Kiri Industries Limited (532967) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '20 Earnings Conference Call of Kiri Industries Limited. [Operator Instructions] Please note that this conference is being recorded. At this time, I would like to hand over the conference to Mr. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, sir.

Thanks, Rupali. Good afternoon, everyone, and a warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. We represent 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 fourth quarter and financial year ended 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. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. I would now like to introduce you to the management participating with us in today's earnings con call. We have with us Mr. Manish Kiri, Managing Director; Mr. Jayesh Hirani, Senior Manager of Accounts and Finance; and Mr. Suresh Gondalia, Company Secretary. Without much delay, I request Mr. Manish Kiri to give his opening remarks. Thank you, and over to you, sir.

Good afternoon, everybody. It's a pleasure to welcome you to the fourth quarter of the financial year 2020 earnings conference call. For the ones who are participating for the first time, let me give a brief background about the company. Kiri Industries Limited is one of the largest manufacturers and exporters of diversified range of dyes, dyes intermediates and certain chemical products, which includes disperse dyes, reactive dyes, specialty dyes intermediates and many are based on naphthalene and aniline derivatives. The company has sizable manufacturing facilities of dyes intermediates and basic chemicals at Vadodara. Majority office production facilities are located at Vadodara. And company has strengthened its competitive edge by having full vertically integrated facilities located in India. Kiri had formed a joint venture with Longsheng of China and set up manufacturing facility for dyes in the name of Lonsen Kiri and financial parts of the Lonsen Kiri has been consolidated line-by-line in our consolidated results. Let me also now go through the operational highlights for the quarter. The company faced total lockdown between March 20 to April 27. After which the plants were partially allowed to operate. Initially, during May 2020, the company was allowed to fulfill its export commitments by operating its dyes manufacturing facilities partially. And lately since June 2020, the company has been allowed to resume normalized operations and execute domestic sales also. For the quarterly performance of the company on a standalone basis, operational income for the quarter was around INR 213 crores, which degrew by around 30% year-on-year basis. The comparative gross margins have remained on a similar range around 38% and EBITDA reported at around INR 11 crores, which declined by 63%. The decline was due to lockdown, which affected revenues and correspondingly, fixed overheads could not be absorbed, and thereby impacting EBITDA. At the same time, please also note that EBITDA is impacted due to a huge legal cost, which has incurred in this quarter. EBITDA margins were at 5.13% with net profit after tax of INR 3.4 lakhs with almost 0 PAT. The operational income on a standalone basis for FY '20 was around INR 969 crore, which declined by 8.7%. EBITDA for FY '20 was INR 96 crores, which declined by 38.6%, bringing EBITDA margin to 9.92%, while net profit for FY '20 reported INR 50 crores and PAT margin was at 5.18%. Since the operational expense include legal expenses as well as fees for valuation towards continuing litigation in the matter of DyStar Singapore International Commercial Court. The cost of litigation in Singapore has been fairly high, which has substantially impacted the bottom line of the company in this quarter. This is the quarter in which the extensive hearings have taken place, and this is a quarter where court had given all the hearing dates. And that is particularly the reason that the engagements of valuers and lawyers was quite high. Now I will try to take you through the quarterly performance of the company on a consolidated basis. The operational income for the quarter was around INR 298 crores, which decreased by 22.7% year-on-year basis; EBITDA has INR 30.7 crores, which declined by 34.6% on year-on-year basis; and EBITDA margins were around 10.30%. Net profit after tax INR 18 crores with PAT margin of 6.10%. The operational income for FY '20 was around INR 1,305 crores, which has declined by 6.3%. EBITDA reported for 2020 was INR 186 crores, which declined by 19.4% and EBIT margins were at 14.26%. Net profit after tax is INR 116 crore, which accounts to PAT margin of 8.86%. Total comprehensive income -- consolidated income for FY '20 stood at INR 375 crores. For the year 2020, the major contributors to the consolidated profits, net of write-downs and exceptional provisioning include Kiri standalone contributing INR 49.82 crores; JV, which has contributed INR 67.19 crores, which is Lonsen Kiri and associated company, DyStar, which has contributed INR 259 crores. And that is how the total brings up to INR 375 crores, which is a very decent number on a consolidated basis. During FY '20, DyStar has earned $121 million before considering exceptional expenses, provisioning and write-offs of $25.86 million, which are disputed items by Kiri directors. During the last 2 financial years 2018-19 and '19-'20, Kiri has been strengthening its product portfolio by expanding and optimizing its manufacturing facilities to manufacture diversified range of products, which basically has contributed in improving its product mix, which includes specialty dye intermediates and disperse dyes, among others. Finance costs increased on account of increase in finance charges and pertaining to discounting of LCs and other bank charges. Operational expenses of INR 872 crores include significant amount of again legal and professional fees related to Singapore Court litigation costs. Working capital cycle has been under tight vigil, and average cycle has been controlled where the collection period of account receivables has remained consistent. Trade payables period has been around 105 days, whereas collection of receivables has been around 70 days in 2019-20. The company is holding inventory of around 36 days. That's an average period in the year 2019-20 financial year. Kiri standalone property plant and equipment have increased by INR 110 crores, which during the preceding year had increased by INR 114 crores. So the expansions of specialty intermediate plant is almost about to get over with all these investments in the last 2 years. Lastly with regards to updates on Kiri suit in the matter of Singapore, it is important to highlight that ongoing trial at Singapore International Commercial Court was completed on April 6, 2020. The relevant hearings got completed on this date, which were held in 2 tranches during the quarter of financial -- during the last quarter of the financial year '19-'20, which is from January to March. The final hearing of oral closing and related arguments were going on yesterday and today. And just about 15, 20 minutes ago, the final hearing arguments got completed in Singapore. The valuation of stake of Kiri shall be crystalized on the basis of financial position of DyStar as on July 3, 2018, which is a valuation date. Now the judgment is reserved. And we expect the judgment to come as per our prior experience in the next month or 2, but nothing more to be done from either side. And just await for the judgment to come from the court. Another development, we said the DyStar has initiated another suit against the company for the violation of non-compete clause in shareholders agreement in other parts of the world, which is different from the earlier claims, which is mainly pertaining to Bangladesh, Pakistan, Iran and Brazil, and company has filed defense and also filed counterclaim on June 8. So company has again come up with the strong response to DyStar on that ground. And the customers which are alleged by DyStar in their new claims have been in business with Kiri prior to execution of shareholders' agreement. So Kiri strongly believe that it is out of the purview of the non-compete clause. Again, we think that these are the desperate attacks by DyStar and Lonsen together knowing the position that Kiri has been having since last 5 years and the judgments which have been awarded in Kiri's favors in the last 3 years. So Kiri management does not foresee any payment of damages to DyStar on this suit. We'll keep you updated. Again, on the main suit, we are awaiting for the judgment now, and let us see when the judgment is delivered. Now I would like to open the floor for the questions. Thank you very much.

