Ion Exchange (India) Limited (500214) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Ion Exchange (India) Limited's Q3 FY '21 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and a warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. We represent the Investor Relations of Ion Exchange (India) Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings conference call for the third quarter and 9 months ended of financial year 2021. Before I begin, I would like to mention the short cautionary statement. Some of the statements made in today's earnings conference call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The focus of today's earnings conference call is clearly to educate and bring awareness about the company's fundamental business and financial quarter under review. I would now like to introduce you to the management participating with us in today's earnings conference call and give it over to them for their opening remarks. We have with us Mr. Aankur Patni, Executive Director; Mr. N. M. Ranadive, Executive Vice President of Finance; Mr. Vasant Naik, Senior Vice President of Finance; and Mr. Milind Puranik, Company Secretary. I now request Mr. Vasant Naik to give his opening remarks. And over to you, sir.

Thank you, Anuj. Good afternoon, everybody. It is a pleasure to welcome you to the earnings conference call for the third quarter and 9 months ended financial year 2021. First, let me take you through the third quarter financial performance of our company on a consolidated basis. The operating income for the quarter was INR 3,492 million, a decrease of approximately 12% on a year-on-year basis. Operating EBITDA reported was INR 445 million, which was an increase of about 14% on a year-on-year basis. Operating EBITDA margin stood at 12.74%, which improved by 290 basis points on year-on-year basis. Net profit after tax was INR 287 million, which grew by about 9% on a year-on-year period. PAT margin percentages were 8.22%, an improvement of 162 basis points on a year-on-year basis. There has been a steady improvement in the financial performance of the company post the gradual resumption of the economic activity. I will now take you through the quarterly segmental performance on a consolidated basis. In the Engineering division, the revenue for the quarter was INR 2,161 million, a decline by 15%; and the EBITDA was INR 160 million, down by about 20%. The order inflow has improved during the quarter, and we expect that trend to continue in the ensuing quarter as well. Supplies and the civil works of the Sri Lanka project were adversely affected due to resurgence of the COVID infections in the country. Revenues for this project have been recognized in the quarter based on the work progress. We expect the situation to normalize in this quarter. The order execution of other ongoing engineering orders picked up pace, resulting in the improved sales and margins. In the Chemicals division, the revenue for the quarter recorded was INR 1,148 million, down by about 7% on a year-on-year basis. The EBIT was INR 268 million, an increase of 51%. Sales and dispatches have normalized in this quarter, and we remain positively optimistic of the continued improvement in this segment. Margins improved due to a higher turnover profile with operational efficiencies and benefits on account of improved product mix. Lastly, in the Consumer Products division, the revenue for the quarter was INR 285 million, and a loss for the quarter was INR 7 million. While volumes under the consumer segment picked up in this quarter, certain segments continue to remain affected due to the after effects of the COVID lockdown measures, thereby impacting the turnover. Coming to the 9-monthly performance on a consolidated basis. The operating income was INR 10,044 million, a decrease by approximately 11% on a year-on-year basis. The operating EBITDA was INR 1,167 million, an increase by about 23% on a year-on-year basis. The operating EBITDA margin stood at 11.62%, which improved by 319 basis points year-on-year. And the net profit after tax reported was INR 729 million, a growth of 12% on a year-on-year basis. The PAT margin percentage was 7.26%, which improved by 147 basis points on a year-on-year basis. Now coming to the consolidated segmental performance on a 9 monthly basis. In the Engineering division, the turnover was INR 6,497 million, a decline of 10% on a year-on-year basis. EBIT margin was INR 438 million, a decrease of 14%. The consumer -- in the Chemicals division, the revenue recorded was INR 3,098 million, a decrease of 14% on a year-on-year basis. And the reported EBIT for this segment was INR 672 million, an increase of 32% on a year-on-year basis. In the Consumer division, the turnover for the 9 monthly period was INR 707 million, a decline of 24% as compared to the previous 9 months. Loss for the segment was INR 23 million. With this, we open the con call for question and answers.

[Operator Instructions] The first question is from the line of Sunil Kothari from Unique Investments.

