Hi-Tech Pipes Limited (HITECH) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q2 FY '23 Earnings Conference Call of Hi-Tech Pipes Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anish Bansal, Whole-Time Director. Thank you, and over to you, sir.

Good evening, and welcome, everyone, for our Q2 H1 FY '23 Earnings Conference Call. I'm joined on the call by Mr. Santosh Rai, Head of Finance; and Mr. Arun Sharma, Company Secretary and Compliance Officer of the company. I hope everyone has had a chance to go through our results and updated investor presentation uploaded on the exchange. During this quarter, the company is able to register a 30% Y-o-Y growth in sales to INR 599 crores against INR 462 crores in Q2 FY '22. And registered a record and highest sales volume of 85,500 tonnes, which is almost 33% growth. This is mainly due to better capacity utilization and improved sales utilization. The EBITDA per tonne for the quarter declined by 26% to INR 2,760 versus INR 3,742 in Q2 FY '22. Net debt of the company has reduced by INR 33 crores. Net working capital days reduced substantially to 50 days as compared to 67 days in FY '22. However, the profitability for the quarter remains in pressure due to onetime provisioning of expected credit loss on an OEM customer and declining trend in HR coil prices. However, steel prices should be bottomed out soon and with our strong presence and continuously expanding reach, we can cater most of the demand and will be further increasing our volumes in medium to long term. Now I would like to take you through the ongoing projects and other developments. I am extremely delighted to inform that the company has commenced the trial run of color coating line at the UP facility. The launch of Hi-Tech Color Star for our color coated coil will further be expanding our portfolio of value-added products. We are happy to announce that Hi-Tech Pipes has become the third player in North India, having this fully integrated manufacturing facility from HR coil to color coated Coils. This will significantly enhance the EBITDA and margin profile of the company. The color coated sheets are widely used for roofing, wall cladding, white goods, domestic and industrial sheds, infrastructure, bus bodies, metros, railway stations, doors and windows panes, et cetera. We are well poised that with the existing and developed distribution network and our deep penetration in the markets, we would be achieving excellent reach and regular supply of these products. Simultaneously, our greenfield project of large diameter pipes or API pipe at Sanand, Gujarat is in advanced stage of commissioning. With this, we'll be adding one more value-added product vertical in our basket. The demand for these products have ramped up significantly over last few years with the announcement of various government mega ambitious projects, such as Jal Jeevan Mission, City Gas Distribution, [ River ] Linking and Smart City Mission. On the utilization front, during this quarter, we have reached 60% capacity utilization and by introduction of color-coated products and large diameter pipes, we shall further be increasing our existing capacity utilization and EBITDA on [ branded ] level. Going forward, we envisage a big CapEx from the government in energy, housing, infrastructure, railways, airports, agriculture, telecom, irrigation and from private sector also in fields of automotive, capital goods and consumer durables. In coming years, this would be big demand drivers for the steel products that the company is offering. And we are confident that with our state of the manufacturing facilities, present almost in all the major geographies, we shall be able to capitalize on this big demand. Now we can open the floor for questions.

[Operator Instructions] We have a first question from the line of Vikash Singh from PhillipCapital.

Sir, I just wanted to understand what is the growth profile which we are targeting for next for this year and next year? And the first question is that. And second question that now the larger part of the attractive price collection is behind us, sir, so how quickly do you think that we would get back to the EBITDA per tonne closer to the previous year basically?

So Vikash ji, our volume guidance for this financial year remains same at 375,000 tonnes. And we are very optimistic that we will be -- company will be like -- can achieve this with the ongoing run rate. Secondly, your question regarding the steel prices and the margin profile, the HR coil prices, we felt that they have bottomed at this price level of INR 55,000 per tonne. But we are seeing a further correction of INR 4 to INR 5 in coming 2 to 3 months. So once this is done, then we can hope that the prices will bottom out. And from there on, they are our original EBITDA of INR 3,500 to INR 4,000 per tonne can come back because in last 6 months, what we have seen is continuously decline in steel prices from INR 76,000 to INR 55,000. So another INR 4 to INR 5 we are expecting as in line with the international market. So once it is done, the company should definitely get back on its original level.