[Operator Instructions] We have first question from Mr. [ Sourav ], retail investor.

And congratulations for the hearing, I mean, the final decision, which is very near, I think. But I have a question like what is the -- I mean the expected date on which the final result of this hearing on the valuation will be taken because it is already so long? And if the valuation is already done, so I think they might have told some date also when the decision will be declared.

Well, the -- when the closing arguments got completed today and as per the earlier practice of the court, they just reserve the judgment. Court doesn't give the specific date on which they would deliver the judgment. So when an entire process is completed, judgment is reserved. So as on today, on 1st of July, court has reserved that judgment. Only thing we can say from the time line perspective, what we have experienced in past. So when court delivered SIC judgment on 3rd of July, and the subsequent judgment by SICC as well as Supreme Court, it has taken at least 2 to 3 months, right? In this case, we are expecting at least about a month or 2. And again, this is the expectation. And during that time, the judgment should come.

Okay. And one last question is, is there -- I mean is it possible to share like how much amount of valuation we have put forward in front of the court from that date?

That we -- because matter is subjudiced till the judgment is out, we cannot -- we are bound not to disclose any number about, right? But you are all smart analysts. You have seen DyStar's performance till today. You have seen DyStar performance till July 3, 2018, which is the relevant date. And you know the profitability from the Kiri's financials. And as an analyst, you can estimate what could be the fair value of DyStar, and that would be the number. And Kiri is expecting substantial number. I may not be able to give number. It would be premature to give any number. But I'm sure court will give proper justice and court will provide a number, which would be the fair number to the valuation of price. Court has done the whole process of hearing both the valuers, giving them enough chance to respond to each other. Court has engaged them with joint meetings, and court has done lot of efforts to find out the true value of DyStar, and I'm sure it would be reflecting in their judgment.

Okay. One last question, sir. I mean as per the standalone financial statement, it was written that due to COVID there is some impact, and we could able to reach in a pre-COVID status with regard to productivity by the end of December. Is it like -- is it not like too much that we could able to regain the same kind of production level and everything, having -- I mean considering that everything is open right now in India, for example?

