Kiri Industries Limited (532967) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Earnings Conference Call of Kiri Industries Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, sir.

Thank you. Good afternoon, everybody, 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 second quarter and half year ended of 2021. 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. We have with us Mr. Manish Kiri, Managing Director; Mr. Jayesh Hirani, Senior Manager, Accounts and Finance; 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 second quarter of financial year 2021 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 the diversified range of dyes, dyes intermediates, specialty chemicals, which includes disperse dye, reactive dyes, dyes intermediates and other products. Company has sizable manufacturing facilities of dyes intermediates and basic chemicals at Padra, Baroda. Majority of its production facilities are located at Baroda and company has strengthened its competitive edge by having fully vertically integrated facilities in India. Kiri had formed a joint venture with Longsheng of China and had set up manufacturing facility for dyes, and the financials are part of the consolidated results. Let me now brief you through the operational highlights for the quarter. Kiri's stand-alone performance was impacted by COVID-19 pandemic in the current quarter also and the shutdown of dyes plant which was almost 37 days during Quarter 2 FY '21. The earnings of the company have been also impacted by the litigation expenses, which were substantially higher in this quarter, which relates to Kiri stake of DyStar at Singapore. Further, the sales volume of dyes and intermediates were lower by around 51% on a year-on-year basis. However, were up by 81% on a quarter-on-quarter basis, whereas the sales price realization reduced by around 14% on a year-on-year basis, which impacted the earnings of the company negatively. The company anticipates prices to recover and sales volume to get normalized gradually in coming 2 to 3 quarters. Exports decreased by 25% on quarter-on-quarter basis and by 85% on a year-over-year basis. Gross margins have reduced by around 1.7% on quarter-on-quarter basis and 5.4% on year-on-year basis to 29.8%. Finance costs has been lower during the current quarter by around 14% on a year-on-year basis, mainly because of lower amount of finance charges pertaining to discounting of LCs and other bank charges. The payable cycle, which has increased -- which had increased earlier from 390 days during Quarter 1 FY '21, now has been brought down to 248 days in Quarter 2 FY '21. Similarly, collection period has increased -- which had increased earlier to 233 days in Quarter 1, which has reduced now to 132 days in Quarter 2. Inventory holding has been around 84 days, which is in normal times used to be around 30 days. The elongated working capital cycle shall normalize once the sales volume increases. The company anticipates normalized working capital cycle of around 60 to 75 days of receivables, around 90 days payable and 30 to -- 35 to 40 days of inventory holding gradually in the coming 2 quarters before the end of this financial year. For the quarterly performance of the company on a stand-alone basis, operational income for the quarter was around INR 111 crores, which degrew by 56% on a year-on-year basis. EBITDA was -- reported a loss of INR 40 crores. The decline was due to lockdown, which affected revenues and correspondingly the fixed overheads could not be absorbed, thereafter impacting EBITDA. Net profit after tax stood to around INR 31 crore negative. Since the operational expenses include legal expenses, towards continuing litigation in the matter of DyStar at Singapore International Commercial Court as well as Singapore Supreme Court. The earnings of the company have been impacted by huge litigation expenses in this quarter in relation to stake of Kiri and DyStar. On a consolidated basis for Quarter 2 FY '21, operational income for the quarter was around INR 175 crores, which decreased by 46%. EBITDA reported a loss of INR 20 lakhs, which is a very nominal loss and net profit after tax stood at around INR 17 crore negative. Lastly, with regards to update on Kiri suit in matter of DyStar. As we reported earlier, hearings for the valuation of stake in Kiri stake in DyStar and the submissions, including closing arguments, were completed on July 1, 2020, and judgment was reserved on the same date. We are expecting the judgment to be delivered at any time in the current quarter. And we are highly hopeful that the judgment can come at the earliest possible. I would also like to repeat what we have mentioned earlier that the valuation of Kiri stake of DyStar shall be crystallized based on the financial position of DyStar as on effective date of July 3, 2018, which is the judgment date, which was determined by the court in the buyout order of Singapore International Corp. Hence the financials of DyStar post July 3, 2018, will not have impact on the valuation of Kiri stake on DyStar and on the buyout order for Kiri stake by the court. The company has succeeded significantly in the appeal, which was filed by the company against DyStar in the Supreme Court of Singapore. And that helped the company with this new appeal order, which has reduced damages by almost half than the earlier award, which was given to DyStar by SICC. So company had significant retreat in the last appeal. Again, this was announced, and I'm just trying to repeat for your knowledge. Now I'd like to keep the floor open for the questions. Thank you.

