Kiri Industries Limited (532967) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '21 earnings conference call of Kiri Industries Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Shilpa Maheshwari from Valorem Advisors. Thank you, and over to you, ma'am.

Thank you, operator. Good afternoon, everybody, and a warm welcome to you all. My name is Shilpa Maheshwari from Valorem Advisors. We represent Investor Relations of Kiri Industries Limited. On behalf of the company and Valorem Advisors, I would like to thank you all for participating in the company's earnings conference call for the third quarter and 9 months ended of financial year 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 undue reliance on these forward-looking statements and making any investment decision. 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, Accounts and Finance; Mr. Suresh Gondalia, company's Secretary. Without my 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 third quarter and 9 months ended of the financial year 2021 earnings conference call. As you may be aware, due to the ongoing COVID-19 pandemic, the last 2 quarters had impacted the textiles and subsequently, the dyes and dyes intermediate sector very adversely. Hence, we reported in the first 2 quarters of this financial year losses due to this situation. For the quarterly performance of our company on a stand-alone basis for the current quarter, operational income for the quarter was around INR 234 crore, which grew by around 111% quarter-on-quarter and 3% year-on-year. EBITDA was reported INR 15 crore versus EBITDA a loss of INR 20 crore in the last quarter. So we, as a company, have now turned into profits. Net profit after-tax was reported as INR 3 crore versus a loss of INR 31 crore in the previous quarters. Kiri attained a gradual recovery in the volumes in quarter 3 -- financial year '21 and sales volume growth of 111% on quarter-on-quarter basis due to higher sales in domestic markets enabling absorption of its operational cost as against operational loss during quarter 2 FY '21. During the current quarter, the prices of dyes were range bound, whereas prices of dyes, intermediates and basic chemicals experienced sustaining spikes. The normalized export sales volumes and EBITDA margins will be realized in the next couple of quarters. We are expecting that the current quarters would be almost near to normalize, depending upon the improvements in the market demands and on account of tapering down of COVID-19 pandemic globally, which has severely impacted U.S. and United Kingdom as well as other countries, amongst others. The comparative gross margins have strengthened in the current quarter by around 334 basis points and as compared to quarter 2 FY '21. The earnings for quarter 4 FY '21 are expected to improve and strengthen, keeping in line with quarter 3 2021 gradually once exports pick up in the coming quarters. The finance cost has increased by around 11% as compared to the previous quarter, primarily on an increase in finance cost of discounting letter of credits and other bank charges. There has also been an unprecedented upsurge in the overseas freight charges, which has contracted margins in the -- of the company. As you know, the company has been incurring legal expenses on ongoing legal cases with Senda and DyStar, which has impacted stand-alone profits of the company. Working capital cycle has improved in this quarter. The collection period has reduced from 130 days in quarter 2 FY '21 to 57 days in quarter 3 FY '21. Similarly, payables have also reduced from 240 days in quarter 2 FY '21 to 114 days in quarter 3 FY '21. Inventory holding also reduced from 84 days in quarter 2 FY '21 to 37 days in quarter 3 FY '21, which is in line with pre-COVID numbers. The normalization of business operations in the coming quarters has also normalized the working capital cycle, which has been distorted because of COVID-19 situation. On a consolidated basis for quarter 3 FY '21, operational income for the quarter was around INR 310 crore, which grew by 77% quarter-on-quarter. EBITDA was INR 39 crores, with EBITDA margin of 12.6%, versus EBITDA loss in the last quarter, and net profit after tax reported as INR 21 crore. Gross profit margin has strengthened in quarter 3 FY '21 by about 1.3% as compared to quarter 2 FY '21. Lastly, with regard to the update on Kiri suit in the matter of DyStar, the court process of valuing 37.57% stake of Kiri in DyStar is being carried out as per the directives issued by SICC. The SICC had announced an interim judgment on the valuation of the stake of Kiri in DyStar on December 21, 2020. The court directed the valuation experts to carry out certain adjustments to the confirmed baseline equity value of DyStar of USD 1.636 billion. After submission of the joint statement by valuation experts on the adjustments directed by SICC, a full day oral hearing has been called by SICC on March 16, 2021. The final valuation for acquiring DyStar stake by Senda shall be announced in due course after the conclusion on the hearing on the joint statement. Kiri and Senda both have preferred an appeal against SICC order before the Court of Appeal at the Supreme Court of Singapore. So both Senda and Kiri have already filed an appeal as on January 20, 2021 against the SICC order. That's the latest update in the case of DyStar. And I would like to open the floor for questions now.