I agree with you that is an optimistic view. And current situation in India as well as outside India, all are very much uncertain and changing daily, right? So even though we may expect recovery to come faster, like how that happened in China, but may not necessarily happen that way. So I would say it's an optimistic view, but we can give more indications or directions by the end of first half, which means by next few months when we see the situation emerging in other countries for our exports as well as changes happening in India, we would have more visibility. But today, I agree with you, it's a lot of uncertainty. And looking at that, we have to wait till we are able to estimate a reasonably predictable forecast, which is difficult, as you can understand, and you rightly stated for the full year to date. So we hope, but let us keep connecting and let us keep updating so that how we can see the recovery coming.

Okay. And sir, one last question. Is there any plan with regard to disposal of the money we will receive from the court? I expect that by the end of this year, for sure, we will receive the stake from the DyStar. Is there any plan the company internally discussing with regard to maybe doing a buyback or dividend or maybe expansion of the current business. Is there any plan which has already formed? Or are you -- I mean will you consider it later on when the decision will be finalized?

I think -- see, there was a broad understanding at Kiri's Board and which was conveyed earlier, and I would convey again that the majority of the funds would be used to create a new platform for Kiri to transform Kiri to also $1 billion company, right? But at the same time, certain portion would also go back to shareholders. So there would be 2 broad uses of it. Now we are not certain what is the amount as on today. So once the amount becomes available and known, we can give more clarity in terms of the numbers, but there are no specific plans yet. There are no specific projects that company has decided yet. The company has been evaluating various options of greenfield projects of many feasibility studies, but nothing has been crystallized yet now. So we would be open to look at what is the best interest for the company and the shareholders. And then we will find to invest into very productive in a very prudent way. So not crystallized yet.

We have next question from Mr. Karan from Ashika Group.

Am I audible?

Yes.

Yes, Karanji, please.

Yes. Yes. So I just had a question. I want to get clarity on the cases. One is we have the main valuation case going on. And apart from that, we also have 2 which DyStar has filed against Kiri, right, for the -- regarding the assets purchase, right?

Sorry, can you repeat again the first question you have regarding the thought processing, correct?

I just wanted -- I wanted some clarity on all the cases going on. Because when I look into the auditor's report, there's also a note that's mentioning that the company has filed defamation suit against DyStar because of damage suffered by Kiri because apparently DyStar has stopped purchasing from Kiri. So could you give some information on that?

Okay, okay. See, let me just -- see these -- there is a main case. And the main case and the main suit that we are fighting is to -- is a minority operations case, where we are waiting for court to decide the value of DyStar and the buyout order to be executed at that value. That is the main suit. All other suits are, I would say, these are side suits. So the suit which you are referring is Kiri has filed against DyStar. Kiri has filed 2 suits against DyStar. Let me just elaborate so that -- one is the defamation suit, in which DyStar tried to conduct -- DyStar and Lonsen to conduct propaganda against Kiri to tarnish image of Kiri. And there were certain evidences for that. So that's why Kiri filed suit against them. Kiri filed second suit against DyStar saying that you have not treated for all these years Kiri, as I said, as a preferred supplier. And it's a shareholders' obligation for DyStar to treat Kiri as preferred supplier, which they have not done, that's what we believe. So there is a second suit that Kiri has filed against DyStar, okay? So these are the 2 suits against DyStar going on from Kiri side. Similarly, DyStar has filed suit against Kiri, which I just explained, which is a non-competes that Kiri has competed into customers of -- with customers of DyStar and tried to take away business of DyStar. So that's third. So all these 3 suits are side suits, I would say. And in a legal battle, you have multiple cross suits against each other. So we have to look at these battles as a side battles. And the main battle is the operation battle and the execution of the buyout. So these are the side suits that are filed against each other by both the parties.

So this is a recent one, is it? Or is it going on for a longer time? The one that Kiri filed against DyStar defamation.

I think Kiri filed almost a year back. I don't recall the exact date, but quite some time ago, yes.

Okay. And so when we say that DyStar had stopped from taking orders from Kiri as the preferred supplier. Again, is this a recent development or was this happening since the time…?

No, no, it has happened since 2014. It is not a recent development. From 2013 -- sorry, 2013.

Okay. Okay. And one more question, sir. I also read, I think there was supposed to be a hearing on June 24 because there wasn't some disclosure about your travel history. Could you share something on that as well?

