GRP Limited (509152) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to GRP Limited Q4 and FY '24 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 involves risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. Today on the call, we have Mr. Harsh Gandhi, JT, Managing Director; Ms. Shilpa Mehta, CFO. I now hand the conference over to Mr. Harsh Gandhi. Thank you, and over to you, sir.

Thank you, and a very good afternoon to all the participants on the call. Thank you for joining us on GRP Limited's Quarter 4 and FY 2024 Earnings Conference Call. As indicated, I have along with me today our company's CFO, Ms. Shilpa Mehta; and SGA, our Investor Relations advisors on the call. We have uploaded our investor presentation on the stock exchanges and the company website, and I hope each of you have had the opportunity to go through the same. The fiscal year 2024 has been an eventful year for the company. Several company-wide initiatives that we've been working on over the last years seem to have fructified and the macroeconomic environment in the industry which we are operating in has provided the much-needed tailwinds, and in our view, is setting us up for continued success. I'll briefly highlight the key macro events and internal highlights of the company before providing the outlook for the forthcoming year. After 3 long years of working alongside the Government of India's committee on extended producer responsibility comprising policymakers, regulators, which is the Central Pollution Control Board, the tyre brand owners and the tyre recyclers, the EPR regime was successfully launched, the portal created and sales of credits have commenced. It has been an arduous journey which incentivizes recyclers to generate an additional stream of revenue to invest in upgrading supply chain and deployment of new technologies. Your company has partially realized sales of EPR credits against its entitlement for the year 2022, '23 and has generated credits on the CPCB monitor total for the years '22, '23 and '23, '24 and as well for the current financial year. As global brands focus on their ESG credential and emission scopes, a key expectation that these brand owners have from recyclers is the need for improved visibility across their supply chains and emissions through their processes. GRP has been at the forefront of such initiatives and through the years has worked on improving its metrics. This has resulted in GRP being the first reclaim rubber manufacturer to be certified for IACC, which is International Sustainability and Carbon Certification. It's efforts at supply chain and workplace practice improvements has led to an upgrade in its CDP rating, which is the Carbon Disclosure Project and its Engineering Plastics and Repurpose Polyolefins business has been certified for GRS, which is the Global Recycling Standard or traceability in recycling value chains. As GRP set up the Repurpose Polyolefin business under a wholly-owned subsidiary, this company formerly started its manufacturing operations in Q4 of FY 2024 along with obtaining key customer approvals in the paint and lubricant packaging sector. These stringent product approvals obtained post extensive process and application testing will go a long way in establishing GRP as a partner of choice in this industry. And as the industry is compelled to use a higher amount of recycled content, this will benefit GRP establish and continue its success on the non-tyre business. Another highlight during the year under review was a successful approval of the Engineering Plastic product portfolio by a global compounder based out of Europe. As Europe is at the forefront of recycled content use, this approval paves the way for potential use in automotive OE brands and increase dependence on GRP products in that category. As brand owners detail their intent to increase consumption of recycled rubbers, the owners on technology development to allow for increased use rests on the tyre recycler. GRP has successfully commissioned a new technology for manufacturing reclaim rubber. This new technology is based on increased mechanization provides for improved mechanical properties of the rubber and in turn, allows for increased use in formulations by the tyre brands. This technology, hopefully will be approved during the current year and provides a much needed growth momentum for the Reclaim Rubber business in the coming years. With emerging clarity in the EPR regulation and the resultant incentives for different types of recycling technologies, GRP has acquired land at joining its existing facility in Solapur to set up a crumb rubber plant and venture into downstream recycling over the years. The proposed plant will implement the clean technology devoid of any waste generation. Let me go through the macroeconomic update affecting individual businesses. As far as the Rubber business is concerned, the tyre industry in both India and key global markets has had a volatile year. The economic slowdown and the inventory reduction across the value chain that has been taken up by the tyre companies globally has resulted in an overall demand of replacement tyres go down in calendar year 2023. In India, on the other hand, the demand for rubbers has increased by 4% in calendar year 2023, but the reclaim rubber demand fell by about 4%. In backdrop of this, GRP has been able to grow its market share in India by 3 percentage points in the calendar year 2023 over 2022. Our export