HeidelbergCement India Limited (500292) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '20 conference call of HeidelbergCement India Limited, call hosted by PhillipCapital (India) Private Limited. [Operator Instructions] I would now like to hand the conference over to Mr. Vaibhav Agarwal from PhillipCapital (India) Private Limited. Thank you, and over to you, sir.

Thank you, Stanford. Good afternoon, everyone. On behalf of PhillipCapital (India) Private Limited, we welcome you to the Q3 FY '20 conference call for HeidelbergCement India Limited. On the call, we have with us Mr. Jamshed Naval Cooper, Managing Director; and Mr. Anil Sharma, Chief Financial Officer. I would like to mention on behalf of HeidelbergCement India Limited and its management that certain statements that may be made or discussed on this conference call may be forward-looking statements related to future developments and current performance. These statements will be subject to a number of risks, uncertainties and other important factors, which may cause the actual developments and results to differ materially from the statements made. HeidelbergCement India Limited and the management of the company assumes no obligation to update or alter these forward-looking statements, whether as a result of new information or future events or otherwise. Also, HeidelbergCement India Limited has uploaded a copy of the presentation on the exchange and its website. Participants may download a copy from these websites. I will now hand over the floor to the management for their opening remarks, which will be followed by interactive Q&A. Thank you, and over to you, Cooper sir.

