products for them. But at the same time, we are in separate contract with Amara Raja, where we are importing the scrap or we are having options to buy from local market also and supplying them finished products. In case of Luminous, it is only one kind of contract presently where we are importing scrap or procuring from local markets and supplying to Luminous. Similarly, we are also working with Exide for this kind of arrangement.

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

A few questions. Can you share the EBITDA per kg number for various segments this quarter?

Yes, EBITDA per kg is -- for lead, it is INR 12,400 and for aluminum, it is INR 22,600. And for plastic, it is INR 1,600.

Plastic, it is positive INR 1,600?

Positive 1,600.

Okay. Okay. The arrangement with the Korea Zinc, has it commenced from the current quarter, which is quarter 4 as this contract was for calendar year '21?

No, this is for calendar year '21. It has already been commenced from this month itself, January onwards.

It would be -- the total contract would be equally split across the quarters? Or there is the kind of front ending of the supply that we have to give to Korea?

So volumes from April onwards will be more and in quarter 4 of this financial year or quarter 1 of the calendar year will be slightly lesser. But more business will be growing from April onwards.

April and June -- April, June and September quarter will be more? June and September quarter, the volumes will be more?

Yes, yes.

Okay. And given the size of the company of Korea Zinc, is there a scope for further increase in the volumes from the initially contracted volumes?

No, it is, in fact, it is our choice. We have the possibility to increase the volumes also. But since we are balancing among these and our customers on customer segments, so this is the best we could do. And we have options to increase that contract also. This is on seller choice. That means we want -- if we want to increase our volume, we can increase the volume also.

Okay. Okay. And this 8,000 tonnes would be sold from the Indian plants or will come from the African plants?

No, through Indian plants. Because we are having plants close to the port like one that in Chennai port, Chittoor plant; and second is close to Mundra Port, so largely selling from these 2 plants.

If you could also highlight on the debottlenecking lead capacity expansion plans, what is the present status and when those capacities could come?

So most of the greenfield projects are now over. We have a capacity upgrade for aluminum in Tanzania and -- Tanzania basically, which has been done. We have expanded our capacities in Ghana, which has been done. Chittoor is now working at 100% capacity. I mean -- so there is no major changes here. But we are -- as I mentioned that we probably will be expanding some capacities in some other locations in the coming year. So that will start happening -- I mean -- but there is no major CapEx planned for those capacity increases.

Okay. Okay. And the Gandhidham plant shift to Mundra, is it still in work-in-progress or anything...

No. Actually, we stopped the work last year because of the COVID situation. But now we are -- we have started it again from January itself, and we plan to partially shift it by June end.

Okay. As in -- partially, as in?

So partially as in -- there is some expansion also, and there is some shifting also. So expansion basically is for value-added products. We are putting up a red lead plant there for export purposes, lead sheet plant for export purposes. So these plants will be put up by June. And the balance refining that we are doing in Gandhidham will be shifted afterwards once these plants are under operation, I mean, they are in operation.

First, you'll set up kind of a new plant and then further -- then you'll shift the Gandhidham unit.

Yes. It's -- yes. Kind of -- yes.

Okay. What would be our full year tax rate this year and next year?

So as we have increased profitability from the overseas plant from aluminum in Tanzania, lead in Tanzania and Ghana is also contributing a lot. So -- and these are 0 tax rates. So the blended tax rate for overall the company is -- came down from earlier 23%. Now it is coming down to 18% to 20%. So 18% we can take as a blended tax rate for the group.

Going forward.

Going forward.

Right. Okay. And this quarter, specifically, the other income was negative.

Basically, other income is contributing whatever we have -- whatever we are hedging. So there is some time on the forward contract, sometimes we gain something and sometimes we lose something, but it is all part of the operational -- the subset of the operational buy and sell we do. So that is included in the other income because of the accounting system. So otherwise, we have considered it in the operational EBITDA -- adjusted EBITDA only. Because whatever we are gaining and losing here, corresponding gains and loss are there in the operational income also. So it's part of the income only or loss.

Should I -- so the other expenses should have the equivalent opposite number?

Yes, correct. You are right.

Correct. Correct.

What is the ForEx impact in the other income number?

So for foreign?

ForEx.

ForEx. Okay. ForEx is -- INR 1.3 crore is the ForEx gain.

Out of the other income number of -- which is about, say INR 1.4 crores -- minus 1.4 crores, how much is related to the hedging which we do?

For the currency hedging, it is INR 3.72 crores positive. And for the metal hedging, it is INR 4.37 crore negative. So net is reflecting in the negative other income for this quarter.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Yogesh Malhotra from Gravita India Limited for his closing comments.

Yes. Thank you. Thank you, everyone, for attending the earnings con call for Q3 financial year '21. We hope we have answered all your queries. In case you need any further information, you are welcome to contact our Investor Relations managers at Valorem Advisors, and we would be happy to answer all your queries. We look forward to seeing you again next quarter. Until then, stay safe and healthy. Thank you very much.

Thanks.