Greenlam Industries Limited (GREENLAM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Greenlam Industries Limited Q3 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're all keeping safe and healthy. On the call, I'm joined by Ashok, our CFO; Samarth from the finance team; and SGA, our Investor Relations adviser. The results and presentations are available in stock exchanges and the company website, and I hope you've had a chance to look at them. The year began with much awaited nationwide vaccination drive, which everyone has been talking about for so long. And I'm sure this will act as a big growth booster for all the sectors, including our business. The current quarter, which is quarter 3, saw sequential improvement in the economic activity in India, and the economy really opened up post the lockdown. However, in several international markets, the economies did open up, and then lockdowns were reintroduced in countries like U.K., Thailand, Indonesia and some more smaller markets. As cases started rising there due to new strains, so we had some challenges in certain international markets, although we don't think that's going to impact our business negatively at all. But yes, the markets were shut for sometime. In certain countries, the lockdown has still persisted. On the demand side, in the domestic market, which is India, the commercial real estate market has been a bit slow, but I think of late we are hearing that projects are opening up and contractors have invited for several bids and inquiries, et cetera. And I guess things will come back to normalcy on the commercial side also very soon. On the residential side of the market, we hear good news in most of the markets. Across the country, we hear that people -- the residential market is doing pretty well, much, much better than the commercial market. And generally, with the entire atmosphere of lower interest rates touching stamp duties, overall, people have been potentially buying more homes. We also hear that consumers want to renovate homes, take larger spaces, upgrade the homes. So this whole residential market, home improvement market in India, we see good things happening, and we're quite positive on the residential side of the market. And the commercial side, too, as I said, we are looking forward for that market also to open up meaningfully in the coming few months. On the temporary challenges in the business, we had challenges on the supply chain on the inwards and the outward from the factories. And these challenges are largely due to significant delay in vessel arrivals, significant delay or difficulty in obtaining empty boxes for exports and the farmer agitations impacted both our plant locations. So really, if you look at the quarter, we did -- the team really worked hard to ensure the supply chain disruptions were minimized, and we went on to have one of the highest productions we have done in a quarter, although we had a fair share of unbilled sales, both for the domestic market and the international markets. The international revenue of laminates were slightly higher than the pre-COVID levels in Q3 of FY '20. And the domestic business was close to 96% of pre-COVID in Q3 '21. While the Veneer & Allied business, we still saw a little bit subpar numbers that are 65% of the numbers we achieved in quarter 3 FY '20. But we are quite positive. We hope that in quarter 4, the Veneer & Allied category should also kind of largely normalize compared to pre-COVID levels. On the business updates, you probably have seen the disclosures. We have opened up 2 subsidiaries, one in Russia and one in Poland. These are largely to set up businesses in those markets, in Eastern Europe and Russian sphere countries. We also have introduced new products in the Mikasa flooring category, which is the Mikasa Staircase Solutions. And on the engineered door categories, we had one of the most important CBRI certifications of fire rating, which is very difficult to obtain, very high, tight standards. So we've got that certification also in the last quarter. And besides that, on the South India plant, we are working on getting all the approvals of the government. So that plant, obviously, because of delays due to COVID and due to certain approvals, has got postponed. But we think -- as we see things now, Q3 FY '22, we should be able to commence building the plant. And one can assume that will probably take us about anything between 12 to 15 months from then to get into commercial production. So this is all broadly from my side. And by and large, we're very positive about how things are shaping up. And I will have Ashok take you through the financial and the operational highlights, post which we'll be happy to address your questions, suggestions, queries, if any. Ashok, over to you.

Thank you, sir. Good evening, friends. I'll take you through the financial...

We are not able to hear you, sir. We would request the participants to wait in the call as the line for the management has gotten disconnected. [Technical Difficulty] Thank you for patiently waiting. We have the management reconnected. Sir, you can go ahead, please.

