JK Lakshmi Cement Limited (500380) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the JK Lakshmi Cement Q3 FY '21 Conference Call hosted by PhillipCapital (India) Pvt. Ltd. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vaibhav Agarwal from PhillipCapital (India) Pvt. Ltd. Thank you, and over to you, sir.

Thank you, Sanford. Good evening, everyone. On behalf of PhillipCapital (India) Pvt. Ltd., we welcome you to the Q3 FY '21 call of JK Lakshmi Cement. I need to highlight that JK Lakshmi Cement is also the holding company of Udaipur Cement Works Limited, and therefore, the call is also open for discussion about the performance of Udaipur Cement Works Limited. On the call, we have with us, Dr. Shailendra Chouksey, Whole-Time Director; and Mr. Sudhir Bidkar, CFO of JK Lakshmi Cement. I would like to mention on behalf of JK Lakshmi Cement and its management that certain statements that may be made or discussed on the conference call may be forward-looking statements related to future developments and current performance. Now these statements are 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. JK Lakshmi Cement 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. I will now hand over the floor to the management of JK Lakshmi Cement for their opening remarks, which will be followed by interactive Q&A. Thank you, and over to you sir.

Good afternoon, Mr. Agarwal and all the participants. May I, on behalf of our company and on behalf of my colleague, Mr. Bidkar, welcome you all for this con-call. And since the results are already public and well read and analyzed by you, we'll straight away go to the question-and-answer session. All are welcome.

[Operator Instructions] The first question is from the line of Sanjeev Goswami from Fractal Capital Investments.

Sir, I just want to have some update in terms of how this goes to the finance expansion plan at Udaipur Cement Works. I understand the INR 1,400 crores expansion plan that you have. Sir, give us some idea about [indiscernible] supervision that you have over there? How much will come from [indiscernible] and how much equity you will be raising?

This is going to be a INR 1,500 crores project, including the railway siding. And broadly, we propose to finance it with a debt equity of 2:1, means a debt of about INR 1,000 crores and an equity of INR 500 crores. Some portion of the equity will come from their own internal accruals, and some would be the capital raising. We are -- we had to form up that, but that is broadly what the means of financing would look like.

Hello?

Mr. Goswami, do you have any further questions?

Yes. I have some follow-up questions on that. Sir, I just want to understand, from the company and group's perspective, what is the reason for having a separate listed company that could also do the exactly same kind of activity?

Yes. You're right. This is, first and foremost, this is a company which we had acquired from -- taken out of -- from [ BFR ] and wanted to keep it separately for some time to nurture it as a separate company. Now at the appropriate time, we'll take that call on the merger. As of now, the compelling reason for not doing the merger upfront is the differential in the tax rate. While JK Lakshmi is at 34%, at the whole regime, UCWL is at the new rate. And in case we do the merger, obviously, whatever profitability is there of UCWL, we'll start getting tax at 34% and also start paying that. So JK Lakshmi can't switch over to the new regime of the concessional tax rate of 25% until the time the MAT credit gets knocked off, which will take another 3 to 4 years. But yes, you are right, ultimately that its structure has got to collapse but at a time when it is tax-neutral. Otherwise, it will result in some unnecessary outgo or maybe losing some tax MAT for as far as JK Lakshmi is concerned or subjecting UCWL to a higher rate of tax than they are otherwise paying.

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

[indiscernible] this is Sathish Kumar from Antique. Sir, I have a -- I just wanted to understand actually on how has been the demand trend in present terms in the month of January, like now we're into February? Are there any signs of price improvement which you are seeing in our markets? And how is the demand traction getting into Q4?

See, we saw a good run on the demand front in the Q3. And the month of January has been no different. And we, therefore, are expecting that Q4 will continue to show buoyancy in the volume as in the Q3. And then, of course, the pronouncement also makes it -- gives us that hope of optimism on the volume front in the coming next 1 financial year, at least. So I think volume does not look to be an issue of worry in the immediate or near future.

And sir, on the pricing front, has there been any improvement after some correction in Q3?

Well, we have not seen any correction in the prices. In one of the markets, we have seen some correction, in Gujarat. But otherwise, the prices continue to remain as they were in the trailing period of the previous quarters.

