Kiri Industries Limited (532967) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Q3 FY '20 Earnings Conference Call of Kiri Industries Limited. [Operator Instructions] Please note, this conference is being recorded. At this time, I would like to hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, sir.

Thank you, Janice. Good afternoon, everyone, and a warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors, representing the Investor Relations of Kiri Industries Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings conference call for the third quarter of financial year 2020. Before we begin, I would like to mention a short cautionary statement, as always. Some of the statements made in today's earnings con call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. Investors are cautioned not to place any undue reliance on these forward-looking statements and making any investment decisions. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter [ revenue. ] I would now like to introduce you to the management participating with us in today's earnings con call. [indiscernible] Mr. Manish Kiri, Managing Director; Mr. Jayesh Hirani, Senior Manager, Accounts and Finance; Mr. Suresh Gondalia, Company Secretary. Without more delay, I request Manish Kiri to give his opening remarks. Thank you, and over to you, sir.

Good afternoon, everybody. It is my pleasure to welcome you all to the third quarter of the financial year 2020 earnings conference call. For the ones who are participating for the first time, let me give a brief breakdown of the company. Kiri Industries Limited is one of the largest manufacturers and exporters of diversified range of dyes, dyes intermediates, basic chemicals, which also includes recently introduced disperse dyes, reactive dyes, specialty dyes intermediates, mainly based on ethylene and benzene, sulfuric acid, derivatives of sulfuric acid, et cetera. The company has sizable manufacturing facilities of dyes intermediates, basic chemicals in Vadodara, Padra. Majority of its production facilities are located at Vadodara, which is the mainly -- main concentrated location for the manufacturing premises. The company has strengthened its competitive edge by having fully vertically integrated facilities in India. We also have a joint venture with Lonsen of China, in the name Lonsen Kiri, which has started manufacturing facility for dyes, and financials are included as part of the consolidated results. Let me brief you through the operational and financial highlights for the quarter. Generally, December quarter is a seasonally low quarter on account of festivals of Diwali and Christmas, et cetera. Additionally, around 3 weeks of plant maintenance also impact the overall business in third quarter, and the same situation prevails in this quarter also. During the current quarter, the prices of dyes, dyes intermediates and basic chemicals were under pressure. On account of demand/supply mismatch, average market prices of dyes, dyes intermediates and basic chemicals were lower by 5%, 8% and 7%, respectively, on a quarter-to-quarter basis, and around 7%, 25% and 45%, respectively, on a year-to-year basis. The company adopted a concentrated approach on penetrating local markets for sale of dyes and dyes intermediates. The company was having lower presence in domestic market earlier, which the company tried to expand, especially in the case of dyes sales in the Indian domestic market. During the current quarter, the company concentrated on volume growth across the product portfolio and achieved year-to-year volume growth of 20%. That means that the company has captured higher market share in the current financial year. For the third quarter, on a stand-alone basis, our operational income for the quarter was around INR 227 crores, which declined by around 3.1% on a year-to-year basis. EBITDA reported was around INR 23 crores, which declined by 28.6% on a year-on-year basis, and EBITDA margins were at 9.93%, close to 10%, with a net profit after tax, INR 11 crores, with a PAT margin of around 5%. The gross margins for quarter 3 financial year '20 was 38.8%, which have strengthened by 334 basis points on a quarter-on-quarter basis, and 490 basis points on a year-on-year basis. During quarter 3 financial year '20, finance costs have reduced by 11% quarter-on-quarter basis, and 15% on a year-on-year basis, primarily on account of reduction of discounting LCs and other bank charges, the company doesn't have any borrowing interest -- or any borrowing, which is interest-bearing. Operational expenses include legal expenses towards continuing litigation in the matter of DyStar at Singapore International Commercial Court, as well as the Singapore Supreme Court, which impacts bottom line of the company. I would like to highlight that the legal cost running is quite high and significantly increased during last few quarters, and one of the reasons was continuing hearings after hearings and submissions after submissions in Singapore. The working capital cycle has improved, with collection period reducing from 76 days in quarter 2 2020, to around 68 days in quarter 3 2020. Payables were around 190 (sic) [ 109 ] days in quarter 3, 2020, as compared to 104 days in 2020, which remains almost similar to the earlier quarters. Inventory turnover remained also static at 37 days in quarter 3 2020, versus 38 days in quarter 2 2020. Year-to-date operational income on a stand-alone basis were around INR 757 crores, which was flat on a year-on-year basis, with EBITDA of INR 87 crores, which declined by around 30% on a year-on-year basis, bringing EBITDA margin 11.28% with net profit, INR 50 crores and PAT margin around 6.64%. Now I will take you through the third quarter performance of the company on consolidated basis. The operational income for the third quarter was around INR 315 crores, which increased by 4.4%; EBITDA, INR 42 crores, which has declined by 4.8%; EBITDA margins were maintained at around 13.23%. So if you look at the company's performance on a consolidated basis, EBITDA margin still