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

Ladies and gentlemen, good day, and welcome to Ion Exchange (India) Limited's Q1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, Mr. Sonpal.

Thank you. Good afternoon, everyone, and a very warm welcome to you all. My name is Anand 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 first quarter of financial year 2022. Before we begin, I'd like to mention a 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. Focus of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Now let me introduce you to the management participating with us in today's earnings conference call and I'll give it over to them for 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. Now I request Mr. Vasant Naik to give his opening remarks. Thank you, 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 first quarter financial year of 2022. Firstly, I hope that everyone is keeping safe and well. Let me take you through the financial performance for the Q1 of FY '21/'22 of our company on a consolidated basis. The operating income for the quarter was INR 3,141 million, an increase of approximately 18% year-on-year. Operating EBITDA reported was INR 358 million, an increase of approximately 14% year-on-year and the EBITDA margin percentage stood at 11.4%, a slight decrease of 40 basis points on year-on-year. Net profit after tax was INR 232 million, an increase of 32.6% year-on-year, while the PAT margin percentage was 7.39%, an improvement of 79 basis points on a year-on-year basis. As evident from the numbers, the company witnessed steady sequential improvement in the financial performance. There has been an improved opportunity flow from the international markets. However, on account of the resurgence of the second wave of COVID-19, besides dampening the economic recovery, it has also posted challenges for execution, including disruptions in logistics for material movement. Let me take you through the quarterly segmental performance on a consolidated basis. In the Engineering division, the revenue for the quarter was INR 1,767 million, an improvement of 3.8% compared to the same period of last year. The EBIT for this segment was INR 92 million, which decreased by 17% on a year-on-year basis. The execution of the ongoing engineering orders was affected due to the second wave of COVID-19 and restrictions in various geographies. We have a healthy order book on the back of steady flow of medium-sized orders coupled with 2 large EPC orders received from UP Jal Nigam for approximately INR 12,000 million and IOCL Paradip Refinery for an EPC project for design and installation of an and installation treatment plant for a total contract value of INR 3,574 million. The ground activity in the UP Jal Nigam project has started, and we expect to start accruing the revenues from the third quarter of this current financial year. The total order book as of 30th June 2021 stood at INR 7,320 million. This excludes the Sri Lanka project, the UP Jal Nigam project and the recent contract awarded to us from IOCL. If we add these to the order book, our total order book would be more than INR 25,000 million, and we would also have a big pipeline of approximately INR 55,000 million. With this, we have a strong revenue visibility for the next 2, 3 years from the Engineering segment. Coming to the Chemical division, the revenue for the quarter was INR 1,251 million, which increased by 51% on a year-on-year basis. The EBIT was INR 273 million, which also increased by 53% on a year-on-year basis. With the progressive COVID-19 relaxation in the country, the sales and dispatches have picked up by the quarter end. However, exports for the quarter were muted due to the logistic challenges which affected the dispatches. The margins were also under pressure due to the increase in the raw material input costs. The company has taken measures to mitigate the impact, including passing on the cost to the customers wherever possible. Lastly, in the Consumer Products division, the revenue for the quarter was INR 235 million, an increase of about 17% on a year-on-year basis. The loss for the quarter was INR 13 million versus a loss of INR 8.4 million for the same period in the previous financial year. The COVID second wave and the associated social restrictions with restrained economic activity in key consumer sectors continued to pose challenges, although the company has launched some new products at the end of the quarter, which are getting good responses in the market. With this, we can now open the floor for the question-and-answer session.

[Operator Instructions] And the first question is from the line of Sunil Kothari from Unique Portfolio Management Service.

Congratulations for really very good performance during this time. Sir, my question is basically Chemicals segment during last almost 10, 12 quarters, our range of revenue is roughly INR 110 crores, INR 120 crores, INR 125 crores. So I wanted to understand the constraints on the side of demand or capacity. That is my first question. And whatever the constraint, what our efforts we are taking to overcome those hurdles to move towards our new territories?

Thank you, Sunil ji. The Chemical segment is seeing much better prospects. The demand scenario has improved, especially in the export market. However, during this first quarter, we faced significant logistic challenges. Availability of containers and other challenges associated with shipping the products to international locations were quite heightened, one of the reasons why the numbers have not grown more than what they already have.

So sir, my question is, are we adding enough capacity and doing CapEx? I think last quarter on call also, you said that we are planning to invest more than INR 100 crores previously we plan and then we are thinking about bigger investments. So if you can talk a little bit more about opportunity and the investment we are doing. I'm not too worried about this quarterly -- this number. What I'm saying is are we moving towards bigger size of chemical business by investing and opening up further opportunity.

Yes, we are. As of this quarter, our capacity utilization was roughly in the range of 70%. So that leaves us a little bit of headway. Beyond that, as I have been mentioning over the past 2 calls, we are going to invest in greenfield project to expand capacity on resins. This investment is going to be upwards of INR 200 crores and that would increase our ability on this part of the market substantially. We are also expanding our capacities in the chemical -- in the other chemical lines. This is not just happening in India, but we are also putting up facilities abroad to meet the distributed demand which we are seeing.

