Kamdhenu Limited (KAMDHENU) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Q4 and FY '22 Earnings Conference Call of Kamdhenu Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference has been recorded. I now hand the conference over to Mr. Satish Agarwal, Chairman and Managing Director. Thank you, and over to you, sir.

Good afternoon, and a very warm welcome to everyone present on the call. Along with me, I have Mr. Harish Agarwal, Chief Financial Officer; and the Strategic Growth Advisors, our Investor Relations Advisors. I hope you all are safe and keeping well in these times. We have reported our results, an investor presentation for the quarter on the stock exchange's and company's website. Hope you had a chance to go through the same. FY '22 was marked by COVID waves, supply side issues and geopolitical situations across the world. Despite the challenging environment, our company has achieved a strong top line growth of 34%, and PAT growth of 74% on back of increased construction activities and consumer preferences, changing towards investing in refurbishing homes and many of it moving towards hybrid culture. We expect the growth momentum to continue in both the business, steel and paints. Now, firstly touch upon the business highlights and performance in the paint business. I have achieved -- we have achieved a strong top line growth of 19% in FY '22. Our paint plant at Chopanki, Rajasthan started full fledge operations during the year. This has enabled us to manufacture high-value products from our own facility and cater to the demand. All our large paint companies have been facing the issue of increase our material prices and we are no exception to this. During the year, we have taken price increase of 8% to 10%. We have been able to partially pass on these raw material prices increase with current environment amid with geopolitical situation and supply side disruption. We shall closely monitor the raw material price situation. With our focus on increasing penetration in other regions in India, we are increasing our dealer network in Tier 3 and Tier 4. Our focus continues to remain on premium products and reducing the manufacturing of low-priced products. We are outsourcing our low-value products to other contract manufacturers with quality assurance being in place. We are consistent in manufacturing products, which are environment trending, with our collaboration with Preity Zinta. We have enhanced the brand recall. Our advertising expenses for paid brand and promotion stood at INR 20 crores for FY '22, and we expect to turn INR 32 crore in FY '23. The [indiscernible] of fire incident at our paint plant, the company has written of INR 5.83 crore as exceptional items during FY '22. As we speak today, we have received a total INR 25.65 crore towards decline. Now I'd like to update on a Scheme of Arrangement for demerger of paints business into a separate legal entity. The Honorable NCLT, as a result, the order on 22 April 2022 on the Scheme of Arrangements, including the demerger of the paints business of the company into a separate legal entity. The order is yet to be pronounced by the NCLT. Now I will move on the -- to give key updates on steel business. We have clocked a revenue growth of 42% year-on-year to INR 599 crores in FY '22. Our revenue has grown majorly due to increased size of steel. Demand for our steel products were also remained strong during the year on account of increased construction activities. Industry demand for quality TMT bar from housing sector in India is growing at exceptional rate. These are present in this market with 38 lakh metric ton capacity, which will benefit from the growing housing demand. Government focused on development of roads, railways, sports and logistics infrastructure and PM Awas Yojana shall also lead to demand creation for steel. This will drive the demand for our steel products. Our focus has been on increasing our TMT steel capacity through franchisee route. We have increased our franchise units count to 81 units in FY '22 with the positive demand situation, we aim to club brand sales turnover of INR 22,000 crore by FY '24. To conclude, we expect with the business environment evolving. We expect demand momentum to continue in both paint and steel business. With infrastructure development activities running at full force, we are confident that demand will remain strong, which shall drive the franchisee sales. With a strong brand, asset-light business model and steel business, large distribution network and huge product portfolio in paint business. We are well placed to talk opportunities in future and provide unique value proposition to the end consumers. Now I'd like to hand over the line to Mr. Harish Agarwal to update on the financial performance of the company.