remains healthy and strong, with a net profit after tax, INR 24 crores, with a PAT margin of 7.65%. Gross profit for quarter 3, 2020, stood at 37.19%, which grew by 253 basis points on a year-on-year basis. The gross margin have been range bound between 34% to 38%. And that also reflects the company's backward integration, which has benefited throughout the years. The major contributors to the consolidated profits, net of writedowns, exceptional provisioning in DyStar, includes Kiri standalone contribution of INR 11.34 crores, Lonsen Kiri contributing INR 12.59 crores, and DyStar contributing INR 112.73 crores in the quarter. The year-to-date operational income on a consolidated basis were around INR 1,007 crores, which were flat year-on-year. EBITDA was INR 155 crores, which declined by around 15% year-on-year. EBITDA margin was 15.42% on a consolidated basis, and net profit of INR 98 crores, which remained at 9.68%. Kiri has been concentrating on consolidating its products portfolio by expanding and optimizing its manufacturing facilities to manufacture diversified range of specialty intermediates, and is focused on continuing innovations to achieve sustainable growth. The ongoing expansions of multipurpose specialty intermediate facility is on track. Certain parts of the facility have already started. Certain products have already commenced commercial production, which has been added in this quarter's performance. So when we talk about 20% year-on-year volume growth, that also includes the additional products, which have been added in this year. Expansion projects are continuing in phased manner. Second and third phases would also be up and running in the next several months. So you will see that the next quarters would have more and more additional products of specialty intermediates from the new facilities, and that will enhance the overall product portfolio, improve the product basket, allow EBITDA margin to be more sustainable in coming quarters. It will also add top lines in the financial year and the company will benefit from these expansions, which have been going on for the last 1.5 years. Now I would also like to highlight to you about the recent incidents, which have happened due to coronavirus effects in China. And as there are interdependency between India and China in terms of supply of raw materials coming to India, there are some effects you will see, which are related to the import of raw material, and that will have turbulent time. Certain disturbances would take place. And positively, there are a lot more intermediates, a lot more dyes, which are produced domestically, sold domestically and export also, which will help short supply from China. We have already seen in the last 2 weeks a sharp increase in the prices of India-based intermediates, where India is also equally prominent to China, such as [indiscernible]and [ HLC ] as well as other intermediates have increased. In case of Kiri, almost 80% of our raw materials are India-based, domestically, either procured or produced, and only 20% of the requirement of raw materials are coming from China. So from that perspective, that would be a net positive effect, which we will see as long as the situation in China continues to be negative, and we will see that the prices may further go up. Because a lot more demand is getting diverted to India, export buyers are also moving towards India, which is -- not only to increase the demand, but would also support the price increases in the next several weeks and months. Lastly, I would like to update you about the Singapore lawsuit matters. And as per the directions of Singapore International Commercial Court, currently, the final days of the valuation hearings are scheduled from February 26 to March 2, 2020, as a first tranche of hearing; and second tranche of hearing has been given between March 31, 2020, to April 3, 2020. So we are expecting that with this date, provided these date do not move due to this coronavirus related effects, we expect the case to get concluded by April 3, 2020. Recently, yesterday, the judgment has come from Singapore Supreme Court. That judgment was the second Supreme Court judgment in favor of Kiri, which was related to the criteria of valuation, which was decided by Singapore International Commercial Court. Our counterparts and us appealed against that, and I'm pleased to mention that Kiri has won that appeal, and minority discount has not been allowed, which means that Kiri would be entitled to receive the full fair value without any discount for the -- for execution of the court order to buy out Kiri stakes by Senda or by Longsheng. So I would like also all of you to understand that, even if there would have been some discount, if the court had allowed, that could have -- that could have implicated with a large dollar amount. But now there is no discount, which means that the company will get its new fair share from the buyout execution. With that -- with that now, I would add 2 more decisions from yesterday's judgment, that all full cost that Singapore International Court had awarded earlier in favor of Kiri for Longsheng to pay for all legal costs that Kiri has incurred, that has also been upheld by Supreme Court. Now, which means that it is final, that Kiri will have to receive the entire legal cost that it has spent over all these years. In addition to that, there was a team, which earlier concluded by International Court, which was awarded in favor of DyStar and Kiri. Kiri is to pay whatever amount is to be, still decided by SICC, on account of breach of the non-compete clauses, and Kiri is expecting that to be paid -- cost as 50% as per the recent order as per yesterday. So that legal cost has been awarded as 50% to be paid, and we expect -- and this amount would be negligible compared to the amount that Kiri have to receive. So it is very minuscule amount, which would not impact [ people or receipt ] of Kiri from the buyout proceeds. With that, I would like to conclude my opening remarks. And now, I would like to open the floor for questions.