[Operator Instructions] The first question is from the line of Shanti Patel from Shanti Patel Investment Advisors.

[indiscernible]. When you think it will be in line with what it was prior to COVID?

You mean to say operational performance of stand-alone business, correct?

[indiscernible]

Sorry to interrupt, Mr. Patel. Sir, your audio is not clear.

Yes, that is right. That is right.

Okay. So if you compare last quarter and in the quarter for the reported results, we made INR 15 crore of EBITDA. And the same quarter last year, we made INR 20 crore, okay? I'm sure that this quarter, January to March, we would be pre-COVID level. We would -- our performance in terms of EBITDA as well as sales and overall would be at a pre-COVID level in the current quarter. So we are already there as we speak.

And do you think it will continue in the future also, correct?

I think it will continue definitely in 2021, '22. Looking at the market sentiments, looking at the demand forecast, interacting with customers, we see that this is going to continue. And probably '21, '22 would be better than what we all are expecting for this industry.

The next question is from the line of [ Rahul Jain ] an individual investor.

Yes, sir. In the matter of Senda and Longsheng, by when can we expect a clear resolution? Like March 16 is the date when you have said that there is an oral hearing. By when do you think this entire matter, which is stretched for 6 years will settle down?

Okay. So now if you look at the current status, as I said earlier, so matter is now in 2 parallel tracks. One track is SICC track with international court, which is called a I day oral hearing on 16th of March. And after hearing from both the sides, i.e. based on the legal advice, we expect that within 2 to 3 weeks, the SICC final order will come. What it means is that by end of March or beginning of April, we can expect a final order with a final number from SICC. That is one track. Now second track, which is Supreme Court track for the appeal, which has already started from 21st January '21. So Supreme Court will take another 4 to 6 months. Let us say, 6 months' time. So by the time Supreme Court give hearing to this matter would be somewhere close to July, right? And subsequent to that, the Supreme Court would give an order or give a verdict, which you can expect somewhere close to maybe September, October. So we can say by end of the year, the matter should close. So whenever the Supreme Court hears the matter and whenever Supreme Court decides now, which is a final leg, matter will be resolved at that time.

Okay. Sir, just to understand, is the Supreme Court appeal in regard to the valuation only? Or is this in regard to whether Kiri has the minority oppressed is the further question?

No, no. It is only pertaining to the valuation. It's only pertaining to valuation. Yes, only related to valuation. Whether Kiri has suffered minority operation or not or whether the buyout order is appropriate remedy or not, for that, Supreme Court has already heard matter long back and Supreme Court has already upheld in favor of Kiri, which has already taken place earlier.

The next question is from the line of [ Rohit Asawa ], individual investor.

My question is regarding this FCCB. In March, April FCCB was due and was postponed to 2022. And allocated price was about INR 11, INR 12 per share, but it got postponed, and share price were trading at that time around INR 85, right? And then in October 2016, some of us got all the allocated share warrants of 35 lakh shares at INR 363, it was an increase of about INR 130 crores in the company. What was the rationale doing this move, sir? And why did the promoter did not buy out FCCB 6 months back at INR 85? Also, sir, even we have been asking the FCCB holders please nail these holders. Who are the holders and where are they oriented from, Mauritius or if they are in India? Those are my questions, sir.

Well, I mean, if you talk about 2015, '16, you are talking about a different situation at that time when Kiri was passing through crisis. Okay. And FCCB were not available at that time for sale, it did restructure. I think you don't have complete information. During that period, the total shares initially issued were more than 6 crores, which were reduced down to 6 crores. So just to answer your first question, that was also restructured at that time, okay? And who are the current shareholders, shareholders keep changing, right? And we do not keep track of those shareholders on a daily basis. That is not our job, actually, right? But as and when we are informed of what shareholders are converting or what shareholders are exiting, which are already there, and we would inform you if we are informed and if we know about that. So whoever is a bondholder, they are not supposed to inform the company if they are changing hands in the exchange, okay? So sometimes they do. If they do, we have information, we'll be pleased to disclose to you.

Okay. So one more question. This unit 1 Vadodara, we have started this recent expansion. Are we going to update the product names? Because just you have mentioned that the unit has started, but the products that we are going to do. Only the broad field you have explained, but are you going to mention the product names as well?

See, there are 8 to 10 products, which are already started in commercial batches. Now particular names of those products are technical names. I don't know whether you would be -- for example, sulpho-gama-acid, let us say, I give you one name, right? All these products are derivatives of naphthalene and benzene, correct? And these are various technical names. So I don't think how it would generate an interest of which particular name of the product because these are all specialty chemicals with certain technical name. For example, 2-amino-4-sulfo something like that, how does it matter to you?