Thank you, sir. I will take you all through the extent of our financials for Q4 and FY '22. First, about the paint business. Total sales from paint business for Q4 FY '22 stood at INR 68 crore as compared to INR 67 crore in Q4 FY '21. Paint business contributed 26.9% remaining in Q4 FY '22. Our overall volume from own manufacturing and outsourcing stood at 7,775 KL in Q4 FY '22, as compared to 9,580 KL for Q4 FY '21. Sales volume during the quarter 4 were impacted on account of demand disruption witnessed in January 2022, due to COVID-related lockdowns across the country. Now let me take you all through the full year numbers. Our paint business contributed 28.7% of total revenue in FY '22. For FY '22, total sales stood at INR 241 crore as compared to INR 202 crore in FY '21, a growth of 19% year-on-year. For FY '22, our volume stood at 30,358 KL as compared to 30,319 KL in FY '21. Water-based product contributed 79%; powder-based 11%, and solvent-based contributed 10% of the total revenue of financial year FY '22. Our average selling price per liter has increased from INR 63 to INR 76 in FY '22. Coming to the steel business. The steel business contributed 73.1% of revenue in Q4 FY '22. Our steel volume, including franchisee route had stood at 7.12 lakh metric ton in Q4 FY '22 as compared to 7.26 lakh metric ton in Q4 FY '21. Total brand turnover for Q4 FY '22 stood at INR 4,822 crore as compared to INR 4,061 crore in Q4 FY '21, a growth of 19%. Royalty income through franchisee stood at INR 24 crore in Q4 FY '22, as compared to INR 27 crore Q4 FY '21. Revenue from own facility was up by 14% to INR 146 crore in Q4 FY '22, as compared to INR 128 crore in Q4 FY '21. Total sales from steel business stood at INR185 crore for Q4 FY '22 as compared to INR 155 crore for Q4 FY '21, a growth of 19%. Now let me take you all through the full year numbers. The steel business contributed 71.3% of revenue in FY '22. For FY '22, our volume, including franchisee route spend at 25.5 lakh metric ton as compared to 23.9 lakh metric ton in FY '21, a growth of 7% year-on-year basis. Total brand turnover for FY '22 stood at around INR 16,072 crore as compared to INR 12,031 crore for FY '21, a growth of 34% year-on-year basis. Royalty income through franchisee for FY '22 stood at INR 92 crore as compared to INR 85 crore in FY '21, a growth of 7% year-on-year basis. Revenue from own facility for FY '22 stood at INR 473 crore as compared to INR 336 crore in FY '21, a growth of 41% year-on-year basis. Total sales from steel business stood at INR 599 crore as compared to INR 423 crore in FY '21, a growth of 42% year-on-year basis. ROCE for the steel business stood at 32.6% and ROE stood at 31.9% as on 31st March 2022. Our overall business, revenue for Q4 FY '22 stood at INR 253 crore as compared to INR 222 crore in Q4 FY '21, a growth of 14%. Our EBITDA stood at INR 18 crore in Q4 FY '22, as compared to INR 20 crore in Q4 FY '21. Our EBITDA margin for the quarter stood at 7.2%. Profit after tax stood at INR 5.4 crore for Q4 FY '22, as against INR 3.9 crore in Q4 FY '21, a growth of 37%. Let me take you all through the full year numbers. For FY '22, our revenue stood at INR 841 crore as compared to INR 625 crore in FY '21, a growth of 34% year-on-year basis. For FY '22, EBITDA stood at INR 58 crore as compared to INR 50 crore in FY '21, a growth of 17% year-on-year, margin stood at 6.9% for FY '22. For FY '22, profit after tax stood at INR 26 crore, as against INR 15 crore for FY '21, a growth of 74% year-on-year basis. With our consistent effort towards improving our efficiencies in the business, our return ratios have been improved over last year. Our ROE stood at 14.1% and ROCE stood at 16.7% as of 31st March 2022. Our debt to equity ratio stood at 0.4x as on 31st March 2022. The Board of Directors have recommended the final dividend of INR 1 per share, that is 10% of the face value for the financial year 2021-'22. With this, I would like to open the floor for question-and-answers.

[Operator Instructions] First question is from the line of [indiscernible] from [ Jain Capital. ]

I have 2 questions. Starting with what are the current utilization levels at both the plants. And what was the utilization in the quarter gone by? Have you faced any impact of third wave look forward?

Yes, there was the impact of third wave on the business, on the steel as well as paint. And our current utilization of the paint is around 50%.

Secondly, can you throw some light on any CapEx plans in our sales as well as steel business for the coming year?