Yes, yes. There was -- I mean there was -- when I was in Singapore in lockdown, okay, there was COVID-related issue that came up. And that COVID-related issue was to -- there are list of questions when you have -- when you enter into a building at the time in Singapore, right? And was entering the court, that did you have fever, did you have sore throat, have you been close contact with someone who has had virus infection, those COVID-related questions. So they -- so one of the questions, which I filed, which they thought that it was the incorrect question, the wrong question, okay? I said that, well, that was my genuine mistake. And actually, that was a right question what I filled up, okay? So then they investigated on this. This is all virus related. It is nothing to do with other cases. Then they investigated. And then they realized that, yes, my contentions are correct, and Attorney General Chamber dropped all the charges against me. So that was already over.

Okay. There is no charges.

No, it's already over. It's finished. It's finished last week, and then I returned back to India. So I'm back to India now.

Okay. And on the operations side, sir, I wanted to know, like during the lockdown, and as they slowly started relaxing, we also saw the company had a lot of labor issues as everyone was going back, are we seeing the laborers return now? Or is the situation still the same?

Yes. The labor issues are serious issues and which are -- we are also facing those. And -- for example, once labor went back, almost 40% to 50% labor have again come back now. But at the same time, we also have demand issues. So there are 2 major issues, which everyone is facing, including us, that demands for textile and demands for dyes has dropped drastically. So on one side, because of lower labor, we are not able to ramp up our production. And on the other side, there is no need because the sales is also lower, right? So that kind of -- that helps each other not to have pressure. But at the same time, we are involved in resolving both. Demand is not in our hands. Multiple factors would effect demand. But of course, labor is in our hand. So we have taken drastic steps to address the labor requirements. And we have made an ambitious target that in the coming quarter, the Kiri's labor requirement would be reduced by at least 30% or even more permanently. So there are many automation and semi-automation measures that we are taking and using this time for and which would allow us to reduce labor permanently. For example, all our plants together today employs unskilled laborers, including contractors, to the extent of 1,300 to 1,400 people. Now we would be reducing that number to less than 1,000 or probably 900 people, okay, in all plants across, including JV. So there are certain steps and measures, which we are implementing on urgent basis, which will reduce our labor requirement permanently. The reason we didn't do earlier because there was no need. And to be honest, we never realized that we will be -- we will short of labor. Only this COVID situation made us realize that it is possible that we may not find labor. So we are taking those corrective measures to permanently reduce our labor requirement for future.

Okay. That's good thing and the effort, sir. And just one last question for me. I just wanted to know like do you have any kind of dividend policy or something framed in mind because I noticed last weekend we had announced a dividend of INR 2, but now it has fallen to INR 0.5. So yes, I'd like to know more about it.

Yes. I think the dividend has been looked at since this year more of a continuation of a token because of -- you can see the ongoing CapEx, which has been happening for the last 2 years and now almost at the verge of finishing. Plus, we believe that next 6 months would be a difficult year -- difficult time of the year. And company should reserve the necessary cash to make sure that we manage liquidity during this year time. And those are the considerations which we've taken while considering this number. I would suggest that what we are looking for in the company post receipt of Singapore funds to be on a growth trajectory to have higher potential to grow, and we would utilize in that fashion.

We have next question from Mr. [ Jaikishan Sharma ].

And congratulations on your -- I mean for the company suit against DyStar. That is quite good to hear. I believe many of my questions have been answered earlier by you, but there's a couple which I would like to toss around. I mean I believe the amount which you have mentioned that would be coming from the DyStar valuation stake sale. I would like to know, I mean, which areas will you be targeting for the expansion growth? And how are we -- I mean -- and also, I mean, now as we have now been disengaged with DyStar collaboration with Kiri and Lonsen, how are we to boost our engagement with the client, which were restitute for us while engaging with the DyStar?

Right, to answer your first question, we would not need investment into the existing dyes and intermediate business, for sure. So I can give you one assurance that the funds would not be required to invest in the same industry as we are today. We would be investing within chemical space, within chemical frame, but there are a lot more projects that Kiri's specific project team, a specialist project team had studied during last 2 years and continue to study. So we will invest within chemical area, many other specialty chemicals, which India continue to import, which you would be targeting. There are huge petrochemical derivatives, which are imported from China, those are being studied. So the investments would be done within chemical, but away from the dyes and intermediates, more into specialty chemicals. And we are also looking at the current situation, which is emerging in a way to go away from China. That's the sentiments. And even new policy announcements are blocking quite a sizable chemicals coming into India. That again gives small opportunity to invest into those areas where India has consumption and more import quantum is still continuing. So we are looking at each and every of those chemicals where we are dependent outside and where we can have consumption in India. And there are host of such chemicals, if you look at the total import of India. So we are targeting those, replacing Chinese import and other imports. So these are the areas where we would focus. I think your second point was related to...

