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

Ladies and gentlemen, good day, and welcome to JK Lakshmi Cement Limited conference call to discuss the outcome of e-voting at the recently held Annual General Meeting, hosted by PhillipCapital (India) Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vaibhav Agarwal from PhillipCapital (India) Private Limited. Thank you, and over to you, sir.

Yes. Thank you, Yashasvi. Good evening, everyone. On behalf of PhillipCapital (India) Private Limited, we welcome you to this exclusive call of JK Lakshmi Cement to discuss the outcome of e-voting at the recently held AGM. On the call, we have with us Mr. Sudhir Bidkar, CFO of the company. I will now hand over the floor to Mr. Bidkar for his opening remarks, which will be followed by interactive Q&A. Thank you, and over to you, sir.

Thank you, Mr. Vaibhav, and good afternoon, ladies and gentlemen, for this call, which is especially being held to share with you the company's point of view of the various resolutions which were put to the vote in the just-concluded AGM, and which was passed barring one resolution with overwhelming majority by the shareholders and the investors. So we take this opportunity of thanking each and every individual investor for having voted based on their recommendation, which they have got from their either proxy or from their internal team, on various resolutions. This call -- the idea of having this call was basically to have a good corporate governance. One, from the point of view of the company, you should understand the points and the logic on which the resolutions were proposed. And two, from the management point of view, also wanted to understand your concerns for the resolutions which you had any reservation for based on which the voting was against one of the resolutions. So we will go item by item. I'd like to share the first item was basically for the adoption of the annual accounts, which was passed with overwhelming majority. In fact, one of the proxy adviser had made some comments on the -- some of the observations of the auditor's report, CARO report, but which -- when we shared with them the correct report, it was then reversed by SES on 2 things. One was the internal financial controls, and other was on the -- whether there was a requalification. They understood SES proxy adviser. They changed their recommendation, therefore. The second resolution was for the dividend, which was again passed with overwhelming majority. Third resolution was regarding the reappointment of our Chairman as Director liable to retire by rotation. Here, while SES has initially given a negative recommendation, but based on the representation made by the company, they understood the company's point of view and reversed their recommendation from against to for. Only ISS had recommended a negative voting, and the logic which they gave was since they have 2 directors, Mr. Ravi Jhunjhunwala and Mr. N. G. Khaitan, who has stronger association with the company prior to the enactment of the Companies Act 2013. But you would appreciate the shareholders that the company law itself allows any director to continue for a term of 2 terms or 5 years each, and they will step down after their term vacates -- gets vacated in [indiscernible]. So that was the logic. Next resolution was for the payment of remuneration to Mr. Bharat Hari Singhania, Chairman. He was not -- he stepped down as the Executive Chairman in October 2021 and has not been drawing any salary, but he has been devoting full time. So the Board decided in the FY '23 to give him a commission of INR 2.5 crores, which -- since it was higher than -- more than 50% of the total commission paid to the other nonexecutive directors, it was put to vote for -- by way of a special resolution. Here also, SES, based on the explanation given by the company, reversed their initial recommendation from against to for, but ISS continued to have a negative recommendation. And the logic which they gave, in ISS, especially was his commission which you gave of, INR 2.5 crores, was exceeding the commission -- the total remuneration of Executive Director, Mr. Shukla, which you paid INR 2.4 crores. But what they forgot to realize that the remuneration of Mr. Shukla was of INR 2.4 crores for a period of 8 months only, which is from 1st August '22 to 31st March '23. So if one were to analyze that, then it comes to the INR 3.6 crores and the remuneration or the commission which was paid to the Chairman was much lower than the salary paid to the Executive Director. So obviously, most of the shareholders and investors likely voted for favorably, and this resolution was also passed with overwhelming majority. Next resolution was for the payment of remuneration to the cost auditor, which was passed unanimously by all the shareholders who voted in favor. The next 2 resolutions were regarding increasing the borrowing limits of the company from INR 4,000 crores to INR 7,000 crores. Here also, initially, SES advisers had recommended a negative voting, but after the company's representation that the company does use a lot of non-fund-based facilities which doesn't get captured in the annual balance sheet, which talks of only the fund-based limit, they also requested a favorable voting. And both this resolution for increasing the borrowing limit and also for the creation of charge, therefore, of INR 7,000 crores was passed with overwhelming majority. The only resolution which some of the investors had reservation was primarily to increase the limit for making investment or giving guarantees of securities from the limits prescribed under Section 186 of the Companies Act to about INR 10,000 crores. As per Section 186 of the Companies Act, a company is eligible to make investment, give loans or offer guarantees or securities up to an amount of 60% of its paid-up share capital, free reserves and security premium or 100% of reserves, whichever is higher. So in our case, the figure was about INR 2,650 crores, and the amount was almost fully utilized. At the time the Board recommended this resolution to the shareholders, the company was evaluating an acquisition opportunity, which was having an enterprise value of close to about INR 6,000 crores to INR 6,700 crores, which was though because of the confidentiality, the company did not disclose the name of the entity. But it was in the interest of the entity or the target asset which the company was looking at. That was the reason as to why the company had proposed a resolution for increasing the limit. If one were to bid that, we would have had to make an investment, one, in the equity capital of the target company. And two, the company would have had to require to give the corporate guarantee for the substitution of the high-cost loan, which the target company was carrying. So about [ INR 4,500 crores ] to INR 4,000 crores was the key value, and about INR 2,000 crores of loans were sitting in the target balance sheet. So this together would have required the company to have sufficient limit in place, based on which this resolution was proposed by the Board. And since all the 3 proxy advisers, IAAS, SES and ISS, had recommended negative vote, this resolution, though passed with a simple majority, garnered 71% voting and was not passed by way of a special resolution, which was required. So just wanted to explain, we have given that explanation in the -- to the TSC also based on some news items that the shareholders have struck down this resolution. But we would like to mention that basically, this was required, the resolution was required since the company was evaluating that opportunity. Now since that opportunity did not materialize, this, we did not pursue aggressively. I just wanted to explain that point of view and wanted to understand from the investors their concerns based on which negative voting was done for this particular resolution. So I hope the company has explained it's point of view. And with that, I'll throw the floor open for question and answers, if any of the investor has any, to understand from your point of view or your concerns on the various items which were proposed to vote at this AGM, just-concluded AGM. Over to you, the investors. The floor is now open for question and answers, please. Thank you.