Yes. Extremely sorry for the disturbance. Line got disconnected. Good evening, friends. I'll take you through the financial performance for the quarter. Please note that financial performance for the 9 months will not be comparable due to shutdown in the quarter 1. For quarter 3 FY '21, on a consolidated basis, net revenue stood at INR 335 crore, a growth of 15.7% on quarter-on-quarter basis and a degrowth of 6.5% on Y-on-Y basis. Gross profit stood at INR 174 crores, a growth of 23% on a quarter-on-quarter basis and a degrowth of 3% on Y-on-Y basis. Gross margin stood at 52.1%, an improvement of 320 basis points on quarter-on-quarter and 180 basis points on year-on-year basis. EBITDA stood at INR 57.9 crore, a growth of 43.1% on quarter-on-quarter basis and 6% on year-on-year basis. The increase in EBITDA was on the back of higher operational efficiencies. EBITDA margin stood at 17.3%, a growth of 330 basis points on quarter-on-quarter and 200 basis point on year-on-year basis. Net profit stood at INR 32 crore, a growth of 72.3% on quarterly basis and 10% on year-on-year basis. PAT margin stood at -- see a growth of 9.6%, a growth of 320 basis points on quarter-on-quarter basis and 150 basis points on Y-on-Y basis. Moving on to segmental performance. Laminate & Allied product formed around 88% of our Q3 sales. Laminate revenue for the quarter stood at INR 296 crore in this quarter, a growth of 14% on quarter-on-quarter and a marginal degrowth of 0.5% on Y-on-Y basis. Domestic laminate revenue grew by 14.7% on Q-on-Q basis in value terms and a growth of 17% in volume terms. On Y-o-Y basis, domestic laminate revenue degrew by 4% in value terms and grew by 12% in volume terms. International laminate revenue grew by 14% on Q-on-Q basis in value terms and 24.6% in volume terms. On a Y-on-Y basis, international laminate revenue grew by 3% in value terms and 9% in volume terms. EBITDA margin for the laminate stood at 19.8%, a growth of 360 basis points on quarter-on-quarter basis and 140 basis points on year-on-year basis. Production volumes were highest for this quarter and stood at 3.98 million sheets at the utilization level of 102%. Sales volume for the quarter stood at 3.9% for the reason as explained by sir. Our average realization for the quarter stood at INR 736 per sheet. Moving on to Decorative Veneer & Allied product, which formed 12% of our Q3 sales. This includes decorative veneer, engineered floors and engineered doors. Total revenue stood at INR 39 crores in this quarter, a degrowth of 36% on Y-o-Y basis. In Veneers segment -- in Decorative Veneer segment, revenue for this quarter stood at INR 25.7 crore, a growth of 74% on quarter-on-quarter basis and a degrowth of 23% on Y-on-Y basis. On a sequential basis, there is an uptick in the veneer business. And the capacity utilization for the quarter stood at 32% as against 18% last quarter. Sales volume were at 0.36 million square meters as against 0.21 million square meter last quarter. Average realization stood at INR 694 per square meter. Moving on to engineered wood flooring. Revenue for this quarter stood at INR 8.4 crores, a degrowth of 7.5% on quarter-on-quarter basis. However, the capacity utilization improved from previous quarter, improved to 14% from 9% in previous quarter. Moving on to engineered doors. Doors revenue for this quarter stood at INR 4.9 crore, a degrowth of INR 29.7 crore -- 29.7% on quarter-on-quarter basis. Capacity utilization for the quarter stood at 18%. Moving on to some performance on funds. Net debt for the quarter stood at INR 180 crores as against INR 249 crore at the end of previous quarter, resulting in a reduction of INR 69 crore in this quarter and INR 83 crores on YTD basis. Working capital also saw a very good improvement and improved to INR 306 crores as against INR 346 crores at the end of last quarter. In terms of number of days also, it has improved to 83 days from 109 days previous quarter. That's all from our side. I would now like to open the floor for question and answer. Thank you.

[Operator Instructions] The first question is from the line of Chandrasekar from Laburnum Capital.