[Operator Instructions] The first question is from the line of Radha Krishna Doradla Wealth More Capital.

Sir, anything we can expect on the expansion side, sir? Have we start our work or it is connected with the DyStar like that, sir?

Sorry. You mean to be relating to the DyStar court order or the expected judgment or I'm sorry I couldn't get you?

No, no, sir. I was asking like our company was having expansion plans in Gujarat with the new capacities and all. So have we started any work with respect to these new expansions or we are waiting for anything like that, sir?

No, no. The expansion is almost at the verge of completion. And I'm pleased to mention that we are starting the new expanded plant from 1st of December. So post immediate Diwali, we would have our new expanded -- I mean, the new facility of Specialty Chemicals would be operational from 1st of December. As we speak, right now, the trials are already in process, and we are in the final stage of starting commercial production. So hopefully, we should be up and running from 1st December.

Okay. Okay. Sir, one more small thing sir. In this DyStar judgment, I think from first week or second week onwards, we are having the Singapore Court holidays. So can we expect before that? Or it is better to wait from the court side only?

I think only court can guide us whenever the judgment is announced. And we have been highly expecting as it has been more than 4 months past since the trial was closed, and we are now almost at 4.5 months insight. And because of the time that has passed, but we are sure that the court must be doing its own diligence and judges must be involved prudently in giving the judgment. So we expect the judgment should come at any time, and we are hopeful for that.

The next question is from the line of Vishal Jajoo from Tycoon Mindset.

Sir, I just want to know, in the past 2 quarters, you have been focusing on to expand in other chemicals as well. Like, you mentioned for the aniline, we have taken our EC approval. So have we given any thoughts to where we are going to expand, like in May 2021 -- from March 2021?

I think those new projects, which we have scrutinized and are planning to implement would start only after the receipt of DyStar proceed funds, right? So our groundwork, our paperwork, all related internal work would continue till that time. But once the funds are available and once the proceeds are with company, then we will embark on implementing those projects. Till that time, we will wait, and we will try to improve our workings internally. I think that's what we are doing right now.

Okay. And sir, second question on the recent textile market, which have been still at the lumpy pace. How do we expect for the next 2, 3 quarters? Like, will it be a revival or -- and whether the textile market will have a share of other countries so that we can have our chemical sales as well?

Yes. I mean, you have rightly asked this question. And one of the reasons that the financials have been down is the dependency on textile and the link of dyes business with textile. Assuming the trend which we are having right now continue for the next quarter or 2, we would see an increasing demand. We have seen month-on-month increase. I think in this quarter, India's export will also resume to the original level of prepandemic, looking at the rates which we are seeing now. So the exports are coming back. Sales are coming back more than -- I mean, better than what we expected earlier. And we will see that the recovery would be faster. So we are quite optimistic for the current quarter where we have order book, which is now till the end of December, we will be able to operate at a decent capacities in this quarter. And hopefully, this speedy revival should continue in the next quarter too. So let's hope that the positive increase in trend continues.

Okay. So sir, do you expect like the special -- because we are having a downward in the pricing of the H-acid and vinyl sulfone. So do you expect like the specialty chemicals to support us in our gross margins or to sustain our gross margins because the pricing of the normal chemicals are going down? So do we expect the specialty chemicals to have sustainability in the gross margin?

Exactly. So our gross margin as well as our EBITDA, you will see them improving from 1st of December onwards as soon as the new products are added. And that will -- that was the objective earlier, and that will happen as a better product mix from the end of this quarter. And of course, next quarter, we will have better margins from specialty intermediates. It's definitely going to happen. You will see that.

So sir, can you name the chemical -- specialty chemicals for which we are going to start our production?

Well, there are several of those. I may not be able to go into each of them because certain products also maintain some confidentiality. But those are the products which would be almost 70%, 80% Chinese import replacement.

Okay. So it's in the textile segment or that -- in the dyes segment or it will be some other segments?

These are 2 segments. One also is a dyes segment as an intermediate. And it will also go into agrochemicals and some of the products will be used in cosmetics as raw materials too. So those intermediates would go not only to final textile segment, but other diversified segments, too.

Okay. Okay. Okay. So the product mix will be improved with a variety of chemicals added, right?

Yes. Yes. It will improve, and the product basket would expand, better margins will have -- even though the volumes may be lesser because the quantum would be less, unit price realization would also improve.

The next question is from the line of Murthy Raju, an individual investor.