We don't have any major CapEx plan for -- in our own plant. However, we are increasing our capacity in the steel business through the franchisee route. And we are increasing our capacity from 38 lakh metric ton and 50 lakh metric ton over the next 2 years. And it will be done through the franchisee route. Investment will be made by the franchisee units, franchisee on us.

Understand. And lastly, as we have a pan-India presence. So as company added a dealers and distributors in both the businesses it is in which particular reason we have added?

This exercise being carried out at all India level. And in the steel business, we have added around 500 dealers during the financial year FY '22. And in the paint business, we have also added around 200 dealers.

[Operator Instructions] The next question is from the line of [ Anjana Shah from Shah Investments. ]

So I have a couple of questions. First, if you could share what is the breakup of our branding and promotion expenses for both paint and steel businesses -- steel business for FY '22? Also, what do you target for the coming year? Any target as a percentage of sales?

Yes. During the FY '22, from steel, actually, overall, we have spent around INR 60 crore on the branding and promotion. So out of that INR 29 crore is done by company and INR 31 crore is done by franchisee unit. So overall, INR 60 crore was spent on the Kamdhenu band.

Sir, what type of plans the company to reduce cost and improve efficiencies in the system?

You are talking about which cost, reducing in which cost?

No, overall cost, as a whole.

Our focus is on increasing the revenue, increase the royalty income, increase the paint business revenue. So we are more of focusing on the revenue side, not on decreasing on the expenditure side.

Not. Okay, sir.

[indiscernible] we want to increase our sales volume, our revenue.

And sir, if you could throw some light on the raw material aspect, like price of raw materials have been on increasing trend in the paints business basically. So has the company been able to pass through the price increase in the last quarter?

No, not in the last quarter. But in the Q3, we have increased the price around 8% to 10%. And in this quarter, in the current quarter, Q1 of FY '23, we are also increasing the price. We are taking price hike, but not in the Q4.

Could you quantify the price hike, sir?

It would be around 6% to 7% in this quarter.

So what we think on the trend going forward? What is your view on that?

In fact, the increased price is mainly done by the market peer like Asian, Berger, Nerolac, and thereafter, Kamdhenu other companies paid the hike of pricing. Without increasing the price of peers, nobody can take the risk of increasing the selling price.

The next question is from the line of [ Atul Kothari from Progwell Securities. ]

Sir, I have a couple of questions. Sir, my query is regarding our [ strong market ]. So our company is looking to increase the penetration in the South region for Paints business. So any update on the same?

You are talking about entering the paint business in the southern market.

Yes.

Yes. If you see, as you understand that my existing facilities are situated in the [ other fund ] majorly. So the costing towards the freight or funding [indiscernible] to the southern region of India, [ it's whether the result ] and very costly for us. Still companies working hard and opening new depot at Vijayawada and Hyderabad and [indiscernible] apart from that some Hubli and Bangalore. We are trying to penetrate the southern market. Once the market is established, then we will look for any manufacturing facilities in the southern part of the India or Central part of the India. But it's very difficult to capture the requirements in paint business, especially for the low price items like distempers and primers. Because the cost of inventory is too much. The cost rate, primary and secondary grow. First, from factory to depots and then depots to dealer. India is a big country, but there still companies trying to absorb some losses on this account of excess of trip. But ultimately, we have to create the marketing network in entire part of the country and in the near future. We will be able to supply the material through other sources once we establish the demand in the super market also. But as you can see that our strong network is the Northern India as well as the Eastern India. And we are just focusing in Tier 2, Tier 3 and Tire 4 cities, because the Tire metros are -- they have the higher brand pool. And though we are having the sales in metros also, but we are just focusing for a common man and the common products they are using in the rural areas as well. So I think they were focusing on the value products for the common man and the -- to have the reach into the rural area, especially across the country.

And sir, how have you been able to tie up with dealers in Southern area? If you can throw some light on the same?

Yes. Once we establish the demand, we have so many opportunities to tie up any outsourcing model from South India also. We have so many queries and so many options relatively, but once the demand is created over there dealer network is set up, then we will tie-up with any supplier. And you can see that in Southern region, we have a dealer split of 12%, and the market share revenue, 8% from the southern market.