[Operator Instructions] We have a question from the line of Keshav Lahoti from HDFC Securities.

So just want to check one thing...

Your voice is not clear. Can you speak a bit louder, please?

Is it better now?

Yes, slightly better.

Yes. So I just want to understand one thing. You said that you wanted to acquire a company at INR 6,000 crores to INR 6,500 crores EV. Have I heard it correctly? Because what we understand, the company was bought at much lower valuations. So that's a bit going off-sync.

Yes, yes. We were evaluating at that value, but obviously, we would have had to -- final offer, which we would have made -- would have been much lower. But to be sure, we wanted to take an extra limit for that. So obviously -- because apart from the acquisition, the opportunity which we're looking at, the company is also required to do 2 things. One, for -- you would know that the company has acquired some mines in Nagaur in Rajasthan, and that -- those mines -- limestone mines for which the company is now presently in the process of doing a land acquisition have been awarded in the subsidiary -- in our subsidiary. The subsidiary is Hansdeep Investment Limited. And for them to acquire land, we have to give continuously the advance to them. So that was another purpose for which this limit of -- was to be used. And secondly, we -- you would know in our con call after the quarterly results, we have mentioned that the company has made an arrangement for sourcing power from a third party under the captive route for sourcing about 40 megawatts of power in the state of Chhattisgarh for our Durg Cement plant. Now under the captive mode, you are required to make an investment up to 26% of the capital of that company, which is producing power to be qualified as a captive user. So this limit was partly to be used for that as well. So that was the reason as to why we had to have the sufficient cushion for keeping and getting [indiscernible].