So maybe 1 more quarter of pain we are expecting and then we would bounce back. That's what your thought process is?

Yes. Yes. Hopefully, yes. I think by December, it should be bottomed out.

Understood, sir. And sir, regarding on just new facilities, which is for the API grade of 50,000 tonnes. Just wanted to understand basically by when do you think that it will start? And usually, in API grade, it takes a pretty big time frame before you can break into, get all the approvals and all that. So just wanted to know that is there any time line which you have planned? And regarding the approvals, how are you proceeding with that?

Yes, sir. We are hoping for a trial production of water pipes and structural pipes by end of Q4 and another 6 months to get the API certification from that point.

So probably this plan would start contributing from the second half of FY '24. Is that the correct understanding?

Yes, but there will be some generation and some contribution from the water and the structural side.

Understood, sir. So sir, just one thing regarding this, basically, what would be the fixed cost of this plan? Basically, I just wanted to understand in case if it takes a longer time then how it affects the remaining portion of the business?

Vikash ji, the company has done this very, very diligently, and we have like constrained the capital cost for this project immensely because the company was having the land and buildings previously. And there's no -- there will be no pressure as such on the if it's -- if at all, there is delay in this. So for plant and machinery, we have incurred a CapEx of INR 25 crores for this.

Okay. And any idea about the operating cost yearly basis, what would be there, basically just to minimum level of fixed cost or operating cost for this plant?

Vikash ji that is negligible because here, we'll be starting with structural pipe. There is good demand for structural pipe. So we can immediately start with our structural pipe segment. And then slowly, steadily, we can go up the value chain.

Understood, sir. And sir, if I may ask just one last question. Just wanted to understand what is your value addition percentage as of now? And how do you see it's moving up in the next, let's say, by FY '24, '25?

Sir, right now, we are in the range of between 5% to 6%. And I think going forward, once the steel prices stabilize, this will continuously expand with the addition of our value-added products also. So same like I'll give you that INR 3,500 to INR 4,000 per tonne our EBITDA per tonne should come back in 2 to 3 quarters.

[Operator Instructions] We have a follow-up question from the line of Vikash Singh from PhillipCapital.

Just wanted to understand regarding our working capital strategy since we are targeting a lot of growth going forward, probably next year as well. So what are the strategies we are taking to reduce the working capital debt -- working capital days so that our debt number should not increase beyond a certain level?

So Vikash ji, if you analyze our H1 results, there is a substantial reduction in the working capital cycle days from 67 to 50. And with -- this is all basically dependent on the steel prices also. So like in the month of March, the steel prices were at their peak and now they have come down. And going forward also with the -- with our stringent control on the stocks, this will further come down.

Any target?

So I think by the end of FY '23, we should be between 40 to 45 days net.

Understood, sir. And sir, regarding our normal [ RW ] capacity, we have [ 580,000 ] tonnes, but we are targeting our utilization would be much less than that. So by when you -- there would be a need of restart of the CapEx cycle. So basically by when you think that, let's say, FY '24, what kind of the numbers you are targeting? And by when you think that the CapEx cycle would start again?

Vikash ji, we are right now at 60% utilization level. And with the start of color coating project, I think this utilization should go from 60% to 65%. 70% is the peak that we can reach. And we have projects in hand, which is the Phase 2 of Sanand plant. So we have enough land, building and other infrastructure in place. So whenever we have to like expand it, I think we'll do it in a very short period.

Understood. And then the CapEx cost would also be lower since we have infrastructure in place.

Yes, because all the further CapEx will be brownfield. So adding 2 lines is very less capital intensive compared to the greenfield project.

Understood, sir. Understood. And sir, any debt number. So basically the peak debt to equity ratio or the big debt-to-EBITDA ratio, which you are comfortable with?

