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

Ladies and gentlemen, good day and welcome to the Ion Exchange India limited Q1 FY '23 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 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 call for the first quarter and financial year 2023. Before we begin, let me mention a short cautionary statement. Some of the statements made in today's earnings calls 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 purpose of today's earnings 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 call. I hand it over to them for opening remarks. We have with us Mr. Aankur Patni, Executive Director; Mr. N.M. Ranadive, Group Chief Financial Officer; Mr. Vasant Naik, Executive Vice President of Finance; and Mr. Milind Puranik, Company Secretary. Without any further delay, I request Mr. Vasant Naik to start with his opening remarks. Thank you. And over to you, sir.

Thank you very much. Good afternoon, everybody. It is a pleasure to welcome you to the earnings conference call for the first quarter of financial year '23. Let me first take you through the financial performance for first quarter of the current year on a consolidated basis. The operating income for the quarter was INR 3,824 million, an increase of around 22% year-on-year. Operating EBITDA reported was INR 329 million, a decrease of around 8% year-on-year, and the EBITDA margin stood at around 8.6%. Net profit after tax reported was INR 274 million, an increase of 18% year-on-year, while the PAT margin percentage was 7.17%, a decrease of 22 basis points on a year-on-year basis. Let me now take you through the quarterly segmental performance on a consolidated basis. In the Engineering division the revenue for the quarter was INR 2,024 million, compared to INR 1,767 million during the same period last year, an increase of 15%. The EBIT for this segment was INR 81 million compared to INR 92 million on a year-on-year basis. The company witnessed robust order flow both in the domestic and international market. Regarding the Sri Lanka order, the execution progressed at a slow pace due to the current political uncertainties and the commodity shortages. On the other hand, execution of UP Jal Nigam Project is progressing satisfactorily and revenue has been recognized based on work completion. Margins in the Engineering segment were impacted because the company has strengthened the infrastructure on the back of the increased order backlog to enable increased pace of execution in the subsequent quarters. Secondly, the rise in the input cost in the earlier quarter also affected the segment margin in the current quarter. Coming to the order book. As of 30 June '22, it stood at approximately INR 1,529 crores, excluding the Sri Lanka and the UP Jal Nigam order. And if you add both to the order book, the cumulative order book would be in the region of INR 2,912 crores. We also have a big pipeline of INR 8,000 crores. With this, we have a strong visibility, revenue visibility, for the next 2, 3 years from the Engineering segment. Moving to the Chemical division, the revenue for the quarter recorded was INR 1,458 million, which increased around 16% from INR 1,251 million on a year-on-year basis. The EBIT was INR 313 million which increased from INR 273 million year-on-year. The sales in the domestic segment continued to record steady growth. Whilst there was reduced volatility in the raw material costs, the sharp appreciation of the dollar kept the input cost under pressure. Coming to the Consumer division segment, the revenue for the quarter was INR 505 million, an increase of around 115% on a year-on-year basis. The profit for the quarter was INR 4 million compared to a loss of INR 13 million in the last year. The steady volumes improvements in the volumes driven by acceptance of our new product launches enable this improvement in the financial performance. We expect the segment to sustain its growth momentum. With this we can now open the floor for the question and answer session.

[Operator Instructions] The first question is from the line of Pratik Kothari from Unique Portfolio Managers.

So my first question is on the Engineering part and you have highlighted a point in that presentation that we invested some to strengthen our infrastructure for future orders. I mean, if you can just highlight where is it, what is it that we are strengthening and what is the outlook there?

Sir, you're not audible.

Yes, Pratik, we have strengthened the design planning and execution teams as far as the infrastructure for Engineering is concerned. There's also been up-gradation of facilities which has impacted the expenditure side. These are the important factors which have led to margin decrease.

But my question was most from -- internally what have you prepared for the -- I mean, because we see very healthy growth in order book the pipeline that we have, your outlook seems very positive at least for the near future. So wanted to understand what is it that you have done to strengthen this. I understand it is -- I mean you take a hit for a quarter or 2 on your margins, but what have you done to strengthen this? Which are those areas that we're improving on it?

That's what I highlighted, Pratik. The strengthening is of the design planning and execution teams, and also of the facilities. This is going to have a direct impact on the scale of operations that we are able to manage through these teams. As we look at the coming quarters, there is a substantial order book which we need to execute. We would need these teams to work parallelly and hence the requirement for improvement of this internal infrastructure.