Nagraj here. Congrats on a good quarter given the tough base and prevailing circumstances. Since the business is back to normality, I had a few longer-term questions. If you look at the domestic laminate sales growth, the industry and for us, still, it looks like it's been roughly mid-single digits on average over the last 5 years. And we've been growing a bit slower than other peers who were a bit smaller than us 5 years ago. So just wanted to understand why this growth rate was so low compared to other building materials ancillaries? Is this because construction pace has been very low in terms of the number of houses built, if you look at any other metrics, et cetera?

Nagraj, so if you look at the past 5 years, I think it's been a bit rough 5 years in terms of demonetization, GST, slowdown in real estate, et cetera. And also in the last few years, we did not have our commodity product line also. So many companies, which probably had commodity lines, they did grow top line better. But I think on an overall balance sheet perspective, on a margin perspective, I don't think they've done better than us. I think each year, if you see, since we became an independent company, numbers or performance ratios in terms of laminates business, we're talking about, post utilization, payment terms, margins, ROCs have largely all been improving. So I think going ahead we should be able to hopefully get better growth. And we've also raised some capacity in 2019. During the lockdown, we also added a commodity liner line, which did not -- which we did not have in the past. So that's also going to help us build some more volumes and some numbers, Nagraj. Does that make sense?

When you mean commodity, you mean the thinner laminates that have been growing faster than the thicker, more premium laminates we focus on, which is what the peers seem to be more active on? How would the margins...

We focus on the thinner line also, which we did in, I think, Q2 of this financial year. And obviously, we're not going to drive too much numbers there, but we have launched thinner line also, which really would help us probably getting more penetration to markets where we cannot meaningfully be present at. So it will help us get into some more counters, some more bounce markets of the country where, with the thick-only product, you could not get into those markets. So this will help us do that, Nagraj.

Got it. Got it. Got it. And how would the margins be different between thick and thin products?

So surely, the margins will be different, but one is you see it on a holistic perspective because your investments on the thin line, because working capital investment is low, you don't have a very large range, marketing spends are a bit -- not a bit, is substantially lower. So RM cost would be higher in the thinner line, but operating cost besides RM will all be low. And anyway, the channel, by and large, the distribution channel, the dispatches are the same. So one needs to see it on an overall perspective. So if you see, in Q3, we have improved our production levels, and margins have actually gone up despite the fact that we did produce some thinner material also because with additional production, you're able to absorb more overheads and costs also. So that kind of helps the overall profitability of the business.

Yes. And on the export side, you've done really well in the last 2, 3 years, added new markets and grown this space significantly and this quarter as well on a tough base. Just where are we now after the rupee depreciation versus the European and the American laminates companies? My guess is, these are the main markets where we sell into right now. So just where are we cost-wise on a per-sheet basis versus these companies? And what would be the rough mix of our export sales right now?

So when we started the export business, it was more of a cost-driven model while now really, although we're still competitive versus the European producers and the U.S. business, more of the European producers, so you can safely assume we'll be at least 10% to 15% lower priced than the European producers. And the export market, we think, will continue to grow. And we see quite encouraging situations in the international markets, although the overall market will probably grow at a fast -- slower pace, but we'll end up taking market share from regional producers in various markets, whether it's European producers, whether it's U.S. producers or even some Southeast Asian producers or some people in the Middle East. So we'll end up -- we'll continue to take some market share from the regional and the local producers, Nagraj.

Got it. And just regarding Mikasa, which has been slower to recover, you did a very good job in FY '19 and '20 ramping up capacity utilization here. But are you now seeing -- what really is the reason we're seeing slower pickup here, number one? And number two, are we seeing increased competition from European manufacturers who have a lower cost base from China or from Eastern Europe on the high-end side and from the Chinese exporters on the low-end side where we sort of get squeezed in the middle with our products here?

So you're right on this observation. And pre-COVID, this was absolutely relevant. In the current situation, what we've heard is that imports, people have not imported much material. The cost of freight has gone up significantly. And cost of doing business with international suppliers for these domestic importers/traders has gone up. So that's one part. The good part of both the businesses are, the flooring and door are largely residential products. And we think over the last -- over the next -- so we think over the next few years, the residential demand should go up, right, and the flooring and the door model is a larger play on the residential market than the commercial market. And probably in the last few years, we have suffered because of this mix. So I think, going ahead, we see this business should recover. And also, we'll probably end up taking share of imports in flooring and probably in doors also. So I think we're positive about how this can shape up in the future, Nagraj.

