Kiri Industries Limited (532967) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Q1 FY '23 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 morning, everyone, and a very 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'd like to thank you all for participating in the company's earnings call for the first quarter of financial year 2023. Before we begin, let me mention a short cautionary statement as always. Some of the statements made in today's 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 call is clearly 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 call and hand it over to them for opening remarks. We firstly have with us Mr. Manish Kiri, Managing Director; Mr. Jayesh Hirani, Senior Manager, Accounts and Finance; and Mr. Suresh Gondalia, Company Secretary. Without any further delay, I request Mr. Manish Kiri to start with his opening remarks. Thank you, and over to you, sir.

Good afternoon, everybody, and welcome to the earnings conference call for the first quarter of financial year 2023. I hope you are all keeping safe and well. In the quarter under review, dyes and dyes intermediates industry experienced sluggish demand and unprecedented increase in input costs, including raw materials, power, gas and fuel. During the last 2 financial years, with demands at rock bottom which is the worst in around 3 decades. Three major reasons identified by the industry experts for negative growth in demand are increase in raw material prices, dumping of dyes intermediates and dyes from China globally and around 65% surge in cotton prices during quarter 4, 2022, compelling industry players to revisit business strategies for sustainability and to overcome unprecedented cash losses. Especially for Kiri, there has been a significant legal cost also incurred in the current quarter. During quarter 1 FY '23, Kiri Industries Limited attained consolidated sales revenue of INR 277 crores, lower by 6% year-on-year basis and EBITDA loss of INR 8 crore. Net loss for quarter 1 '23 was INR 26 crores versus a net profit of INR 9 crore in quarter 4 '22. Kiri's share of 40% in Lonsen Kiri yielded a revenue of INR 105 crores and EBITDA of INR 23 crores for quarter 1 FY '23 in consolidated financials of Kiri. During the quarter, Kiri attained stand-alone sales revenue of INR 171 crores, lower by 14% on a year-on-year basis, and EBITDA was negative INR 31 crores. The reduction in sales resulted into under absorption of fixed costs, generating negative margins during the quarter. The net loss for the quarter was INR 28 crores. The major reasons for negative EBITDA was unprecedented volatility in prices of raw materials, much higher legal cost, lower capacity utilization due to lack of demand, substantial increase in conversion costs on account of increasing cost of power and fuel. And most importantly, not being able to pass on the cost increases to its finished goods products sales prices. Dyes intermediates, dyestuff and basic chemicals contributed 48%, 39% and 13%, respectively, to quarter 1 FY '23 revenues as against 67%, 28% and 5%, respectively, in quarter 4 FY '22. In quarter 1 FY '23 has been an exceptional quarter, which we hope and expect to reverse in coming quarters, we envisaged improvements in gross margins in coming quarters with an increase in turnover and by attaining optimum product mix. The sluggish demand and volatile raw material prices have increased the payment cycle and reduced to some extent, inventory churning. The company expects liquidity to smoothen in coming quarters and the payable cycle sell come down to 90 days in coming 2 to 3 quarters. Industry expects cotton prices to get established and stabilize in the next 2 quarters, and every demand for dyes to pick up. Raw material prices are also expected to stabilize, enabling manufacturing units to regain operational margins, which are currently in negative zone. Kiri has been monitoring the global dyes market and has taken steps to mitigate sluggish demand and reduce cash losses during quarter 1 FY '23. In the coming quarters, after taking cognizance of market dynamics, Kiri shall strive optimum product mix to enhance overall margins, enabling the company to absorb its fixed overheads and take a leap forward to achieve normalized revenue and EBITDA in coming quarters. In the coming months, Kiri management will leave no stone unturned to recoup and normalize its core business of dyes, dyes intermediates and basic chemicals and also look at the business opportunities to enhance intrinsic value of its stakeholders in Kiri. In the matter of DyStar where Kiri holds 37.57% equity stake, Senda International Capital Limited appeals have been dismissed fully by Supreme Court of Singapore. And Kiri has prevailed on the issues -- on the 2 issues in the Supreme Court with regard to Discount for lack of marketability and the quantum of notional license fees payable by Longsheng to DyStar for its wrong full exploitation of the Patent. Both of these issues were overturned in Kiri's favor. Hence, 19% of DLOM shall not be applicable, while deciding final valuation number of Kiri's stake in DyStar and amount of notional license fee shall be crystalized based on the available evidences to Singapore International Commercial Court. SICC shall now decide final valuation number of Kiri stake after giving an effect of DLOM and Patent license fees. Further, court has ordered Senda to Kiri costs of $180,000 for Senda's appeal and disbursement of $47,623 incurred in Kiri's appeals, amounting to a total of around $227,623. With that, I would like to open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of [ Veesh Suresh from Puram ] Financial Services.