So you mean that Gujarat has been in correction in January, and East and North are stable versus December?

Right.

All right. And sir, on UCWL operations, you mentioned for a INR 500 crore equity, you might want to raise capital outside the internal accruals. Does that mean you want to raise the equity? Or is it like debt only you are referring to?

Equity, equity. Debt is INR 1,000 crores only on debt equity, when I mentioned debt equity of 2:1. So obviously, INR 1,000 crores is the debt. Balance comes from the equity and some internal accruals, as I mentioned, just to answer your earlier question.

Okay. Okay. And sir, but our debt -- I mean, balance sheet doesn't look to be like in a very leveraged position to fund this kind of project, which is also staged out then for 3 years. So any specific reason we are looking for equity?

Equity because balance -- UCWL on a stand-alone will have to -- will require that sort of an equity to sustain that 2:1 debt equity. Already, there are in a slightly high debt equity. So they will require some equity increases.

So JK Lakshmi stand-alone will not be funding that -- this project in that way?

Actually, we'll not be required to borrow additional money to make equity contribution if it is required to. But otherwise, JK Lakshmi on its own is at a very healthy debt equity.

[Operator Instructions] The next question is from the line of Nitin Arora from Axis Mutual Fund.

Just one clarification. When you talk about equity raising, you mean to say Udaipur Cement, right?

Yes.

And that, Udaipur will only do, no dilution will happen at JK Lakshmi. Is that the right way to look at it?

Sorry. Come again? I have not heard you right.

What I was trying to understand is that equity raising is at the Udaipur Cement, not at the JK Lakshmi?

Yes. You are right. It is at Udaipur Cement, not at JK Lakshmi.

What are the mechanisms? Are we going for the right issue, where JK Lakshmi is then also participating like...

No, okay. We have not yet formed up, but in all likelihood, it could be a right only.

[Operator Instructions] The next question is from the line of Pritesh Sheth from Edelweiss Wealth.

Sir, I was looking for volume numbers for this quarter, if you can provide.

Volume for this quarter, we had JK Lakshmi volume at 26.95 lakh tonnes of total sales, which includes cement of 25.04 and clinker of 1.91.

Okay. And what was it last year?

Last year, in the corresponding quarter, we had total sales of 23.27, which included the clinker sale of 1.59.

Sorry, I didn't hear -- get the total volume. What again, 2? Hello?

Didn't you hear?

Yes, yes. I didn't get the volume numbers for last year. Your voice broke up.

Last year, total volumes were 23.27 lakh tonnes, which included clinker sale of 1.59. Balance was cement.

Okay. Okay. Got it. And can you provide your debt figures for this quarter, both stand-alone and consolidated?

Sorry?

Debt numbers. Your...

Debt? As of December 31, 2020, on a stand-alone basis, we had a total debt in JK Lakshmi of INR 1,450 crores and about INR 900 crores of surplus. So it was about INR 550 crores was the net debt. On a consolidated basis, as of December 31, we had INR 1,975 crores as the total debt and INR 1,020 crores as the net debt on a consolidated basis.

[Operator Instructions] The next question is from the line of Kamlesh Bagmar from Prabhudas Lilladher.

Am I audible, sir?

Yes, yes. You're audible.

Yes, yes. Sir, one question to understand, what is our consolidated sales volume, sir, adjusted for traded cement volumes?

Sorry?

What was our consolidated sales volume, excluding our traded cement volume, sir?

You see, total -- you see, we had mentioned about total sales volume for this quarter for JKLC was 26.95, UCWL was 5.05. So total was 32 lakh tonnes for this quarter. Then eliminating about 4 lakh tonnes of the interunit sales, the total net sales, net of crossing of -- knocking off the interunit sales, is 28.02, which is about 26 of cement and 2 lakh of clinker.

Okay. And sir, lastly, on the noncement revenues, like Blocks, sir, and RMC revenue in this quarter and last quarter, sir.

Yes. This is your pet question, which you always ask every quarter. Value-added products or the other revenue value-added products in this quarter was, Kamlesh, INR 91 crores, and in the corresponding quarter, it was INR 93 crores -- INR 73 crores. INR 73 crores has gone up to INR 91 crores. Right?