[Operator Instructions]

Mr. Vaibhav, if there are no questions, we can...

Sir, we have one question. Should I take it now? Yes. We have a question from the line of Fatema Pacha from Mahindra Manulife.

Sir, is this the call only for queries regarding the AGM? Or can we ask business questions right now?

Yes, sure. I'm not restricting it to that. Idea was to keep it for the AGM, but I would be happy to answer if there are any questions on the business.

So sir, basically, obviously, we have a full year guidance on how EBITDA per tonne trajectory is moving and how company will transition. So sir, what are your thoughts on what happened in the last 2 quarters on the general change in the movement? Obviously, the entire industry has had some issues, but -- no one's EBITDA per tonne had such a big drop. Everybody would have -- not had the expansion that we were expecting. But no one -- like very few companies in the Street would have had such a big drop, say, from Q3 EBITDA per tonne as the way the [ fund's been ]. Sir any -- if you could throw any, whatever your, light on that particular thought process? And when will we come back to trajectory because that's a big deceleration for the trajectory that you are looking at?

You're right. First quarter was slightly hard to tackle for us, primarily on account of the fact that we sell almost 70% of our reuse of [indiscernible] in the Rajasthan and Gujarat, which was [indiscernible] rains brought by cyclones in the month of June. So that impacted us more than anybody else. And that was the reason our volumes were much lower than the industry volume, resulting in our fixed costs being amortized over a lower sales volume. But we are sure, as we mentioned in the last con call after the quarterly results, we should bounce back from the next quarter onwards. This, obviously, current quarter is a monsoon-impacted quarter, but there also, the growth has been there. And from quarter onwards, we should be able to bounce back in line with the industry growth.

And sir, when is the new capacity expected? I think it's coming from Udaipur, right? The UCW capacity is coming. Our own capacity will be yet a year away, right?

Yes, the Udaipur capacity clinker is coming on [indiscernible], which is next or third quarter, FY '24. But next year [indiscernible].

I'm sorry, sir, your voice is cracking. Can you repeat the last part, please?

Yes, sure. What I'm saying is Udaipur clinkerization line will be on a stream in the next quarter, which is third quarter of FY '24. And its cement capacity of 2.5 million would be towards the end of the second quarter of FY '25. So those are the time lines which we are talking about.

So right now, we'll be operating on full utilization, right? So incremental growth, say, would be very difficult, right?

Incremental growth will come from these additional clinker and cement capacity coming up. Clinker line, as I mentioned, will come in third quarter, so that will give us additional volume for both clinker as well as cement in the coming quarters. And then when the clinker -- cement capacity comes, that will fuel further growth.

Fair enough. And sir, is the pricing part back in the industry right now? Or is it yet a volume growth game?

Sorry, come again?

Is the pricing -- in a way, are the players looking to take price hikes? Or yet is it a volume market share game?

This quarter is a monsoon-impacted quarter. But still, there are -- as we see every year, there is a drop in the monsoon. This year, there has not been. On the contrary, we have been able to increase some prices in July, especially in the Northern and the Western markets, and in September in the Eastern market also because the rains have now disappeared almost. So hopefully, we should see good growth in demand going forward.

[Operator Instructions] We'll take the next question from the line of Ronald Siyoni from Sharekhan.

Just a few questions. On the acquisition front, like you had highlighted now, if some another kind of opportunity comes up in the future, then the same question would arise. So is there any plan B that you would go for to acquire? Or after this approval not getting passed through, so what is the management strategy of considering the acquisition-related expansions?