Sir, in our last call -- last conference call, I am asking. This is the final judgment to July 16, if at all. But again, he will give the -- postponement, what is the issue, sir, final judgment?

The judgment from the Supreme Court is the final judgment. But what Court of Appeals, which is the Supreme Court of Singapore has done has directed the SICC to give an effect to the decisions taken by the Supreme Court. So to give that effect, the thought process of SICC going on. There is no -- so when the SICC does the computation and gives the final number of valuation that is in connection with the Supreme Court order, that is to give an effect to Supreme Court order. So it is in continuation of Supreme Court order. So this is the final judgment, and it is part of the final judgment, I would say. There would be no further judgment as per se for the valuation. So this would be an end of the legal trial, in fact.

Sir, is it the SICC, the valuation, any change of valuation changes has happened? In the case valuation issue?

Right. There would be 2 points. There are 2 appeal points which were considered and accepted from Kiri side by the Supreme Court. And they overturn those 2 points in Kiri's favor. So those 2 points will add a significant amount, which would be instead of $481.6 million, now this amount would be north of $600 million. So it would be a significant increase in the award to Kiri.

Actually, after SICC decision, you can give the final judgment to the Supreme Court of Singapore?

Right. So Supreme Court of Singapore has directed SICC to give an effect to the Supreme Court decision. So SICC is just following the instructions of Supreme Court to give this number to us.

Sir, do you want to -- general investors, they cannot understand these issues, sir. In Moneycontrol, in some market rumors, Kiri not received that money -- that valuation has not come. So many issues and market rumor...

I would...

One minute, sir. It will give the clear picture of Kiri's issue, in the website or Kiri or exchange. Finally, what time you can take, sir, final judgment and do money will come, what time we can expect it? Give the clear picture of investors, sir. They no doubt about it in the Kiri issue. You will give the clear picture, sir, please. Please misguide of investors. You will give a clear picture, sir. Please you can understand, sir. I see...

Let me address your question. Number one, the -- I would like to encourage you to read the judgments, right? And if you -- rather than depending on the rumors on Moneycontrol or anywhere else, if you go through -- reading the judgements, you will know what is happening and what Supreme Court has decided. Number two, we already disclosed that there will be a short write-up to be submitted by both the parties on 26th of August. And that is the 20 pages write-up from both the sides. And then SICC would give a judgment. It may take another 3, 4 weeks' time. So practically, we are expecting the judgment to come giving the number by end of September, right? And post end of September, the recovery process will start. So what I mean recovery process will start, which means the enforcement process will start. So we'll try to ensure that the funds are realized as soon as possible for September.

What time and date, sir, after September ending?

Well, there is not -- see the money is due the day this order is out, and money is due even today, right? So Senda is already running in default in paying Kiri for more than a year without having any stake on the earlier orders. So that means that money is due immediately. And there is no stipulated debt here. So we hope that once the judgment is announced, Senda should pay immediately after that. That is our expectation.

Immediately you can receive the money, your expectation after...

As per the court order, the money will get immediately.

Court order you can expect it in September ending, we will complete the clear picture?

Correct, correct.

And sir, one thing there. Out of the court issues, you can state the market sale or any other company can stake -- that type of event cannot happen in the issue, sir?

Who's stakes you are referring to?

Actually a DyStar stake -- Kiri DyStar stake, you can sold in open market or out of court market. You are not right.

We cannot because the shares are subsidized, there is no -- it's an unlisted company, right? Sir, it's not a listed company.

Unlisted company can stake private equity or other type of you can sold...