Sir, coming back to the same paint business, what incentives have we offered to our paid dealers in FY '22?

Can you just repeat the question, please?

Can you throw some light on the incentive schemes you have offered to your paint dealer in FY '22?

You are talking about the incentive schemes?

Yes, yes.

You see till the brand is established well over the market in the minds of end consumer. So in turn, ultimately painter and dealer, 2 entities are the main key drivers to push the sales to the end consumer. Because the painters promoted products, dealer has to promote the products. And normally, if you go in the market, once a dealer satisfy the customer that the product is good, the quality is good, prices are lucrative, and give some guarantee towards the performance of the products as we are writing on the each and every packaging of the products. Some products are -- have the guarantee of minimum 5 to 7 years. So once the end consumer uses the product. So that is the process, which we are adopting and now more than 20,000 painters are working with Kamdhenu, and more than 4,000 dealers are working with Kamdhenu. And I think companies trying its best to reach each and every part of the country, especially where the fruits are reasonable and we can supply the materials from our own plant and our sourcing from Udaipur. So I think in Northern East, we can compete easily with any other company. And we are just having through the incentive schemes, I think each and every company is giving the incentive schemes. And we just want to bring you that the Kamdhenu is getting a lot realization of 4% to 6% lesser than the Asian paint. Other paint companies are getting the realization to be extent less 2% to 3% from Asian paint. Moreover the retail prices and dealer prices are the same for each and every paint company. Kamdhenu maybe, maybe Berger, maybe Asian.

And sir, have you introduced any new products in the paint business in the last 6 months?

Yes. Actually, in particularly, I would like to bring to your notice that paint is such a commodity or such a product, which needs every time, R&D on focus on the newer products. During the last 6 months, or you can say financial year FY '21, '22, we have introduced a new star range of paint products for the medium consumers or low and medium consumers, where the local companies are working and to fast the market of local companies and the -- where the premium products are not sold. For those products, we have developed our exterior emulsions, whether Classic star, Kamo Superstar. In interior emulsions, Kamosilky star in distemper range, Kamo star distemper in primers range, Kamo star exterior primer, Kamo star dual primer, Kamo star interior primer. And one new product, especially for the putty, Kamo star waterproof wall putty. And I think these products are now used. Earlier in the rural areas, whitewashing or some cheaper products are used, now every -- since the labor cost is too high, everyone in the rural market or semi-rural market needs good shine, good life of the products, good physical appearance. And so I think the company is doing hardly all R&D work and launching newer products for average middle class segment. Because middle class segment is the biggest market in India.

Sir, coming on the waterproofing part, which you just mentioned. So since now many paint companies are selling that as a default product with paints. So what is your outlook on our waterproofing product segment?

Can you just repeat the question, please.

Sir, how you, on waterproofing product segment to grow from here on, considering, assuming that many paint companies are selling that as a default product along with paints.

[Foreign Language]

[Operator Instructions] The next question is from the line of [ Anand from AS Capital. ]

Sir, actually, I want to understand about the franchise model in the steel business. So like generally, how much investment the franchisee has to make? And you mentioned that they are -- they do advertising also some INR 30 crore they are spending. And typically, one point is how much investment they make and like how much they have to invest in working capital? And what is the like return on investment for them? Just want to understand the basic, how it works? Because this kind of franchise model is quite unique. I have not seen in other companies in the steel business area, please.

I think you have gone through the -- our asset-light business model. In this model, I briefly explain you this model. We identified the unit, which are the existing under production, selling their product in the market, but they are facing the problem of selling their product. We are under-utilization of their capacity. We are not producing quality products. So we take the unit under the umbrella of Kamdhenu. And we identify those units, which have the potential to manufacture good quality products, where promoters are good. They had good market reputation. We are financially resourceful, but facing the problems. So what we do, we first upgrade their plan at their cost and dispute our technical team to upgrade it, and also the Q2 person, one for monitoring the quality and other for operation. In this, you want to know the investment, so they are already having investment in their plan. So with the association of Kamdhenu, they don't require any heavy investment. They only require INR 5 crore, INR 10 crore investment to upgrade their plant only. And the working capital also, they are also having the working capital as they were selling their product in the market. So with the association of Kamdhenu, they don't require any additional working capital or additional CapEx, except our investments. So this is about the investment required by the franchisee. And you want to know about the branding expenditure done by the franchisee. We charge royalty from the franchisee ranging from INR 300 to INR 500 per metric ton, or depending on the area to area, region to region. And with the receipt of royalty, we also put a clause in the agreement that you have to spend the expenditure of around INR 125 per metric ton on the local branding expenditure on the Kamdhenu brand. So last year, around INR 31 crore has been spent by the franchisee units on Kamdhenu brand. I think these are your questions?