Okay. Fair enough. So my second question is on the Chemical. If you can highlight the CapEx plan that we had earlier announced. Any update on the same?

Yes, the CapEx plans stays on course, except that we've had a long period where the concerned gentleman who would have given us the approval, which we were waiting for, that seat was empty for quite some time. And now we understand that the seat has been filled up. We should be receiving the due approvals in the near future. Currently, our expectation is that the plant will go into operation in FY '23-'24.

Okay. So this will take about 12-odd months once we receive the approval to put up the plant in operationally?

That's right.

Okay. Fair enough. And the other de-bottlenecking that you are doing in other Chemicals division?

That's an ongoing process, Pratik, and it continues. We have lot of headroom there for expanding our revenues.

Fair enough. And, sir, last clarification, we were in works to consolidate all of the various subsidiaries that we have as part of the parent company. Anything you would like to highlight there?

The consolidation of subsidiaries is also on course. We will start the formal process in the second half of the current year.

The next question is from the line of Kiran Sebastian from Franklin Templeton.

Yes, my first question was on CapEx. Just wanted to be clear about this. So we are still awaiting the environment clearance, right? Now is that -- is my understanding correct?

That's right.

Right. And the person who's supposed to give the clearance finally, I mean, has been appointed. That is the status.

That's right.

And there is a high chance that we will be getting the approval and then right away, we can start the construction.

Again, correct.

Yes. And parallelly, is there any plans to augment the capacity inorganically in case we get delayed with this capacity expansion?

As of now, our expectation is there will be no further delays. That's our understanding based on discussions. We are almost always on the lookout for opportunities in organically. If we do get something which is very interesting, we will certainly evaluate that also.

Right. Right. And the second question is related to Sri Lanka. So I see that not much execution is happening there. So have we at least [indiscernible] the liabilities. So sometimes you see projects where, I mean, execution gets delayed and you keep burning cash, and you end up with a lot of losses. Can you just give me some color around the risk management around this particular exposure?

Sure. For one, we do not expect to have any credit risk in future. We're not getting paid directly by the Sri Lankan government. And this project is funded by EXIM Bank. So to that extent, credit risk is not something which is on the top of the mind. We also feel that the costs on account of overstay be -- are covered through our contract. And every overstay which is happening on site as per contractual provisions, cost on account of extension, which is attributable to customers can be claimed by the company. So there again, as far as overstay cost is concerned, it would not impact. We remain hopeful that in a short period of time, we would get the necessary go ahead more from the Sri Lankan government and the funding agencies to start execution at a faster pace.

The next question is from the line of Chetan Vora from Abakkus Asset Manager.

Sir, I would like to understand what would be the execution for UP during this quarter? And what would be the margins made on those?

During the quarter, you asked?

Yes.

No. Sorry to interrupt, sir. Mr. Vora, I would request you to use your handset to ask the question because there…

Yes, sorry. Is it clear now?

Yes, please.

Yes, the execution of UP for the quarter, sir.

Can I request Vasant, if you have approximate number which we can suggest to them.

Ladies and gentlemen, we have lost the line of the management. [Operator Instructions] The line of the management has been connected now, please proceed with the conference.

Vasant, can you share some approximate numbers for the UP contract estimated revenue during the second quarter?

And sir, my next question was till the time we get the answer. Okay. The margins in Engineering for the quarter has gone down to nearly about close to 6%. So how should we consider the [indiscernible] ahead because for the full year, we were guiding out anywhere between 10% to 11% margin. So how should one see this quarter particularly? I understand we should not extrapolate the quarterly performance, but would like to understand how the commodity pressures are and how should we see the margin trajectory going ahead for the Engineering division?