So sir, by when we are planning to invest this INR 200 crore plus investment? When the project execution cycle, something more detail will be very helpful.

The investments would likely start towards the end of this financial year. The capacity would get online only towards the end of FY '23.

Okay. Okay, sir. And sir, my next question is on Engineering side. You rightly always talks very positively about our capability in the industrial market and our recognition in Engineering segment. And we were, I think, expecting some really good and sizable orders, which we already received from domestic government of Indian -- UP government project. Anything, sir, would you like to talk on international order? That is one question. And related to that, currently, we are executing roughly INR 1,000 crore of size of business in Engineering segment. If given of order and industrial opportunity, can we reach higher size execution maybe INR 1,500 crore or maybe INR 2,000 crore? And for doing that, what we will require to do? And are we preparing ourself for those things if you can share your thoughts will be really helpful.

We have been following a lot of opportunities globally. As I have shared on a few of the earlier calls, these opportunities take time to mature. However, we are close to concluding some of these. I would still not be able to give you an exact time line. But hopefully, it will be soon. These are large international orders. In terms of looking at an overall expanded invoicing from the Engineering segment, I certainly hope that in the coming periods, we will be able to reach it at a larger scale. We are in a position to execute a few large orders. And as we speak, we are augmenting our capabilities to be able to handle more numbers of such large contracts.

[Operator Instructions] The next question is from the line of Renjith Sivaram from ICICI Securities.

Hope we are able to tackle this COVID in a better way compared to our competition looking at your number. So again, just wanted to know this INR 200 crore of CapEx, which we are putting. So what can be the potential revenue from this INR 200 crore CapEx? If you can share some ballpark numbers. Hello?

We should be expanding our capacity substantially. This would go up by more than double of our current capacity eventually. In the initial phases, we are expecting the capacity to at least double. And thereafter, we will take up further expansion of that [ investments ].

Okay. So potentially, the contribution from this resin segment can potentially double from hereon once these capacities come onstream, is that understanding correct?

That's right. Once we achieve full capacity utilization, that is what would happen.

Okay. And sir, you had mentioned INR 5,500 crore in the order pipeline. So if you can elaborate from which segments are you seeing these orders or what will be the time lines or some more clarity on that order pipeline of INR 5,500 crore, which you have shared in your PPT?

The offer pipeline which we have, that is largely in the heavy segment. So it would be a mix of infrastructure, industries like refineries, steel, fertilizer, the power segment. So it is slightly biased towards the heavy segment. And a reasonably good percentage of international offers. This does not include the mega projects that we are pursuing in the international markets.

Okay. And we get to hear regarding this desalination project from Chennai and also there have been a couple of other desalination in and around Bombay. Did we participate in any of these tenders? Or we will try to stay away from desalination? What is our strategy on the desalination market?

We were one of the first in the country to enter into the desalination engineering projects and have been participating in such projects for quite some time. However, we are not necessarily pursuing all activities and especially when it comes to the infrastructure side or the municipal side, we take our pick and would pursue only selected opportunities.

So we won't be looking at Chennai because of the size of the project? Is that understanding correct?

We would evaluate our strategies and we would be taking [ again on this out in the ] times to come.

The next question is from the line of [ Dipen Shah ], an Individual Investor.

Congratulations on a good set of numbers. Sir, continuing with the chemical business, I just wanted sir, slightly more understanding on how is the competitive scenario in the Chemical segment panning out? And specifically, are there any protection or protective measures which help us in terms of, say, antidumping duty or any other protection which is currently helping us? And if yes, then whether you expect these to remain? Or to go away?

There is no significant advantages, which we are getting because of anti-dumping duties or otherwise. We are experiencing some unreasonable price movements on the raw material side and the corresponding price movement, which should happen on the finished goods, may not always be a [indiscernible] Therefore, in spite of these unreasonably movements, we have not really seen any countermeasures being taken from the side of the government. But we are well capable of handling competition, both domestically and internationally.

Okay. And sir, in terms of the margins in this business, how confident are we of being able to pass on all the cost increases or maybe we should expect some impact on the margins in the foreseeable future?

We have seen a good amount of impact in the current period and that is the margins in the Chemical segment have dipped a little bit. Our ability to pass on the cost is reasonable, but it takes a little bit time. It is not immediate. It actually takes 1.5 to 2 months for the margins to get stabilized again. We should be able to do that even in case of future [indiscernible]. Certainly, we have seen [indiscernible] the recent commodity price increases.

[Operator Instructions] The next question is from the line of [ Chirag ] from and [indiscernible].

This is [ Chirag ]. Sir, according to you, where do you see Ion Exchange within 10 years? And what are you planning to grow it's operations in a diversified field?

I'm sorry, [ Chirag ], your voice was not very clear. Can you please repeat it again?

Sir, where do you see Ion Exchange growing within 10 years? And what about the DuPont hiring into the Ion Exchange business? And is Ion Exchange planning to grow it's operations and diversify field in Rajasthan rather than growing more on only chemical and engineering?