And just to add on, has there been any been non- -- has there been tariff or non-tariff protection given to us over the last year or 2 that has helped sales growth in '19, '20? Or can you help us...

No, nothing has come to us. Whether the government will do something, I'm not sure on it. So no tariff support to promote the floors and the doors as yet.

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

Congratulations on the set of numbers. I have 3 questions from my end. Firstly, as you mentioned that doors and floorings ideally should have seen faster growth because we are actually facing issues with respect to inward logistics and also ideally your imports should have been impacted. I mean, your doors and flooring should have done better quarter-on-quarter. What are the reasons why there is extensive losses or losses have widened compared to Q-o-Q in both doors as well as the flooring segment?

So the demand, actually, you'd probably see, like we were saying earlier, we had supply chain disruptions because of vessel and containers for the entire wood veneer business, whether the decorative veneer, whether the door or the floor. Most raw materials are imported, and we've had some challenges on that. That's one. We've had some export shipments, which have happened, but not -- they've remained unbilled, which will happen now. And probably this whole builder market where we are focusing our products on, we are seeing a lot of inquiries, but probably in the last quarter we haven't seen much of closure of those orders or even pending orders are there at the plant, which we've not been able to execute. So yes, so Q3, obviously, the numbers are out there. It's visible. But I think it should get better. And like I said earlier in the call, in Q4, we think this whole segment should come to near normalcy, which is the veneer, flooring and the doors business.

Sure. So that actually just brings me to the point. You said the demand has been normalized, but you were unable to supply that because of raw material constraints that you were unable to import.

I said demand will get normalized in this quarter. So there is a lot of discussion between customers and all that, but it hasn't really translated to revenues, yes.

Okay. Okay. Got that. Sir my second question is with regards to your margins. We have seen substantial improvement in your margins. This is despite your realizations coming down almost every quarter that we are seeing. And of course, since you've launched even commoditized product, how sustainable are these margins? And where do you see long-term margins heading towards in the laminates business?

So the laminates margin, I'm not sure whether this is sustainable or not. And reason being, in quarter 3, we had certain old purchases, old raw material costs, materials with a little bit lower cost. On the mix, the mix, although the price per sheet of production has gone down, but because volume of production has gone up, so overall, the overhead absorption expanded. In the export business, we had introduced several new products which is now gaining a lot of traction. So several commodity products in exports have moved to value-added categories. So overall -- and we've also done improvements to the plant in terms of utilization, in terms of wastage reduction, in terms of certain other initiatives taken at the plant level, which also controlled/optimized our costs. In the future, what margins can be maintained in laminates, because as we talk right now, raw material costs have gone up in chemicals, in kraft paper. There's inward freight increase, there is outward freight increase in exports. We have implemented some price increase in quarter 3. We are implementing certain price increases in quarter 4. So I think like a 17%, 18% types, to me, to us seems something which we hope that we can sustain unless something substantially goes right or goes wrong here.

So that was really helpful. And last question from my side would be, can you just specify some more details on the staircase solutions which you've launched? Are you going to do some more CapEx on this and where we get the demand from?

No, no. There's no CapEx. It's more of a product development within the flooring section. So there's very, very marginal CapEx. And it's a new product. So it's going to take time to really build business in the domestic market. It's more of communicating to you all that we're trying to look at more application areas with our products with just minor CapEx. We are trying to develop more products and expand our potential market share -- the market opportunity, rather.

Sure. So this is one of the products that you must be mentioning in the earlier calls that you would be launching certain products, and maybe this is just one of them, which is in line.

Yes, yes. Correct, correct.

Right, right. I got that.

The next question is from the line of Achal Lohade from JM Financial.

