Greenlam Industries Limited (GREENLAM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Greenlam Industries Limited Q2 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Saurabh Mittal, Managing Director and Chief Executive Officer, Greenlam Industries Limited. Thank you, and over to you, Mr. Mittal.

Thank you. Good afternoon, friends. A very warm welcome to all of you. I hope you all are keeping safe and healthy. On the call, I'm joined by Ashok, our CFO; Samarth Agarwal from the finance team; and SGA, our Investor Relations adviser. The results and presentations are available on the stock exchanges and our company website, and I hope everyone has had a chance to look at it. This quarter, we saw an improvement in revenues on a sequential basis as most of the domestic markets opened up. While certain urban markets were partially open, if you view the entire quarter like Bombay, Thane, little bit of Calcutta was shutdown, Delhi had certain problems. So if you look at Q2 from our perspective, most markets opened, some certain urban centers were still struggling with the virus cases. Most of the international markets were open, besides, again, a few markets in Southeast Asia. So the business on the international front has come to near normalcy as you can see and -- which is nearly at a 93% of what we did in Q2 FY '20. Domestic business also has pulled up versus Q1 and has come to like an 80%, 83% normalcy. But we're still below the pre-COVID levels. In last quarter, we did face some challenges on the export front in terms of containers availability versus delay, which also led to certain revenues, which could not be recognized in quarter 2, and that problem still persists in this quarter as we move ahead. While the revenues were at a 83%, 84% overall, you probably have seen that we held on very well on the balance sheet front. We managed to reduce the debt, which increased in quarter 1. And beyond that, too, we reduced about INR 14 crores, INR 15 crores of debt/we had cash on the balance sheet. The debtors days improved to 32, which has been one of the best for us until now. And the costs were well managed in this period. So really, I think the focus on quality of the balance sheet remained which is aligned to our philosophy. And I think we did fairly well on that front. In terms of the demand situation, currently, in the international markets, by and large, demand is back to what we were experiencing last year at the same time. While we don't see growth in the export demand, but with some markets growing, some markets still struggling, on an overall basis, we think international business demand is by and large near a pre-COVID kind of a level. On the domestic front, too, there surely is an improvement in the demand. And if there are no other surprises of lockdown, et cetera, we think H2, we should be able to do reasonably well on the domestic front, too. So this is by and large on the domestic -- on the domestic front, the residential demand seems to be more robust than the commercial part of the business. And besides the domestic and international demand improving in H2, we think we will gain from the shift from unorganized to the organized players. We also think there will be improvement in the flooring and door business because of the issues of imports and people moving to domestic -- manufacturing domestic products. So overall, we think our H2 should be better than H1. And obviously, I'll put this to the disclaimer, subject to no surprises and no fresh impactful lockdowns. On the product side, we launched the antivirus product in last quarter in August, actually. And this was backed up with a marketing campaign. And this has been launched in the flagship brand of Greenlam, very well received in the market. And we really started talking about the health and hygiene strengths we had with the product. We were offering anti-bacteria for over 10 years, and in this pandemic, we kind of made more noise about it, we communicated it to our customers. And on the same path, we launched antivirus. And now you'd be happy to know that Greenlam, the flagship brand comes with triple features of antivirus, antibacterial and antifungal. And this has been very, very well received in the market. The other feedback or the other update is on the Greenlam South Limited, which is the plant we wanted to build in Andhra Pradesh. So we are moving ahead with the necessary approvals from the government, environment clearances and certain other approvals. So the moment we get those approvals, we'll be -- we'll begin to build the plant. So I can't give a date on it right now, but yes, obviously, it's got postponed because of the COVID and certain delays, et cetera. But by and large, once the approvals come in, we'll start constructing the plant. I don't think that's going to happen in this financial year, probably will move to next financial year. So that's on the Greenlam South plant. The other point I'm sure you must have seen that today we had an announcement of incorporating a company in Russia. So this is to market laminates in the Russian and CIS countries. We started -- we are going -- just going to start with 1 person currently, but we hope to scale this up in the near future. So that's it from a business update from my side, and I'm sure things will improve in H2 versus what we did in H1. I will now hand over the call to Ashok. Ashok will take you through the financial highlights, post which we'll be happy to answer your questions, queries and happy to take your suggestions also. Ashok, over to you.