So right now, we are at 1.2. And I think with the current performance and once these steel prices, they -- this impact -- this negative impact is over, I think we should very soon be around 1 is to 1 level.

Understood, sir. And sir, just one last question. Some of our peers, basically, some of our larger player has actually targeting like 30% kind of the growth. Our growth number looks a little bit less than that. So is it the constraint is on the product mix? Or are the targeted geographies are different? So what's the difference here? Just wanted to understand.

No, sir. This year, we'll also be hitting a 30% volume growth.

And so basically, they are talking about next 3 to 4 years continues 30% of volume growth. You have not given any guidance for the next year. So I just wanted to understand, are you just trying to be a little bit...

We are targeting a 25% growth every year.

[Operator Instructions] We have a next question from the line of Mahesh Waze, an individual investor.

Okay. I just wanted to understand this credit write-down that you have taken, if you could give more detail. And have you written-off whatever [indiscernible] completely? And is there any expectation of recovery from there?

So Mahesh ji, this credit loss was to an OEM customer. This -- we have been dealing with this customer for the last 4 years. And due to COVID, they have gone down, and they have done -- this company has gone into NCLT, and we have filed our claim of INR 6.1 crores in the NCLT. The recovery process, like I am, honestly, I'm doubtful because we are right now in the fourth category. So once the financial creditors get their things and then the unsecured lenders will get, and then it will come to operational creditors. So the chances are minimum, but we are still trying our best to recover whatever we can from this loss.

Okay. But what's the estimation currently? Currently, it's the write-off?

We have done full provisioning.

Okay. Secondly, I can see that the balance sheet has improved quite a bit from March to September and there is some operating cash flow also. So what specific initiatives were taken to improve the balance sheet during this H1?

So sir, basically, despite the steel price correction, the volumes of the company has increased significantly. Apart from this, better working capital management in terms of receivables and inventory days. So we were quite focused on bringing this down. And in coming quarters also, you will see a good improvement in these 2 areas. And simultaneously, there will be a reduction in the net debt also.

Okay. Good. In third and fourth quarter, approximately, what kind of volumes will we get from color coated?

So sir, October -- sorry, November month is the first month, we have started trial production. There are now a few teasing problems, which should get resolved by end of this month. So December, I think we'll do a -- we'll start with a 50% utilization from month of December. And it will -- slowly, steadily, it will go up. And we can reach 80% utilization by end of March.

So what does that mean in terms of numbers?

So basically, this is the capacity of 50,000 tonnes per annum. So we are targeting a 2,000 tonnes production and sales in month of December. And slowly, steadily, it will go up to 3,500 to 4,000 tonnes per month.

So what is the kind of the new -- the galvanizing line, what kind of production we are getting out of it currently?

So right now, we are producing almost 4,000 tonnes from this line. And with the color coating line, I think the production of galvanizing line will also enhance.

Okay. So will most of the galvanizing line production, once the color coating line stabilizes, will be used in-house?

Yes, yes. That will run on full stream basis.

And in the presentation, you have mentioned that as the color coating goes onstream, the capacity utilization will improve. So basically, we are talking about the cold rolled mill capacity utilization?

Yes, sir.

What is the current, let's say, in the month of September, how much was the cold roll production?

Sir, 11,000 tonnes.

11,000 tonnes. So basically, the incremental ones, it will come [Foreign Language] as our color coating stabilizes.

Yes, sir.

Well, 1 last thing, in between, there was some notice for preference issue. And after that, I didn't see the details. Can you update on it? [Foreign Language].

Sir, there was a promoter equity infusion that was spent, but it will now be taken in the next meeting.

So at this Board meeting, it was not discussed.

Yes, sir.

We have a next question from the line of Vibhav Kapur, an individual Investor.

Sir, I just want to know what exactly would be your API capacity? And I couldn't get the number on the amount of CapEx that you have done in this plant? If you could just repeat it?