volumes have decreased by about 11%, and that is aligned with the subdued global market conditions, which reflected in a 3.5% decline in overall rubber consumption although the reclaim rubber exports from India were, by and large, unchanged. Our share of exports from the country are maintained, while notable improvements in margins have been witnessed, thanks to the significant reduction in ocean freight costs over FY 2023 and enabled us to manage these challenges of exports effectively. I'll now go over the Non-Reclaim Rubber businesses. During the year under review, the price of key polymers, essentially nylon or polyamide, which is a key product category for your company, has been volatile with a deviation as high as 14%. But despite such volatility in the nylon prices during the year, GRP was able to grow its volumes in the sector by 13%. Now this increase is quite significant given that the company's operations are not stabilized until the end of Q1 post the fire incident in February 2023 at its Engineering Plastic plant. As the government of India focuses on implementing the EPR regulation also in the plastic sector, there, the focus is on embedding increased circularity, the recognition that the recycling industry needs much longer time to come up to the standards of recycling required to feed the growing plastic packaging sector of the economy. This has prompted to a delay in implementing the EPR regulation and the same is likely to be stabilized in the current year. Despite this, brand owners continue to increase usage, and this has led to a Q-on-Q increase in volumes for GRP for this particular business. GRP was also successfully able to introduce a new range of products in its Engineering Plastic business made from ocean plastics, which is mostly the fishnet waste. The growing focus on cleaning up the oceans has created major opportunities for end products based on such recycled materials. And GRP is confident of this new product development and introduction in the sector as a way to create another pillar of growth for the future. Let me provide you with a quick snapshot on the operational efficiency achievements that the company has witnessed during the year. The volume growth in the Reclaim Rubber business was at 6%. However, the growth in volumes in the domestic market was over 21% over the previous financial year. Within the Non-Reclaim Rubber business, the Engineering Plastics business experienced a volume growth of 13%. So as the industry is experiencing input cost increases on account of energy fuel surcharges, the impact of the same has been total 9% in unit costs. However, on account of substitution to green energy sources by way of wind power and solar power, the energy cost at GRP has reduced by 4%, with further savings expected in the full year on account of investments that the company has made in Bio Briquette systems to reduce its fuel consumption. On account of increased wage inflation, minimum wages across more states that we operate in have risen by 9%. Again, on account of steps towards automation and improved manpower efficiency, the overall wage cost increase for GRP has been only a 2% increase versus 9% minimum wage increases. We have had a further reduction in working capital cycle of about 24 days compared to the previous years tightening the working capital across all businesses, allowing for improved turns and faster cash realization within the system. While ocean freights tended lower for the first half of the year, increased tensions and escalation of the regional conflict in the Middle East led to an increase in freight costs, as a result, lowering margins on the fourth quarter of the financial year. As we continue our quest in helping brand owners embed more circularity in their operations, here is a brief outlook on FY 2025 as we view it based on the current economic reality. As far as the Reclaim Rubber side is concerned, we expect continued strength in the order book for most of 2025 based on projections received from key customers. We expect approvals for new products developed during the year, and that's likely to provide a boost for future earnings. We are hoping that the EPR regime will stabilize during the current financial year and will provide long-term positive cash flow to allow for increased investment in building scale to compare with global benchmarks. We will continue to remain focused on tightening working capital as we invest in synergistic businesses, and we are hoping this will bring our overall working capital even lower. Expansion in the crumb rubber capacity will hopefully pave the way for future plans and other end users like pyrolysis that covered carbon black, CRMB among others. As far as the Non-Reclaim Rubber side is concerned, the focus on the compounding industry shall provide opportunities for long-term global partnerships for your company. And the new application development initiatives we have taken on in the composite and the CDF post a successful restart of the relationship with the new partner should sort of reap dividends over the current year. We do believe that the Repurpose Polyolefin portfolio that has been developed should stabilize in the current year and will contribute significantly to the consolidated financials in the years to come. At this stage, I'd like to hand over the call to Shilpa Mehta to take you through the financial highlights for the quarter as well as for the year gone by. Shilpa, over to you.