Okay. And sir, lastly -- yes, lastly, sir, we have seen a fall in the prices in North, like the nontrade, and even in the East market. So what would be the trend in the month of January as compared to previous quarter's average in realization for [indiscernible]

In response to your previous question, that we have seen only some price increase in one of the markets in Gujarat. Rest of the -- all the markets have remained the same as December. So be it East or North, they remain at the same level as December.

Okay. And lastly, like you say on the pet coke cost, pet coke front, when are we going to see the impact? Or like you say, in this quarter, how much increase could be there on the cost front for us?

We should see some impact of that coming in this fourth quarter and full impact in the first quarter next financial year.

[Operator Instructions] The next question is from the line of Ritesh Shah from Investec.

Sir, in one of the prior questions here, you just said that tax rate differences between UCWL and JK Lakshmi, that you indicated that it will take a couple of years before it's tax-neutral. So can you explain this? What is the quantum involved over here and why is it 2 years?

Sorry. Can you repeat that last bit of your question?

Sir, you indicated that the effective tax rate at UCWL is 25%, right? Now is it the existing? Or is it for the new expansion, that what you were referring to earlier?

We are talking of the existing. They have opted for the lower tax regime. We, JK Lakshmi, not opted for the lower tax regime because we had MAT credit entitlement pending. In case of the switchover to the new rate of 25% total, including the surcharge, et cetera, then you lose on the MAT credit entitlement. That figure is about close to INR 200 crores for us as far as JK Lakshmi is concerned, MAT credit entitlement. So it will take some time before we are able to knock that off against our actual tax liability. So only when that MAT gets knocked off, then we can secure and register to a lower tax regime of 25%. And when both the companies are at 25%, that will be the opportune time for us to merge. So depending on the future profitability of JK Lakshmi, it may take 3 to 4 years before we are able to knock off the MAT credit entitlement against our normal tax liability.

Okay. So that's total, sir. A second related question, I think it will also be a function of UCWL, the extent of what UCWL as is as compared to JK Lakshmi remains. So can you please elaborate on how much are the incentive on a per tonne basis at UCWL versus JK Lakshmi?

UCWL, whatever incentives they were having for the sale tax, that is going to expire sometime next month. So that is not a reason as to why we are not merging. For their new expansion, that, in any case, they will get, depending on where they're going to set up their units.

But sir, I'm assuming that the new expansion will also have incentives...

They will have and then we will make sure that the merger doesn't impact the availability of incentive because the merger is -- their incentive is linked to the CapEx. And if CapEx has been done, the incentive should be available.

Okay. That's perfect. And sir, expansion time lines over here for UCWL?

We are talking about 3 years' time line from the day we do the financial closure.

Okay. And sir, one last question for [indiscernible], sir. Sir, how much is the trade, nontrade gap in North? Any scope of this huge gap which is there narrowing? That is one. And secondly, sir, any color on pricing in Eastern India, which is quite different? So I understand like 2 large players, there is a market share story, which is going on between them. But how should one look at this? Is there some way out? So if you can elaborate on pricing in North and East, that will be very useful.

When there have been no change in the prices, that huge gap between the trade and nontrade continues, unfortunately, in the case of North. And the lower prices in the East also continues. And -- but one can only hope that better sense will prevail. And I won't be surprised if that happens in the month of February, things might start looking up because the demand is good, many people are running out of clinker. We all just don't have any clinker, to running short of clinker interest. Some [indiscernible] are facing that problem. But I think the -- that it makes a very strong case for price [indiscernible] And I think it [indiscernible]

That's all useful. Sir, if I may just squeeze in one more. Sir, you've indicated in the prior question, INR 91 crores of value-added products. Sir, is it possible for you to give a breakup over here? And do you have any specific target for the segment and corresponding EBITDA numbers, if you can give?

We don't share the separate EBITDA number, but broadly, this is coming from AAC Block, RMC [indiscernible]

And this quarter, we have added the putty also...

POP. So these are the 3 main constituents of that.

Okay. And sir, any targets for the year?

Yes. We are targeting in the coming financial year about a INR 500 crore turnover from the value-added products.

[Operator Instructions] The next question is from the line of Indrajit Agarwal from CLSA.

Can you help us with the fuel mix, pet coke, coal and if you are looking to change this given the rise in prices?