Congratulation for a really good set of numbers in a very challenging time. Sir, my question is a little larger to understand on Chemicals segment. We have really done very well in terms of profitability during this 9 months and this quarter. But our revenue during the last 6, 8, 9 quarters, if you take, we are ranging between INR 100 crores and INR 120 crores, in the range of from -- maybe around INR 110 crores, INR 112 crores. So to understand the things, which are the roadblocks to the growth? Because we were very positive and optimistic on the growth opportunity in the Chemicals segment, which I believe, again, also, we will be definitely doing those things. But which are the impediments and challenges, maybe domestic and exports both the market? [indiscernible] question.

Thank you, Kothariji for the compilements on the overall performance. As far as the Chemicals segment is concerned, we have successfully made improvements in the quarter because business is quite dependent on the overall level of operations of the consumer industries. So during the period when the pandemic was in full rage, the operational levels of the various industries had come down substantially. Thereby, they had an impact on the consumption patterns of chemicals. And that led to a dip in the top line numbers. This had happened both on the domestic and international fronts. As of the last quarter, as Vasant had mentioned, we are seeing progressive improvement and a lot of the overall top line numbers have come to near normal range. And hence, on the domestic front, the performance has been much better than as compared on the international front, where the impact of the pandemic is still being felt in some of our major markets, notably North America and Europe. The levels of revenue which we normally get from these markets and what we are expecting once the operating levels of the various industries there come back to normal, that would be substantially higher than what we are getting today. That's the primary reason why we are still not seeing the growth which this segment promises.

All right. So sir, on your outlook on margin also will remain very positive because we are really improving well on margin also. So how do you look in the medium term this margin scenario, Chemical segment, particularly?

So margins are very sustainable at the levels which you currently see. We have had a lot of improvements on the front of efficiency and output focus. And therefore, the -- progressively as we implement capital utilization plans further with increased top line numbers, we should only expect to see some further improvements on the margin levels.

Okay. And sir, my last question is in the AGM, we had discussed about consolidation of international subsidiaries and some associates merger with the listed company. Any update would you like to comment? Because we are doing a lot right things in terms of corporate governance, in terms of balance sheet, treasure shares and all these things. So this is just 1 point on which sometimes investors are, I mean, raising issues about so many subsidiaries and associates. So I would like to just listen your views on this consolidation of so many entities.

A lot of the international subsidiaries are required for operating in those respective countries. You would know that many of countries in the Middle East and Southeast Asia as well as in Africa have now brought in provisions which gives extension preference to domestic companies in those countries. So it is quite advantageous to have a local company there. And that's one of the primary reasons why independent companies operate in the respective geographies. Besides that, there are other companies in -- within our fold in India, which we are in the process of consolidation. You would hear about merger of a few entities into the main company in the near future. The process is already on. And because of the intermittent hurdles which we face on account of COVID and other issues, that process has taken longer than we had originally expected. And it is progressing okay now, we are hoping that in the next 4 to 5 months, that process should be -- that one-stage process will be completed.

The next question is from the line of Siddharth Rajpurohit from JHP Securities.

And congratulations on a steady set of numbers. Sir, first on the Chemical business, sir. Sir, what are our key raw materials? And where do we source it from, sir?

It's a very wide range of products that we deal with. There are various types of raw materials that we're using. A few of them are petroleum based. And there are others which are not petroleum based, but another broad industry [indiscernible]. And the sourcing is a wide mix of international and domestic sourcing. We have, over a period of time, tried to make sure that our concentration of sourcing in any particular geography is limited to the exchange sourcing.

Okay, sir. Can we have a breakup between petroleum and nonpetroleum and domestic and imports, sir, broad breakup?

Not at this point of time. I can very broadly indicate that in terms of the petroleum-based industry, that could be quite a significant percentage. But I won't be able to share with you an exact percentage at this point of time. Having said that, the other point to also note is even where we have a petroleum-based industry, the price movement of those raw materials are not in tandem with the crude price movement. So that is what we are trying to assess in. Some of these have quite independent price movement patterns, which is -- which if we're trying to correlate them with petroleum price movement, we might not get a very good correlation.

Okay. And sir, on the margins, I want to understand is the margin because of higher realization or better cost to the company?