See, this was an opportunity which we are evaluating based primarily for 2 reasons. One, it was making a strategic sense for us. And two, it was coming -- it was in the same marketing zone where we had. Three, it was coming again at a place where we ourselves have got the mines in Kutch, limestone mine. And this opportunity would have given us the ready facility without going through the rigmarole of first acquiring land and going for environmental clearance and then putting a facility, which would, in any case, take 7, 8 years. That was the basic idea. Otherwise, our road map for reaching the 30-million-tonne capacity by 2030 is very clear from 18 million, which would be after UCWL expansion. We have 2 brownfield projects, 1 in Durg, another in UCWL of 3 million each, which [indiscernible] then 2 greenfield opportunities at Nagaur and Kutch, another 3 million each. It would take us to 30 million by 2030. But going forward, if some opportunity comes, we are open to that. If it comes, makes strategic sense, comes at the right valuation, we are open to that. We'll seek shareholders' approval as and when required, if there is any such opportunity in future as well. But this turning down of a resolution does not dissuade us from exploring the possibility or evaluating any growth opportunity in an inorganic way in any manner. Our investors, once they appreciate the real logic, the reasoning or rationale, I'm sure they will support that as well in the future.

And in terms of balance sheet, like consolidated debt was almost around INR 2,000 crores last quarter. So management would be comfortable to how much debt levels? Are you considering any net debt-to-EBITDA kind of figure or debt-to-equity kind of figure having in mind with respect to acquisitions or organic expansions?

Generally, we have a threshold of having a net debt not exceeding 3.4x. That is the -- we have informal guidance, which we keep in mind against which is almost on a very low level as of now as you rightly said of only INR 2,000 crores of consolidated gross debt and that to on an EBITDA of close to about INR 800 crores, INR 900 crores, around 2x. But usually, when you go for an expansion or an acquisition, for a year or so, that ratio is diluted -- ratios get diluted. Like in case of UCWL, you would see that today, their EBITDA is INR 150 crores, and they are in the process of putting this expansion. So their existing debt is INR 500 crores. They are taking a loan of INR 1,100 crores for the expansion. So in the current year, they are expecting a INR 200 crores EBITDA. So against the INR 200 crores EBITDA, their target -- their total debt before the expansion EBITDA comes in would be INR 500 crores plus INR 1,100 crores. It is INR 1,600 crores, almost 8x. But moment that commensurate EBITDA from the expansion comes in of around INR 300 crores, then obviously, this looks -- the ratio looks much better, healthier, INR 500 crores of EBITDA and INR 1,600 crores of debt, which is within the normative norm of less than 3.5x. But initial -- before the expansion EBITDA comes in, that looks very high. So also, same thing happens in an acquisition. The moment you do an acquisition for a year or so, that figure of net debt-to-EBITDA may look higher. But moment you factor the commensurate EBITDA, which comes either from expansion or from acquisition, this gets normative and comes within the normal range of 3.5 to maximum 4x net debt-to-EBITDA. So that is the guidance which we have, and we'll continue to follow those going forward, whether it is organic or inorganic growth.

And sir, inorganic expansion, is it -- the target company should be towards the North and Eastern or Northeastern regions or open to another Central or Southern regions as well?

We will be keen to do the acquisition in the place where we operate, will make strategic sense, make synergical sense for us. To go to a [ new place ] where we have not been, we will be thinking twice before we're taking a call on a place like where we are not operating.

Okay, sir. And sir, last question was on the demand front, like July had, I think, as per cement data from various waves or DIPP, July was a weaker month while August, a little bit better. So September onwards, we are seeing good demand in -- from channel checks, we are seeing that Eastern and Northwestern, Central regions are seeing price hikes. So if you can quantify like how much price per bag do you now have? Because Eastern region has specifically suffered in terms of weaker prices post quarter 1, so how much that portion has been recovered? Or how much incremental pricing action you would have been taken in the Eastern region specifically?

Yes, your observation is right. July was a subdued month. But still, there was a growth. It has come [ in the ] corresponding month of the last year. August, because the rains certainly had disappeared, so there was almost [ 10% growth ]. September also, we expect a similar growth. Eastern side, we expect in the current -- after the rains have gone because [indiscernible] was impacted by rains in the Eastern region. We are talking of a price hike of [indiscernible].