Yes. In this quarter, we had total coal of about 27%, [indiscernible] pet coke and 5% was other biomass, et cetera, alternate fuel. So that broadly is there. It has changed. In fact, the coal has gone up compared to the corresponding quarter and also depends on the pricing and availability of coal at the plant site.

So the coal, is it domestic or mostly imported?

In the East, is mostly domestic only. But in North, it is partly imported as well.

And right now, what is the price differential on a blended basis for per tonne [indiscernible] between coal and pet coke?

Broadly on [indiscernible] basis, it works out to be the same, but pet coke works out to be on [indiscernible] basis, slightly cheaper always.

Even now?

Certainly.

[Operator Instructions] The next question is from the line of Rajesh Ravi from HDFC Securities.

I had a few questions. First, on the RMC number for the quarter, was how much?

We didn't give separately for the RMC number. Overall value-added was INR 91 crores. Out of it, if you specifically want, it was about INR 35 crores for [indiscernible]

Okay. And sir, when you give the consol numbers for the quarter, 28.02 lakh sales volume, possible to share for 9 months also, what was this number?

In 9 months, we had total sales for JK Lakshmi of 69.85%. UCWL was 14.55%. So aggregate was about 84.4. And if one were to knock off the interunit of 10.27, the net of the interunit sales was 74.13, including clinker of 7.95 and 66.18 of cement.

Clinker is 7.15 lakhs?

7.95 out of 74.13.

Yes. And talking about the clinker, we are also selling clinker and we would be also buying clinker in a few markets. So could you elaborate on which market you are falling short of clinker and where you're getting the opportunity to sell surplus clinker that you have?

We were only marketing and there's no outside sale of clinker. Whatever is there is negligible. But yes, in the East market, that is -- I mean, we are -- these are clinker sales. So in Northern West, we do not have any clinker to sell now. We are meeting our partners to outsource. But in the East, we do have. Some of the clinker sales, we have liquidity by trade.

Okay. And with this catch-up in trading units ramping up, would that surplus remain or...

Yes. Hey, gradually, this will come now.

Okay. And sir, how much clinker we would have bought in third quarter and for the 9 months as a -- for a stand-alone basis?

I don't have the figure. I believe we only bought in the -- I think in December. We did not buy it earlier. So the purchase in the third quarter, that is 9 months also.

Right. And sir, on the volume growth, you have been delivering strong numbers. So which -- any specific markets you saw this growth, like Gujarat, West, North and East, if you could give some indicative numbers, which market saw what sort of volume growth, would you?

We have been growing mainly in Gujarat and Rajasthan.

Sorry, Gujarat and Rajasthan?

That is where our growth has come from.

Okay. And how about East because the market was growing in...

East also, we have grown there. And East, we have grown all around and we have grown -- we probably have grown in MP and Maharastra also.

Okay. Okay, okay. And sir, lastly, when you talked about equity dilution at Udaipur, would that -- equity dilution, but when we promoters also participate -- not the promoter, JK Lakshmi will participate in the right issue, will that have any material impact on your leverage ratios?

No. I said at JK Lakshmi, we don't need to borrow to invest in UCWL. It will remain unaffected by this investment in UCWL as far as JK Lakshmi leveraging goes. JK Lakshmi will not be required to borrow further to invest in UCWL.

Okay. The current leverage level, even if it remains stable, you can still participate in the required equity contribution.

Yes, we have, as of now, INR 900 crores of surplus cash. I don't think that's an issue.

Okay. [indiscernible] I'll come back in the queue. Now [indiscernible] that it's a 2- to 3-year spread, the CapEx will be spread over 3 years.

Yes, yes.

The next question is from the line of Swagato Ghosh from Franklin Templeton.

Sir, one clarification on the differential tax gain. So if we merge UCWL with JK Lakshmi, the total profitability goes up, then currently actually expedite the market utilization as JK Lakshmi.

But then they will be further required to pay MAT on their profit, which is the they are -- that was not required to pay. So MAT will keep on spending to the extent of the additional MAT being paid on UCWL profitability. On top of that, they will be charged at 33% on their profit as opposed to 25%, which is a normal tax today. So we have done those numbers and that it makes sense to wait until the time both the companies are at the same tax rates.