We are benefiting from better realizations. As I mentioned a little while earlier, some -- quite a few success initiatives, which have led to improvement in efficiency and increased operating figures. So all of these have further contributed to the increased margin movement. There have been some intermittent benefits of better costs or advantageous spot price movement, which is more transient in nature. But the other elements which have contributed to margins are much more sustainable.

Okay. So the capacity utilization, we are around -- I think, 60% plus. So with utilization, the margins had a scope to increase?

Yes. With increasing utilization, the margins would have a tendency to improve further.

Sir, in the membrane units, sir, we are at what utilization?

Overall, we would be roughly around 70% plus.

Okay, sir. And in the Engineering division, sir, what is the order booking in this quarter, sir?

I'll speak last. Vasant, can you throw some light on the order booking, please?

Sorry. Sorry, sir?

Yes, we'll just share that number with you.

Order booking is INR 620 crores at the end of the December quarter.

What was there in this quarter, sir?

This quarter, the inflow was INR 170 crores.

INR 170 crores. Okay, sir. And sir, my -- one more question, then I'll come back in the queue, sir. Sir, our receivables are on the stretch -- stretched even though we are more focused on the industrial and not on municipal kind of. So what is the reason for the stretched receivables, sir? And what is the scope for improvement, although we have steadily been improving?

I think...

Our receivables in the March also and -- as well as in the September and in December, they are in the region of just under INR 473 crores, and that level was around INR 513 crores in March. So receivables have come down. And you see, our major chunk of the business is Engineering segment, where about, if you see, more than 60% of our turnover comes from the Engineering segment. And the payments are -- there is always 10% to 15% retention, which is retained from the -- every trade, every inverting which we do. So a fair amount of the receivables is part of the retention. And that is the nature of the EPC business. Overall, my receivables are in line with the kind of business we are doing.

Okay. But the government has reduced this now to, I think, 3%. So will this help?

No. That 3% reduction is only in the performance guarantees. Not in -- and we are doing a lot of business with the private sector also, and PSUs. So I think that is -- the retention percentage per se will get substantially affected.

The next question is from the line of [ Dipen Shah ], an individual investor.

Congratulations on a good set of numbers, sir. Sir, I had a couple of questions on the Engineering side. Firstly, if you can just throw some more light on the Sri Lankan order. What were the issues? Is what -- is it primarily COVID because of which the project has been elongated? And when do you expect the project to get completed? That's the first question. And the second question is, sir, how do we see the visibility of this business in the next year since we have an order book of about INR 600-odd crores, which is approximately 2 quarters of revenue. So we were actually talking about a large order. And if you can just give us some more visibility on how should we expect things going ahead over the next 1 year?

The Sri Lankan revenues had been impacted in the last quarter because of the fresh wave of COVID infection which has resurfaced in the country. And because of that, material movement as well as labor movement was affected quite a bit. We are quite hopeful that this situation would improve in the current quarter. And our expectation is that by the end of the year, the total revenue that we will book on this account should be in the region of around INR 350 crores to INR 375 crores. So that's broadly on the Sri Lankan front. In terms of visibility for the future, visibility is pretty good. As I had mentioned in the previous call also, we are very much on the closure. We are closing out a couple of large contracts, which are in the process of documentation, which is currently on. We should be in a position to announce it pretty soon, but the orders are, as I mentioned, will be subject to the closing of documentation.

Sure. Yes. That's very reassuring to hear, sir. And sir, just one more thing I had that's more on the balance sheet side. Sir, we have got some treasury shares, which have been outstanding for quite some time. Could you just give us some management perspective on how do you intend to go ahead with these treasury shares, whether we want to liquidate them or we should expect these to stay in the balance sheet for some time?

These are the shares held by employee trust. We have never been in the market in terms of being available for trading. And the trust has held on to these shares for more than 35 years or so, 30, 35 years. So there is no intention to bring these in the open market for trading or any such activities.

Okay. Sir, in the last year, we had realized about INR 20-odd crores from sale of some shares. Am I right in my understanding?

This was under SEBI directions. So we required certain changes in the way the trust shares are retained as is. And based on those regulations, the company had to initiate certain transactions in there. And if the shares which were disposed by the trust were taken up by the other constituents of the promoter group. So there was no sale in the open market.