Thank you, Vaibhav, and thanks, everybody, for joining this earnings call. I hope you have got the copy of the presentation, which have been posted on our website. Taking you to the Slide 4, which is the Indian cement industry, trailing 12 months' performance. You can look at it. And you can see that, for the 3 quarters, the growth of the Indian cement industry has been about 3.5% as of now. And the utilization is close to about 68%, which, in the industry standard, it is quite soft, I would say, and there is room for movement upwards. Coming to the last quarter of December, the growth has been -- of cement industry has been about 5%. In terms of taking you to the next slide and page, and that is the quarterly volumes of Heidelberg, you may observe that there is a dip in the December quarter by about 5%, but mainly this dip is -- the maximum has come because of our Ammasandra unit, which is in south, and south has been a de-growth market. So that is where the impact is. Plus, there is an impact of -- because last year, in the same quarter, we sold about 23,000 tonnes of clinker, which is no longer there. That time the clinker prices were remunerative. So there was a benefit to it. But this time, there is no clinker sales. So that is the impact. Otherwise, in Central India, where that is our core market, the dip is very marginal. Capacity utilization for the company has been close to about 90%. And coming to the financials and operational highlights. So the zero lost time injury process. Safety is our foremost priority, which we always start our business with considering human life, which is very important. So as a group, we practice highest level of safety standards, and that remains our foremost priority. And this year, we have also moved into a target. This year, 2020, is declared as the zero harm year. So it is virtually a scratch-free working environment. Coming to the premium product segment, the growth has been about 53% year-on-year, and it constitutes this contribution is about 16% of our trade volume. Depend -- we have been working continuously on reducing the power cost because power cost remains one of the biggest -- power and fuel are in the cement industry. And also from the viewpoint of looking at future getting to carbon neutrality by 2050, so one has to start working now. And on this part, we have started reducing our consumption parameters also, and there is improvement there. And you will see that in our results also plus here, as I see, you can see that our contribution from grid power has been about 65%. And that means we have sourced cheaper power of almost 35% to 35 extent. In Central India, we have done a capacity, a little bit of debottlenecking, which we have been telling you over the previous quarters also during our earnings call also. And now it is close to about 6.26 million tonnes, which is -- also which will be available to us -- in full steam should be available in the next financial year. We had distributed a 15% interim dividend for the 2020 -- FY '20, and we have repaid also the INR 1.25 billion worth of our NCD. Now considering today, the cash net balance in our banks, which case is virtually a debt-free company including the balances are more than the debt, which we hold in our books. On the income statement, which is on Slide #7. There is a marginal -- I will only point out the negatives for you to discuss about it. It's just only a 2% negative EBITDA. However, on the post-tax expenses, post tax, we are 10% growth over the previous quarter -- year-on-year basis. This is the second-highest PAT, which has been -- the company has given prior to the June quarter. So this is -- June was the highest quarter in the history of the company, and this is the second highest we have achieved so far. On the KPIs, you can see -- look at everything virtually except in the volume part. Otherwise, in all the other positives, there are always a positive, which you can see which is a result of improved efficiencies and in terms of sourcing, in terms of consumption parameters. So this results into this. On the EBITDA per tonne bridge, which is on Page 8, you can see that last quarter, it was -- EBITDA was INR 947, now moved to INR 981. Mainly it has come from the GSR, from the market, market has given us. Raw material, there is some improvement. Power and fuel, we have seen improvement because of our outsourced power plus improvement in our utilization of the WHR. So that is added to it. Freight, minor components a little bit here because there were certain -- some areas where we needed correction because the material was not moving. So some minor corrections are there. Business practices, we are changing. So a little bit on that count, the freight element is impacted. On the others, so basically, if you look at it, it has been mainly coming out of the employee hire provisions, which we have taken under for their retirement benefits and because this is also a discounting factor, which has reduced. So this is showing a little higher. But again, in the next quarter, this will be balanced out. So nothing much about it. On the Page 9, you can see 45% of our volume is by road. About -- our petcoke consumption is close to about 60 -- 63%, which we are trying to move it to about 70% in the coming quarters because now the petcoke prices are down. So we will try to improve. As long as petcoke is easily available, we'll keep balancing it as usual. 16%, as I mentioned already, our power sales is in 16% of our trade volume and 85% of our business continue to be in trade. So we are not a nontrade push area -- market. And we prefer to be in a trade market where the realizations are relatively better. In terms of capacity expansion, Page 10, you can have a look at it. How the capacity has been and how it has grown. This is the result of our debottlenecking at our various mills. Still, there is -- despite that, we can say that we have a headroom to utilize this because of the clinker capacity utilization is close to 85% for us as of now. So this will give us more headroom to increase our dispatches, improve our production and keep our markets little more stable for -- to meet the peak demands also of our markets as and when it appears. Coming to the outlook. The positives are that continues to grow -- the cement demand continues to grow on a pan-India basis. In some markets, in some regions, it is negative, somewhere it is at par. Some Eastern markets, it has been a little more positive in the Eastern markets, but not so much in the South. And in Central also it's a little bit, I would say, flattish or a little positive, marginally positive. On government allocations, we are seeing in the budget session, we have seen it that there are a lot of investments the government has announced, allocations have been very good, very healthy, I would say. And if they were to materialize, and I pray that they materialize, it would be a very good going for the industry in the years to -- in the months to come. For the next financial year, at least, I can see a very good hope for cement industry. Reductions in interest rates by RBI, that is improvement. However, there is an overhang of somewhere in terms of available tenements, which are available, housing is available, that there's some hangover there in some districts and some states. But in Tier 2 and Tier 3, there is no hang -- overhang of such nature because every day, the person builds a house need to his requirement. They are not -- housing is still not an investment criteria there in Tier 2 and Tier 3 cities, it is need-based. Government has already announced 20 million houses to be made for low housing costs, that will be completed by 2022 or '23. So there is also very good demand there. Brent is stable, and you can see that the coal prices have gone up in India, but the diesel prices and all that have been remaining very, very stable. And the Brent is coming down. So I think it will have a positive impact on the freights also going forward. The concerns are -- the sentiments are a little bit of an issue. I think the money is there in the pocket of the people. It's an improvement of sentiments. Once the sentiments improve, the engines of the economy will fire, and we are hoping there -- but there is a concern as of now, we have been watching this very closely. More of the issues are that rupee could depreciate, that is one concern which we have and the liquidity situation, as I said, the sentiment is the one major factor where -- which keeps coming time and again. And you ask anybody in the market that is there a money problem? So it's not the money problem. I think it is more of a sentiment problem, which is a little soft right now. And I think this cannot stay like this. We have seen quite a few months of and quite a few quarters of a subdued performance of demand and hoping that we very soon see, because agriculture has been good, okay, the monsoons have been good, we have got adequate monsoons, the crops are everywhere, I have seen, are very good. So this money has to come to the market. So just hoping for the best. This is all from my side, and I leave the floor open to you for your questions. Thank you.