[Operator Instructions] We take the first question from the line of Manish Ostwal from Nirmal Bang Securities.

Yes. So my first question, on the DyStar case. So based on the current understanding, if we win this case, [ the all ] includes your legal cost plus value of the stake of DyStar, net of taxes, how much will we receive and -- at the end of the day? And secondly, how do we use these funds? Any thoughts on it will be very helpful.

First, your first question, how much value we would receive. Today, the next course of proceedings and hearings are related to determination of the value. So court is going through proceedings to finalize the value, so value itself, submitted their valuations. And now, going through this legal process, court will give a judgment and decide the value. So we would not know value at this moment. But when the court decides and gives judgment, we would know the number, right? So it would be premature to speculate any number. But DyStar's profitability has been given and has been disclosed in quarterly as well as the early results. From that, you can make out, as a prudent analysis, what could be the value that Kiri and Kiri shareholders would expect. So that was your first part of question. Second, where these funds can be used has not been crystallized by my company yet. Kiri's Board will decide at a measured time, what could be the best use for the funds for the benefit of the shareholders. So -- and there are several options for that. Some funds can be used for the future expansion of the company in several areas, and there are project teams working on it. Certain amount can go back to the shareholders. But how that portion and what amount to be attributed to each of the options would be dependent on what amount that we will receive when everything's crystallized. So let's wait until the amount and the number is available, and then we'll appropriately address it. Only -- I can assure you that the use of the funds will be very prudent and the Board would be deliberating a lot of efforts before making decisions that we use.

Thank you for the clear and the assurance part, sir. The second question on the -- this coronavirus related -- the short-term benefit to the chemical industry in general and some of the products there, like [ SS 0 ] and the [indiscernible]. So if you -- can you tell us what is the price increase last 15 to 20 days in these categories, number one? Number two, in terms of profitability of this quarter, can we meaningfully improve on the back of this short-term benefit?