Sure. Let me answer the for you and Vasant can get back to you on expected numbers for UP during this quarter. The margins for Engineering segment, as we discussed during the opening comments, they have been impacted for primarily 2 or 3 reasons. One being that we have strengthened the infrastructure on the back of increased order backlog, and we expect increased pace of execution in the coming quarters. So this cost, which is currently hitting us on the bottom line would no longer do so in the coming quarters because the corresponding revenues would also come in. The second is the rise in input costs in earlier quarters affected the segment margin in the current quarter because of the inventory which was carried over. And also purchase of the spreads during earlier quarters, which got delivered during Q1 and were used for the invoicing. So there was a clear impact on these 2 accounts. In the coming quarters, however, we expect to see a significant improvement on the Engineering revenue. For FY '23 as a whole, we expect a substantial increase. We also have a very strong order book at this point of time and are further witnessing a very good inquiry bank. So from this inquiry bank, our prospects of converting orders are also very bright. So with all that outlook, we are certainly hoping for a very good growth where whatever we have seen in the previous year, both in terms of the invoicing as well as the order book. As far as the margin is concerned, conservatively we should maintain the full year margin percentage similar to what we achieved in the past year.

Right. And for the UP, would it possible to give the details?

Yes, let me just -- Vasant, are you there on the call?

I am there, but I just missed the question. We were disconnected. So what was the specifics of the question?

Mr. Vora, could you please repeat the first question that you asked?

Yes, sure. Sir, I wanted to understand what was the execution for UP during the quarter and the margins made on those for the quarter?

Yes, the execution for this quarter was around INR 27 crores. And regarding the margin profile, we don't discuss the specifics of the contract in the con calls.

All right. So I understand from Mr. Patni what he give the answer to the next question that due to the strengthening of the infrastructure for the UP to gear up for the execution front. So the cost was frontloaded and going forward, we will be seeing a healthy execution. And accordingly, the expenses would not be increasing in line with that and we would be -- should be seeing the operating leverage benefit. Is it right, sir?

Yes. That is our expectation. That's right.

All right. Sir, the other question was that during the quarter, we have got the other income of nearly about -- in the stand-alone I'm talking about -- close to INR 18 crores. Could you elaborate the details on that?

The other income primarily comprises of the interest income. And also for this quarter, because of the strengthening of the U.S. dollar, we have an exchange gain of just around INR 8 crores to INR 9 crores.

Okay. The ForEx gain is INR 8 crores to INR 9 crores, and the balance is the interest on the loan -- interest income, basically.

That's right.

Okay. And the Chemical division performance was quite steady. So how should we see the remaining part of the year in terms of the revenue growth? And the greenfield plant has been postponed to the next year. So how should -- because we were operating in nearly the optimal capacity. So [indiscernible] there will be a growth on the Chemical division?

We will certainly see a good growth in the coming periods also. We expect the growth trends which you've seen in the first quarter to continue. For the year as a whole, we should see better full year margin as compared to what we have achieved in the past year. However, we still should look at contingent upon stability in commodity prices, also resolution of supply chain issues which is affecting the commodity market, and certainly a stable exchange rate. So with those small caveats in place, we should be seeing a better full year margin compared to last year.

Right. Sir, and lastly the bid pipeline of over INR 8,000 crores, would it be possible to say how much percentage of the bid pipeline we would be in the advanced stage of talking? And the split between the domestic and whether it is in the domestic part of that or whether it is in the overseas?

There is a mix of international as well as domestic opportunities in that bid pipeline. And as far as the stage at which the discussions are, these are at varying stages of discussions. I would put roughly around 30% or so at a more advanced stage.

Okay. Fine. And sir, the CapEx for the year would be what considering the greenfield plant is postponed to the -- the expansion is postponed to the next year as and when we issue the clearances.

That's right.

So keeping that aside, what would be the maintenance CapEx for the year?

Vasant, can you please elaborate on that?

Yes, our total CapEx will be in the region of around INR 60 crores, and the major CapEx would be in our enhancement of membrane facility, the CapEx which is currently being done. And also the incremental CapEx, which we keep on doing in the Chemical segment, that will also be done. So in the region of INR 50 crores is our estimate of the CapEx.

Right. And lastly, what would be the mobilization advance issued from the UP government? And are we paying any interest on that?

We are not paying it on the mobilization advance. But regarding the quantum, as I mentioned earlier for another question on the same contract, we don't discuss the specifics of the contract.

The next question is from the line of Santosh Kumar Kesari from Kesari Wealth.

I have one question. Regarding all these projects that we have, do you have any cost escalation plus build-in, for example, for the high input cost? Did we receive any compensation from the project owners? That's the first question.

Yes. And what's your second one?