Sorry, I'm repeating probably the same question with respect to gross margins in the laminate business. So you mentioned that you had certain old raw materials, but I would presume that, that cost would have been there even in the past quarter. So I'm just curious to figure out, is there any write-back of provision or any specific thing because gross margins have improved Q-o-Q when the RM cost has gone up from 49% -- 49.9% to 53.7%, almost 400 basis points while the realizations actually declined. So can you please help us understand it a little bit more?

Like I said, there have been several initiatives at the plant level. RM costs have been low -- sorry, RM costs, we've had RM at fairly lower costs. The subsidiary business has also added to additional gross margins, which it is not add in -- or it added lower gross margins in quarter 2. And wastage improvements have happened. We've taken certain initiatives in the product, which has also helped us get this there. So there's been no provision write-back or any sort of creativities involved.

Understood, understood. Can you help us understand what has been the extent of cost increase in case of the kraft and the other paper and the chemical cost? Broadly in last 3, 4 months, what is the increase? And what is the blended cost increase effectively for us in the -- for the laminate business?

So I'll give you just like broadly math. Of the RM cost in laminates, about 2/3 cost in the -- from the paper side and 1/3 is on the chemicals, approximately. And the 1/3 part which is chemicals has probably gone up, I think, between 20% to 25%, approximately. The costs on the paper side, which is kraft and decor paper, some costs have gone up. Some -- we've had intimation from suppliers of prices going up, especially in decor paper. And certain costs will go up because of increases in sea freight, right? So this is broadly the approximately cost increases. Besides the cost increases, what's also happening is in certain raw materials, not for us, for most of the other industry players, there is availability issue, which probably holds good -- holds -- it holds us in a good position because we've always been quite rich on inventory, as you see our inventory value and age. So that's probably helping us actually throw out more production and get more business in the market.

Sorry, I missed the paper. What is the increase in the cost of paper at the aggregate level?

Paper. Yes, kraft. So in the paper, certain increases happened. So kraft paper, you can assume our costs have gone up anything between 6% to 8%. And decor paper, we've had -- we've got communication from vendors of price increases being implemented. We still have paper of the old costs. So there, increases will be in the band of maybe probably 3% to 5% types, yes, but there will be additional increase in sea freight costs because most of decor paper is imported for us.

Right. And what is the price increase have we taken in the third quarter? And you said you're also interested in certain price increase in the fourth quarter.

Q3, we've taken about 2% to 3% increases in both domestic and international markets. And about -- in Q4, we will take up some in February, some in March and some will probably get pulled over to April, another about 2% to 3%.

And -- sorry, I'm going into a little depth. Your -- in terms of -- is the price increase similar for other players as well? Or the others are yet to follow the price increase what we have taken?

No, I think price increase for others are probably equal or higher also. Local companies have also increased prices. So I think -- so either people have implemented price increase or they've announced increase, they've partially implemented. Partially, they will implement. So the entire industry has actually literally taken a price increase. Some have even taken it twice, actually.

Sure. In terms of the global trade, I mean, we have some sense in terms of the global size of laminate industry, but is it possible to see what is the actual traded volume in terms of exports or imports which is got done globally? And what is India's market share in that?

I can't give you a math side on that. I don't think we have so much of data with volume and trade. But you can connect with Ashok off-line, and we can see if something can be done.

Sure. And in terms of the domestic situation, how do you see, in terms of the competitive intensity, has it increased, remained stable or kind of declined, what we've seen a few of the other building material categories?

I don't think intensity has increased. I just want to say we think that certain -- several players have significant supply chain disruptions. So probably that's helping us sell enough maybe, but -- or sell whatever we can largely produce. I would say by and large remains the same, I would say that, yes. Probably it's come down a bit, I would say.

Sure. And just last question, if I may, sir. With respect to the imports, what is the extent of the import we have of laminates in India in terms of the percentage of the volume or percentage of the market?

Laminate imports of what we know is very, very negligible. And whatever is happening is extremely high-end laminate products in specialty categories, but nothing of much consequence.

The next question is from the line of Kunal Shah from YES Securities.

Is it audible?

Yes.

Yes.