Sir, this is Murthy from Hyderabad. Sir, you have projected around INR 2,000 crores of turnover per year from this year. So where are we currently on that line? By when we can reach our INR 2,000 crore target of this turnover from these existing operations?

I think COVID has delayed us at least for 1 year, right? So we would need at least 1 year gap in between to come back to that number, which we wish to achieve, which means that we would be doubling -- almost doubling our stand-alone turnover, which we can do from our existing assets from the new expanded facilities, which are just starting. But that can happen at the earliest in '22, '23 and not in '21, '22, right? So I think we have to have 1 year gap in between because we have to forget this year and see how we can ramp up in the coming 2 years. But what you are asking is virtually doubling our numbers where we are.

Yes, sir. My second question is, you are continuously showing your, what we call, court fees and lawyer fees, that's legal expenses.

Yes.

So it is -- every time you are -- almost every quarter you are showing. What is the total amount you have spent as of date towards the legal expenses, sir? We are really worried about that number from every quarter in the last at least 8 quarters. So how long we are going to have this kind of legal expenses in the coming?

Right. See, most of the legal work got completed when the trial got over, but the invoicing of the lawyers came in subsequent months. And that's why post of 1st July, in the second quarter, we saw another round of expenses from the legal team at Singapore. But that was the end of the major fees. Now only few side cases are going on from this quarter onwards. So almost, I would say, 70%, 80% of what we have been having this legal costs since last 8 quarters, as you mentioned, right, would now significantly drop from the current quarter, okay? So because the valuation trial was the most important and -- where the highest expenses have taken place. But from this quarter onwards, we will not have those high legal costs. But to ask the exact number, it has been continuously under compilation okay? And it would be submitted to the court. I would request you to wait till we file our submissions to the court. And post that, you will have in the announcement. But let's wait till our compilation is over. But as we have reported in all these quarters, the amounts are substantially large. And one point you should also understand is the court has awarded Kiri to receive its full legal costs and expenses. That has already been upheld by Supreme Court related to the valuation case and the minority operation case. So we hope to have this number as soon as we are completing our compiling.

[Operator Instructions] The next question is from the line of [ Shanti Patel ] from [ SB Investment ].

My question is our turnover will double in '22, '23. Is it correct?

Well, that is the optimistic view. But yes, based on our existing capacities and based on what we have invested now, our turnover is expected to get double in 2 to 3 years' time. Let us see.

Yes. Correct. What will be our PAT margin at that time? And what will be our return on capital employed and return on equity, approximately?

Our EBITDA margin should be north of 15%. Our current internal estimation is somewhere between 16% to 18%. That's what we are targeting to achieve with this. And from an expected return on capital employed that we will have to -- I'll have to actually estimate the number, but it would be, again, north to 20% based on the current...

Sorry, 20%?

Sorry, 19% exactly.

19%. That is a return on capital employed, right?

Return on capital employed, that's the target.

Yes, what about return on equity?

Return on equity up 20 -- because I mean debt is not there. So expecting to be, again, yes, almost similar.

Around 20%?

Yes, around 20%.

The next question is from the line of [ Karan Ramesh ] from [ Ashika Group ].

So I had a question regarding something I read on the annual report where it was mentioned about the trade receivables. And in that note, I saw that there's some around INR 49 crores which has been pending for more than 180 days. I was just hoping if you could throw some color on that, like who are these customers? And are we confident of receiving this eventually?

Yes, yes. See, those delays have happened in several -- and the entire amount belongs to our dyes exports and majority, and some of that amount also belongs to domestic sales. But more than INR 40 crore is exports. We are 100% confident that each and every dollar or rupee is going to come and -- going to be received because there were also lockdowns in various countries, such as Brazil, Honduras and various other places where customers got delayed in paying. But we are very positive. We have seen the recovery coming fast in the current quarter. And we expect that everything, every rupee of that would come back because those distributors and customers have been having long years of relationships with us. We know them. Our distributors also know the final end users very well. And all these amounts belongs to our distributors, mainly because Kiri doesn't do much business directly with the end user. So we expect the entire amount to come to the company.

Maybe by this year or it might take a little longer than that?

Maybe this year, before the 31st March. The target is to bring maximum back. These are all extended receivables due to current situation.

Okay. Okay. And just one last question from my side was what kind of capacity utilization we are at right now?