Okay. And UCWL did not have any unutilized MAT credits?

Yes, they did not have. That was the reason as to why they immediately switched over. As soon as it was offered by the government, they switched over to the new rate. They did not have any MAT credit entitlement pending.

Okay. But for the period they were making losses, I'm wondering if they're paying [indiscernible]

No, you don't understand. They are making losses, they don't have to pay MAT. In fact, they were able to take now, because of the losses, the shield on the normal tax also. So if they are neither paying MAT nor are paying normal tax, obviously that they were at a nil debt, until the time the whole tax losses get absorbed, they will continue to be debt. After that, they will pay at 25%.

Got it. Got it. Okay. Now this is clear here. Okay. And sir, if we borrow at Udaipur level versus if we borrow at the JK Lakshmi level, what is the current interest call differential?

Since we are providing, I don't see that to be an issue because we'll provide the corporate guarantee. And then the risk is for the bankers on JK Lakshmi. So I do see that to be an interest rate differential. On a stand-alone basis, you are right, there could be interest rate differential for both the borrowing entities because risk appetite for the 2 entities are different. So we will be offering the corporate guarantee.

Okay. And hence, there is no interest call differential?

And hence, there would not be because in any case, I -- yes, you were asking that question. Can you repeat your question? I missed that out again. I'll answer it again.

No, no, I got it now that there will not be an interest call differential Yes, yes. So I have one last question. Can you just give me the cement production for the quarter at JK Lakshmi?

Cement production for JK Lakshmi is 22.74 lakh tonnes.

[Operator Instructions] The next question is from the line of Uttam Kumar Srimal from Axis Securities.

This is Uttam from Axis Securities. Sir, what has been our trade mix here during this quarter?

Trade mix is about, in this quarter, is about 50-50.

50-50. Okay. So nontrade has increased from last quarter?

Yes. I think there is [indiscernible]

First quarter, in fact, trade was higher. Second quarter, it was -- from second quarter, 49% trade has gone up to marginally to 50%. Overall, in 9 months, it is 53% trade.

Okay. Okay. And sir, this quarter, other expenses has been quite higher. Any specific reason for that?

Sorry. Come again?

Other expenses have increased quite sharply compared to last 3, 4 quarters. So any specific reason for that?

For 2 reasons. One, I mean, towards the year-end, based on the profitability, we have to provide for the managerial remuneration. Instead of loading it in the final quarter, we appropriated over the remaining quarters. That is number one. Number two, some additional assignment has been given to BCG. So some fees have also gotten added there, too. Thirdly, in the first 2 quarters, because of this lockdown, et cetera, the activities on the advertisement front were slightly subdued. That has picked up in this -- as the lockdown got lifted, and third and fourth quarter should get increased.

Okay. And sir, my last question, with regard to volume. This quarter, we had done quite a good growth in terms of volumes. So do we expect to maintain the same volume in this quarter also, fourth quarter?

Yes. Dr. Chouksey mentioned, in response to an earlier question, that tempo is expected to be there maintained in the fourth quarter.

[indiscernible], we believe, would remain the same.

The next question is from the line of Amit from Motilal Oswal.

So my first question was around WHRS. So the Sirohi WHRS, I believe, you're entitled for commissioning by September in 2021. So firstly, is the time line still holding? So my first question was on WHRS of -- at Sirohi. So you had earlier guided for a September '21 commission. I just wanted to confirm that, that time line is still holding up, right?

Yes. And there could be a 1- or 2-month slippage because of this COVID, when there were workers going off and migrating to their respective places. So those have come back. So we are trying to make up for this loss of time. But there could be a 1- or 2-month slippage. And [indiscernible] commissioning in September, it must be moved to the coming next quarter thereafter. There's nothing more, 1 or 2 months.

Sure. And on the power and fuel front, so I don't know if it's already discussed, but Q-on-Q, there seems to have been a drop in the cost. And so I believe it could become a low-cost inventory. So is there still some low-cost inventory left with you? Or it's all in [indiscernible] now?

Some assets -- some impact would come for the high-cost inventory in this quarter. So some inventory is there. And then full impact of this increase in the pet coke and coal prices would get reflected in the first quarter of FY '22.