Sir, this will be approximately 15,000 tonne per year capacity. And the CapEx is ongoing. So we'll have the final number by the end of FY '23. Right now till date the company has incurred a CapEx of INR 25 crores on this project.

And any range on how much more do you think we would incur?

It is almost, almost completed. Another like INR 4 crores, INR 5 crores would be needed.

Okay. So approximately INR 30-odd crores and INR 25 crores is done.

Yes, sir.

Okay. And your capacity would become [ 630 ] along with this plant or this is just a value addition so...

No, no. There'll be net capacity addition.

Okay. So this has become [ 630 ], correct?

Yes, sir.

Okay. Sir, the other thing I just wanted to know is with your color coated facility, what kind of differential in terms of EBITDA per tonne do you expect range from the normal EBITDA that you generate for this value addition that is there?

Sir, historically, the EBITDA per tonne has been in the range of INR 6,000 to INR 7,000 per tonne on this product. But in the month of May, due to the imposition of export duty on the coated products, so this gap has come down to INR 4,000 per tonne. So -- and the industry is expecting this to go away in the next budget session. So once this is done, the expected EBITDA per tonne will be above INR 5,000 per tonne.

Okay. And do you see that because of the addition of you and -- as a new player and more people entering the space, this kind of EBITDA of INR 5 per tonne that you are anticipating would remain or do you see a reduction?

No, sir, I think with the demand and with the ongoing projects that we are expecting and if these all shape up here, the demand will not be a challenge.

Okay. So you're saying the size of the market is pretty large to basically absorb?

Very large, very large, and it is growing by the pace of 15%, 20% per annum. This -- the roofing segment.

Right. Sir, the second question I have is on working capital days. It's a great improvement. But on a line-by-line basis, sir you projected about 45 days. Could you give me a breakup of how do you see the ratios improve from here going forward with respect to receivables and inventory and payables in a number of days?

Sir, I think there should be improvement in all the 3 areas in terms of receivables, in terms of payables and in terms of inventory. So we are very focused, but the prices, the fluctuation we're not able to chart it out because sometimes we feel markets have bottomed out and then we can increase our inventory and sometimes we feel there is still some decline expected. So the volatilities are too much, but we are very cautious. We have to bring this down to 45 days by end FY '23.

Okay. And you're saying that you see a jump in the payable days also from this quarter, the result that you have declared?

Yes, yes, yes.

And receivables, I believe what my understanding is that it would go down based on the policy and the inventory you're saying once the volatility is a little bit better than probably it would help us?

Yes, sir.

I think -- so one, just sort of a bookkeeping question. In terms of the CFO, I mean, -- do you -- I mean, any time lines on the coming of a new CFO? And what kind of time line should we expect in that? And what are you looking for something that...

Sir, I think another 1 or 2 months.

[Operator Instructions] We have a question from the line of Ronald Siyoni from Sharekhan.

On the -- question only on the difference between secondary and primary steel producers. So last time we spoke [indiscernible] had almost narrowed down and they're similar. So how now they are behaving and what kind of price differential is there between these 2?

Sir, prices have reduced significantly from like at one time INR 16,000 per tonne difference was there. It has now narrowed to around INR 5,000 to INR 6,000 per tonne. And we see this gap further closing down by Q4. So I think the prices of secondary steel products and primary steel products, there will be very, very negligible gap, which will help in our volumes.

Yes, sir, but 3,000 to 4,000 to is a good gap to maintain, right?

Yes, yes, yes.

Okay. And another thing is how has been the channel inventory behaving like...

Sir, there's not much inventory in the pipeline. So once the prices bottom out, they'll be restocking by all the dealers and distributors. So we are just waiting for that period and I think it should come in at the end of December.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to Mr. Anish Bansal for closing comments.

Thank you so much, everyone, for sparing time to attend our earnings conference call. For any other further questions, you may reach the Company Secretary on e-mail or by phone. Thank you so much for your time.

Thank you.