So given the current laminate utilization level, the balance sheet positioning and the fact that the 1.5 million sheet capacity of GSL is primarily focused towards the export segment, aren't we planning to put another line or maybe increase the CapEx side given that, obviously, it's delayed, then why not come up with a bigger capacity and provided that the current laminate utilization level has also peaked out?

So you have a very valid question. So the current utilization levels, we can go up to 100% to 115% utilization. That's point number one. By debottlenecking the plant, by making it more productive, which we are doing, and we are hopeful to increase utilization from the current 100% to hopefully go up to 115% over the next few months. And your point on the 1.5 million sheets also makes a lot of sense in the current environment. So we are evaluating that, whether we should add more capacity in the new location because we have -- we bought 65 acres of land. So there's enough space, and we were designing the plant for more number of production lines. We initially announced only 2 at that point. But yes, we are looking at that, Kunal.

Okay. Great to hear. And sir, the other question, just to repeat on the door and floor business, over the last 4, 5 years, what we have seen, now I just want to understand whether is the product acceptability, that's an issue? Or was it the Tier 1 market not doing well an issue? So just putting it inversely, like let the Tier 1 market, obviously, is picking up and we are seeing green shoots for the same, are we confident to profitably ramp up these 2 units? And what would be the time frame that you'd be looking at for the same, given that the investment yields have been on a lower side over the last 4, 5 years for these 2 segments.

So yes, like FY '19, '20, the numbers of door, floor, recently are INR 100 crore revenue. So we moved up. And then again, there was a little of a downfall with this COVID thing. The confidence is obviously there to build up these businesses. The fact is we haven't -- until now, for whatever reasons, we haven't got there as yet, yes. So is there an acceptability problem? I don't think acceptability is a problem because the product is quite well settled and operational problems do come in. That's a different matter, that's with any product category. So there's no challenge from an acceptability perspective. Yes, we have to get there and get more markets and get more business and build this business actually. So like in FY '19, '20, we're thinking at the next -- the year after that, we should come to at least a breakeven perspective. And then COVID happened. And again, things kind of slipped, and we are again building it up. So it should happen. When should it happen? Difficult to give you a time frame right now because in the past we've given a couple of time lines and have failed doing that. So I want to just restrain myself giving some time line, but we will build this up.

[Operator Instructions] The next question is from the line of Dhiral Shah from PhillipCapital.

Sir, my question is, of the overall laminate market, what percentage would be, let's say, 1-mm size? What percentage would be below 1 mm, and what percentage would be above 1 mm?

Difficult to give you a number right now, but we've noted this question. And I'm going to ask Ashok to connect with you off-line. And so again, we have a very rough estimate of what is the total capacity in India, what's the actual utilization of factories, what is the thinner -- what's below 1 millimeter production percent. But surely, below 1 millimeter is a far larger market than 1 millimeter. So I'll ask Ashokji to -- probably Ashok to have a chat.

Sure, sure, sure. And sir, secondly, one of the unlisted players had also come out with 1.25 mm. So are we also looking at that segment?

So 1.25 is not new in India. So many people have it, but we are not looking at that category. Because what happens, if you have 1 millimeter and then you have 1.25 millimeter, so typically, the smaller companies, they don't have inventory. They put the inventory at the distributors. The range is limited. Then if you use 1.25, then you can't use 1 millimeter together with 1.25 because of the undulation on the surface or on the vertical -- on the surface with the horizontal or vertical. So we've examined this, but we've realized it doesn't make sense to just create another thickness and kind of trade one more category. The working capital cycle, the volumes, the market challenges, it's not worked out for us that we should enter that space at all because 1 mm is more than good enough, right? So that is, an additional 0.25 millimeter is not bringing any aesthetic value to the customer or any physical properties -- enhancing any physical properties of the product. So we decided to not be in that space because it's not needed to be in that space.

Okay, okay. And sir secondly, whatever the price hike which we have taken, is it -- will it be offset the cost inflation which we have seen later?

Yes, by and large, with both the increases of Q3 and Q4, which we're in the process of implementing, once both these increases are implemented, we should be able to offset the cost increase.