Sir, your voice is breaking down in between.

I'm saying in this month of September, we are talking of a price increase of INR 10 to INR 12 per bag in the Eastern market since the rains have now stopped there and the demand is good. In the Northern and the Western market, an increase of about INR 10. INR 5 to INR 7, INR 8 is expected in the Western region, about INR 10 in the North region including Rajasthan.

Okay. And just the -- I could not hear the August and September demand growth, which you mentioned.

July was subdued, you rightly heard that. But in July, still though it was subdued as compared to the corresponding month of the last, there was a growth. In August, it was almost a 10% growth. September is expected to be even better.

We will take the last question from the line of Rajesh Ravi from HDFC Securities.

My first question pertains to -- with this -- with the Sanghi Industries now getting acquired by a bigger hand, do you see the risk in terms of market getting -- in the nontrade market getting disturbed because of the volume push from the full operations of the Sanghi assets, which were operating at low utilization in subsequent quarters?

Not so much because for 2 reasons, the increase in capacity or the capacity utilization in the target asset will -- and not the entire will come in the Gujarat market. They -- because of their coastal jetties, et cetera, would also be serving other markets which they have talked to. And the demand is good enough to absorb that additional volumes-rich income. So it may not have a material impact on the pricing because the demand is quite robust in the Western market.

Sir, how much of your consol volume would be getting sold in Gujarat market, sir, out of 14 million -- [ 12 million ] tonne odd, which you sell?

About 40% in Gujarat market from whatever we produce in Sirohi and Udaipur, and 30% in Rajasthan.

Okay. 40% and 30% is the Northern production you're seeing is sold over there. Okay.

In these 2 markets, Gujarat and Rajasthan.

Okay. And sir, this upcoming clinker expansions, which you refer to Udaipur, this will target which market? The [indiscernible] cement and used capacity?

[ They feed ] in Northern market.

Okay. That will feed growth in the Northern markets.

Yes, yes. Plus something in Madhya Pradesh, UP also.

Okay. So you're not targeting the Gujarat market from the upcoming capacity?

We are very much because 40% of that in any case goes to -- so if one were to do it, at least 40% in Gujarat market quota will definitely go there. 30% goes to -- will go to Rajasthan and balance in Northern and other MP markets.

Sir, out of this, you mentioned 40% of the Northern production. On a total company basis, how much would that be?

That is almost -- it means out of the total capacity of about 14 million before the expansion, we have 3.5 million in the Eastern market and 10.5 million in the Northern market. So when we talk of 70%, it's 70% of 10.5 million.

Okay. And sir, last question, your current plans of 2 brownfields and 2 greenfields, it will already take you to 30 million tonnes by FY '29, '30? So -- and organically, you would be having a much better balance sheet, well below net-to-debt EBITDA below 2x. So why are you looking to go -- or leverage the balance sheet, so in a way, you go for inorganic -- anything north of 2.5, 3x net debt to EBITDA. Don't you believe that that could have a negative reaction from the minority shareholders?

No. Basically, as I mentioned, because of the time lag, because when we were to put up, we are going to take 7, 8 years to put up a Kutch cement plant, and this was a ready facility that was coming. We would have certainly slowed down our pace of our brownfield expansion had that asset come to us. But obviously, your point is right, brownfield comes at a much lower cost. But because of the time value of money, we are evaluating opportunity.

Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Vaibhav Agarwal for closing comments. Over to you, sir.

On behalf of PhillipCapital, we'd like to thank the management of JK Lakshmi Cement for the call. And many thanks to the participants joining the call. Thank you very much, sir.

Thank you, Mr. Vaibhav, and thank you, ladies and gentlemen, for joining this -- on this special call. I hope this company has been able to convey its point of view. Thank you very much.

Thank you. On behalf of PhillipCapital (India) Private Limited, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.

Thank you. Goodbye.

Thank you, sir.