And next 2 years, what is the plan to add the number of dealers in the Kamdhenu brand?

This is a continue -- this which we are doing and our target for FY '24 is to have brand turnover to [ INR 22,000 crore, ] which is INR 16,000 crore at present.

Let's produce there, how many dealers are required? And which geographies are we'd like looking to target for this?

We are doing this exercise on all India basis. And our presence is in all India. In the franchise network of steel, we have -- across the country, we have our presence. And we have around 8,000 dealers and around 250 distributor across the country, which is increasing every year by 500 dealer or 1,000 dealer every year it is increasing.

No, my question was more from the franchisee. Like you mentioned in the initially, there are like 81 franchisees currently. To reach this to INR 22,000 crore in FY '24, do we need a significant increase in the franchisees, if we reach some [ 100 or 110, we will be ]...

No. We are not increasing the number, rather, we are focusing on increasing the capacity by the existing units. So we are increasing our capacity from 38 lakh metric ton to 50 lakh metric ton in next 2 years through the existing franchisee only. Our existing franchisees have the capacity to increase in their plan. So we are not focusing on the increasing the number of franchise. We are focusing to increase the capacity in the existing units.

So now this increasing the capacity, all the investment will be done by the franchisee itself, and we -- from Kamdhenu side of view -- point of view, there is no investment required. Is that correct?

Yes, yes. You're absolutely right.

[Operator Instructions] The next question is from the line of [ Ankit Agarwal from Arc Capital. ]

Sir, I have a couple of questions on the paint business. Sir, how was the demand for paint in this current quarter from Tier 2 and Tier 3 cities?

The demand is good. And Q1 is always have less demand as compared to Q2 and Q3. The highest demand over the 4 quarters in Q3 followed by Q2, Q3 -- Q3, Q2, Q4 and Q1.

But accordingly, like to the season, the demand was good for the fourth quarter.

Yes. If you compare with the last year, FY '22 Q1, the demand is increased by 20% to 25% in Q1 FY '23.

And sir, are there any particular products would have gained market share in the segment for the quarter or for the year itself?

We are focusing our increase the market share of the water waste product, water waste emulsions. In the last year, we sold around 79% water waste product, 11% solvent and 10% water waste product.

And sir, what was the average selling price there?

INR 76. In the FY '22, it was INR 76, in FY '21, it was INR 63.

And sir, in terms of, say, competitive intensity, so Grasim recently announced to double its CapEx plan for paint business. So how do you view this competition -- increase in competition?

Yes. There are competition -- it's a competitive business. And the adjusting competition is also there. Market share is also increasing. And we need a very, very less portion of the market share. In this year, we have INR 240 crore sales. And in FY '26, we are targeting INR 1,000 crore, whereas the market is around INR 70,000 crore. In the next 2, 3 years, it would be around INR 1 lakh crore. So we are seeking very, very less market share. So we are not seeing any difficult to achieve the targets.

[Operator Instructions] Next question is from the line of [ Sachin Shah from SS Securities. ]

My first question is by when will the demerger be completed and listing of Kamdhenu venture will happen?

Yes. It will be completed in the Q2, because our pleading and hearing has been completed, and we are waiting for the quarter from NCLT. Any day, it can be announced. So thereafter, we will effectuate the demerger process and go to the stock exchange for listing options.

And my second question is how was the demand scenario for TMT bars in Q2 -- Q4 FY '22?