Good afternoon, everyone. Let me take you through the consolidated financial highlights for Q4 and FY '24. First, Q4 of FY '24 total income stood at INR 1,381 million as compared to INR 967 million in Q4 FY '23, an increase of 43% on a year-on-year basis and on a sequential basis, it was increased by 26%. Gross profit for the Q4 of FY '24 is at INR 790 million as compared to INR 494 million of Q4 of FY '23, an increase of 60% on a year-on-year basis and sequentially, it is by 29% increase. Gross profit adjusted for exceptional items has increased by 22% due to favorable raw material costs and product mix. EBITDA for Q4 FY '24 is at INR 229 million as compared to INR 70 million in FY '23 Q4. This is an increase of 227% on a year-on-year basis, and sequentially, it is increased by 110%. EBITDA margin is at 16.6% in Q4 of FY '24 as against 7.2% in Q4 of FY '23. And PAT for Q4 FY '24 is at INR 117 million as compared to INR 28 million in Q4 of FY '23. In respect of the fire, which had occurred in the preceding financial year in the holding company, the insurance claim on inventory lost has been settled during the year, and the loss of INR 239.57 lakhs has been recognized as an exceptional item the above results. In terms of property, plant and equipment of the holding company, the same has been reinstated during the year at a cost of INR 538.26 lakh and has been added to PPE. The WDV of the PPE that was so destroyed was INR 350.50 lakhs was treated as insurance receivable in the preceding year. The company had launched claim of INR 996.20 lakhs towards the same and the final claim in respect of the [indiscernible] reinstatement has not yet been approved by the insurance company. A sum of INR 250 lakhs has been received on account of -- as an advance against this claim. The net amount of insurance claims when approved by the insurance company shall be reduced from the gross [indiscernible] property, plant and equipment. And for FY '24, the total income in FY '24 is at INR 4,630 million as compared to INR 4,605 million in FY '23. Revenue from operations grew on back of increased volumes of 7%. Gross profit for FY '24 stood at INR 2,537 million as compared to INR 2,512 million in FY '23. EBITDA for FY '24 is INR 523 million as compared to INR 343 million in FY '23. And EBITDA has increased by 53%, driven by the gain from EPS and a 4% reduction in power costs following the switch to wind energy starting from April 2023. EBITDA margins for FY '24 is at 11.3% as compared to 7.4% in FY '23. PAT for FY '24 is at INR 226 million as compared to INR 139 million in FY '23, which is up by 62% on year-on-year basis. On the debt side, I'm pleased to share that we were able to reduce our working capital days from 98 days to 74 days in FY '24. During the year, the company has invested in CapEx, INR 499 million in various CapEx projects, including biofuel fitting system for energy cost saving, technology upgradation in manufacturing process, tight upgradation across all locations, firefighting system upgradation and for purchase of land at Solapur and for the subsidiary. Our debt-to-equity ratio is 0.67 in FY '24. And interest coverage ratio has changed from 4.49% to 6.63% in FY '24. The debt EBITDA ratio stands at 2.14 compared to 2.91 in FY 2023. We are happy to announce that the board has recommended payment of final dividend of INR 37.5 per share, which is 375% on the equity shares of INR 10 each for the year ended 31st March 2024, which is amounting to INR 50 million as a symbolic payout on the eve of 50-year celebration. With this, I now will open the floor for question and answers.

[Operator Instructions] The first question is from the line of Ajay Kumar Surya from Niveshaay.

Congratulations on good set of numbers. My question is on the EPR side. Sir, based on our capacity of 72,000 tonnes, how much are we eligible for EPR credit? I mean, how many credits can we generate in terms of this?