Right now, if I give you information on the current quarter because last quarter was less than 40%, right. But the current quarter utilization -- last quarter was around 45% capacity utilization for dyes and even lower for intermediate. So it was overall less than 40% capacity utilization. But for this quarter, we expect the intermediate utilization to be almost 80% to 90%. And dyes also will go north to 60%. So this quarter would be a normalized quarter we are expecting.

The next question is from the line of [ Prashant Jariwala ], an individual investor.

My question is regarding our revenue contribution. How much contribution we are getting from textile industries currently? And how much it will be after the expansion completed and it will be in line?

So if I give you the overall breakup, out of our total sales, almost 50% sales are for intermediates, okay? And almost 50% sales for dyes. Now from dyes sales of 50%, you can say that most of that relates to textile because almost 90% of those dyes are used in textile, right? So dyes sales is purely linked with textile sales. Now with new capacity kicking in, that portion will go down. So where we are 50-50 right now for dyes and intermediates, with intermediates expanding and intermediates also known dyes area intermediates, which I just mentioned about, we expect that intermediate portion would be more than 60% and dyes portion would be lesser. But again, textile dependency on our dyes sales is going to be there because that is where the maximum usage is.

What about this 50% intermediary, where do we feel? It is almost always going to towards textile industries only, right?

Yes, those 50% -- out of the remaining 50%, again, close to, we would say, post expansion, at least 70% to 75% would be used to make dyes. So eventually, that will connect to textiles. And...

So altogether even after expansion, we will have exposure to textile by around 70% kind of thing, right?

Yes, more than 75%. Let us approximately 75% exposure -- ultimate exposure to textiles is going to remain, too.

Okay. So currently, we are almost 100% kind of thing?

Yes, almost 90% kind of a thing right now.

Okay. And what about the trend in H-acid and vinyl sulfone? Like, is it improving or it still remains stagnant?

I think they are range bound right now. So vinyl sulfone is hovering around INR 170 to INR 180. And H-acid is ranging between, you can say, INR 360 to INR 375. So it has been in this range last quarter. It is continuing to be in this range in the current quarter also.

And what will be the -- what can we expect going forward for this?

I think based on the demand increasing and based on the exports of dyes increasing, we would expect that both of these raw materials before the end of this year should have at least another 5% increase. That's what we are expecting.

Okay. And is there any improvement in exports demand like we saw after...

See, because the prices are also impacted by what price is prevailing in China, right? And the Chinese prices are also not increasing. And there's another reason that the Indian prices of H-acid and vinyl sulfone are also in parallel to the Chinese prices and are not able to go higher. But the moment we see that the Chinese prices are going up, then Indian prices would also follow.

Okay. So is there any improvement we have seen after like this corona crisis, this against China movement kind of thing, have you seen any improvement in export side or any inquiry side?

Yes. Yes, yes, exports are increasing. And this quarter overall export from India for dyes is expected to be normalized in this quarter compared to pre-pandemic. To give you the number, India exports reactive dyes every month in the range of 14,000 to 16,000 tonnes quantum, right? So let us say, on a quarterly basis, you are expecting 45,000 tonnes of exports of reactive dyes, which is a major category of dyes out of India. That 45,000 tonnes might resume in the current quarter. That kind of demand has already come for exports. And domestic demand is reviving, but reviving at a slow pace. So as an industry, this quarter is expected to be actually very near to normalized quarter.

Okay. So next quarter, we can be in green again, right, on the profit after tax and standalone entity?

Even in this quarter also expecting to be on green.

The next question is from the line Ashish Agarwal from Navis Capital.

I had 2 questions. The first one was, I was noticing the gross margins during this quarter, which were down not just compared on a Y-o-Y basis, but even compared to Q1 when the volumes were down. Given what you just mentioned about the direction of selling prices of H-acid and vinyl sulfone, what's the trajectory of gross margins that you expect for the next half of the financial year? That was the first question. The second question was the new capacities that you were referring to earlier in the call. What's the revenue potential for those capacities?

So to address your first question, the later shrinkage of gross margin has happened due to increase of the raw materials, which has not been passed on to the sales prices, right? For example, acetic acid prices have increased compared to the earlier prices. Aniline has also gone up. So we -- vinyl sulfone and H-acid both have increased, but not to the extent of increase of those prices. So we expect that this quarter, we would be able to increase and pass on whatever gross margin shrinkage that we had in last quarter to get to the normalized level, which is basically below 70% of the raw material costs compared to our sales price. So hopefully, this quarter, we should be able to pass on and have a little bit increase, which will cover up in the 5%, which I have just mentioned as an expected price increase. That's the first question. Right, your -- sorry, your second question was relating to?