Prices of [indiscernible] were around INR 170 to INR 175 for [indiscernible], close to INR 340 to INR 350 for [indiscernible] in around December, when this quarter ended. Now only in the last 2, 3 weeks, they have sharply increased. Today, adjusted prices increased beyond INR 500. The [indiscernible ] prices has also increased beyond INR 300. Many companies are quoting, including us, around INR 350 for [indiscernible], and adjusted for INR 550. These prices could take some time to get absorbed because the dyes prices also have to increase parallelly. And as for the market information, most of the companies have already started increasing their dyes' prices. These price increases could be temporary if Chinese get [ restart ]. But based on our assessment of the situation, it can prolong at least 2, 3 months by the time actual manufacturing plants get stabilized in China, if the situation comes in control. So I would say, reasonably that we should have 3 months' time to capture this opportunity, which could be temporary. But it can help the remaining of this quarter maybe somewhat, and especially in the next quarter, because the real meaningful impact can come in the next quarter.

Your next question is from the line of [indiscernible] of [ CO Capri ].

Sir, I have 2 questions. One was on the new CapEx that you have done. By when will we see, [ which will be in-force ] for the results -- the impact of the entire new CapEx? When will it be fully stabilized and fully operational? And what quantum of revenues will get added at current prices? By current prices, I mean the previous quarters' prices, not the current elevated prices. So what kind of turnover? And what kind of margins would you take in the expanded capacity?

Expanded capacities would be fully operational and working from April 1. That is the target. And we will be able to achieve that full effect in the financial year 2021. Now from a -- from first year, we do not expect that 80%, 90% capacity can be utilized. Naturally, within 2 years, it can be [ this sort of ] level. At full utilization, we expect about INR 600 crores to INR 800 crores of revenue, depending on the price -- on the prices in the market. If I consider the bottom prices of last year, it could be around 600 -- around INR 600 crores of revenue come from there. Regarding EBITDA, we are expecting it to be at least maintain 18% to 20% EBITDA. And those products have been selected such that, even in last 2 quarters, when overall general intermediates were down, certain specialty intermediates helped to maintain that kind of EBITDA. So we hope that we can generate 18% to 20% at EBITDA level, and around INR 600 crores to 800 crores depending on the prices.

Great. And sir, these expansions that you have undertaken, are these in a separate entity? Or [indiscernible] entity?

[ Their own entity. ] They are all in [indiscernible].

So the tax rate that we'll get on this will be 25%, right?

Yes, true. Because these expansions were already started before this new policy was announced. And actually, these plants are coming in the same campus, so we are adding new buildings in the same campus.

Right. I just wanted to make sure, sir. And sir, congratulations on the results -- on the court order which came yesterday. So I was going through the order, and one question that I had was, are there any subsequent appeals, which they can go for further -- for the matter which has been discussed in the court order yesterday? Is there any other forum they can go to for appeals?

No. There is no higher forum at all. So yesterday's order of Supreme Court order was the highest level. That's it. There is no further higher up from there.

So on -- what they say is the main judgment, on the main judgment, there is no further appeal. Now we move to valuations, and there could be appeals on valuation, or even that is not in?

Yes, you're right. So there was -- see Supreme Court today has had 2 appeals. Let me clarify for you. The first appeal was the appeal on the main judgment, which was a judgment dated 3rd July 2018, okay? That was already heard by the Supreme Court, judgment already announced by the Supreme Court on 19th May, 2019 -- sorry, 29th May, 2019, sorry, for the date. So May 2019 judgment already upheld the buyout order, and already confirmed the minority operations. So that appeal was disposed of and in Kiri's favor. Yesterday, judgment was a second judgment of the Supreme Court. So till now, 2 appeals were filed and both the appeals were awarded in Kiri's favor. Now, as you rightly said, for the valuation and valuation number, whenever that is decided and given by the court, that would also be subject to appeal. And that would be the third appeal that is if Supreme Court admits that third appeal of the valuation number whenever it comes.

Right. And sir, the second part of the judgment, it speaks about you -- Kiri breaching certain non-compete agreements, right? And so, even that matter is now completely settled, the [ weight is worth ] -- so I mean, on the second judgment also, there is no further update?

No, there is no further update.

Right. So now we are completely in the valuation part? The matter is now decided; it's valuation now?

Yes. Yes, correct. So only the valuation piece is now under court proceedings. Correct.