The regulation -- sorry, if you have any other set of questions you can go through; otherwise, we'll answer this in a moment.

I have one more question on this. So sir, also because -- if I look at our business mix, some 60% of our revenue is from export market. So are we also eligible for credits even on the exported volume? That's one thing I wanted to know. And sir, more questions, sir, out of the EPR requirement, which the tyre companies have to fulfill, sir, how much has been currently fulfilled by them based on the targets which were required to limits, like have we met like 5%, 10% of that? Or is it still more or less any clarification on that? And sir, one last question. Sir, if I look at -- if we exclude the INR 15 crore EPR which we have generated this quarter, our margins look pretty suppressed for this quarter. So sir, is that going forward, there is a possibility that players might incur losses or even sell the reclaim rubber on lower margins whilst generate higher income through selling credits? So how are you seeing that going forward? If you can answer on that?

Okay. So that's a lot of questions, about 4 of them, and I'll try and answer each of them. So number one, as far as the credit generation is concerned, there is a policy document, which has a certain number of weightage for the extent of recycling that you do, and it is based on the type of recycling that you do. Each category of recycling, which is reclaim rubber, crumb rubber, CRMB, RCB, [indiscernible] each of these carries different weightage and as a result, the eligibility of credit varies. There is also a conversion factor, which is under the purview of the steering committee of the government, and therefore, there is a possibility that, that will change. I'm not able to answer your question in terms of what is the extent that we will, as a company, generate on an annual basis because this is a number which is not 100% frozen. There are likely changes in the policy when it comes to the weightages, when it comes to the conversion factors and also the categories of the products within it. As we have indicated that we have sold part of our EPR credits, that brings me to the next question, which is the target of the tyre company. I can't comment on what it is that they have purchased and what has been sold. I mean, I can only confirm from GRP's point of view, we have, as a company, sold partial credits that we generated for the year '22, '23. So I cannot comment beyond that in terms of how much the tyre companies have purchased and how much it is against their requirements, et cetera, because that is not something that is visible for us to see. We, as a recycler only have access to the recycling side of the portal to see the extent of credits generated and against that, the credits that are sold on the system. As far as your next question on whether exports out of these different product categories, whether they are eligible for the EPR. EPR Is very clear, the policy states that you will generate EPR, a, if you use domestic waste of end-of-life tyres, and that is what is eligible. It is not linked to where you sell the output, which is reclaim rubber in our case. So yes, we will generate EPR credit even for the exports that we undertake. Your last question was regarding the margins of the company without the EPR. As I said that the margins partially were subdued because of the ocean freight increases in Q4. But apart from that, there was also a onetime write-off on account of loss due to the insurance and all the other provisions and write-offs. So therefore, comparing all of that, yes, the margin was marginally lower than the previous quarter that was significantly better than the Q4 of FY '23. Hope that answers the next question. Maybe we can move to the next.

[indiscernible]

I'm sorry, I'm unable to hear you.

I wanted to ask that, have you made any tie-ups with tyre companies with them approaching us for a particular number of units that they want to tie up with us for their obligation on EPR?

EPR credits will be sold to the tyre companies. There's no question of tie-ups. This will be an open market. We have generated EPR credit, so we have a lot of other tyre recycling companies. And tyre companies will buy credits from the tyre recycling companies, which is kind of credits over a portal. There's not going to be any tie-ups. We will -- I mean, the good thing for us is that all the tyre companies are our customers because we are selling them reclaim rubber. So the relationship is robust, and that allows us to conduct the sale of the EPR credit seamlessly with these customers.

Got it, sir. And sir, you said that you sold only partial credit. Sir, we need to know that how much are we still in line to sell or how much more...

We sell the credits because all of this is very dynamic. The price of the credits are changing. The number of credits that we will be accruing may change on account of the policy. So I think we will make announcements or rather we will report our income as and when the EPR credits get realized. I mean, our income from the credits get realized. So I don't think there's any point in reporting the number of credits. I mean, it's a number that will keep fluctuating.