[Operator Instructions] The first question is from the line of Apoorva Bahadur from Jefferies.

Sir, on your capacity addition, wanted to understand. So we have an installed capacity of 5.4 million tonnes, and we are adding roughly 1.05. So the new capacity -- increased capacity should have been around 6.45 million tonnes, while your presentation mentions it to 6.26 million tonnes. So are we retiring any units?

No, nothing. There is no retirement of any unit. This is the consent to operate what we have now.

Okay. So basically, if we get further consent, then the 6.26 can go up to 6.45?

That is in case we do furthermore work on that.

Okay. Okay, got it, sir. Sir, secondly, on your basically higher sales of premium products. So just wanted to understand this market. So what are the types of customers and whom do we target? Is it the affluent customers in the urban areas or more so on the rural side? And how much do you think that this market can increase? So basically, how much of our overall sale could be of premium materials?

See, as you said, that we are growing this segment, the customer of these premium segment products, you will be surprised to see that this is not necessarily a product, which is bought by people with affluence or anything, okay? These are the people, also people who understand quality and they want to, see, consider housing, investment in a house as an asset class, okay? These people understand that life cycle cost of a building is very important. Today, you buy a low-cost cement where the cheaper quality product. And then after every 5 years, you are into the renovation and maintenance and leakages and things like that. Now so you will find even the smallest villager who buys 2 bags of cement for making his boundary wall of a well, he says, why do you buy this, you ask him, and he will tell you. "Sir, I don't want to keep again and again coming in every year, break the wall and then again, the wall falls and I again come and buy it. So I prefer to buy a INR 20, INR 30 bag more, it's okay with me, but at least it will last longer." So it is not a -- I cannot tell you that this is only targeting the affluent customers or anybody. It's a product available to people who value quality.

So I mean how do we sell it then? Is it like a push from the dealer side and then by providing -- we provide higher, say, commissions? Or is it more so we are spending a lot more on the literacy, improving literacy of customers or awareness of customers on these type of products?

No, we just keep the product there in the retail shop, but it's -- whatever the literature we give to the people, if the people want to buy, the dealer has an option, okay? He gets the margin -- similar margins on both the products. So whether he sells this product or the other product really does not matter to him. For him, it is -- for him, he may promote this product because if the customer is happy, feels nice about it, goodwill of his shop goes up. So he will be more interested in promoting good product always, and he will say, "Okay, let me push a product where the customer will become more loyal to me after use."

Okay. Sir, how do you -- how large do you see this market getting?

We're not looking at a very big market size of this. At best, we will reach a share of about 20%, 25%, which is good enough for us. We do not want to really push it beyond a point.

Okay. Sir, also, I mean, now in this budget that the dividend distribution tax was abolished. So should we expect any increase in our payouts going ahead?

That we left to the Board. That is left to the Board. I cannot answer that question.

Got it. Sir, just 2 more bookkeeping questions quickly. One is your lead distance for the quarter? And secondly, you said that the WHRS utilization has increased. So if the clinker plants were operating at 85% in last quarter or sub-7 previously as well and still operating at 85% utilization, how did we manage to increase our WHRS utilization then?

So I'll answer your 2 questions. One is the lead distance. Okay? That is about 360 kilometers to 370 kilometers, you can say. This is the part. As far as the WHR is concerned, you can say that we have been very constantly monitoring it. See WHR running is totally dependent on the kiln, okay? If the kilns are firing properly, then the heat is available for running of the boilers and the turbine okay? Steam is available accordingly. So we have to see to it that the productivity at the production end and the kilns are continuously running. So that is one challenge, and that is what we are -- this is what the cement industry, totally -- the profitability of the cement runs on how much your kiln runs.