Demand was good, but there was a price fluctuation, heavy price fluctuation in the Q4 FY '22. So in our own manufacturing [ LELCR ] region, we managed the so, but across India, there was an impact of COVID shut down. There are some regions where the production of sale has been hampered in the Q4. So the franchisee -- that is why franchisee royalty and franchisee quantity was less, whereas our own manufacturing was good during that Q4.

And what was the split between the retail versus project?

Our most of the sale is in the retail segment. You can say around 80% to 90% sale is in the retail segment.

Compared for the full year, or for Q4?

Yes, for the full year. In fact, we are the largest TMT selling brand in India in the retail segment. We have sold around 25 lakh metric ton in the retail. And mostly, it was in the retail segment.

The next question is from the line of Sandeep Goyal from Davis Index.

I just want to know what is the current utilization level in steel business?

Yes. In the steel present capacity utilization is around 75%, in our own plant.

And in franchise routes, franchisee business.

In franchise, in fact, this is a continuous process, presently, we have around 68% to 70% capacity utilization.

The next question is from the line of [ Raj Joshi from Ace Securities. ]

Sir, I have 2 questions. Our company has plans to increase the TMT steel capacity through the franchise route. Has the company found any other region where franchisee capacity can be increased?

You want to know in which region we are increasing our capacity? What is your exact question, please repeat it?

Sir, our company has plan to increase TMT steel capacity through the franchisee route. And the company found any other region where franchise capacity can be increased?

Yes, because it require investment by the franchisee itself, There is no CapEx on the part of company. And our business model is to create a company as a branding and marketing company, that is why we are not investing in the CapEx. And we are investing in the branding and marketing.

Sir, what is the current market size of TMT bars in the retail segment?

It is a very difficult question because this data is not available at any portal or any rating agency. So it's a very difficult question. I don't have the data.

Sir, any new players who have entered in this segment in a retail space? How much would be the capacity?

For TMT?

Yes.

Yes. Already, Tata Steel is [ swing ] in the retail segment and GSW is also in the market, but we are selling in the retail segment more than those players.

Sir, apart from any -- apart from the -- or JSW and Tata Steel?

Other players are at the regional level. At the national level, these are the 2 players. But the regional level somewhere you want, you may have Amba Steel, other as the Shyam Steel and some other, Goel TMT, right, but they are at regional level, not at the national level.

Sir, are you aware of how much would be the capacity?

Capacity of?

Of that entire TMT bar segment on an industry level?

I said, this data is not available. Not available with the retail agency. We have tried our best to get it, but right now, we don't have the data of the industry.

The next question is from the line of [ Aditi Sawant from ADM Advisors. ]

I have just 2 questions. First is, sir, I'd like to know the [ environment was ] the royalty income less in Q4 FY '22, as compared to Q4 FY '21. And the second question is, if you can just throw some light on what is the current price trend in steel side business? Yes, that's it.

In fact, due to COVID restrictions and COVID lockdown in some part of the country, we have given special concession to the franchisee unit, and we have given some discount on the royalty that is why it has been reduced. Otherwise, the quantity was Q4 FY '21 and Q4 FY '22 are almost same. So we have given some [ repeat ]. And if I'd like to share the number, then the average realization of the royalty in Q4 FY '22 was INR 354, as against INR 381 of Q4 FY '21. So you are seeing the INR 2.5 crore less in this royalty account. It was because of the discount given to the franchisee unit in view of our long-term business relations. And your second question was about -- what was your second question?

My second question was if you can just throw some light on the current price trend in steel business side?

Yes. Current price is around INR 58,000 per metric ton, plus GST.

And how is the trend sir, has the prices are increasing stable or how is the trend?

There is a fluctuation in the price. Sunday it increased by INR 1,000, and the other day it reduced by INR 2,000 is a price fluctuation. It's a commodity market, so nobody can predict the pricing.

No, issues, sir. That was helpful. And all the best for the upcoming quarters.

As there are no further questions from the participants, I now hand the conference over to Mr. Satish Agarwal for closing comments.

Thank you, all. I take this opportunity to thank everyone for joining on the call. I hope we have been able to address all your queries. For any further information kindly get in touch with me or Strategic Growth Advisors, our Investor Relations Advisors. Thank you, once again.

Thank you. Ladies and gentlemen, on behalf of Kamdhenu Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.