Sir, would we have shown like 30%, 40% of the eligible plan?

I can't comment because the prices are dynamic and so are the generation of credits.

The next question is from the line of Aditi Sawant from ADM.

A couple of questions on the...

We can't hear you at all. I'm sorry.

Ma'am, actually, there's a lot of static from your end. Could you use your handset or mic while speaking?

So can we move to the next caller and bring them back in.

Can you hear me now?

It's the same. If you could please follow up in the next. The next question is from the line of Ritesh Poladia from Girik Capital.

Sir, just on your EPR credit. Does that place in any of the balance sheet items, unrealized EPR credit?

No, the accounting principle, we have taken an approach as far as the revenue recognition is concerned, it will be on the sale of credits. There is no balance sheet reflection of the credits.

Okay. And sir, how do we -- the EPS how many -- in the EPS, how many credits we can accrue or is there any visibility or recurring element into it? Or is this like occasional as and when you realize?

The credits will be generated through the portal. And as I indicated before, there is a policy document in place, which outline the process for the generation of credits. We are generating credits for every tonne of reclaim that we produce made from waste, which is sourced from domestic end-of-life waste in India. But the portal reflects the number of credits, it does not reflect the value. The value is outside of the portal negotiated between a customer and the recycler.

Sir, is this negotiation is on one-on-one basis? Or is there exchange kind of a platform?

There is no exchange at the moment.

If you can comment what is your ongoing EPR rate?

I can't comment on what is the ongoing rate. I mean, we have a broad sense of what we are selling the credit at, but this is a wide range. I think you should -- I mean, I can't comment on what are the range of rates. I can -- I only know what it is -- our rates are. Obviously, these are not matters that can be discussed. I mean, this is similar to asking price of products which are obviously all range based on customer relationships and the extent and volume of credits that are sold.

Okay. But you will generate credit on each tonne of rubber or the EPR recycler?

Correct.

And is the EPL now applicable in the non-rubber business? Or there is a [indiscernible]?

As far as the plastic EPR is concerned, as I outlined in my speech earlier, there has been a delay in the implementation of the regulation. However, as I mentioned even before and is available in public domain, the plastic EPR is not based on sale of credits. The plastic EPR mandates packaging companies to use a certain level of recycled content lacking material. As far as companies that are using plastic packaging is concerned, they have to buy EPR credits, and that is also generated by recyclers. But that market at the moment is going through a volatile phase and currently, the portal is not operational as far as plastic systems.

The next question is from the line of Darshil Jhaveri from Crown Capital.

Sir, just wanted to ask, now if you can segregate the business into our normal business and EPR business, so the normal business, what kind of growth and margins are we looking at for the upcoming years?

We don't make comments on percentage growth or any of those, number one. But the other part is -- I mean, EPR is not a separate business. EPR is embedded into the recycling business that we are operating. So we are not considering the EPR as a separate business activity at all. EPR is generated for, as I mentioned, what we produce. And currently, what we are selling is credits that were generated from our production of 2 years ago. We have credits of '23 to sell apart from the balanced credit of '22-'23, and we will continue to generate credits. But again, mind you, this is not a separate business. This is an integral part of the recycling operations that we are currently operating. The revenue recognition is different, but this is an integral part of the tyre recycling business. This is not a separate business.

Okay. Fair enough, sir. And sir, just wanted to get -- sir, so the EPR credits that we'll sell, it will be a very recurring every quarterly thing or maybe it's the end of your thing. Any comment on how is it or is it just to dynamics? Or just like how is it that we are planning?

I think it's a combination of what are the market prices and so on. So again, it's too early. The regulations been introduced freshly. The sales have commenced only in Q4 of FY '24. So some of these questions are honestly a little too nascent. I think we'll be able to give a better response to this by next year when there is more stability in the entire regime.