No, we cannot because the shares are under court's order. The shares are to be bought by Senda and Kiri is bound to sell to Senda. That is the order...

Sir, after court order, you can give this Senda, not Senda, you can offer any other companies we cannot sold, sir?

If Senda defaults and if Senda is -- if Senda is not honoring the judgment, then we will see what to do at that time. But we hope and we expect that Senda honors the judgment.

Honor the judgment, you can hope Senda. It cannot honor, you can sold to after private equity. That time, you can expect any huge amount or Senda is a better option?

We have not contemplated or analyzed such things what you are saying. We -- our thinking and the process is pretty straightforward. Kiri shares are to be sold as per the court order to Senda and Senda is bound and compared to buy Kiri shares honoring the Supreme Court's judgment. So there is nothing else to think about currently. We do not want to -- there is no point in putting card before we lost, right now. Let us see what happens.

Sir, our business is [ 8%. ] Kiri next quarter, we can improve the business sales or profit margin in the stand-alone?

Yes, the current quarter would be -- I mean, the second quarter FY '23 seems to be a better quarter and improving quarter, correct.

Sir, FDIs sold some shares in -- Kiri shares -- FDIs in the market. The disclosures of fast SAST exchange. Why sir can -- FDIs can sell the shares? What is the reason?

I think anybody can sell shares whenever they want to sell share. And we are not as a company here to ask somebody, why is somebody is selling share or somebody's buying share. That's not our subject matter.

After receiving money, you can increase the stake in Kiri, sir?

We will see. We'll -- promoters are quite keen to the increased stakes and you will see in future.

Okay, okay. Sir, you can hope a better judgment will come. I can -- future in Kiri is very bright, is expecting.

The next question is from the line of [ Jay Bhatija from JV Investments. ]

I have a couple of questions. First, my question is what are the debt level on your book currently?

What are the, sorry, I couldn't get you.

Debt level on your book?

Debt level in the book has been reduced actually. So current debt level is INR 53 crores and which would be also paid back -- repaid by end of September.

And how do we plan to repay that, cash flow generated from the businesses or from other sources you are expecting the cash flow?

From external sources. Entire INR 53 crores is being paid from the external sources.

Okay. And sir, second question is regarding the business. our business is quite weak in this quarter as you explained due to the China issue. So how is the business going on this quarter as an in quarter 2 as quarter 2 will be completing in few days?

Right. So quarter 2 is much better than quarter 1. And quarter 1 was one of the worst quarters we faced. Industry issues were there. The legal cost was also high. So because of that, we had bad performance in quarter 1. But quarter 2 is much, much better as we speak. So there would be a drastic improvement in quarter 2.

So quarter 2 will be better because of the legal fees getting down or the business also improving? As last quarter, you had told about legal expenses are somewhere around INR 60 crores to INR 70 crores?

Right. So business is better. Demand is coming better in quarter 2. And at the same time, relatively, the legal expenses would be lower.

So what is the legal expense we can expect in this quarter?

Last quarter, it was close to INR 16 crores. This quarter, we are expecting at least INR 5 crores to INR 6 crores, let us see.

Okay. And regarding this, the court case with Senda, so the only issue is spending the license fees. So what is the amount which Kiri is quoting and Senda is quoting? What is the quantum of difference between both the company?

Right. So the earlier judgment, which was overturned by the Supreme Court, was with consideration of Senda's value -- Senda's amount, which was $1 million. And Kiri's side, the valuer appointed by Kiri, presented the amount of $40 million for Kiri's stake.

4-0 or 1-4?

4-0. So the patent license fee range is from $1 million to $40 million. So it could be the number that judges decide, in between this range.

Okay. And how well is Senda prepared to obey the judgment on cash levels as well as other business? And how well DyStar is performing currently?

DyStar's performance has been quite well. DyStar's cash level is very high, no loans in DyStar. We see the cash levels in DyStar more than $400 million. At the same time, we also see a lot of cash sitting Longsheng, too. So I think financially, both Longsheng and DyStar are strong enough to honor the judgment.

So they have about $600 million on the books because earlier our judgment was $418 million. Now considering without the license fee, also judgment is near $600 million?