Thank you, sir. Dear friends, I'll take you through the financial performance. Please note that the financials are not comparable on 6 months basis due to partial shutdown of operation in the quarter 1 due to pandemic. So I'll focus more on the Q2. For Q2 FY '21 versus FY -- Q2 FY '20 on a consol basis, net revenue de-grew by 17.1% on a Y-o-Y basis at -- and at INR 289 crore. However, on quarter-on-quarter basis, the revenue grew by 80%. Gross margin improved by 190 basis points on a Y-o-Y basis and stood at 48.9%. On quarter-on-quarter basis, gross margin declined by 80 basis points. Gross profit declined by 13.7% on Y-o-Y basis and stood at INR 141.6 crore, whereas this has improved by 78% on quarter basis. EBITDA margin remained flat on Y-o-Y basis at 14%. However, on quarterly basis, EBITDA margin improved by 910 basis points. EBITDA declined by 16.6% and stood at INR 40.5 crore on Y-o-Y basis. On quarterly basis, EBITDA is -- there is a huge improvement of around 414%. Net profit for the quarter declined by around 33% to INR 18.6 crore in this quarter as compared to INR 27.5 crore in the corresponding quarter last year. Net profit for the last year for the same quarter was higher on account of onetime tax benefit of INR 9.7 crore under the new tax regime announced by government in September 2019. Moving on to segmental performance. Laminates & Allied products formed around 89% of our Q2 sales. Laminate revenues de-grew by 12.7% to INR 258.5 crore in this quarter from INR 296 crore in Q2 last year. However, on quarterly basis, Laminate revenue improved by around 77%. Domestic laminate revenue de-grew by 18.8% in value terms. However, in the volume terms, the degrowth was lesser, and it degrew by around 5.4%. International revenue degrew by 6.9% in value, and in volume terms, it degrew by 8.6% for this quarter. EBITDA margin improved by 80 basis points and stood at 16.2% as against 15.4% in quarter 2 last year. EBITDA margin has improved by 770 basis points on quarterly basis -- on quarter-on-quarter basis. Production volume were at 3.24 million sheets and utilization level was at 83%. Sales volume for the quarter stood at 3.23 million sheets, a decline of 7.1%. For quarter-on-quarter basis, Laminate volume grew by 87% and production improved by 62%. Our average realization for the quarter was INR 772 per sheet as against INR 803 per sheet for the Q2 last year. Moving on to Decorative Veneer & Allied business, which formed around 11% of our Q2 sales. This segment consists of decorative veneer, engineered doors and floors. Total Veneer & Allied revenue stood at INR 30.8 crore in this quarter, a degrowth of 42% on Y-o-Y basis. In the Decorative Veneer segment, revenue for this quarter degrew by 50.8% and stood at INR 14.8 crore on Y-o-Y basis. However, sequentially, Decorative Veneer revenue improved by 136%. Capacity utilization for this quarter stood at 18%. Sales volumes were at 0.21 million square meter. Sequential production and sales of decorative veneer improved by 188% and 149%, respectively. Average realization stood at INR 704 per square meter as against INR 670 per square meter in quarter 2 last year. Moving on to engineered wood flooring. Revenue for this quarter degrew by 39% to INR 9.1 crore. However, on a sequentially basis, we improved by 173%. EBITDA loss for this quarter was narrowed down INR 0.7 crore from a loss of INR 1.1 crore last year same quarter. EBITDA loss in quarter 1 FY '21 was INR 1.5 crore. Moving on to engineered doors. Revenue for this quarter degrew by INR 13.6 crore (sic) [ 13.6% ] and stood at INR 7 crore. However, sequentially, revenue improved by 35%. EBITDA loss for this quarter was at INR 0.8 crore as against INR 0.9 crore in the Q1 FY '21. Capacity utilization for this quarter stood at 29%. Moving on to balance sheet. Net debt for this quarter stood at INR 249 crore as against INR 318 in the quarter 1 FY '21, resulting a reduction of INR 69 crore. In comparison to March '20 also, we could able to reduce our debt by INR 14 crore. Working capital cycle saw an improvement from INR 383 crore in June '20 to INR 346 crore in September '20 due to improvement in inventory and debtor cycle. However, the same is still elevated due to still higher inventory and a bit lower sales. This is all from our side. I would now like to open the floor for question-and-answer.

[Operator Instructions] The first question is from the line of Nehal Shah from ICICI Securities.

Sir, my question would be on the demand for laminates as far as the market share gains are concerned. So like last quarter, we were hoping for market share gains across domestic as well as overseas. Are we already seeing that or do you think that that's still some time away?

So Nehal, I think on exports in the categories we operate, I think, we are gaining market share. And on the domestic, too, if you see, versus Q1, the volumes have gone up, and the realizations have reduced a bit, which clearly means the 1 millimeter business is still not at what it used to be, while the commodity products we launched, that sale has gone up. And each passing month, we see that the 1 millimeter business is coming back to normalcy, while we are also able to continue and keep building on the commodity, which is the 0.7 category. So in my view of whatever we see in here, I think we are moving in that direction. And obviously, we can't quantify it so clearly, but I think we are moving in that direction, Nehal.