[Operator Instructions] The next question is from the line of [ Ashit Kothi ] an individual investor.

My question is with regards to other expenses. We have some change on other expenses, INR 52 crores. I suppose 1 quarter and 9 months, it is INR 129 crore, if I'm correct. So if we look at like total raw material cost, it is INR 146 crores. And compared to that, it is INR 50 crores. So near about 1/3 of expenses in other. So what exactly these other expenses are?

See, the biggest expense in other expenses are manufacturing expenses, and particularly power and fuel. So the biggest number is -- how much is power and fuel?

60%...

60% of other expenses are only power and fuel. Then it also has freight, right?

Pollution treatment.

There are environmental compliance and pollution treatment expenses. So there are a host of expenses, which are plugged in other expenses, but the biggest one is power and fuel because power and fuel is the main other cost. And it also includes, by the way, legal expenses and the legal costs, which we are incurring in Singapore court cases.

So how much of legal costs we are incurring right now?

Well, if you look at the range, I can give you, every quarter, we are ranging from somewhere to INR 4 crore to sometimes as high as INR 12 crores per quarter.

Right. And sir, this new capacity, the combined installed capacity of first phase of new plant is 6,000 metric ton per annum?

Yes.

Now this is a greenfield or a brownfield?

This is greenfield.

Greenfield.

So in the existing campus, there is a new building which has been set up, 2 buildings. And -- but it's in existing campus. So new plants, expansions in existing devices, but as new buildings.

Okay. And this is again 6,000, it is first phase. So all in all, in totality, how much it is going to be? And by what time that would be going to get completed?

So see, the first phase, probably next quarter, we plan to realize as much as possible, okay? If we are able to achieve 80%, 90% of the monthly turnover and monthly sales, we'll immediately start working on the second phase. Second phase also building is ready. Only we will have to have some machinery and equipments to be commissioned. So once we start, it will take us 6 months. So our plan would be by the end of the year if we do second phase, provided the first phase is operational, giving results and generating numbers. If not, we would still wait until we get results from the first phase.

Right. But then on second phase, how much -- what will be capacity addition?

It would be another approximately 5,000 tons depending on the product mix.

And this would be the last or there will be phase 3 also?

No, it would be the last. Only the special intermediate expansion has only 2 phases.

Other than that, any other expansion, which is already on the drawing stage and which is going to get implemented in next 1 year?

No. Nothing else.

Okay. And sir, with regards to Longsheng -- I mean, Senda and all the legal hurdles, what we have been going through, are we -- what are we looking at? Because current year consolidated figures also takes into account certain amount as our share.

Right.

Assuming that '22 -- FY '22, there would not be any.

Okay.

So that fall in the numbers. How are we planning to compensate?

See, let me just elaborate a little bit on your question, okay? Even though we consolidate numbers today, being the shareholder and continuing shareholder of DyStar is not entitled to any benefit from the performance of DyStar, right? It is valuation for buyout orders has been fixed as on July 2018, right? So whatever is the value of the company as of July 2018, that is what it is going to receive through buyout orders, right, the value of the company for which court has already given a base value of $1.6 billion, okay? In the final order, we are expecting that the court could also reward interest on the valuation number, right, which means July 2018 onwards, what Kiri would be entitled to till the shares are transferred and bought by Senda that to on interest, right? Whether it comes from 2018, which is the judgment date or whether it comes from 2015, it is up to the court, which was the date of the filing the petition, okay? So whatever court decides, if court awards from whichever date interest, Kiri would get interest till the transaction gets completed. So once the transaction gets completed, Kiri would realize that entire value in its book. The money will come to Kiri, right? So that is...

I understand, sir. I understand. Let's say, we are going to...

Sorry to interrupt, Mr. [ Kothi ]. This is the operator. There is a disturbance coming from your line, sir, from the background. I would request to mute your line while the management answers your question.

Yes. Yes. What I would just say, then -- sorry, sir, that with regards to completion of this court dispute, and then how we would -- increase our turnover and profitability to compensate this profitability?

Right. See, then whatever funds realized from Singapore, okay, company would use in 2 forms. So one would -- distributing some dividend, but majority of the funds would be used in futuristic projects, right? In future projects, invest into future platform that Kiri is going to create, for which we have a special team, which has been working since last 3 years. There were a number of projects have been done -- feasibility study for. And we will make a prudent decision where we would invest, but it will have a better platform. We aspire to have more than $1 billion turnover and more platform of new business to be added in the field of chemicals and specialty chemicals.

And sir, what happens to Longsheng Kiri Indian joint venture?