Sir, how much was the WHRS utilization during the quarter?

Close to 95% we are running.

Okay. So there is -- I mean, going ahead, it will be difficult for us to scale it up further and given that -- so from 60% of grid dependence, not much upside over there?

No, no, Why? We can -- we will always source outside power, third-party power, we can always source. In Madhya Pradesh, we are not able to source because of the cross-subsidy charges are very high. It does not make -- really it does not make sense to do that in -- but in Jhansi, we're doing it.

[Operator Instructions] The next question is from the line of Prateek Kumar from Antique Stock Brokings.

Sir, my first question is on employee cost. So you said that it seems that it's due to fall in yields and gratuity provisioning, which has been factored in this quarter. So but generally, that is the case for year ending phenomena when companies factor that. So we have factored in 3Q and like the fourth quarter employee cost could be, again, INR 31 crores, INR 32 crore kind of number?

So basically, Prateek, this is not on account of gratuity, because whatever the gratuity, actual valuation gain/loss is there, that goes to other comprehensive income that is part of the reserve. It is because of the leave salary, and as a policy in the company, we do the actual valuation 2 times in a year. One is in December, another is in March. So in December, you appreciate that during 2019, the G-Sec return has reduced significantly, and it has resulted into higher leave liability provision. Having said that, this is the kind of book entry. And as soon as the returns come back on the government securities, you will see there will be saving also in the subsequent quarter. So we -- that's why we mentioned it is a provision of the retirement benefit, and this is not the actual cash outflow. This may be considered as a one-off item. And in the March quarter, if we see only this factor, you may have some saving.

Okay. And sir, in other expense also -- other expense also, without increase in employee -- in volumes for, like, let's say, year-on-year, other expense has gone up by 9%, 10%? Any specific reason there?

Yes, Prateek, this other expenditure is also a combination of semi-fixed and the fixed expenditure. These are not the kind of variable costs and there are many expenditure, which is linked with the inflation like consumables, repairs and maintenance and then the cement handling costs, it includes your shutdown cost, it includes your handling at the railway siding. So those costs, you need to factor, depending upon the rate inflation, rate revision, some more repair costs, some sort of fixed costs like your traveling, advertisement. So you will see -- in some quarters, you will see some small increase; in some quarter, you will see a small decrease. So it is not directly in proportionate to the volume increase or decrease. It is kind of a fixed and the semi-fixed cost.

Right. And sir, on trade segment sales, this slight decline versus -- we report like around 88% kind of number last quarter, it's around 85%. I know this is a small decline, but any specific reason there?

See what happens, in certain times, there are some government orders come in, okay, at good price, okay, that we take them. But ultimately, it goes under our nontrade segment. So we are very choosy about what orders we get. We have a certain target price line. Below that, the NSR, the difference between NSR between trade and nontrade, we do not entertain business. But when we see that, okay, something has come at a good price, and it is coming, and the demand is good, so we push it out.

All right. And one question on CapEx. So we have preponed capacity by 1 year. Last quarter, we actually sort of delayed by 3 months in our conversation. So any -- how could we -- I mean our capacity shortage was always on the cards. So how could we do this like 1 year in advance in terms of rollout?

If you look at it, we have been -- in the past 3 of our discussions, we have been mentioning about it that one thing we have done something part of it is in [indiscernible] we have done it. For Jhansi, it was progressing. I mean we have been telling this, it's not that it has come all of a sudden, that we have been working on these things. And we said also it will gradually step up. So now we have come to -- now we are -- given the discussion, we have put it on the table that here it is there. So nothing is that we did it something, which was not known to the investment community.

And Prateek, just to add one more thing. Last time when we discussed, we also said with you that we have been increasing this capacity in the different phases. So we have the grinding mill in Madhya Pradesh, grinding mill in Uttar Pradesh, and we have expedited. Maybe you recall that last year in the month of March, when we have the earnings call, that time we told that because of the capacity constraint, we could not produce cement for around 10 days. We have expedited this whole process, and we think that in the coming fiscal year, we will get the benefit on account of production.