And the hearing, sir, as you said, the next set of hearings, the last date 3rd April, if that is required. So post-3rd April, on some particular date, the court will come out with another judgment, and that... [Technical Difficulty]

Ladies and gentlemen, we've just lost the line for the current speaker -- participant. We take the next question from Riddhesh Gandhi from Discovery Capital.

Just wanted to understand with regards to, again, the DyStar case itself. When do we see sort of a long stop date by which we think this entire thing will get resolved and we're actually receiving the cash in hand?

We -- if you try to project time lines, as I said, April -- currently, based on the dates given by the Court, April 3 is a date on which the hearings and the closing arguments would get completed, which will be followed by the judgment as per our experience in the next 2, 3 months. You can say, by middle of 2020, we can have a judgment. If that is appealed, and then let's assume that it is appealed, and Supreme Court have reached that appeal, that will have another 4 to 6 months' time line. We are looking at 2020, maybe November, December. By the time Supreme Court final valuation-related hearing and the decision gets over. And then some time is given to pay, you are looking at first quarter 2021, realistically, to have some color of money to the safe

Got it. And isn't there any sort of out-of-court settlement we can reach, which, I mean, saves them legal fees, you legal fees, time, value all of that and just sort of reach an agreement, earlier than planned?

I don't see any possibility, because we passed those phases long back. And when Kiri is sitting on the final judgment on the Supreme Court awarding judgment, and there is no active, any negotiations or discussions between the parties currently. I think it would be through the court only. I don't see any [ such possibilities. ] .

And the legal expenses which you are bearing in this regard, is it all expensed through the P&L?

Yes, they're all booked in P&L. Yes, last 4.5 years, it has impacted our P&L quite significantly.

So just to understand, in the last 9 -- I mean, months per se, in the first 3 quarters of this year, what has been the extent of the legal expenses?

Let me give you -- because now with the Supreme Court order yesterday, Kiri will be compiling entire legal costs from 2015 till date, and putting that gain. Now that amount would be a large amount, okay? And I -- difficult for me to give you one number for this.

Again, I'm not asking for -- effectively speaking, historical, I'm just saying how much have we actually expensed through our P&L in these 9 months?

Just to give you -- it has impacted almost 4% of our EBITDA in this 9 months. If I can give you the -- so our EBITDA, on a stand-alone basis, would be what we closed -- would have been close to 15% instead of 10%, 11%.

Got it. So effectively, with 4% on an EBITDA, I mean, like you [indiscernible] marginal level is just in legal expenses?

Yes, correct. That's the hit on the margin we have been taking.

Got it. And on the China thing, are you seeing things being -- we actually -- I mean, temporary until it is resolved? Or are you seeing some of usual customers looking at a long-term diversification of their supplier base and therefore, a larger opportunity cropping up? Or is this more sort of once the corona goes away, then ultimately, again, we'll go -- again, those prices will come back down and go back to normal?

Our views are that once this corona goes away, and once the Chinese companies are back on the normal performance and on the normal operations, price would -- would come down to a normal level, that's our assessment, okay? Now on your second part, which you said on a long-term effect. The long-term effect can arise if the trend in textile orders get diverted from China, which is happening now. Today, we are getting more demands of dyes from Turkey, from Bangladesh, from Central America, because a lot of orders of textiles are immediately getting diverted to those countries, which are demanding more dye from India. So if that trend continues, and if the purchase pattern of the major buyers of textiles get reshuffled to other countries at the expense of China, then to that extent, we will have long-term benefit. But that is to be seen how it plays out in the long term. But temporarily, yes. People have moved away from China. And a lot of our end-user customers where we supply directly to the processing houses have got higher quantum of orders, and there is immediate spurt in the requirements of dyes.

Got it. And a last question is with regards to -- obviously, a lot of the -- I mean, textile, I mean, the manufacturers are in stress given the capacity and slight slowdown and some of the incentives is going away, et cetera, et cetera. Are you seeing any sort of risk with regards to the -- I mean, collection of receivables or any sort of pressure on that front?

On for -- especially for Kiri, we do not export in open credit.