Well, we do not know about it currently because it is not part of court proceedings yet. There's nothing which is a separate entity, and there were some discussion in the past for separation. And I believe that we will have with the same shareholder Longsheng some level of discussions to get separated from them.

And what will be the current turnover of that company?

Pre-pandemic, it was INR 900 crore plus. Maybe 2021, '22, it would be at least equal or close to INR 1,000 crore.

Okay. And post-pandemic?

Yes. Post-pandemic, it is also coming up well. So this year, 2020, '21, it may end up close to INR 700 crore. This is our projection. But '21, '22 would be close to INR 1,000 crore.

And our stake is 50% in that?

40% in that.

40% in that.

So when you look at our consolidated statements, it has been consolidated line by line in our financials.

Okay, sir. And that joint venture is purely on specialty -- is it dyes or...

You mean the Longsheng, Kiri?

Yes, yes, sir.

Longsheng, Kiri, the product portfolio is only dyes. It doesn't produce any intermediates or basic chemicals. Those are supplied by Kiri.

Okay. And those are quite good in demand?

Well, it's -- the beauty in the JV is a range of products. There are certain highly specialized products in JV. Also, there is a product named Indigo in JV. So there are certain products, which are unique for which the competition level is less, and those products are getting premium also from the market. And that provides a little better margin for JV.

Okay. So it would make lot of sense if a company thinks about it?

Yes. So our aspiration, our desire has already been expressed to the Chinese partner that we wish to acquire their stake when the opportunity comes. They are managed and operated by Kiri, by the way. Management control is with Kiri.

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

This is regarding valuation. The valuation already decided, and things are going on. I just want to know the components of that valuation. Which all costs or the parts, which are to be recovered from DyStar that are included in that valuation?

Sorry, I couldn't understand your question. So you mean the valuation, which has been confirmed by the court. That is valuation of $1.632 billion, correct?

Correct. In that, what are the, say, the legal cost is included, then each time there, we show the dividends -- sorry, profits coming out from that, and we show in our books results also. So that -- which are the components are -- all are included and which -- other than this valuation, which are the costs we should recover from DyStar or will recover from DyStar?

Understand. Understand. So $1.6 billion includes the basic value of DyStar, okay, as on July 3, 2018. It doesn't include legal cost. Legal cost is additional and legal costs since 2015 till the end of whenever the final trial gets completed. Entire legal cost has to be paid to Kiri by Senda, which has already been ordered by the court. So legal cost is not included in that, and interest is not included in that. So if the interest is awarded post whatever date court decides, so interest part and legal cost, these 2 components are not there in the values. That would be erased.

Okay. And I see the decision was done on previous date. After that, whatever DyStar has earned, and we are also showing in our results as a profit, that part we get or we don't get that?

No, no. We don't get it. We don't get that part, okay? So since 2000 -- July 2018 onwards, we do not get -- we do not get that profit share of Kiri, right, as a dividend to Kiri. We don't get it. It's -- we are not entitled to, right? But what we are entitled to, as I said, is court award is the interest on the whole equity value of Kiri. So let us say, if it is $500 million or whatever, correct, then the interest component on it on a yearly basis we will get.

The next question is from the line of Anurag Patil from Roha Asset Managers.

So my first question is on the H-acid and vinyl sulfone prices. Can you throw some light on the current prices versus the last couple of quarters and the outlook going forward given that the textile domestic demand has been strong in the recent quarter?

Right. See, the -- currently, the prices of H-acid and vinyl sulfone are close to INR 240 to INR 410 to INR 415, respectively, for VS and for H-acid. Those are the running prices as on today, right? The last quarter prices, right, was for H-acid about INR 370 and for VS INR 174, right? So from INR 174 VS, it is now close to INR 240 and H-acid INR 370, it's INR 410 to INR 415. But please also understand this increase in the prices are having 2 components. One, you are right because the demand is increasing. And because of the demand, the price -- prices are going up. But at the same time, the cost of production has also increased. The basic raw materials such as aniline, ethylene oxide, even sulfur has also increased. Sulfur increased from last quarter to this quarter about 29%, okay? So some portion of this price increase is just passing on the cost increase to the customers, and there is also an incremental margin to it.

Okay, sir. Next question for this new multipurpose plant, phase 1 and phase 2, what will be the total CapEx? And what will be the asset turns on these CapEx?

The further phase 2 investment based on our current estimates would be less than INR 40 crore, right? And the turnover on an annual basis would be somewhere -- depending on the price, between INR 600 crore to INR 800 crore, including phase 1 and phase 2 put together.