Yes. The second one is about Sri Lanka corporate site. So there -- as I understand from the previous participant's question, that there is some work going on. So I wanted to ask that have we built any loss on that or any expected loss considering that this may not move for the year or so considering the economic and political situation in Sri Lanka? So are we expecting any loss or have you booked any so far in the financials?

Okay. Let me answer the second one first. No, we do not expect any loss arising of it. As I explained, the overstay which is caused by the customer or because of the actions attributable to the customer is covered under the contract and we can claim forward in this overstay. So those costs are not going to be a loss for us. And the other risks, which are attached to this are the credit risk, which again I explained that we don't have a direct exposure to the Sri Lankan government. And because of that, credit risk is also not there. We do not expect to have any loss on this.

Is there any intention body, for example, finance Institution, which is -- which had given the contract to us?

No, this contract funding is through EXIM Bank. That's why the credit risk is not there -- EXIM Bank of India.

Okay. Okay. So we are sure that the project is going to be finished sooner or later or the credit be --?

We remain hopeful. We remain hopeful that very shortly the permission for execution of the contract would improve and then a go-ahead with execution in consultation with the funding agencies and the Sri Lankan government. Only when we feel that the recoverability is not going to be a challenge and execution can proceed at a desired pace, that is when we will go ahead and start invoicing for the balance of the project. As we have indicated in our operational highlights and also in the introductory statement that currently the project execution is moving at a very slow pace. That's as far as this particular thing is concerned. As far as price variation is concerned, some contracts, especially with the government and PSUs, they do have a price variation clause, and we managed to get from our customers in spite of the fact that price escalations may not exist because of the way the price volatility has impacted the margins of not just company like us, but across the globe and across industries. The customers have been quite considerate, and we've managed to get price escalations from customers, even where a price variation clause did not formally exist in the contract.

The next question is from the line of Vikas Goel, an Individual Investor.

So my question is what type of opportunities we are looking for this green hydrogen team because water is the key ingredient for this. What type of opportunities we are looking in this field and how big it can be for us?

This is an interesting opportunity for us, and we are keenly working with all major players in India who are evaluating large-scale infrastructure set up for green hydrogen. We would certainly be a part of almost all these projects. You're right in saying that water is an important part of this entire process and we hope to be able to contribute to this particular industry in a big way.

And sir why -- my next question is how is Hydrolife progressing, sir? [Foreign Language], what is the progress related to Hydrolife right now?

The market acceptance of the product is very good. There is a substantial up in earnings, which we are able to generate from this product. In the coming times, we should see much better numbers coming from this product even compared to what we have done in the current quarters.

Sir, how much of revenue percentage of consumers invent is driven by this project?

I would not be able to disclose the exact numbers. I'm sorry for that. But it is a significant contributor. Still I wouldn't say that it is the only we contribute. There are other key product lines, which also benefits the consumer product there.

And so my last question is, are you manufacturing [indiscernible] plant?

Yes, we do.

The next question is from the line of Anurag Patil from Roha Asset Managers.

Sir, what would be the contribution from private sector in our current order book?

Let me see if I have that number handy. We should be looking at roughly around 40%, 40% to 50%, am I right, Vasant, on that?

Yes. I think around 40%, 45% will be a right figure. Yes.

Okay. And sir, in the Chemical greenfield CapEx, what is the total CapEx plan and how much we have spent till date?

The total CapEx on that is expected to be in excess of INR 200 crores. At the moment, the execution of this new plant has not started. As we highlighted a little bit earlier on the call, we are waiting for the environmental clearance to be formally signed. Only after that, we will start working in earnest.

Okay. Sir, in terms of asset terms, can you expect around 2x for this CapEx?

You mentioned [indiscernible]?

Revenue potential from this INR 200 crore CapEx? Any ballpark in there?

Yes, it would be 2x to 3x. It will take some time for it to reach the full capacity utilization. But when it does, it should be in that range of 2x to 3x.

Okay. And one last question, sir. Any progress on our international orders? We were looking at some large orders we were working.

We continue to work on those. The movement on that, unfortunately there is nothing yet to report on it. Hopefully, we will have something to inform you in the near future. As of now, nothing has materialized out of those.

The next question is from the line of Tushar Raghatate from KamayaKya Wealth Management Private Limited.

Yes, I will say what would be your gross profit margin for your Chemical business? And can you expect the Chemical business to increase in terms of share going 2 to 3 years down the line?