The next question is from the line of Dhrushil Jhaveri from Aditya Birla Mutual Fund.

Sir, my question is, sir, on the new CapEx on the Chemicals side. Have we taken any decision on the greenfield plant? And what are the thoughts there?

Yes, we have taken a decision. We are proceeding with the plans to expand capacity. Land has already been applied for and allotted. We should be, therefore, on track to have this greenfield project commercialized by the end of FY '22 or latest by the middle of FY '23.

Okay. And what will be the total CapEx, sir?

On our -- our investment will be close to around INR 100 crores or thereabouts . Further funds will be used -- banking funds will be used also. So overall, CapEx in the -- CapEx will be north of INR 100 crores.

The next question is from the line of [ Hitesh Jain ] from -- an individual investor.

Sir, I had a couple of questions on the Engineering segment and probably one on your overall cash flows and balance sheet situation. First, could you please help us understand the reason for the decline in Engineering revenues given that the booking numbers have consistently stayed very strong? How should we look at this conversion of the book that you have to build? And typically, how many months this takes? And within Engineering, what is the proportion of revenues which are receipt or slow? And what is the proportion that is impacted by the book you have? So that's the first question. The second is a related one. If I see the capital employed in your financials within the Engineering segment, you have shown a INR 70 crores increase year-on-year, and there has been a decline in the quarterly revenue that you have on a year-on-year basis. So could you please help us reconcile this? Should we be modeling a very material pickup in revenue in the Engineering segment due to some investments that are taking place currently? Lastly, if I look at your working capital cycle, and somebody has already asked a question on your receivables, a large chunk of why you've been able to have that efficiency in the working capital cycle is also because of the elongation of the payable days in line with the receivable days. Now who are these vendors to whom you are making these payments? And what are the contours of that, if you could explain that, please?

Vasant, would you like to answer the question on the composition of this increased working capital number, INR 70 crores that the gentleman asked?

No, coming first, I think one question which was raised is why the capital employed in this segment is higher and there's a INR 70 crores increase. I think that was one of the question which was raised in the Engineering segment.

Yes.

I think because of the increase in the cash and bank deposits of -- for the -- primarily in the Sri Lanka project, some of the collections have come at the reporting end of the quarter and the year-end. And the -- that's why the cash and bank figures have increased, and that has resulted in the higher capital employed for the Engineering segment. That was -- second question which was raised is why the Engineering revenue has declined on a quarterly basis despite the higher order inflow? The Engineering revenue is also inclusive of the Sri Lanka revenue, which we account every quarter. And in this quarter, the Sri Lanka revenue was recognized lower at around INR 43 crores. And if we exclude the Sri Lanka revenue from the overall numbers in all the quarters, the -- for this quarter, the Engineering revenue, in fact, has grown by almost 19%. So yes, if you exclude the Sri Lanka revenue, the higher order inflow which has come, that is now getting reflected in the revenue which we are accounting in the quarter.

Now again, on the capital employed question. So is it fair to correlate that the increase in capital employed that we have seen on a year-on-year, even on a sequential basis is mostly because of the Sri Lanka project and the flow-through impact of that into revenues will come in the next few quarters?

Yes. As I mentioned, the capital employed has increased because of the collection which we got from the project at the quarter end, and that has led to the increase in the -- higher increase in the cash and bank. So that correspondingly has capital employed for this project.

If I could just -- last question. On your -- the INR 100 crores greenfield project that you talked about, is there any sense [indiscernible] revenues or the volumes or even the target market that you are looking at for the next 5 years given the high asset turn that your business is currently on -- as it stands right now currently at? Because if I see your net block and the revenue that you generate, there is a 10x asset turn. So if you could give us a little bit of a sense on how you look at revenues over the next 5 years, please?

We would be increasing capacity by almost 100% on the resin manufacturing setup. And therefore, the potential of revenue growth there is equivalent to what we currently generate from the resins through our setup. And over a period of 3 to 5 years, we should see a progressive improvement in the product mix. That is what is one of the targets of this new capacity expansion also, which should have a consequent benefit on overall realization levels and also on margins.

The next question is from the line of [ Anil Kumar Sharma ], an individual investor.