Right. And sir, on 1 mm category, do you think the discretionary spends are now coming back?

Yes. I think it is coming back -- since we track secondary sales of most distributors across the country. Like I was saying earlier, in July, August or even in Q2, we still had lower sales in markets like Delhi NCR, Bombay, Thane, Bangalore, Calcutta. So these urban markets, which are largely 1 millimeter markets, so there, there was still pressure on sales, the shops were still shut, markets were not completely open. But like in September, we saw secondary sales improve. And even October has been quite decent from that point. So answering your question, yes, it is coming back, Nehal.

Yes. And sir, my last question, has October started -- has the degrowth gone away in October, because October, you'll have a benefit of the festive days of last year?

So yes, we don't have any degrowth in October.

[Operator Instructions] The next question is from the line of Sneha Talreja from Edelweiss.

Sir, couple of questions from my end. Firstly, you said that of course container availability was one issue because of which your exports got impacted. Can we quantify the same? Just to gauge how much is the normalcy that we have attained.

So you could assume that from a business point, we nearly had a full normalcy in exports. And the way we recognize revenues of exports, when goods sail from the sailing port and not from the date of dispatch. And where our subsidiaries are concerned, we recognize revenues when the goods reach the destination ports. And so because of lack of availability of vessels and container availability and being some delays, I'm not going to be able to put a figure to it, but you could assume that we are nearly at a normal revenue on that front, yes? So assuming for the subsidiary sales, what could have been booked -- what could have been recognized as revenue in September has moved to October. And they have delays of availability of trucking and at the ports also, yes? So I hope that answers your question.

Right. So maybe if the situation was normal, we wouldn't have seen this kind of a 9% sort of a drop, it could have been even 0% is what I wanted to understand.

Yes, you could assume that.

Okay. My second question was, of course, you mentioned your domestic realizations are down because your 0.7 mm sales is picking up versus 1 mm. Could you just give us the mix of the same?

Last year also we discussed this. So you'll have to take this offline with Ashok, please. I can't give you a number on this right now.

Sure. I'll just keep that noted and keep speaking to Samarth sir or Ashok sir on that.

Yes. Yes, please.

Sir, also, I mean, the repetition of the first question about the competitive intensity that you are seeing versus smaller players. Of course, you've discussed in brief last quarter that market share gains could be there. If at all you could put some number on how do you see industry must have grown or, of course, degrown because even you have seen decline. So what could be according to you in H1, the decline in the industry could have been?

Honestly, I can't put a number to it. So I'll just be making a wild guess, which I don't want to do. So really, I can't put a number to it what could be the decline, and so -- I'm afraid I can't put a number to you on that, please, right now.

Okay. Sir, one last question from my end would be, from the distribution front, just want to know the number of distributors today as on maybe 6 months back what it could have been?

So not much is seen from the distribution front. What has changed maybe addition of secondary dealers who buy from distributors. So just -- maybe just a few distributors have probably got added on. So there's not much change on the primary distribution front. Secondary dealers probably have increased with the commodity product getting into the market.

[Operator Instructions] The next question is from the line of Shrenik Bachhawat from JM Financial.

Sir, I wanted to understand gross margins have contracted by 80 basis points quarter-on-quarter. So is that the savings in [indiscernible] cost has been offset by the commodity laminates? That's the first question. Second question is, has the employee cost come back to pre-COVID levels?

So we have restored the -- all the paycuts, et cetera, which we had effective October 2020. So that's one response. On the gross margin contraction versus Q1, so yes, certain costs have gone up a bit, some chemicals, certain paper costs, et cetera. So I think there's a minor shift in RM costs. Mr. Ashok wants to add something.

Yes. So from the Q1, the dip which we have seen in the Q1, there is some amount of cost going up in the quarter 2, which we've seen, but none of the major impact which we've seen.

And some realization also gone down...

Yes, yes.

Some realizations have also come down in exports.

And sir, in commodity laminate segment, what would be the EBITDA margin that would be the target?

Can't put a figure to it right now. I'm asking Ashok to take it offline with you, please.

The next question is from the line of Pranav Mehta from Equirus Securities.

Sir, just wanted to understand on raw material front. So are you seeing any cost inflation on the raw materials side for next 2 quarters and even for FY '22? That is one question and the -- yes, sir, you can continue. I'll ask the question...