Regarding the client's investments.

Regarding the DyStar, see the -- to be fair to say that Kiri and DyStar operates or have been operating in a different market segments. And 2014 onwards, Kiri has not supplied a single kilo of products to DyStar, nothing at all, okay. So Kiri's dependency on DyStar is not there as on today, right? So for Kiri, it's not going to change anything once we break out from DyStar. Kiri's client base, Kiri's customer base, Kiri's distribution networks and Kiri's storage and warehousing facilities outside India are sufficient enough to serve Kiri's own sales and growth. And it is a fact that Kiri is known to each of the textile producers across the world where we don't need introduction to go into them, right? So in that sense, our -- as far as we continue to serve our existing customers and sell more of dyes to them, we would not be needing anybody's support or help. At the same time, if you look at our next 3 years growth plans, where we just completed -- almost completed our new specialty intermediate plant of second phase which was to get started on 1st of April, now it will start somewhere around 1st of August. And that will serve to a different class of clienteles, which are only intermediates. There are around 26 products. We have almost 8 product lines there in the new facility. And that will be serving to around 60% dyes intermediates and 40% to performance chemicals and agrochemicals intermediates also. So that intermediate segment has nothing to do with DyStar. That's the point I'm making. So Kiri's own growth plans, Kiri's own identified products that it will produce and sell in the market are also distinctly different from DyStar.

Okay. That helps me understand a lot of things, and I believe your words are quite promising for the future of our company. And good to see you're opening up for the new product spaces as well. There's another -- I mean I'd like to end up asking last question for you. I mean I believe we are quite optimistic with the full-fledged operations, but I would like to know how we will be -- I mean getting into the full-fledged usual activities, seeing the COVID pandemic in near future? Can I consider it somewhere between quarter 4 for 2021?

I think 2021 would be extremely challenging, okay? We -- the optimistic view, which we have presented to come back on track by December or faster is an optimistic view. And I can tell you that current uncertainties, I have mentioned earlier, are very high. Demand is almost crashed. And you are looking at companies operating at 20%, 30%, 40% demand since certain countries have not opened up. For example, Central America has not opened up, right? Many other parts from Brazil also not opened up. Indonesia just opened. So in such a situation, it would be difficult to predict how 2021 look like. We will do our best, and our current endeavor is to achieve results which are in line or similar to the last year. And we would try to do by utilizing our new plant, which is starting essentially by changing our product mix, but that would be an optimistic view, I would say. So if we achieve near about number as the year '19-'20, please bear in mind that this year, and why I'm saying this, please understand, last year there was a heavy legal cost. Now trial being over, okay? This year, we would not -- so when you see our INR 50 crore profit, it is after a huge amount of legal costs that we are bearing. That will reduce in this year from now onwards, from second quarter till fourth quarter, correct? So that will give us some room. With that room in place and with our new plant up and running in August, we might be able to improve our product mix and sell more intermediates with higher capacities which we are creating. And we can endeavor in target to achieve last year. And I would be very happy if we do near about that.

Yes, and we will be.

Right?

Yes. There's one thing. I mean you have mentioned that -- I mean the orders have not been opened from many of the markets, I mean, even in the European and the emerging markets. But are we in consideration to maintain inventory in the case of dyes and chemicals and specialties for any shock orders that we receive, I mean, post opening of the markets? I mean there might be a surge in demand basically. So how are we going to deal with that? I mean are we going to maintain inventories to supply it hangover, urgent basis, something like that?

Yes. Post lockdown over -- see, we have seen certain surge in demand, and we are serving that right now. But we don't see -- to be honest we don't see that high in demand. Actually, demand is -- compared to earlier times, let us say, lockdown before, right, let us say, in December, January demand and the current demand, you are looking at less than 50%, level of 30%, 40% of the [ industry ] demand. That's where we are today. And to grow from this level, the surge may be not so fast. I think it will gradually build. That's what our data and our feedback from the customers are indicating.

Okay. Thanks, Manish Kiri. I believe doing the automation and innovation step that you're taking care will also help in maintaining a good cash flow in the future.

Thank you.

We have next question from Mr. Pratik Kothari from Unique Asset Management.

So good to hear that you're back in India.