[Operator Instructions] The next question is from the line of Gaurav Rateria from Morgan Stanley.

Sir, a couple of questions. Firstly, on the premium segment, it has grown very well, while the overall trade segment has not grown. So does the premium segment completely cater to a different market altogether, different segment altogether? Or it has a cannibalization impact on the nonpremium product also?

Gaurav, see, the market remains the same. The pie remains the same, okay? Some shift would take up from the less premium product to a premium product. I would say that -- the shrinkage is because of the market demand, okay, the market forces beside the total overall shrinkage. It is -- and in Central India, the shrinkage is very small. As I said, that the major 5% what you're observing is because of my Ammasandra plant, where we could not sell a good volume because of South demand going -- slipping badly. And because of the 23,000 tonnes of clinker, which we did not sell, which was part of the previous December quarter. If you ask me that whether trade sale has shrunk because of this, answer is no.

Okay. Sir, would it be possible to get some sense for the central regions where you operate? To 2019, what was the growth in that? And what has been the market share trends between the players?

I won't be able to tell you for others, but we are close to about 10% market share in Central India.

Okay. Lastly, sir, you talked about outlook to be brighter for next year, mid-single-digit growth. How much of that do you think is going to be driven by uptick in infra segment? And how much of that will be a better improvement in the housing?

Okay. So Gaurav, the thing is what we -- because of these past few 1 or 2 quarter -- 1, 2 years almost now, we have taken a little conservative approach that the Central India market or the overall India market will grow around at 5%, I would say. Okay? So Central India may have a share of about 3%, 4%, something like that could -- possibly we should expect. If you ask me 1-to-1 basis, personally, I would say that it could be more. But for the purpose of forecasting when we make a plan, business plan, we take a little based on the past historic data. So we are considering that let us take a 4% increase for Central India to be a little safer on this. But maybe I can tell you, it may -- in Madhya Pradesh and Uttar Pradesh, many a times, they surprise you, you take a 5% and then they deliver you 11%.

Okay. Sir, I was asking more from a driver perspective, whether it will be infra or it will be housing for...

Okay. So I think it will be mostly driven by housing only because the agricultural income has been very good. Infra, I would say, yes, we expect road projects which are now -- which are in the pipeline. There are some railway projects, which have been announced, but the demand, don't expect it before July, August in the next year. So I do not expect them, all of a sudden, that next month, I'm going to see this infra -- anything happening on infra impossible. Mobilization takes from the budget at least 6 months.

[Operator Instructions] The next question is from the line of Mangesh Bhadang from Nirmal Bang.

Sir, 2, 3 questions. Firstly, the power that you said sourcing outside if I know -- if we may know the rate of the power that you are purchasing for? And again, for your Ammasandra, you get -- I think you have a PPA, solar PPA, what would be the rate for that?

At least 20% -- 20%, 25%, the power cost from -- sourced from outside is cheaper.

And this is largely for UP, I guess, so you -- because you are saying MP, the cross subsidy...

Largely UP and Ammasandra.

UP and Ammasandra. Okay. And sir, just wanted to check, if last year or in this year, have we bought any clinker from Zuari?

No, no clinker from Zuari.

In Ammasandra, we purchased.

Ammasandra, we purchased. Yes. Ammasandra, we have been purchasing from Zuari. So entire clinker from Ammasandra -- to Ammasandra is from Zuari.

Okay. So earlier it was market purchasing, now it is from Zuari...

No, it was always from Zuari.

Okay. And again, on the CapEx side, sir, now we are operating at full utilization. A lot of new capacities probably will start coming in, in MP, say, in FY '21. Has the Board or yourself thought about adding capacity? And if yes, in which region you would be looking at, whether you would continue to grow in the same region? Or you would look at some other region?