Pranav, even though -- just like what I mentioned, in the dip what was there in the quarter 1 as compared to quarter 4, so yes, the cost from there, it has slightly gone up in quarter 2, but still the costs are much lower in comparison to quarter 4. And most of the cost has come down in chemicals. So the cost still is down in comparison to previous year. But on a quarter 1 basis, there is slight increase in the cost. And going forward, we are not seeing any huge cost increase or increment as of now.

Okay, sir. And sir, just wanted some clarity on your door and floor businesses. So I see that door is gaining some traction, but the floor is still not able to do it. So can you throw some light on how things are going to move in both these segments going forward?

So on the flooring business, I think we will see an improvement in this quarter. So we have business lined up and certain executions could not take place of the flooring business [Technical Difficulty] come down a bit. So I think -- versus Q2 of last year. So we should see improvement in the flooring business in this quarter.

And Pranav, if you see the flooring [Technical Difficulty]

Sir, sorry to interrupt, sir, you are not audible.

Yes, Pranav?

Yes, sir. I can hear you.

Yes. If you see in flooring, from Q1 to Q2, there is an increase in the sales. Obviously, the sales of doors was not come down to that extent, so it was down [ too much. ] But as Saurabh said, we can see the improvement in the -- in this quarter and quarter to come.

[Operator Instructions] The next question is from the line of Hrishikesh Bhagat from Kotak Asset Management.

Sir, just 2 questions from my side. So firstly, when you made this comment about container availability for export, I believe we import some degree of paper also. So any challenge of availability in imports from paper also or any difficulty on that front, paper or chemicals?

So on the import front, availability is not a problem because the exporting nation is shipping the container availability. So there this challenge does not exist, but the delays of vessels and some congestions, but it's a minor impact. So yes, there is an impact of [Technical Difficulty] congestion and clearances, but not of availability.

Okay. Okay. And my second question, I know it was asked, but more or less on the similar line, now when you make this comment that 1 mm is gradually picking up, then is it a fair assumption that seems now that mix might improve towards slightly related towards 1 mm, the margins, EBITDA margins can improve because as Ashok sir said that not much impact on the raw material side. So I believe that gross margin might get maintained herein around some level, so EBITDA margin can increase with the mix -- improvement in mix towards 1 mm?

So yes, you're right. If the mix improvement happens on 1 millimeter, EBITDA margin could improve because gross margins in 1 mm are higher and margins are also high in 1 mm. So yes, you're right on that.

The next question is from the line of Harsh Shah from Dimensional Securities.

I want -- I just wanted to understand the industry dynamics in terms of imports. I mean how much does import contribute to the over laminates and the veneer furniture business? And how has it moved over, say, last couple of quarters?

Boss, we'll have to take this independently because we'll have to give you full information and...

Sir, if you can just throw a gist for everyone's...

Okay. So just very quickly, I'll take this. On -- in laminates, the import of the finished product is very, very minimal, while raw material is largely imported. And what was the next question you had? What was the next...

I mean, how has the imports moved over last couple of quarters, for both laminates and veneer furnitures?

So furniture, I cannot talk much -- I cannot give you a figure on that. On the veneer piece also largely the raw material is imported. In the laminate and veneer business, the imports are largely of raw material. The finished goods imports are limited. While in the flooring and door business, especially the flooring, besides us, literally everything gets imported into the country. But door -- in the Doors segment, you could say there's a mix between domestic production and imports happening. But as far as the trend and figure, I'm afraid I can't put that -- give a figure on that side.

Okay. Okay. And also, would you be in a position to highlight, I mean, how much of your sales are going towards institutions or [indiscernible] wholesale? And how much would be retail? Just to understand which market is picking up.

So again, this is going to be more like a general direction feedback. 60%, 65% revenue's coming from the residential part of the market, if you say domestic, the balance comes in from the commercial market.

Okay. And where are you seeing better growth of the 2?

At the moment, if you say, the retail/residential market seems to be more bouyant versus the commercial market. But it's not such a huge swing which really is going to impact. It could be just a few percent movement here and there, yes.

Just digging a little deeper. So when you say residential, then is the demand more towards refurbishment or innovation of houses -- I mean, individual houses? Or is it going more towards the bigger projects of, say, 3, 4 buildings and similar entire projects?

So again, it is all estimates. By and large, the newer construction, newer interiors consume more laminates, right? And the renovation percent in our country generally is low. There could be improvements or additions, but largely, there's more newer interiors, newer projects, newer homes, newer construction, which would end up consuming more percent of our products.

The next question is from the line of Mithun Soni from GeeCee Investments.

Couple of questions. Would you be able to share what is the mix of 1 mm versus 0.7 mm for us in this quarter? What was it last year?