10-year is a long time frame, Chirag and I would not like to delve into speculation on that longer time frame. Needless to say we will be looking at multiples of where we will be, we are today. We hope to continue growing at a reasonably good pace. As we undertake these measures on capacity expansion and both in terms of geographical presence and the products that we manufacture and engage in. I'm sure that we will see a reasonably good growth in the foreseeable future. We do not really envisage that we will be going into unrelated areas. As of now [Technical Difficulty].

[Operator Instructions] The next question is from the line of [ Vikas Goel ], an Individual Investor.

Sir, my question is regarding -- you have recently launched a product called Hydrolife in consumer segment. Because all the ingredients to become our company at a next level, it has everything to -- but I want to know about this product, how this product can help our company to go to a different level. Because -- and what about the competition. Is there any competition for this product in the Indian market?

This is an innovative product announced by our company. I'm sure in times to come, it will contribute significantly to the growth of the consumer segment. The competition for the product is very limited.

Sorry sir, there is a slight echo coming from the line.

Okay. There should be no more echo on my side. Is it better now?

Yes, sir.

Okay. So there isn't really any competition, which has got an equivalent product versus this has got a lot of innovative features, which other similar products don't really have. And so you are right, this has a significant potential to contribute to growth of the Consumer segment.

Sir, but I'm not seeing aggressive marketing or any push for this product since it has been launched 3, 4 months back. But this product is so good we should spend aggressively for marketing on this product, sir.

The product goes through various cycles of introduction in the market. The initial couple of months is always a soft launch where we would try out the product in different markets, make sure that our service delivery is optimized and the supply lines are completely streamlined. And only thereafter, you would see an increased level of market spend.

And sir, we are hearing about DuPont taking stake in our company. What about this?

Please don't look at what market rumors are. And I would request you to keep the questions to the facts and the numbers, which are being published by the company.

The next question is from the line of Manish Poddar from Nippon India.

So just 2 questions. First one was on the chemical side. So could you probably quantify how much of orders, let's say, didn't go through because of probably the logistics or the lockdown? And would it be a fair understanding that this will come back in Q2 and thereby, your margins will get restored?

Yes, Q2 should perform better. However, the logistic challenges haven't really been solved as yet. If you were tracking the global prices on the front of the availability of containers and the [indiscernible] and the closure of a few major ports in some of the countries, you would know that the problem is still there. There is expectation that this situation would start easing over the next few months. We are keeping our fingers crossed and hoping that in the coming times, the logistic challenges would be significantly lesser.

And probably, could you quantify how much amount of orders were lost because of this?

Orders were not exactly lost, but we've not been able to ship out what we could have shipped out during this period. And we -- our customers have been quite understanding. Everybody is aware. I guess, there would always be situations where the requirement is immediate. And if our ability to supply is not commensurate with the demand expectations, there would be some attrition of this demand. I would not really be able to quantify exactly how much this has been -- how significant.

Okay. Just 2 small ones. So let's say, this chemical CapEx which we are doing, any time line which we have, let's say, for -- let's say, utilization of the plant?

Once we -- once the capacity, [Technical Difficulty], it would take roughly 2 to 3 years for the plant to get into a 100% capacity utilization stage.

And if I understand you, this largely a extension of the existing products? Or are we going to be more value-add products here?

No, it would be focusing largely on the current line of products. The addition to the existing product line is an ongoing exercise. This plant is not a part of new product introductions.

Okay. And one last one, if I can is, on this 2 contracts, let's say, which we had for the 3 projects. Have you been able to now, let's say, quantify the quantum of the order? Because I think the earlier last quarter, we had an estimation. So now given that now it's -- we're up about 2 to 3 months and the order is getting -- probably start booking revenues from Q3. So any estimation now you would have got on the order size?

We have started some of the project reports at the village level, cluster levels approved. This process is still in the early stages. However, based on the current numbers that we are seeing, the estimate should -- would go up from what we had earlier projected.

The next question is from the line of the Pratik Kothari from Unique Portfolio Management Service.

Sir, last quarter, we had mentioned that the reason for upping our CapEx on the chemical side was -- we were working on some technological innovation. So if you can just throw some light on what that is? Hello?

Sir, can you hear us?

The question, please?

My question was, in the last con call, we had mentioned that we were working on some technological innovation under Chemical side and that was the reason why we had delayed our CapEx a bit and also taking it up from INR 100 crores to INR 200 crores. If you just throw some light, what was the technically innovation that we were working on?

I'm sorry, that is not something that I can discuss with you at this stage. But are you being able to hear me?

Yes, sir, we can hear you.

So that's not something which I'll be able to share with you, but it is a significant advantage that this bit of innovation will provide to us. And we really hope that once the plant is fully executed, we'd be able to profit and earn margins.

Fair enough, sir. Sir earlier, our plan was to double the resin capacity, right? So now what we're doing is we're also doubling the other Chemicals segment too.